Sharesleuth.com: Xethanol Corp.

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by Christopher Carey

Xethanol's plant in Blairstown, Iowa. June 30, 2006. Xethanol Corp. bills itself as a biotechnology-driven ethanol company that can turn wood chips, corn stalks and paper sludge into cheap alternative fuel.

But a Sharesleuth.com investigation found no evidence that Xethanol (XNL: AMEX) has produced significant quantities of ethanol from those raw materials. Combine that with Xethanol’s announcement that it’s poised to become one of the first companies to commercialize that technology – a sort of Holy Grail in the renewable-energy world – and you’ve got the type of inconsistency that Sharesleuth seeks to uncover with its stories.

When Sharesleuth identifies what might be considered corporate misdirection, we take a deeper look at the company, its history, its business and the people behind it.

At Xethanol, we discovered that the shareholders whose names appeared in the company’s SEC filings over the past year and a half included no fewer than eight current or former stock brokers who have been the subjects of disciplinary actions by the Securities and Exchange Commission, the National Association of Securities Dealers or other regulatory bodies.

One of the five biggest shareholders in Xethanol when it went public last year was William Scott Smith, who was charged by the SEC in 1995 with defrauding investors in a Denver-based shell company called Melbourne Capital Corp. The SEC said that Smith installed his nephew and two friends as officers and directors of Melbourne Capital, and that the group -- at Smith’s direction -- misused or misappropriated 70 percent of the $246,000 that the company raised from investors. The onetime stockbroker settled the charges in 1996, without admitting or denying guilt. The SEC assessed $256,000 in financial penalties and barred Smith from serving as an officer or director of any public company.

Xethanol's plant in Hopkinton, Iowa. June 30, 2006. Xethanol’s SEC filings refer to him as W. Scott Smith and do not mention his past. We confirmed that he was the same person by comparing address records, birthdates, Social Security numbers and other identifying information.

Sharesleuth noted in its investigation that Christopher d’Arnaud-Taylor, Xethanol’s chairman and chief executive officer, claims to have gained “global senior corporate executive experience with multinationals including Unilever, Reed Elsevier, Northop Grumman and TKM Trading.’’ Two of those companies – Reed Elsevier and Northrop Grumman -- said they could find no information confirming his employment, in any capacity.

Sharesleuth also learned that one of Xethanol’s two conventional ethanol plants, a facility it once called its Biomass Technology Center, has been idle for more than a year and no longer has water or sewer service – two prerequisites for testing or production.

Other things that caught our attention include:

The company’s minimal spending on research and development.
An absence of scientists on its staff.
The relatively low price it paid for the outside technology upon which its waste-to-ethanol dreams are based.
Key alliances with two companies founded by the same person -- a former stock broker who now functions as a financial consultant and promotor.

A SHARED HISTORY

Smith’s ownership stake in Xethanol was not happenstance.

Florida corporation filings list D’Arnaud-Taylor and Smith as officers of London Manhattan Limited Inc., the company that provided executive-management services to Xethanol from September 2001 to January 2005. The filings list d’Arnaud-Taylor as president of London Manhattan They list Smith as vice president and Franz A. Skryanz, another Xethanol officer, as secretary and treasurer.

Sharesleuth uncovered a second connection between d’Arnaud-Taylor and Smith dating back to 1996. Their names appeared together in a suit filed by a New York doctor who claimed he was defrauded of $30,000. The doctor alleged that d’Arnaud-Taylor and Smith participated in a scheme to extract an up-front fee for business financing that was promised but never materialized. The doctor dropped his suit in favor of settlement negotiations. But d’Arnaud-Taylor’s three co-defendants later wound up in prison -- two for advance-fee loan frauds and one for laundering money for a drug ring.

Sharesleuth found that d’Arnaud-Taylor was more recently a partner in two business ventures with Andrew Kimmins, a former British brokerage executive who served prison time for fraud in the 1990s. One of those companies, or its shareholders, had an early stake in Xethanol.

It’s possible that d’Arnaud-Taylor just bragged a little on his resume and has picked the wrong people to do business with. Sharesleuth readers should use their own judgment.

