SEC Issues Big Fines, Penalties Against Green-Tech Investment Firm

A123 logoThe venture capital redistributionist game that surrounds President Obama’s green energy stimulus doesn’t necessarily require the actual delivery of taxpayer cash to crony corporations. Sometimes the malfeasance appears simply based upon the false promise of government “investment.”

Such was the case with the co-founders of Chicago-based Advanced Equities, Inc., who just received a severe reprimand (including big fines) from the Securities and Exchange Commission for dispensing false information to potential funders in attempts to gain private equity investment. In two separate offerings in 2009 and 2010, co-founder Dwight Badger (who left the firm in June) was accused of telling investors that the financial condition and business orders for Advanced Equities’ client – revealed to be fuel cell manufacturer Bloom Energy by Crain’s Chicago Business – far exceeded reality. Badger’s partner, co-founder and Board Chairman Keith Daubenspeck, was fined for “failing to reasonably supervise Badger.”

Advanced Equities also was the top capital raiser for troubled Fisker Automotive, an electric auto maker that received a $529 million stimulus loan guarantee from the Department of Energy, only to get cut off for failure to reach milestones. Both Advanced Equities and Fisker have been sued by an investor for fraud.

In the SEC case, among the falsehoods Badger allegedly told investors was that Bloom (or “Company A” in the SEC Cease-and-Desist Order) was granted a loan of up to $300 million from the Department of Energy, when in fact the company had only applied for – not received – a $96.8 million loan. Maybe Badger was amped up by Fisker’s loan award. According to the Web site Bloom Energy has not received any grants or loans from the stimulus. 

“Dwight Badger misled investors by embellishing key facts about the energy company’s sales orders and its loan application to the Department of Energy,” said Merri Jo Gillette, director of the SEC’s Chicago Regional Office.

In response to the charges, Advanced Equities agreed to pay a $1 million penalty, and Daubenspeck agreed to pay a $50,000 penalty and to submit to a one-year supervisory suspension. Badger agreed to pay a $100,000 penalty and is barred for one year from association with any brokers or other investment dealers. Advanced Equities (corporately), Badger, and Daubenspeck consented to the cease-and-desist order without admitting or denying the SEC’s charges. Daubenspeck was cited for his failure to correct the disinformation Badger provided while they both were in meetings or on phone calls together.

The DOE loan story wasn’t Badger’s only whopper. According to the SEC order, in January 2009 he told one potential investor that Company A had a 2,000-unit order from the CIA, and repeated the claim again the following month to another interested party. The second incident was witnessed by Daubenspeck, who remained silent.

“The sale of 2,000 units would have been huge,” the SEC reported in its findings. “An order that size would have generated approximately $2 billion in revenue for Company A. In reality, however, Company A did not have any orders, contracts or agreements with the CIA at that time.”

Badger told other stories on repeated occasions, with minimal variation in the false details, that weren’t true. One of them was a claim that Company A had order backlogs of more than $2 billion, when the truth was that orders ranged anywhere from $10 million to $42 million. Another he told had Company A in a $1 billion deal with a national grocery store chain, when the truth was the chain had only a $2 million order with a non-binding letter of intent to purchase the company’s power in the future.

The shady behavior for which the SEC punished Advanced Equities and its principals only confirmed early reports about the reputations of Badger and Daubenspeck. The pair were accused in a 2008 Forbes Magazine article of “foisting junky startups on investors.”

“The problem with this picture is that in vaulting (Advanced Equities) to its high perch in the VC world, Daubenspeck and Badger have left a wake of aggrieved customers, furious former employees, lawsuits and more than their share of busted startups,” Forbes reported. “At least 18 former clients have filed arbitration complaints accusing the firm of wrongdoing. Separately, six brokers have alleged that AE stiffed them for millions of dollars.”

In June this year Advanced Equities was ordered by a Financial Industry Regulatory Authority (FINRA) arbitration panel to pay $4.5 million to one of its former brokers, John Galinsky, over breach of contract claims.

“The panel finds that Respondents (including Badger and Daubenspeck) exhibited a reckless disregard for the warrant rights of the broker and breached their fiduciary duties to the broker,” the FINRA dispute resolution said.

Bloom Energy was one of the companies that Galinsky raised capital for, without receiving commission, according to FINRA. After the ruling was announced, Advanced Equities reached an agreement with Badger for him to leave the firm.

Another company Advanced Equities raised money for is Fisker Automotive, which has also experienced legal problems (in addition to recalls of its sole electric vehicle, the Karma, pictured). Fisker has boasted that it has received more than $1 billion in private investment, yet couldn’t perform well enough to receive its full $529 million loan award from the Department of Energy. Advanced Equities says its niche is in late-stage equity financing, where it “bridge(s) the gap between venture money and traditional corporate finance.”

In February an investor sued Fisker and Advanced Equities for their alleged failure to perform fiduciary duties and for fraud. He alleged that after he bought $210,000 of preferred stock between 2009 and 2011, Fisker and Advanced Equities demanded more than $83,000 “due to Fisker’s urgent need for equity capital,” or else he would lose privileges that came with his purchase of earlier stock.

“The lawsuit says Fisker and…Advanced Equities Inc., knew their promises to him were false all along,” reported the Orange County Register. “The suit seeks restitution, compensatory and punitive damages from Fisker and Advanced Equities.”

One of the venture firms that Advanced Equities builds “bridges” from is the massive Silicon Valley venture capital firm Kleiner, Perkins, Caufield and Byers – a big Fisker advocate and investor – which has strong ties to the Obama administration, boasts former Vice President Al Gore as a senior partner, and highlights Green companies as one sector where it focuses technology investments.

The ties between Kleiner Perkins and Bloom Energy are also tight. Kleiner Perkins and its high-profile partner John Doerr are identified by Bloom as its first investors, and Bloom is also credited as Kleiner Perkins’s “first clean tech investment.” Doerr is a director for Bloom, and Bloom co-founder and CEO K.R. Sridhar is a “strategic limited partner” at Kleiner Perkins.

Bloom may not have received a loan guarantee from DOE because, as The News & Observer of Raleigh reported in April, the U.S. Energy Information Administration says fuel cells are among the world’s most expensive forms of electricity, costing $6.7 million per megawatt….” But that didn’t stop Kleiner Perkins and Bloom from capitalizing on the relationship Gore has with Apple Inc.  – he serves on the company’s board – as the computer manufacturer agreed to a $30 million contract with Bloom to use its fuel cells at its massive new data server farm in Western North Carolina.

The sordid activities and crony corporatism surrounding Advanced Equities, Badger and Daubenspeck – who huckstered “green” energy companies to investors and government in order to get every possible dollar they could – illustrates why taxpayer money should never be at stake in the venture capital process. The government needs to turn off the spigot – completely. 

Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes, an aggregator of North Carolina news.