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Biofuel investment heads accused of tax fraud: Iowans had strong ties to N.D.'s Red River Valley

CEDAR RAPIDS, Iowa -- Two men with strong connections to the Red River Valley, who headed companies seeking biofuels investors and sold tax credits in North Dakota, have been indicted for federal tax violations in Iowa.

Darrel Smith
"At $1.40 a gallon, you all would be crazy not to do it, you know?" says Darrell Smith, chief operations officer for Energae LP Holdings, Clear Lake, Iowa, urging Grafton, N.D., area farmers to invest $10,000 into a beet-to-ethanol plant. (Mikkel Pates, Agweek)

CEDAR RAPIDS, Iowa -- Two men with strong connections to the Red River Valley, who headed companies seeking biofuels investors and sold tax credits in North Dakota, have been indicted for federal tax violations in Iowa.

Darrell Duane Smith of Forest City, Iowa, and Randy Less from Hopkinton, Iowa, each have been charged with multiple counts of "willfully failing" to collect, truthfully account for and pay federal income, Social Security and Medicare taxes that were withheld from the wages of employees of Permeate Refining Inc., a business that made ethanol in Hopkinton.

U.S. Attorney Keven W. Techau of the Northern District of Iowa, and Acting Assistant Attorney General Caroline D. Ciraolo, of the Justice Department's Tax Division, on Jan. 27, announced indictments from a grand jury say Less was the majority owner, a general partner and the general manager of Permeate Refining Inc.

The federal indictment says from 2009 to 2010 Less failed to pay $116,000 in withheld federal taxes. From 2011 to 2012 Less and Smith failed to pay $307,00 in withheld taxes. If convicted, the two each face up to five years in prison and $250,000 fines for each of several counts.

A state court injunction prevented Smith from selling tax credits involved with the companies.

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Steve Young, an assistant U.S. Attorney and spokesman for the office, says it's possible other charges could be added.

A trial is set before Chief Justice Linda R. Reade on March 28 in Cedar Rapids.

Dakota investors

On March 23, 2012, Smith appeared in Grafton, N.D., where he introduced the idea of sugar beet growers investing a minimum of $10,000 in Energae LP Holdings. Smith told farmers his company would reopen the Alchem Ltd. plant that closed in 2007 and was owned by Northeast Energy LLC, since 2010.

Smith said investor-growers would own shares of Energae, which was

associated with various biofuels companies. One was Permeate Refining of Hopkinton, run by Less, which made ethanol from agricultural processing byproducts. Another was BFC Electric, in Cedar Rapids, Iowa, which made electricity from wood waste.

Agweek subsequently investigated Smith's business dealings, including his forced resignation as a stockbroker, various irregularities in company documents and false business associations with individuals from other companies.

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Despite this, Smith continued to raise tens of thousands of dollars from investors in the central and northern Red River Valley.

The Grafton plan didn't come to fruition and the Alchem plant was dismantled.

In April 2013, the Iowa Department of Revenue, issued an order, preventing Smith

from selling insurance and ordering him to cease activities from Energae. In 2014, the same department warned investors that tax credits the company was selling for green energy production couldn't be verified for 2012 production and the credits needed to be paid back.

FINRA actions

John S. Chapman, a Cleveland attorney in an investors rights law firm, represented about  35 clients, all in Iowa. Some of those were resolved with Financial Industry Regulatory Authority.

In the FINRA action, filed July 16, 2013, Chapman alleged that Multi-Financial Securities, Inc., failed to adequately supervise Smith while he was a stockbroker for them. Chapman's clients sought more than $1 million in compensation from Multi-Financial and its successors.

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Alan Rosca and colleagues, in a second, competing Cleveland law firm, represented investors in separate but similar actions.

On Aug. 26, 2013, clients Robert Hylden and Darren Sheldon, both of Fargo, settled a case that asked for Energae to be placed into receivership. Robert's brother, Clifton Hylden, and Clifton's son, Josh Hylden, of Park River, N.D., filed a second receivership petition that was subsequently abandoned in early 2014.

In more related actions, Rosca's firm took several actions to FINRA, filing three group cases against Smith's former employers in 2013 and 2014. The FINRA claims by Rosca's firm were against Multi-Financial Securities Corp. of Denver, a company Smith had worked for, which was later acquired by other companies and would be responsible for damages.

The firm represented 24 clients with a total of about $4.5 million in investments with the company. Along with direct investments, at least one of Rosca's clients received purported tax credits from Energae and was told by tax officials the credits were not good, triggering an audit of the client, Rosca says.

State injunction

Separately, several investors, including Joan Priestley of Alaska and John Harpole of Washington State, have sued Smith, Free Fuels Charitable Trust, Corporate Benefits Inc., ENERGAE LP and I-Lenders LLC. The suit was filed in December 2014, in Polk County District Court in Des Moines, Iowa.

The investors seek a complete accounting of all of the funds received and spent in companies associated with Smith, and also a complete accounting of the percent ownership interest of shareholders. They also want the judge to appoint a receiver, and to find and protect any assets, including tax credits of I-Lender and Energae LP. The plaintiffs recently obtained a court order barring the sale of any tax credits owned by the companies. The investors also seek restitution for funding allegedly diverted.

On Jan. 23, Polk County District Judge David Porter granted an injunction, barring Smith from selling, gifting or transferring shares in Greenbelt Resources Co., a California company, held by I-Lenders or Energae. Smith is similarly barred from any transactions involving gifting or selling tax credits owned or held "by Energae or I-Lenders or any of their investors." This includes "consummating or closing the sale of $15 million in tax credits that was disclosed by their attorneys" in earlier hearings.

Priestley, a medical doctor, is from Anchorage. She says she initially received mortgage funds through Smith for an apartment building she invested in and he became one of her financial advisers. She claims Smith improperly removed funds from her accounts without her authorization. She says the Energae-related companies didn't produce significant amounts of energy in 2013, 2014 or 2015, which would have to be the case to generate tax credits.

$1M of $4.9M

On Feb. 2, the FINRA website showed nine allegations against Smith -- eight of them money settlements that occurred Aug. 14, 2012, through July 9, 2015. Plaintiffs filed claims totaling $4.9 million, which include punitive amounts. The damages granted in those cases were $1 million.

The various FINRA allegations listed include forgery and conversion of funds, organizing a fraudulent investment scheme, converting and misusing client funds, misrepresentation of a private investment placement, forgery and placing the client in "unsuitable investments," purchasing investments without authorization and signing a variable annuity application without client consent.

"It's disappointing that the indictment is focused solely on the tax activities, not the investment activities that victimized a lot of folks," Rosca says, of the federal indictment. "Hopefully, prosecutors will look into these investment issues as well."

Rosca says his firm estimates Smith's enterprises brought in between $5 million and $10 million. When Rosca studied the company's books in 2013, he says it appeared the company had only about $100,000 in its accounts.

Chapman says he finds it surprising the Iowa Insurance Division so far has taken no action on allegations that he violated state orders.

Related Topics: NORTH DAKOTA
Mikkel Pates is an agricultural journalist, creating print, online and television stories for Agweek magazine and Agweek TV.
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