“Our objectives are to access a continual stream of diverse advanced technologies from academic and other research organizations, on a worldwide basis, rather than be captive to any one particular technology platform.’’

Xethanol did five such deals with UTEK Corp., a Florida company that specializes in identifying potentially useful technologies, licensing them, and then placing them with potential users -- typically in exchange for stock in the company. Xethanol issued 1.34 million shares to UTEK between June 2004 and June 2006 to acquire the rights to the technologies.

The value of that stock amounts to a fraction of the money spent by Iogen in its bid to discover an economically viable way to produce cellulosic ethanol.

UTEK filed forms with the SEC last month covering the planned sale of 786,123 of its Xethanol shares, with an estimated value of $6.23 million.

TESTING?

Many of Xethanol’s recent press releases say that the company’s biotechnology is “currently deployed” at its two Iowa facilities. The company has characterized its plant in Hopkinton, Iowa as a testbed for evaluating potential feedstocks and technologies.

But that statement directly contradicts the company’s SEC filings, which note that the plant in Hopkinton suspended production in April 2005. When we paid a visit to the operation June 30, we found the doors locked, the building dark and no employees present. A large filtration unit sat on a grassy patch outside the plant, and an air system serving the building was in obvious disrepair

D’arnaud-Taylor said in an interview with The Wall Street Transcript in March that the Hopkinton plant was being refurbished “as we speak.’’ But we saw no signs of improvements, and Xethanol’s SEC filings show that capital expenditures in the first quarter were just $38,000.

Last week, a Hopkinton city official said plans to make the plant a test facility apparently had fallen by the wayside, adding that no public utility services were being provided to the building and no Xethanol employees worked there on a regular basis.

PREVIOUS QUESTIONS

Xethanol says the ability to turn waste from factories and farms into ethanol has multiple benefits. First, the company can locate its plants close to the sources of waste, saving on transportation costs. Second, the waste producers might be willing to offer Xethanol an attractive price, or even pay the company to take the material off their hands. Third, by targeting locations in the Southeast, Northeast and, eventually, the West – it will have plants where ethanol demand is greatest.

D’arnaud-Taylor has projected that Xethanol will be producing 300 million to 400 million gallons of cellulosic ethanol a year by the spring of  2009.

For the moment, however, Xethanol is a conventional ethanol producer. And even at full output, its Blairstown plant produces just 6.6 million gallons of ethanol a year from corn. The company had $4.3 million in revenue in 2005, and posted an $11.4 million loss.

A MEDIA QUESTION GETS A QUESTIONABLE RESPONSE

A financial analyst writing for MotleyFool.com suggested last month that Xethanol went public in a bid to exploit investor excitement about ethanol. The writer cited the company’s unusual history, which included a flurry of name and business changes (from FreeReal-TimeQuote.com to LondonManhattan.com Inc. to Xethanol) in the five years before the reverse merger.

Xethanol responded with a press release calling the article inaccurate and misleading. D’Arnaud-Taylor said that the company had been focused on the ethanol business since 2001. He defended the reverse merger, with Denver-based Zen Pottery Equipment Inc., as a legitimate means to get its stock on the public market.

“None of Xethanol’s management were involved with Zen or its businesses and none of Zen’s management or owners are involved with Xethanol,’’ he said in the release.

SEC filings, however, show that Zen’s treasurer and chief financial officer, Walter C. Nathan, wound up with 383,333 Xethanol shares immediately after the reverse merger.

Another group of Zen shareholders, headed by Lawrence M. Underwood, emerged with 138,974 Xethanol shares.

Nathan was described in Zen’s SEC filings as a Denver insurance salesman and former real estate developer.  Sharesleuth has looked deeper into his past and identified him as an ex-stockbroker, who was charged by the NASD in 1987 after two of his clients said they were guaranteed against loss as an inducement to invest $100,000 in two penny stocks. When the value of the shares fell and the men asked for the return of their money, they were rebuffed. The NASD fined Nathan $5,000 and suspended from association with any member firm for 60 days.

Underwood, too, is a former Denver stockbroker. He was charged by the NASD in 1986 with violating the rules of fair practice by charging excessive markups. He was censured, fined and ordered to disgorge $10,000; however, the SEC set aside the order after Underwood appealed.

Other early Xethanol shareholders with past regulatory actions include:

Stanley C. Brooks, chairman of Brookstreet Securities Corp. in Irvine, Calif. Brooks has a long history of fines and disciplinary actions by the NASD and state regulators.

