RegulationDecember 22, 2019

CFO Pleads Guilty for Role in $1 Billion Ponzi Scheme

Funds were ‘pilfered’ to purchase luxury vehicles, real estate, and to pay earlier investors.

Reported by Michael Katz

The CFO of a California solar energy company has pleaded guilty for his role in an alternative energy tax credit Ponzi scheme that defrauded investors of approximately $1 billion.

Robert Karmann played a key role in a scheme to sell investment opportunities offered by his company and another unnamed solar energy company that manufactured, leased, and operated mobile solar generator, according to charges filed by the SEC and the Justice Department,

The generators were touted for their versatility and environmental sustainability. and were purportedly used by cell phone companies to provide emergency power to cell towers during power failures. They were also supposed to power lights at sporting events. The investments also were advertised as presenting gains in the form of tax benefits, guaranteed lease payments, and profits from the operation of the generators.

“That was all a sham,” said the SEC in its legal complaint. “The company had manufactured and put into service far fewer generators than it claimed, and made hardly any of its revenue from leasing generators.”

As CFO, Karmann allegedly managed and directed the periodic transfers of new investor money to pay the company’s obligations to existing investors, said the Justice Department. It also alleged he disseminated false financial and other information to investors to mislead them about material aspects of the generator investments.

“Karmann’s criminal conduct was intended to create the false impression for investors that the MSG [mobile solar generator] investments were operating as promised,” said the Justice Department, “which helped lull existing investors, lured prospective investors, and caused investors to seek more than $1 billion in tax benefits from the Internal Revenue Service to which they were not entitled.”

Karmann also pleaded guilty to securities violations associated with the same investment fraud scheme.

The SEC said that in late 2014, Karmann allegedly began transferring, or coordinating the transfer, of funds to hide the fact that there was no legitimate lease revenue. He also allegedly supplied brokers, investors and prospective investors with reports and financial statements that he knew contained false information.

Investors paid hundreds of millions of dollars for generators that never existed, according to the SEC’s complaint, and most of the purported revenue was comprised of funds from earlier investors, which is the hallmark of a Ponzi scheme.

The SEC said the majority of investor funds were “pilfered” to purchase luxury vehicles and real estate, in addition to paying earlier investors

Karmann was charged by the SEC with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The regulator is seeking injunctive relief, disgorgement, and civil penalties. Karmann has consented to permanent injunctions, with monetary relief to be determined by the court on a motion by the SEC later. The SEC previously charged two other unnamed defendants in the scheme.

Karmann, who is scheduled for sentencing at the end of March, faces a maximum of 15 years in prison. The investigation into the fraud is ongoing.