Fishing for Facts
FARGO, N.D. -- What happened to Energae LP? That's the Iowa company that on March 23 offered Red River Valley farmers the opportunity to sign contracts for ownership, linked to contracts to grow beets in 2012 for the mothballed Alchem Ltd. ethano...
FARGO, N.D. -- What happened to Energae LP?
That's the Iowa company that on March 23 offered Red River Valley farmers the opportunity to sign contracts for ownership, linked to contracts to grow beets in 2012 for the mothballed Alchem Ltd. ethanol plant in Grafton, N.D. That was even before the plant had been remodeled from its original purpose of making ethanol from corn.
The beet plant hasn't gotten off the ground -- yet -- but Energae officials reportedly are still talking about it. An Energae representative recently was in the Red River Valley, on a separate effort to give previous existing investors an opportunity to purchase extra tax credits, generated by the company's pioneering new generation fuel production.
Darrell Smith, a company representative and long-time stockbroker met individually with farmers and other investors, saying his company has $5.5 million in extra tax credits for sale. One investor told Agweek he'd put a total of $20,000 into the company since 2009, without any return on investment, but now was planning on investing another $3,500 to get a $9,000 tax credit.
Smith declined to speak to Agweek, saying there had been "innuendo and untruth" in an earlier story, but declining to specify what those untruths were. Similarly, he declined to share how Energae, which is managing business for Permeate Refining LLC, might be facing legal claims by three separate supply companies for products delivered to Permeate Refining without payment.
Since last March
A quick recap: On March 23, Agweek covered a public meeting by Energae at a Grafton, N.D., restaurant. After a free lunch, Jerry Krause, Energae's president, a retired realtor and businessman from Clear Lake, Iowa, introduced Smith as "director of operations." Smith spoke for nearly two hours, telling farmers they could invest a minimum of $10,000 in Energae, entitling them to shares in the larger company. Energae in turn owns shares in Permeate Refining, a company with energy plants in Iowa. A $1,000 investment would be worth more than $1,300, he said.
Smith assured farmers their money would stay in Grafton, but also that they'd own a share of a larger, prosperous company.
"As a grower, you get the beet profit, as an investor you get the ethanol profit," Smith said. "If you're a grower, you're going to sell us beets, you're going to be an investor. Our motto here, is one plant builds them all."
At the March meeting, Smith said the Grafton plant would somehow be ready for 2012 beets, and -- if not -- could be run on wheat byproducts. Peppered with questions about the company's plans for beet handling, Smith said farmers would pile them on their own farms. The company would insure them, pick them up from the farms through the winter, and then pick up what was left in May 2013. Energae would take them to a warehouse near the plant in Grafton, Smith said.
The farmers were publicly polite, but privately skeptical.
Information or pitch?
Here are a few of the things that have happened since March:
•Smith initally complained that Agweek incorrectly reported that the company wasn't registered with the North Dakota Secretary of State. Then Smith acknowledged that was true, but was largely the agency's fault because of backlogs. Agweek has learned the company is still not registered. On May 9, the agency notified Energae that it still needed more information on I-Lenders LLC (also called Interested Lenders), to register. The company never responded.
• Securities Department attorney says the Agweek story prompted the department to contact the company about whether it was selling securities on March 23, 2012. Mike Daley, the department's enforcement attorney, says company officials told him the meeting was "informational" and didn't solicit investments. Officials were handing out a 200-page document labeled "Energae, LP: Farmer-Producer Proposal Registration Amendment" and ended with an "exhibit" labeled "Subscription Agreement." The document also said the company had registered with the federal Securities and Exchange Commission and that the securities could "not be sold, nor may offers to buy be accepted" prior to a registration. Agweek has filed a Freedom of Information Act request with the SEC to learn the status of the registration.
Daley says the subsequent, separate offering of tax credits is probably legal if it's offered only to pre-existing investors from the state.
Sue Fagen, an Iowa securities regulator, says Energae appears to be operating under a federal exemption filing with the SEC. The most recent version she could find was filed Algae Energae LP, in 2009, an earlier version of the company.
•On March 2, Smith was allowed to resign as a broker for Multi-Financial Securities of Denver over an unrelated insurance problem. Fagen says Smith is an "investment adviser representative" for Bradford Financial of Clarion, Iowa. To keep his stockbroker license without retesting, he must find a new broker-dealer within two years of departing Multi-Financial.
•Duaine Espegard of Grand Forks, N.D., a former bank president, former state legislator and current member of the North Dakota State Board of Higher Education, says he still has no connection with the company. In the March meeting, Smith said Espegard was "on board" but not officially signed up, and that Espegard "would be handling your money if you do invest." Recently, Espegard repeated to Agweek he'd only ever spoken to Smith once, by phone, the day of the Grafton meeting. He said he hasn't talked to anyone from Energae since the meeting.
•Rick Newman, owner of Alchem Ltd., says it doesn't appear Smith will buy the ethanol plant. He says Agweek had made a mistake in prematurely reporting on the economic development story before it was fully developed.