A SLOW START AND A FAST RISE

Xethanol entered the ethanol business in 2003, buying a small plant in Hopkinton, Iowa, that was using waste water from candy companies as the source of sugars it fermented into ethanol. It bought a second plant, in Blairstown, Iowa, out of bankruptcy in October 2004. The two operations have a combined capacity of 7.1 million gallons a year and are designed to make fuel from corn and other high-starch or high-sugar feedstocks.

Xethanol went public in February 2005 through a reverse merger with a moribund pottery business whose shares traded on the Over-the-Counter market. Its stock performance was unremarkable until early this year, when its shares rose sevenfold. Xethanol climbed from a low of $2.30 in January to a high of $16.18 in April, riding a surge of investor interest in ethanol producers and a steady wave of press releases about new deals and developments.

Xethanol’s trading volume was amplified by a financing deal that called for Fusion Capital Fund II of Chicago to buy $40,000 of stock a day, provided that the company’s shares remained at or above certain price levels. The deal also allowed Fusion to quickly sell the shares it purchased.

According to Xethanol’s SEC filings, Fusion Capital bought 1.89 million shares between Jan. 3 and April 30. Fusion paid $9.85 million, or an average of $5.20 a share. Xethanol’s stock hit its peak of $16.18 in interday trading on April 18, which also was the highest volume day.

While Fusion Capital was buying, D’Arnaud-Taylor and his wife were selling. He filed SEC disclosure forms covering 125,000 shares of Xethanol stock held by his spouse. The filings listed sales between Feb. 21 and April 12 and estimated proceeds of $1.37 million. D’Arnaud-Taylor and his wife still control roughly 1.5 million shares, excluding options, with a current market value of $10.4 million

Jeffrey S. Langberg, described by Xethanol as an independent investment banker who has advised d’Arnaud-Taylor since 1999, reported the sale of $1.41 million in stock from February through April.. His filings said the shares were held by his spouse. Langberg has been a Xethanol consultant and, until June 12, a member of its board of directors

Xethanol’s stock has skidded over the past three months, and closed at $6.95 a share on Friday. Trading volume also has declined, despite a move in June to the American Stock Exchange. Xethanol still has a market capitalization of more than $180 million.

(Disclosure: Mark Cuban, the majority member of Sharesleuth.com LLC, sold short 10,000 shares of Xethanol’s stock at a time when the price was around $12.65. Cuban also has sold short about 25,000 shares of UTEK Corp.(UTK: AMEX), a Florida company that is a large Xethanol shareholder.)

XETHANOL’S STRATEGY

Xethanol says its long-term strategy is built around the promise of producing ethanol from cellulosic “biomass.” Advocates of that approach say it is less expensive and less energy-intensive than using corn and other grain products as a feedstock.

Detractors say cellulosic ethanol has yet to prove economically feasible, despite three decades of trying.

“Sometimes I compare the difference between ethanol from corn and ethanol from cellulose as the difference between traveling to the moon and traveling to Mars,’’ said Robert Rapier, a chemical engineer who works in the petroleum industry and has done research on alternative fuels. “We have traveled to the moon several times, and while not cheap, the feasibility has been demonstrated. There is no doubt that we could travel to Mars, just like we can make cellulosic ethanol, but the costs of both are prohibitive, and the barriers to commercialization are huge.’’

Xethanol said July 20 it would proceed with plans to convert a former pharmaceutical plant in Augusta, Ga., to produce ethanol from biomass. It said the operation would open in mid-2007 and have a capacity of 50 million gallons a year.

That announcement came as a surprise to officials at Iogen Corp. The Candian company operates the only plant in North America that produces large quantities of ethanol from cellulose, and that operation still is in the demonstration phase. Iogen does not expect to complete its first commercial plant, a 50-million-gallon facility with a projected cost of $300 million, until 2008.

Iogen has major financial backing from Royal Dutch/Shell Group, Petro-Canada, the Canadian government and Goldman Sachs & Co. It has spent tens of millions of dollars on research and development to move its project forward.

Xethanol did not say how much it expects its plant to cost, or how it would finance the project.

Xethanol’s plan to open a commercial cellulosic ethanol plant within a year seems overly ambitious to Spencer Kelly, ethanol analyst for the Oil Price Information in Rockville, Md.

“Nobody else does it,” Kelly said. “It’s still basically experimental.’’

Xethanol has also announced that it will expand its operation in Blairstown, adding a corn-to-ethanol plant with an annual capacity of 35 million gallons. It plans to convert the original plant to produce cellulosic ethanol.