In January, he settled compliance-related charges the NASD brought against him and an affiliated brokerage, First Securities USA Inc. Brooks did not admit or deny guilt, but agreed to a two-year ban on serving in any supervisory capacity with any member firm.

Xethanol filed a registration statement with the SEC last year listing Brookstreet with 100,000 shares. The filing said Brooks had voting and disposition power over the shares. Brooks’ personal website says he and his wife are the sole owners of Brookstreet.

Russell W. Newton, chief financial officer of Source Capital Group Inc. in Westport, Conn.

The NASD imposed a $180,000 fine against Newton and a previous firm, Merit Capital Associates Inc., in 1999 for using brokers known to have been barred from the industry. The industry group also suspended Newton for 30 days and ordered him to retake a qualifying exam.

Newton was Merit’s chairman. A joint investigation by the NASD and the State of Connecticut found that Newton, on behalf of Merit, paid $167,500 to people who were disqualified from working as registered brokers. The investigation also found that Merit representatives in one branch office used sales scripts that were materially misleading and made exaggerated and unwarranted claims.

The Utah Division of Securities brought additional charges against Newton and Merit Capital in 2001, alleging the sale of unregistered securities, sales by unlicensed agents, failure to supervise and securities fraud. Newton settled the charges without admitting or denying guilt. He and Merit were assessed a joint fine of $25,000.

According to Xethanol’s SEC filings after the reverse merger, Newton owned 94,639 shares and had options on an additional 12,187 shares.

Marc K. Swickle and Howard B. Berger, co-founders of Professional Traders Fund LLC.

The Washington Division of Securities filed a complaint in February against Swickle, Berger and Professional Traders Fund, alleging that they sold unregistered securities to residents of that state. The agency said it intended to issue a cease and desist order against the men and the firm. Swickle and Berger have asked for a hearing, so the order remains pending.

Berger settled NASD charges in 2000 related to the alleged “flipping’’ of shares in the initial public offering of a penny-stock company.

The complaint charged that he and at least one other person at his brokerage placed more than 15 percent of the IPO shares with clients, with the understanding that the firm would buy them back immediately after the offering. The NASD also charged that Berger failed to take steps to prevent unregistered individuals from selling securities for his firm, or failed to register them.

Berger agreed to pay a $20,000 fine. He was suspended from working in a supervisory capacity for any NASD member firm for two years and suspended from working in any capacity for 120 days.

According to Xethanol’s SEC filings after the reverse merger, Professional Traders Fund held 46,153 shares.

Xethanol declined to say how it raised money from investors when it was a private company, or whether a particular company or individual acted as placement agent for the shares.

“The information concerning its initial funding is confidential information of both the Company and its initial investors and not relevant to those who now invest or own shares in the Company today,’’ it said. “We have provided, and continue to provide, complete and accurate financial information as required by applicable SEC regulations.”

Nor would the company say how William Scott Smith, who is 76, wound up as one of Xethanol’s largest shareholders.

“Mr. Smith’s transactions and relationship with the Company (other than as a shareholder) predated our becoming a publicly traded company,’’ Xethanol said. “The relevant information regarding his relationship with the Company is disclosed in our filings with the SEC.’’

It was impossible to tell from Xethanol’s filings which early shareholders invested in the company before it went public, and which bought shares in a private placement that accompanied the reverse merger.

Smith reported owning 972,414 shares of Xethanol in an SEC filing in February 2005. At the time, that stake amounted to 7.3 percent of the company. Those shares would be worth $6.76 million at Friday’s closing price.

Smith’s holdings excluded 338,115 additional shares held in the name of Therese Roos, with whom he has shared addresses in Delray Beach, Fla., and Westhampton, N.Y.

One of Smith’s co-defendants in the old SEC fraud case also appeared on the list of early Xethanol shareholders. A registration statement in October 2005 shows Anthony Skulski holding 2,648 shares. An additional 1,766 shares were held in the names of Skulski’s two young children. Like Smith, Skulski settled the SEC charges without admitting or denying guilt. He agreed to pay $4,402 and commit no future violations of securities laws.

Xethanol declined to discuss d'Arnaud-Taylor's relationship with Smith.

INTERNATIONAL MAN OF MYSTERY

D’arnaud-Taylor’s biography describes him as an international merchant banker, entrepreneur and turnaround specialist who has managed the strategy, operations and financial affairs of companies on four continents.