Newman says he'd had a face-to-face meeting with Smith about six weeks ago and spoke with him on the phone on Oct. 28. Newman says Smith was still talking about using sugar beets in the plant, but "nothing has happened and nothing will happen" unless Smith meets the asking price, which Newman declined to disclose.
"They're working on it; it takes a lot of money and some investors," Newman says.
•Energae claimed it could run the Grafton plant, but hasn't. During the March meeting in Grafton, Smith offered a slide that said the Alchem plant was worth $8 million currently and would be worth $55 million fully running -- "especially under an advanced biofuel model." He said the company could start the plant with "second clear flour" from durum and profitably produce 5 million gallons a year with that, assuming a $1 million roof is installed, along with some centrifuges and other equipment. He said there was an undisclosed waste product supplier that could produce 10 million gallons a year.
Meanwhile, Agweek has learned that two former Energae officials -- Todd Hylden of Fergus Falls, Minn., and Osmund "Bud" Jermeland" of Estherville, Iowa -- both resigned their posts in 2010, saying they couldn't stop Smith from bringing money into the company's entities without transparence or authority.
Two farm boys
Jermeland, 54, served as Energae's president from September 2008 to July 2010. He says he stepped down because of conflicts with Smith, who was not an officer of the company.
Jermeland grew up on a 180-acre farm near Forest City, Iowa. He graduated from Iowa State University in 1983, in ag business. He started working for the local Farm Service Agency office and sold farm machinery and managed dealerships at nearby north-central Iowa towns, eventually in Mason City, Iowa.
There, he met Smith, a stock- broker and financial adviser. Smith lived in Forest City, and kept a stock brokerage office in picturesque downtown Mason City, where his wife also worked.
In June 2008, Smith asked Jermeland if he wanted to make extra money by bringing in ag contacts to an investment meeting. The meeting was for Black Lion Energae, which raised money for algae ethanol and waste-based ethanol.
Black Lion then raised equity capital for Renewed World Energies, of Georgetown, S.C., which was promoting growing algae for biodiesel production. Some of the algae was to come to a soy biodiesel plant in Algona, Iowa, where Jermeland separately was an investor. In the meetings, Smith first introduced Jermeland as the "farm liaison." In about August 2008, Smith started publicly introducing him as "president" even though Jermeland had no private notice.
"So I became the president without really knowing I was president," Jermeland says. "Darrell put this thing together, lock stock and barrel." Soon, Jermeland worked full-time for Energae.
Hylden, now 51, grew up on a farm near Park River, N.D. He graduated in secondary education and social sciences at Valley City (N.D.) State University. He worked for two years at an FSA office, and graduated from a St. Paul, seminary in 1994. Married in 1997, he served Evangelical Lutheran Church in America parishes until the fall of 2005.
In 2008, a Lutheran pastor friend in Iowa told Hylden a stockbroker friend named Darrell Smith might hire him to help sell shares in Energae. Hylden started at Energae in December 2008 and Jermeland promoted him to vice president of marketing and general partner.
Hylden traveled two days a week for the company, conducting investment meetings in Iowa and elsewhere, including Arizona. He says the company had already raised more than $2 million for energy projects when he arrived. He helped raise another $1.2 million or more. Hylden promoted Energae as an investment to his friends and family in the Red River Valley.
He connected the company with public relations and promotion professionals in the Grand Forks, N.D., area.
Black Lion Energae was renamed Algae Energae, and finally just Energae LP. One of the early projects for Energae was raising money for a prototype plant for Greenbelt Resources Corp., formerly of Burnsville, Minn., and now of Paso Robles, Calif.
At the March Grafton meeting, Smith told potential beet suppliers and investors that Energae had significant ownership in several companies, including a publicly traded company, into which shares of Energae eventually would be rolled -- likely within two years. In his Grafton slide show, Smith listed entities under an Energae LP Holdings heading. The only publicly traded company among them was Greenbelt Resources, which Smith said had a value of $1 million, but is projected to be worth $8 million sometime in 2013.
Darren Eng of Los Angeles, CEO of Greenbelt, confirmed to Agweek that Energae is a shareholder, but is not a controlling shareholder, and has no one on its board.
Energae listed Eng as its "West Coast manager." When asked about this, Eng declined comment except to refer Agweek to his LinkedIn page, which does not include any reference to his management in Energae. Like others on the list of Energae "Partners and Control Persons," Eng's degree from Yale was incorrect, and listed for 1989, when he graduated in 1992.
Eng says Greenbelt is an engineering services and manufacturing company. It was a retail fashion company in 2001. While the company is publicly traded, few shares change hands. In 2006, it morphed into an ethanol company and changed its name to Greenbelt Resources. The centerpiece is a pilot-scale ethanol plant that was first installed in Eagle Grove, Iowa, then migrated to Mississippi during a merger/acquisition struggle, and finally to California.
Today, Greenbelt has only two employees -- Eng and engineer Floyd Butterfield. Both have other incomes because salaries often are deferred. Company management has not released financial projections.