Xethanol is not without resources in its bid to diversify and grow. It raised roughly $34 million in equity capital in April, including $4 million from Goldman Sachs, which has been investing in ethanol ventures. And Xethanol says it has enlisted PRAJ Industries Ltd., an Indian company that designs and builds distilleries and ethanol plants, to work on its new projects in Georgia and Iowa. Although PRAJ has begun exploring the cellulosic ethanol business, it has no demonstrated expertise.

TRICKY SCIENCE

Although the vision of biomass as an abundant, low-cost source of alternative energy is alluring, scientists have struggled for years to find an efficient and economical way to break down its cellulose fibers into usable components.

“The proponents always downplay the challenges, and just presume they will be solved,’’ said Rapier, who writes about ethanol issues on his blog, R-Squared. "They seem to think they can just legislate their way to commercial viability. That hasn't worked with hydrogen, and I don't believe it will work with cellulosic ethanol.’’

It is not Sharesleuth’s job to evaluate whether the technology that Xethanol has chosen will work. In the scientific debate over ethanol, just as in all debates, it’s easy to find “experts” on both sides. But it is our job to find examples of activity that could lead Xethanol to success. The aforementioned Iogen has published and demonstrated its progress. We have been unable to find any comparable announcements by Xethanol, or any outside individuals aware of the progress that Xethanol has made towards producing cellulosic ethanol.

Sharesleuth asked the company whether it had created any test batches and, if so, where the tests were conducted and what the company used as a feedstock. Xethanol declined to answer.

“All of the information that you requested is confidential and proprietary information relating to our research and development,’’ the company said in a written response.

Xethanol does not have a chemist or scientist among its top executives, nor has it been granted patents on any internally developed technology for processing cellulosic feedstocks or converting them into ethanol. The company’s SEC filings say that the company spent less than $240,000 on research and development in the two years that ended Dec. 31. The company has augmented that work by licensing a variety of technological applications developed mainly by government and university laboratories. Here is how the company described its approach in its most recent annual filing with the SEC:

“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?

Exterior of Hopkinton plant. June 30, 2006. 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

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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.

Comments

Congrats Chris,

This is the best piece I've seen on Xethanol.(It's been kicking around the short community for a while.)

I especially like how you explored the backgrounds of the principals.

Good luck!

Christopher Laudani
chris@shortideas.com

Posted by: Chris@shortideas | August 7, 2006 02:14 PM

Great piece. For the moment, though, like so many great short ideas, though, this one is not shortable anywhere I trade, either.

I'll keep checking, though. Regularly looking for shares does work when you trade in the tiny sizes that suit my portfolio.

Which reminds me -- what's Cuban doing only short 10k? That's got to be way less than one basis point of exposure in his portfolio.

I guess this thing really is impossible to short just now.

Posted by: wcw | August 7, 2006 02:43 PM

Excellent story, folks. It's my hope that stories like this one prove to be the catalyst for criminal actions against these folks and others like them across ALL industries...

Posted by: ehddiej | August 7, 2006 03:09 PM

Nice work. Keep it up.

Posted by: LucyH | August 8, 2006 06:38 PM

The fact that Goldman Sachs has invested in this makes me question their credibility. Do you think the Wall Street types don't know where IA is located so just took Xethanol's word for it? Sounds like they need to take a road trip. Makes me wonder who has friends in high places - you would think that GS would do the due diligence on the principals of these companies.

Great work! You go the extra mile, glad I haven't done anything that would make you want to investigate me! Also very timely with oil prices in the news again today.

Posted by: 2_travel | August 8, 2006 07:46 PM

Lets see, the latest news is Xethanol purchased a fiberboard plant in Springhill NC and in 6 months they will be producing ethanol out of it. Sounds like big news for such a small town...but nary a word about it here; http://www.springhopeenterprise.com

Posted by: LarryDan | August 9, 2006 08:03 AM

So what's the connection between Agonal Bio-Refineries and Xethanol? I think the point of all of this is to find additional connections and leads....right? Please provide more info if you have it.

Posted by: 2_travel | August 9, 2006 08:37 AM

Chris and Mark,

Excellent work on this first story. Looking forward to the next one. Will you have follow-up reports on stories like this one in order to update the readers?

regards,

the_worm06

Posted by: the_worm06 | August 9, 2006 01:05 PM

Great work!

