No One Is Immune: Staying Safe from Investment ScamsSubmitted by Bernhardt Wealth Management on July 22nd, 2019
It was an ideal setup: good for the environment, good for the company, and good for investors. DC Solar, a startup in Martinez, California, projected huge growth in demand for its portable solar power generators, which could be transported to outdoor sporting venues like backcountry four-wheel-drive racing events, cross-country bike rallies, and others. The company utilized the federal tax incentives for investing in renewable energy sources to sweeten the deal for investors, who readily poured hundreds of millions into the company. The list of investors in DC Solar included some of the most well-known names in the financial world: Berkshire Hathaway, Progressive Insurance Corp., United Financial Bancorp, and others. All told, the company raked in more than $800 million in outside funding.
The only problem was that the promised profits never materialized. In fact, DC Solar built and leased only a fraction of the number of generators mentioned in their projections. However, the founders, Jeff and Paulette Carpoff, established a lavish lifestyle that included a collection of classic cars, some twenty properties, and a professional baseball team. The rapper Pitbull headlined the company’s Christmas party at a swanky hotel. A few days later, when federal regulators came calling, the party was definitely over. The Carpoffs were charged with operating a Ponzi-type scheme. All their investors had to take significant charges for the tax credits they had booked—credits that were based on nonexistent solar generators.
How could such a thing happen? How could a list of sophisticated investors get taken in by a scheme launched by a small company previously unknown outside the auto racing world? The answer, it would seem, lies in the eagerness of investors to claim tax credits for investing in renewable energy. These credits, on offer since 2006, have been instrumental in encouraging billions of dollars of investment in legitimate renewable energy enterprises from some of the largest banks and holding companies in the world, moving solar and other renewable methods from the margins to the mainstream of the American energy economy.
But it may be the very popularity of the tax credits that opened to door for the Carpoffs and other unscrupulous types. Familiarity breeds not only contempt; it also breeds laxity. Because the language used by DC Solar sounded the same as other, similar offerings, it seems that even usually savvy investors failed to perform the due diligence that might have alerted them to the scam.
The takeaways for individual investors include the importance of paying attention and asking the right questions. If DC Solar could take in Warren Buffett and the Sherwin-Williams Corporation, similar dishonest operators can certainly lure in less sophisticated victims. Another lesson to be learned is that transparency and disclosure are essential whenever any investment is being considered. Finally, investors should be extremely wary of investments where there is little or no public history. DC Solar was able to swindle some very smart people because they were able to make themselves look like similar, legitimate businesses. They had no track record of their own, but they sold themselves based on the track record of others. And by the time their investors realized what was really happening, the tracks evaporated in the harsh glare of the truth.