But a string of lawsuits stretching from Washington, D.C. to New York and Phoenix paint a somewhat different picture of Xethanol’s 60-year-old CEO, whose father was a British diplomat.

In 1992, two of d’Arnaud-Taylor’s partners in a financial-services firm called London Manhattan Co. sued him in federal court in Washington. The partners claimed that he and another member of the firm, James V. Hackney, were soliciting money for a private investment fund without their knowledge. The suit also said d’Arnaud-Taylor and Hackney engaged in other activities that were beyond the scope of London Manhattan’s business. The court file included complaint letters from companies that said they paid d’Arnaud-Taylor a retainer to secure capital but had not received funding nor collected a refund.

The partners in London Manhattan settled their litigation and parted ways. The two who sued kept the company’s original name, while d’Arnaud-Taylor and Hackney operated under several variations, including London Manhattan Ltd. and London Manhattan Communications.

The original London Manhattan Co., now based in South Carolina, has no connection to Xethanol or d’Arnaud-Taylor.

Hackney was indicted on four counts of mail fraud in 1998. Authorities said he solicited investment capital from friends and relatives, including his father-in-law, but used the money for his personal use. He was convicted and sentenced to 41 months in prison. Hackney committed his crimes in late 1995 and early 1996, a time when he was still a partner in London Manhattan Communications, according to descriptions of thet firm contained in a pair of SEC filings from that period.

The New York doctor who sued d’Arnaud-Taylor and three other men alleged that, in late 1996,   d’Arnaud-Taylor posed as someone who was interested in backing him in a medical-management business. The doctor claimed that the people who were supposed to be arranging the financing -- Bruce W. Kitchen and Brian Cook  – held out d’Arnaud Taylor and another man, Franco Nocito, as verified sources of funding simply to beat a deadline that would have triggered a refund of the doctor’s $30,000 retainer. The suit said that William Scott Smith attended the same meeting and misrepresented himself as a willing source of money.

At the time, Kitchen was already facing charges in Florida in connection with an advance-free loan scheme, and was on probation in New York for running a fraudulent car-leasing operation. Nocito had been caught delivering drug cash in 1992 and agreed to cooperate with authorities. He was indicted on under seal on money-laundering charges in 1994, and was arrested and arraigned in August 1996. Smith had just settled his case with the SEC.

Kitchen eventually struck a plea bargain in the Florida case. He also pleaded guilty in a federal fraud case in New York in 2000. Those charges grew out of his activities at the financial-services company that was the focus of the doctor’s suit. Kitchen was sentenced to 50 months in prison and was ordered to pay $4.27 million in restitution. Cook also pleaded guilty in the New York case. He was sentenced to 18 months in prison and was ordered to pay $2.18 million in restitution.

Nocito pleaded guilty in his money-laundering case, acknowledging in his plea agreement that he had delivered $4.6 million in drug cash.

RESUME QUESTIONS

D’Arnaud-Taylor’s biography says he worked as an executive for several large corporations. Sharesleuth searched old newspaper and magazine articles, Who’s Who guides and other archived material and was unable to find any references to him serving in those positions.

An article in Inc. magazine in 1983 identified him as president of Boles & Co., a trading company in San Francisco. It made no mention of previous executive positions at Unilever, Reed Elsevier or Northrop Grumman. Nor did his marriage announcement in the New York Times that same year.

Sharesleuth has accounted for d’Arnaud-Taylor’s career moves since then, and none took him to any of those companies. So, for the claims in Xethanol’s SEC filings to be true, d’Arnaud-Taylor’s would have needed to make his way through the executive ranks of all of those companies by age 37.

Reed Elsevier said its pension and payroll records turned up no trace of d’Arnaud-Taylor or Christopher Taylor, as he sometimes called himself. Northrop Grumman said its human-resources department was unable to verify that  d'Arnaud-Taylor had worked for the defense contractor or any of the "heritage'' companies it acquired through mergers and acquisitions. Northop Grumman noted, however, that it could not say with absolute certainty that  d'Arnaud-Taylor never worked for the company.

Xethanol declined to provide d’Arnaud-Taylor’s titles or dates of service at the firms.

The first mention of d’Arnaud-Taylor’s purported positions with those companies appears in a 1996 SEC filing for Continental Orinoco Co., a penny-stock company that was pursuing a minerals venture in Venezuala. D’arnaud-Taylor was the firm’s chairman and investor relations contact.