The company holds no patents but aspires to sell its "systems" to "hundreds of customers" eventually, Eng says. The only system sold so far is to the University of Florida. That project is under construction and is expected to be running in several weeks.
Meanwhile, Greenbelt's California ethanol plant is used intermittently for study projects that would produce ethanol from waste beer, wine and other food wastes. Byproducts can be marketed as livestock feed or for other purposes.
In the fall of 2009, Energae became 49 percent owner of Permeate Refining. This was an ethanol plant built at Elgin, Iowa, in 1984, initially rated 1.65 million gallons per year. Swiss Valley cheese factory in Hopkinton, Iowa, bought it and moved it to Hopkinton in 1987 to make ethanol from excess cheese whey. In February 1988, a new owner bought it and hired Randy Less, then a 21-year-old local chicken farmer, as an operator.
In 1989, another company called Xethanol bought it and converted it back to corn feedstock. In 2006, Xethanol shut the plant down to increase its capacity to 3.5 million gallons per year. In the midst of the corn price spike of November 2008, Xethanol sold the plant to Less, who renamed it Permeate Refining. Less was looking for capital and found Energae to supply it. Among other things, Less was testing other feedstocks, including ground paper.
Jermeland says investment money came in rather quickly. Energae put in about $550,000 for a 49 percent share in Permeate Refining. "I thought we had arrived," Jermeland says, adding that he thought it would be a gold mine if it were run properly.
Smith often emphasizes his credentials as a stockbroker and regularly spoke at Energae investment meetings, usually after Jermeland or Hylden gave their spiels. Smith is not an Energae employee, but represented a subgroup of investors he organized and joined -- Interested Investors LLC.
The fold, the gold
Jermeland remembers clashing with Less, who was running the Hopkinton plant. Jermeland was nominally on Permeate's board, but it never met and Less didn't provide sufficient details on how the money was spent. Meanwhile, Smith told Jermeland he was providing loans to Permeate Refining, without going through Energae or providing details.
Jermeland and Hylden became increasingly concerned because they couldn't verify Smith's financial projections, they say. Also, they weren't satisfied with documentation of the nature and terms of any money Smith brought into the company -- basic information such as whether money was loans or equity.
Jermeland and Hylden consulted with a lawyer, Rolf Aronsen of Mason City, Iowa. Aronson drafted cease and desist letters to keep Smith from making financial statements on behalf of the company.
Hylden reported Smith's activities to the Financial Industry Regulatory Authority with concerns about him promoting Energae while he was a stock broker for Multi-Financial Securities Corp. Smith later said the FINRA inquiry was based on "bad advice." FINRA officials did not immediately return Agweek calls.
Jermeland and Hylden left in July 2010. Krause bought out Hylden's shares, but Jermeland still owns shares.
In August 2011, Energae purchased a majority operating interest in BFC Electric LLC, a 7.5-megawatt-hour plant in Cedar Rapids, Iowa. It is designed to make electricity from various kinds of waste products, including garbage pellets.
Less, now 46, works with both companies. Employee business cards call the Cedar Falls plant Permeate Refining even though legal documents and Smith still call it BFC.
Energae lawyer Ray Stefani II of Cedar Rapids on July 25 wrote that Energae and I-Lenders LLC now owned 100 percent of Permeate Refining, and that Energae and its general partners managed its business. The ethanol plant produced more than 2.1 million gallons of "D5" based ethanol in taxable year 2011, he said, and expected to produce 3.5 million in 2012.
In his Grafton presentation, Smith said both the Hopkinton ethanol plant and the Cedar Falls electricity plant were profitable, but there are other indications.
•On March 19, Trillium Construction Services LLC filed a lien for $101,956.
•On June 18, Phoenix C&D Recycling Inc., of Polk County, Iowa, sued Michael Malecha, and various others associated with Permeate Refining for breeching a contract.
Phoenix alleges that Malecha had written a three-year contract on Permeate's behalf, at 15,000 tons a year. Phoenix delivered wood salvage products as fuel for the electrical plant from Oct. 17, 2011 through April 30, 2012, and wasn't paid $60,000 it was owed. Pheonix sued for an entire three-year contract period at a total of $1.575 million.
•As of Sept. 28, Tate & Lyle, has an action against Permeate Refining for $118,886, regarding corn starch deliveries. Attorney Stanley Thompson of Des Moines, Iowa, did not immediately return messages.
• On Oct. 15, Cherokee County Solid Waste obtained a guilty plea by default from Permeate Refining. It claimed Permeate Refining hadn't paid for garbage pellet fuel that had been delivered. The landfill manager called it a large amount. He referred questions to attorney John Loughlin who did not immediately return calls.
Meanwhile, Jermeland is back in the farm equipment business as sales manager for a John Deere dealership chain based in Estherville, Iowa. He says he's happy to be out of the energy business.
Hylden, with his shares bought out by Krause, is again a pastor, serving rural churches in Underwood and Ashley, Minn.
Smith, in refusing to answer Agweek's questions about the business, or the legal actions regarding Permeate and Energae, says he is working 16 hours a day, sometimes seven days a week, on behalf of investors.