Even Warren Buffett's Berkshire Hathaway can get scammed by a 'Ponzi scheme'

The multinational sank $340m into DC Solar, a fraudulent entity, along with a dozen other high-profile investors

FILE PHOTO: Berkshire Hathaway shareholders walk by a video screen at the company's annual meeting in Omaha May 4, 2013.  REUTERS/Rick Wilking/File Photo
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Jeff Carpoff had a lot to celebrate as friends and business associates gathered at his company’s Christmas party last year.

The one-time auto mechanic and his wife, Paulette, had started a solar company about a decade earlier that was doing remarkably well – so well that it could count Warren Buffett’s Berkshire Hathaway as an investor in its funds. Their business, making mobile solar generators, had afforded them a lavish lifestyle. They owned more than 90 cars, from classic Fords and Plymouths to Bentleys, at least 20 properties, and even a professional baseball team in Martinez, just northeast of San Francisco.

Billionaire Warren Buffett, CEO and chairman of investment company Berkshire Hathaway, speaks during a conversation with David Rubenstein, president of the Economic Club of Washingtron, during the club's 25th anniversary dinner in EWashington on June 5, 2012.    AFP PHOTO/Nicholas KAMM / AFP PHOTO / NICHOLAS KAMM

And as the year came to a close, Pitbull, the rapper from Miami, headlined their Christmas party at a swanky Fairmont hotel, according to sources. The event, tweeted Kyle Larson, a race-car driver once sponsored by a Carpoff company, was the “best holiday party I’ve ever been to by far”.

A few days later, when law enforcement agents showed up at their front door, the Carpoffs’ extravagant life came crashing down. It was an edifice largely built on an alleged fraud — a Ponzi-type scheme, in essence, say federal authorities — that was as elaborate and brazen as their spending habits.

Their company, DC Solar, is now out of business, most of its 100-strong workforce unemployed. Their sprawling home in Martinez is in foreclosure, the swimming pool littered with leaves. When FBI agents visited the home on that day in late December, they took many of the luxury cars. They also seized a pile of cash – $1.8 million in all – that had been secreted away in a safe and elsewhere in one of the couple’s offices.

AVONDALE, AZ - NOVEMBER 12: Jeff Carpoff, DC Solar President and CEO, speaks in a press conference during practice for the NASCAR Sprint Cup Series Can-Am 500 at Phoenix International Raceway on November 12, 2016 in Avondale, Arizona.  (Photo by Robert Laberge/NASCAR via Getty Images)

The Carpoffs, authorities contend, had managed to parlay a do-good incentive to encourage solar investments into an $800m fraud scheme. Promising big federal tax credits and profits, their pitch enticed sophisticated investors, even though it came from an enterprise little-known outside of California and the car-racing world.

Not only did Berkshire bite, sinking $340m alone, but so did insurer Progressive. It had to reverse tax benefits worth more than $150m due mostly to its DC Solar investments. A half-dozen or so regional banks were financial backers, too, including East West Bancorp, Valley National Bancorp and United Financial Bancorp. All plunked their money in funds set up by DC Solar that afforded significant tax credits and possible profits.

Within a short time, we were doing over $60m in sales.

The company was supposed to use the money to build mobile generators, which supply power at sporting events and other outdoor venues. But evidence suggested DC Solar “engaged in nearly no legitimate business,” the government said. The company built and leased only a fraction of the more than 12,000 mobile units it had claimed were in use, the FBI said. Instead, the company allegedly used much of the money from new investors to pay off old ones – and to fund the couple’s spending.

DC Solar’s precipitous fall is now forcing many of the investors to take charges on tax breaks that they thought were worth millions of dollars. It’s also putting the spotlight on the federal tax credit, which since 2006 has helped fuel solar’s surge from an alternative electrical resource to the US mainstream. Dozens of the country’s biggest companies, from JPMorgan Chase and Bank of America to even paint maker Sherwin-Williams, now invest in renewable energy to benefit from the tax credits. Sherwin-Williams was also among DC Solar’s investors.