SEC filings show that in July 1996, Continental Orinoco hired a onetime broker named Cary Cimino as a management consultant. D’Arnaud-Taylor signed the agreement, which called for Cimino to receive 1 million shares of Continental Orinoco stock to advise the company on everything from management and marketing to strategic planning, international activities and shareholder relations.

Less than three months later, Cimino was one of 45 people arrested as part of a nationwide sting aimed at cracking down on bribes to stockbrokers. The FBI, which set up a mock brokerage firm as a front for its investigation, alleged that Cimino offered payoffs to its brokers as an inducement to sell 45,000 shares of Continental Orinoco’s stock.  The FBI, which taped the conversations, said Cimino offered to pay brokers 40 percent of the transaction price in stock, or 35 percent in cash. Authorities said he followed through on the offer by transferring shares to an account controlled by undercover agents. Although others involved in the scheme were indicted by a federal grand jury, the charges against Cimino were dismissed with little explanation. He was arrested in an even bigger crackdown in 2000, and was charged with offenses that included bribing brokers and soliciting the murder of a person he thought was cooperating with authorities. He pleaded guilty and was sentenced to 10 years in prison.

SMALL WORLD

SEC filings, corporate records and other documents reviewed by Sharesleuth show that d’Arnaud-Taylor has a pattern of doing business deals with a familiar circle of associates.

D’Arnaud-Taylor’s biography says he was president of Findex.com, a developer of religious software, when it went public through a reverse merger in 2000. The person who took over as that company’s chairman after the deal was Benjamin Marcovitch.

In August 2003, Xethanol signed a partnership agreement with DDS Technologies USA Inc., a small, publicly traded company in Boca Raton, Fla. The joint-venture deal called for Xethanol’s plant in Hopkinton, Iowa, to install DDS Technologies’ “revolutionary’’ equipment for separating agricultural products and biomass into substances that can be converted into ethanol and other byproducts.

SEC filings for DDS show that the company’s chairman and chief executive at the time of the deal was none other than Benjamin Marcovitch. The filings also identify another of the company’s co-founders as Lee S. Rosen, a former stock broker whose license was suspended by the NASD from October 1998 to April 2001 because of his failure to pay an arbitration award to a former employer.

Xethanol and DDS said in a press release that they expected to process 40 tons of biomass a day at the Hopkinton plant, starting in early 2004, and that the sale of end products would generate $5 million in annual operating profits. By October 2004, the deal between Xethanol and DDS had devolved into a federal lawsuit, with DDS claiming in its filings that Xethanol refused to pay for the first of four units and refused to give it back. Xethanol claimed the equipment did not work as advertised.

The two companies announced last fall that they had settled their differences. DDS got its system back, while Xethanol agreed to buy a new and improved version for its Blairstown plant. The companies also agreed that Xethanol would be the exclusive marketer of the equipment to the U.S. ethanol industry.

Xethanol said the original units did not perform as well as expected because of calibration issues. The company added that it entered into a new deal with DDS because it thought the improved version would give it a competitive advantage, and because it wanted to preclude rivals from getting the systems.

HELLO AGAIN

In April, Xethanol entered into a partnership with H2Diesel Inc., a new company headed by Rosen.

H2Diesel had been incorporated seven weeks earlier. It says it has the North American, Latin American, Caribbean and African license for a proprietary additive used in making biodiesel fuel. In a convoluted deal, two investment funds with stakes in Xethanol bought 3.25 million shares of H2Diesel’s stock for $2 million. H2Diesel issued an additional 2.6 million shares to Xethanol, which in turn agreed to manage H2Diesel’s business.

The deal gave the investment funds, Crestview Capital Master LLC and Toibb Investment LLC, the right to sell their H2Diesel shares to Xethanol in exchange for 500,000 shares of Xethanol stock. They exercised that right in April, shortly after the agreement was signed. In the end, the investment funds put in $2 million and got Xethanol stock that Xethanol valued at $5.4 million. Those shares were still worth $3.47 million at the end of last week. Xethanol said in a recent SEC filing that the additional shares it received in the swap brought its ownership stake in H2Diesel to 45 percent.

Xethanol said it did the deal with Rosen and H2Diesel to gain access to potentially valuable technology.

