How to Spot Scams: Cow Manure Edition

Here is a headline that caught our eye today, and whether this says more about us or the general nature of the summer slow-news stretch, we will let you decide: “Man Is Sentenced in $9 Million Cow Manure Ponzi Scheme.”^[i] It is the story of how someone created a fake company that alleged to transform manure into synthetic natural gas and bilked investors out of several million dollars in the process. As with all such scams, it featured the big warning signs Fisher Investments founder and Executive Chairman Ken Fisher detailed in his classic book How to Smell a Rat. We are dedicated to helping investors avoid falling victim to these things, so let us take a look.

Most of our past looks at Ponzi schemes have focused on purported financial professionals running fake investment management services a la Bernie Madoff. This one is different—it is all about a fake company, putting it more in league with DC Solar and Theranos, albeit with some key differences.^[ii] As the article, which was in Wednesday’s New York Times, explains: “Mr. [Raymond Holcomb] Brewer, 66, of Porterville, Calif., told investors that he was building the plants [to convert manure to gas] and would generate millions of dollars in revenue by selling the biogas, the statement said. He told the investors that they would receive two-thirds of the profits, as well as tax incentives. ‘None of this was true,’ Phillip A. Talbert, the U.S. attorney for the Eastern District of California, wrote in a sentencing memorandum. ‘Mr. Brewer did not begin construction on a single digester. He simply took his investors’ money and ran.’”^[iii]

To get this money, he went to rather great lengths to convince investors his company was real. In the official release announcing the sentencing, the Eastern District of California US Attorney’s Office said Brewer “took investors on tours of dairies where he said that he was going to build the digesters and sent them forged lease agreements with the dairy owners. He also sent the investors altered agreements with banks that made it appear as though he had obtained millions of dollars in loans to build the digesters. Moreover, he sent the investors forged contracts with multinational companies that made it appear as though he had secured revenue streams. Finally, he sent the investors fake pictures of the digesters under construction.”^[iv]

As the Theranos and DC Solar sagas showed, even high-profile investors can have a hard time determining whether a business is legitimate. Yet the manure enterprise had many of the same common threads that run through all Ponzi schemes—the same red flags detailed in How to Smell a Rat. You don’t need to be able to spot fake images or doctored documents—just spot the structural issues.^[v]

1. To invest in the company, people had to give Brewer direct custody of their money, which he then transferred to his various bank accounts. Refusing to transfer your money to another individual is one of the simplest ways to avoid falling prey. This might seem to apply only to avoiding a fraudulent investment professional, as any legit money manager would custody clients’ accounts at third-party brokerage firms. Yet it is also a prophylactic against fake companies. If you don’t give your money to a bad actor, they can’t run off with it. It is really that simple. Yes, that theoretically cuts off some private investment opportunities, but any legitimate business with a good shot of reaping big profits from the creation of synthetic natural gas likely would have had venture funding and wouldn’t be soliciting local individuals. Nor would a company that had actual contracts with big multinational firms and bank funding be raising capital from mom and pop. So yes, we think someone asking for direct custody of individual investor money was a big red flag.

2. The advertised returns were too good to be true. The Eastern District of California reports Brewer promised investors “66% of all net profits as well as tax incentives.”^[vi] It would not surprise us one iota if at least some of the investors heard this as “66% return.” Plus extra revenue from tax incentives! But how would that be generated? That leads us to …

3. Flashy tactics. In addition to the net profits from creating and selling the biogas, Brewer promised investors proceeds from Renewable Energy Certificates (REC), which the gas would have been eligible for as a “green” fuel. As well as being eerily reminiscent of the DC Solar scam, it qualifies as hoodwinking investors with complex, buzzword-heavy strategies. Fraudsters use this to impress and confuse their victims into thinking well, I don’t understand it but it sounds smart, it must be great! Those who pressed Brewer on how selling RECs would have generated a windfall probably would have scared him off, because this is in reality a complex market with volatile pricing and questions about oversaturation. An EPA explainer on the topic happens to show REC prices falling in the years Brewer was running his scheme.^[vii]

4. The crook used the money to fund a lavish lifestyle. This happens every time. Brewer spent the money on “two plots of land that were 10 or more acres each, a 3,700 square foot custom home, and new Dodge Ram pickup trucks,” according to the Eastern District of California.^[viii] The DC Solar folks also splashed out on fancy property as well as high-profile auto racing sponsorships. Disgraced brokers nearly always went for luxury sports cars and fancy houses. None of these people ever live small.

We hate that these schemes keep happening and that people keep falling for them. But if you know what to watch out for, you can avoid being a statistic. So keep your eyes and ears open, don’t fall for flashy tactics and big returns, and don’t let another individual take custody of your hard-earned money. Forewarned is forearmed.