Feds force Iowa biofuel fraudster’s firms to disgorge funds
Two companies in Iowa that are defunct have been sentenced to a total of $3.4 million in restitution and forfeiture in federal court, in a fraud case. Darrell Duane Smith, the companies' former leader, already is in federal prison in Duluth, Minnesota. He was tripped up in his fraud when promoting investments and tax credits in North Dakota in March 2012.
CEDAR RAPIDS, Iowa — Federal courts recently ordered two Iowa biofuels companies to pay more than $1 million restitution to ten fraud victims and separately to forfeit a total of $2.4 million in a forfeiture judgment to the U.S. government, also jointly and severally.
This is the same amount ordered four years ago in a personal federal conviction for company official Darrell Duane Smith, whose schemes first were tripped up in North Dakota. The companies and Smith as an individual both are liable for some of the same penalties, according to federal court records.
U.S. District Court Chief Judge Leonard T. Strand on Sept. 22, 2022, sentenced the two companies — Energae LP, and I-Lenders, LLC. The government gave a $150,000 credit for tax credits against the forfeiture judgment the company claimed they still held, meaning they can’t sell tax credits.
The case involves dizzying complexity.
Smith solicited funds from investment clients to be invested in Permeate, which were transferred to Energae and I-Lenders. Then, he improperly made the transfers by providing false authorization to the financial institution that held the personal investment funds for his clients. Smith would send clients “relatively small” checks from Energae and I-Lenders, falsely claiming it was principal or interest on the investment.
In 2014, a shareholder group asked Iowa state courts to name a receiver to find assets to hand over to investors. In 2020, the state court closed the receivership after it failed. By abandoning the receivership, the state effectively gave control back to the imprisoned Smith, who federal officials since have dealt with to close out the business.
While the companies never made money, they had suspected or theoretical assets, including stock in a separate, publicly-traded company called Greenbelt Resources Company. Smith would improperly offer to sell, gift or transfer the companies’ GRCO stock to new investors, if they would invest more.
Smith first made news when he came to the Red River Valley in March 23, 2012.
At a meeting at Grafton, North Dakota, Smith asked sugarbeet growers and others to invest in his company and told them about his plan to buy their beets. He said he planned to buy the former Alchem corn ethanol plant in Grafton —which was seven years idled and out of date — and use sugarbeets to make ethanol.
Smith claimed he would retrofit the building — including repairing a damaged roof — for the 2012 production year. Smith claimed numerous business connections that turned out to be false and made claims about sugarbeet storage and processing that the producers immediately said were irrational.
Agweek reported he was promoting an investment in his companies and offering tax credits for environmentally-beneficial biofuel production. Other ongoing reporting in Agweek spotlighted fraudulent promotional claims. Iowa tax and investment officials issued cease-and-desist orders in 2013. Iowa officials revoked his insurance and securities licenses. The same year, federal authorities raided the company’s offices.
The federal fraud case against Smith focused narrowly on frauds from 2010 to 2015. Smith used the stolen funds to pay expenses for Permeate Refining LLC, which operated a whey-to-ethanol plant in Hopkinton, Iowa. Smith forged client signatures or used pre-signed blank authorization forms, without client approval. Smith and a colleague also were penalized for withholding but failing to pay Internal Revenue Service taxes for employees.
In 2018 Smith was sentenced to nearly 15 years in prison and $1 million in restitution to victims for wire fraud and aggravated theft. There was no forfeiture judgment, so the $2.4 million against the companies is new.
To be free at 73
Now age 66, Smith grew up in Alaska and later lived in his wife’s hometown of Forest City, Iowa, and had a stockbroker office in nearby Mason City, Iowa, both in the northeast corner of the state.
After his federal conviction, Smith initially was imprisoned in Forrest City, Arizona, at a minimum security prison, but ultimately was transferred to a Federal Prison Camp in Duluth, Minnesota.. He is scheduled for release on Oct. 1, 2029, at age 73.
(In a separate but closely related matter, a federal judge in 2019 convicted Smith’s brother, David Smith, of Pocatello, Idaho, to two months in federal prison after he pleaded guilty to conspiring with Darrell to obstruct Darrell’s sentencing by influencing a victim. David was ordered to pay $160,000 to a victim.)
Since Smith’s personal conviction, federal authorities continued to pursue assets remaining in the companies. Federal court officials weren’t immediately able to say how much he’d paid.
After the receiver left, the companies were defunct and claimed to have no liquid money to pay for an attorney. Smith appeared for court functions from prison through an audio phone.
On Dec. 24, 2020, Smith signed a plea agreement on behalf of each defunct company.
Court action to get to the sentencing was delayed by COVID-19 concerns, and a number of delays, requested by Smith.
Assistant U.S. Attorney Tim Vavricek prosecuted the case, which included investigation from the FBI, the U.S. Postal Service Inspection Service, the Internal Revenue Service-Criminal Investigation, and the U.S. Department of Agriculture, Office of Inspector General.
Agweek published numerous stories about Smith’s saga, and Smith once told an reporter he was being unfairly “persecuted.”
Smith was operating in North Dakota without registering, and some of his colleague connections listed in investment materials were false. Some North Dakota investors individually successfully sued to get their investments back, but Smith’s operation rolled on in Iowa. Agweek later reported extensively on his long history with mishandling funds for investors as a stockbroker.
Smith — the son of a radio evangelist in Alaska — at times in North Dakota used his Bible knowledge to gain the confidence of investors. Some investors placed tens of thousands in his care, and some used income tax credits his companies falsely generated.
It is unclear whether this is the last chapter in the case.
The latest plea agreement specifically said it does not address or include a waiver for any fraud-related money laundering criminal charges “relating to, or arising out of, any purported tax credits” including any “claimed or potential federal and state tax credits” including “investment credits, utility credits, bio-fuel production credits, methane sequestration credits, electricity production credits, closed loop energy credits and renewable energy credits” starting in the 2008 tax year.