“While Mr. Rosen is involved in H2Diesel, our transaction was not with him individually,’’ the company said. “Rather, it involved our obtaining a license to certain technology to which H2Diesel, which was founded by Mr. Rosen, had procured certain rights and our making an investment in H2Diesel.  We believe that technology will be valuable to us in our ongoing business.’’

NEW PARTNERS

Xethanol has a joint venture agreement with Coastal Energy Development Inc., a newly formed company in Savannah, Ga., to develop its ethanol plant in Augusta, as well as additional plants. The agreement calls for Coastal to locate sites and secure funding for the plants.

Coastal Energy's president is Chandler Hadlock, a 30-year-old West Point graduate who has spent most of his adult life in the military. According to a story that appeared in January in the Atlanta Business Chronicle, Coastal Energy and Xethanol are getting help in the funding search from Epiphany Partners Inc., described as a Savannah-based merchant bank.

Florida corporation records show that two of the founders of Epiphany Partners were previously involved in a separate venture with d’Arnaud-Taylor and Kimmins, the former British brokerage boss. The records, for a company called Trafalgar Resources Inc., listed Taylor as chairman and Kimmins as chief operating officer.

Delware franchise tax records also link d’Arnaud-Taylor and Kimmins at a company called Xeminex Inc. Kimmins was listed as Xeminex’s president in a filing on Feb. 25, 2005, just a few weeks after Xethanol completed its reverse merger. Although he did not claim them at that time, d’Arnaud-Taylor later reported beneficial ownership of 426,588 Xethanol shares held by Xeminex. He said in an SEC filing that the shares were contributed through a settlement among the shareholders of Xeminex.

One of the founders of Epiphany Partners, John J. Murphy Jr., appears in the Florida corporation filings for London Manhattan Limited Inc., the company that provided management services to Xethanol. A document in April 2002 lists him as a director of the company, with William Scott Smith as president.

Xethanol has also created a joint venture to pursue ethanol plants in New England. The company it is working with there is run by a longtime gambling promoter, a political lobbyist and a former executive with an independent electricity producer.

Xethanol is counting on its joint venture partners to raise the money needed for its new plants. Here’s how d’Arnaud-Taylor described Xethanol’s approach to local alliances in his interview with the Wall Street Transcript:

“Especially down in southeast Georgia, Florida and in the Carolinas we are developing a regional alliance platform with people who have local political access, local real estate knowledge and expertise, and who basically can access the local capital market. We see this business as a very local business. It’s not a national business, it is local; for example, is it only people who live in Savannah who understand how to get things done in Savannah.’’

Xethanol announced today that it has entered into a purchase agreement for the plant in Georgia. Whether that deal works out for the company and its shareholders, we won't presume to say. 

These are simply the facts as we know them.

D’Na Hankins did field research for this report; Julie Armstrong Editing LLC provided fact-checking services

Copyright Sharesleuth.com 2006

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AFTERWORD FROM MARK CUBAN

Based on the information that Sharesleuth has uncovered, I have chosen to short shares of this company. My personal approach to investing, and in this case shorting , is very consistent. When there are a lot of individuals with pasts that include sanctions from the SEC, there is a good chance they are up to their old tricks again. Which leads me to want to short the stock.

When a company says they are operating a plant to produce a product, and that plant has no utilities, I want to short that stock.

So I am short 10,000 shares of Xethanol. I would like to short more, but I haven’t been able to borrow any more. I am currently in the money on the shares.

I am also short approximately 25,000 shares of UTEK because of its relationship to Xethanol. I have tried to short more, but have been unable to borrow the stock. I am currently underwater on this short.

My intention is not to cover based on any short-term swing in the price of either stock.  I will stay short until there is a material change in the operations of either company. My goal is to never have to cover.

As a note, my personal preference is that you not take any investment action based on the information in this report. We are not trying to move the price of the stock. The operations of the company will define the long-term prospects of the companies mentioned.

What we are doing is the nook-and-cranny research that most people are unable or unwilling to do.  The process of tying together the little pieces that you find when you visit a plant and talk to local officials, from uncovering information from newspapers that haven’t made it onto the Net yet, from making the calls to confirm a resume. Those are the Nth degree of investigation that all investors wish they could do, but can’t afford the time or resources to do. It’s uncovering this depth of minutiae that can be valuable. Valuable not in the sense that you should trade on this information. Valuable in knowing more information about the people involved, just in case you come across them in your personal business dealings.