While the programme has been largely free of irregularities, the DC Solar tale now stands as a warning sign of how investors, perhaps too hungry for the credits, may be lax in scrutinising the health of the underlying business. Indeed, the alleged scam started to crack only when a former employee told federal authorities that they believed the number of leased mobile units claimed by DC Solar was false, according to a court filing.

“Having that pot of money incentivises this type of behaviour,” says Nicolas Loris, an economist at the conservative-leaning Heritage Foundation think tank, commenting generally on tax credits. “Sometimes it’s difficult to catch this behavior because of the intricacy of the way these policies are woven into our energy markets.”

Carpoff didn’t respond to inquiries seeking comment.

“DC Solar Solutions was an innovative, substantial and credible solar-energy business. It manufactured thousands of mobile solar generators, which were examined and physically delivered,” Carpoff’s attorney, Malcolm Segal, said in a statement. “Any allegation that there was a Ponzi scheme or anything illegal about the operation of the business is without merit.”

The FBI and Securities & Exchange Commission have said they were investigating, according to separate February filings. Representatives for the FBI and SEC declined to comment.

Berkshire said it was “more likely than not” that the tax benefits it received from certain investments from 2015 to 2018 were invalid, according to a May filing that didn’t name the sponsor. It later identified that sponsor as DC Solar. The company took a $377m charge in the first quarter to reverse the tax benefit.

Progressive spokesman Jeff Sibel said the company believes it was defrauded after investing in three funds with DC Solar. The goal was to earn “attractive investment returns” and to support the environment, he said. It also took a writedown of $24.3m primarily because of the DC Solar investments.  Valley National said in a regulatory filing last month it’s coordinating with 10 other investors to investigate the allegations.

Jeff Carpoff had come from an unlikely background to end up hobnobbing with financiers. For years he had been an auto mechanic, eventually running a car-repair company, servicing Land Rover and Jaguar vehicles, according to his LinkedIn page. Intrigued by solar, he founded DC Solar more than a decade ago, building a line of generators and light towers. Veering from the usual bets on panels scattered across large farms or atop homes, Carpoff offered portable units rather than diesel generators that could be placed on wheeled trailers.

Among the “early adapters” of the company’s products, Carpoff claimed on LinkedIn, were AT&T and T-Mobile US (AT&T said DC Solar was never one of its vendors.)

“Within a short time, we were doing over $60m in sales,” he told Inc. magazine, in an interview published before reports emerged about the federal raids. And the key was the investment tax credit. It “helped us create a financial model that enabled us to keep growing.”

The Carpoffs also worked to build their profile locally, gaining favourable media coverage of its charitable pursuits, such as helping Northern California neighbourhoods devastated by wildfires.

Meanwhile, the couple was living large. At staff meetings, Jeff Carpoff often would pull out a wad of cash from his pocket -- at times more than $2,000 – and ask employees to guess how much he was holding, according to sources. The person who came closest, if within about $50, would get the money, one of the people said.

Overall, DC Solar attracted at least a dozen investors in complex deals that raised money through what’s known as tax-equity funds, according to the government’s allegations. In a typical DC Solar deal, filings show, investors bought each mobile unit for $150,000 but paid in cash only $45,000 – the maximum amount of the tax credit they could claim.

They were told the company would then lease the equipment to end-users such as telecom companies. The lease money would pay down the remainder of the $150,000 cost plus provide any profit to the investor.

Except, DC Solar didn’t usually lease the generators to third parties as described by the company, the filings say. Instead, about 90 per cent of the money one of its affiliated companies claimed as lease revenue was actually new investors’ money. In 2016, for example, that sum amounted to $50m of the claimed $55m in revenue, a former employee told authorities.

As for the generators themselves, DC Solar allegedly made it appear it had leased more than it did, filings say. Employees placed GPS transponders in various spots where, “in truth, they were not located,” according to the government filings.

Investigators later said they did find many generators, though not where the company claimed. Some were sitting, unused, outside DC Solar’s offices.