Beet ethanol promoter must 'cease and desist'
GRAFTON, N.D. -- An Iowa man who a year ago spoke to Red River Valley farmers about supplying sugar beets to make ethanol in a mothballed Alchem Ltd. corn ethanol plant in Grafton, N.D., has had his Iowa insurance license suspended and Iowa offic...
GRAFTON, N.D. -- An Iowa man who a year ago spoke to Red River Valley farmers about supplying sugar beets to make ethanol in a mothballed Alchem Ltd. corn ethanol plant in Grafton, N.D., has had his Iowa insurance license suspended and Iowa officials have accused him of improper handling of securities sales.
Iowa regulators have said that, unless Darrell Duane Smith requests a hearing within 30 days and successfully challenges the order, he'll be assessed a $10,000 civil penalty for acting as an unregistered securities agent. They have ordered him to cease investment activity with Energae LP, the company he was representing a year ago when he told North Dakota farmers they should invest in the former Alchem plant and turn it into a sugar beet ethanol plant. Smith is also ordered to open any business records for analysis.
At the meeting in March 2012, Smith told Grafton-area farmers that investing a minimum of $10,000 in the company would give them the right to deliver a minimum of 20 acres of beets for processing. Later, he said he wasn't seeking investments. If commitments came through, Smith said investors would be part of Energae, which also had an ownership in Permeate Refining Inc., with a small ethanol plant in Hopkinton, Iowa, and an electricity generation plant in Cedar Rapids, Iowa.
On April 4, 2013, the Iowa Insurance Division suspended Smith's license to sell insurance in that state. Smith had a stock sales office in Mason City, Iowa, and lives in Forest City, Iowa. On April 10, the same agency ordered Smith to cease and desist securities activities in Iowa with Energae LP.
Contacted by phone, Smith told Agweek he "of course" will challenge the rulings. "I've put my whole life into making this work," Smith said. "There are just a few things left to do. People get antsy." He said he's done "everything to try and help make everything work."
Smith's attorney Kathryn Barnhill of West Des Moines, Iowa, who says she's the attorney for all of the related companies, says there has been "no violations of securities laws" and that the company is "on the verge of becoming very successful and very profitable." Barnhill says the company is "selling under exemptions to sophisticated investors" that existed for a predecessor company name.
The Iowa Insurance Division says reasonable evidence exists to demonstrate the extensive allegations.
James Mumford, first deputy Iowa Insurance Commissioner, signed both orders. Mumford says the agency implemented the suspension because it has evidence that in September 2011, Smith assisted an Iowa resident identified only as "L.L." in "rolling funds out of a pension plan into a Jackson National Life Annuity in the amount of $23,000."
The Iowa Insurance Division says Smith in August 2012 "had sent several emails to L.L. informing him that Energae LP qualified for tax credits" and verbally promised to invest $25,000 "which Smith had stated would bring L.L. $40,000 in tax credits going forward 20 years," the order says. "The money was to come from his funds at Jackson National Insurance Co."
In mid-October 2012, L.L. discovered that $50,000 was withdrawn from his or her Jackson National account in three separate draws -- two in August and one in October, according to the Iowa Insurance Division.
Two of the withdrawals happened before L.L. had signed the papers on Oct. 4, 2012, to authorize any transfers. L.L. inquired with Jackson National, which produced signatures, two of which L.L. allegedly thought were "forgeries and that Smith was responsible for the forgeries," according to the order.
L.L. contacted Smith, who explained that the "extra $25,000 was a mistake," according to the order. In February 2013, Smith said he'd restore the money by March 1, 2013, and delivered "a tirade of anger and intimidation accusing L.L. of greed and selfishness," the agency says. As of April 4, Smith hadn't returned the $25,000 to L.L. for the alleged investment in Energae LP, according to the order.
Another Iowa resident, "A.L." allegedly had invested $387,483 in a Met Life IRA between September 2008 and October 2008. According to the Iowa Insurance Division, Smith on Sept. 21, 2009 "solicited A.L. to withdraw $40,000 to invest in Energae LP." A.L. signed papers, but alleges that $10,000 more was withdrawn than discussed.
The Iowa Insurance Division says A.L. thinks Smith made other transactions to acquire more than one commission within a 16-month period. When A.L. questioned the rollovers, Smith allegedly told her "not to worry because he was making A.L. so much money in other investments that she would be OK," the agency says.
According to the order, the agency alleges Smith made four unauthorized withdrawals from A.L.'s accounts from Oct. 26, 2010, through Dec. 30, 2011, totaling $90,000 to an entity called Interested Investors Trust/I-Lenders. "A.L. told regulators she does not have information on what Interested Investors Trust/I-Lenders does, its financial condition or operations of the firm ... to her knowledge, there is no value to this investment," the order states.
In another case, Met Life representatives on April 3, 2013, told Iowa regulators that Smith had made an unauthor-
ized transaction for an Alaska resident, "B.B.," for "approximately $1.2 million in disbursements made to entities controlled or affiliated with Smith," says Mumford's order. "Bank records show at least some monies deposited from Met Life into an account(s) believed to be controlled by Smith," it adds.
Separately, Jackson National estimates $700,000 had been "disbursed to entities controlled by Smith," the order states. The division's investigation into Smith's activities is ongoing.
Despite Barnhill's assertions, Mumford's order alleges that Energae has never been registered with his division to sell securities in connection to the company, nor had I-Lenders LLC (also known as Interested Investors, LLC or ILenders). The two companies share an office address in Clear Lake, Iowa.
The agency says multiple Iowa consumers, "some of whom were insurance clients of Smith's," were contacted by Smith to make investments. Smith allegedly was familiar with their portfolios because of previous relationships when he was employed as their registered securities representative or investment adviser.
Smith allegedly told consumers they should "invest in Energae for various reasons among them being gaining tax credits that could be carried forward" for 20 years, the Iowa Insurance Division says.
Since 2008, Smith has transferred money out of insurance client accounts "many times without their knowledge to invest in Energae and/or ILenders" and some clients have "never received documentation of ownership of their investment," the order states. The Iowa Insurance Division thinks Smith has converted the money for his own personal use.
The agency says Smith offered for sale limited partnership units that weren't registered with the state and were not federally covered securities. It says he acted as an unregistered agent, and made key misrepresentations and omissions.
Similarly, in North Dakota, Agweek reported Smith was offering information about investments, even though printed materials included caveats.
Subsequently, Smith has in recent months traveled to North Dakota to offer tax credits to people who earlier had invested in Algae Energae, a predecessor name for Energae, LP. One person said he had purchased credits in January 2013.