I don't know if it's just me but don't you just love reading this kind of stuff. Maybe it's the quality of the dd, maybe it's that fly-on-the-wall perspective or maybe it's that guilty pleasure of peeking at the car-wreck death scene we are driving by. Maybe it's all the above.

If you can keep doing these you are guaranteed a wide audience.

David Baines of the Vancouver Sun built a huge following "David Baines has been uncovering white collar crime for the past 20 years. He has an MBA from the University of Western Ontario and has won three National Newspaper Awards. His column appears Wednesdays and Saturdays."

His coverage on OTCBB's is nearly unmatched (see his June 10/2006 Promoting an Aura of Respectability -- re Bulldog Technology)

A classic Baines
http://www.pugetsoundradio.com/cgi-bin/forum/Blah.pl?m-1153642850/

I don't see a problem with the fact there are no shares available for borrowing. This was your first subject and you needed a company that fit the mission. I think Xethanol was a perfect case study.

Looking forward to more.

Posted by: Bitstream | August 9, 2006 01:17 PM

Saw this on CNBC. Very nice.

Posted by: NYSE Broker | August 9, 2006 06:56 PM

Mark & Chris,
You guys rock! This is awesome. Please keep this initiative on going. CNBC needs to pay attention.

Posted by: eraptor | August 9, 2006 06:57 PM

WOW! Xethanol Corp. seems like they are operating like the following stocks I bought.

GSCT.OB
GSHF.OB
GSEG.OB

Any thoughts? Or information?
I lost 3k on my initial investment and it "seems" as though they have things going on but I think they are a pump and dump. Please advise.

Posted by: secretvip | August 9, 2006 10:53 PM

Chris-

This is an awesome report. I love how you visited the location of the site and took photos of the facilities. It's one thing to report on someone's background or SEC filings, but when you include photos it makes it even better. A photo is worth a thousand words, and your photos of the worn down plant say it all.

Keep up the great work.

Posted by: FraudBuster | August 10, 2006 03:37 AM

Excellent piece Chris. Another company in the same space that appears to be legitimate is Dyadic International (DIL). I came across Dyadic after a reading an article titled Children of The Corn by SmartMoney.com earlier this year during the height of the alternative energy craze. Most scientists I have spoken to remain skeptical about converting biomass to ethanol and hence I have refrained from investing in Dyadic. It will be interesting to see how well Iogen and Dyadic execute in coming years.

Once again congratulations on a lengthy but well researched article.

Asif
Editor
SINLetter.com

Posted by: sinnerMan | August 10, 2006 02:08 PM

Xethanol has made an attempt to respond to this article. Find it below:

http://tinyurl.com/ohxb9

Posted by: ndk | August 10, 2006 03:14 PM

An "attempt" to reply is a correct characterization. How hard is it to publish a resume, or say "Come see our plant, employees, vendors, customers"

Posted by: Dan4911 | August 10, 2006 05:20 PM

Great article!! Thanks so much for the in depth reporting. This company never sounded right with me as I was researching biodiesel and ethanol companies. Its so hard and time consuming to find factual infomation about especially in a hot trending sector. Investors high on emotion and the continually higher oil prices, fosters an open season for schiesters looking to take advantage.

I have used Stocklemons.com to check stocks I'm looking at. One that I had in my portfolio the first time I check this site was XSNX, upon reading their report I sold. I agree with the man a few posts above me here that I would like this kind of reporting on Greenshift (GSHF) and thier holdings. I have owned them at one time. They have supposedly taken orders for thier oil extraction equipment from ethanol plants. Are they building them? When will the first be installed. According to thier website their prototype is installed and working. They just went thru some name changes and ticker changes, I want an explanation.

Another stock to look at is Earth Biofuels(EBOF). Can Willie Nelson, Morgan Freeman, and Julia Roberts be wrong about this company? It was the announcment of Willie Nelson selling Biodiesel that introduced me to biodiesel over a year ago. I now drive on B100 and am involved in a non-profit in CA providing education to all stakeholders of biodiesel. www.biodieselcouncil.org

Look forward to more of your reports!!
Kari Lemons

Posted by: klemons | August 10, 2006 06:21 PM

Nice work.

Impossible to short, but there are put options available for the kamikazes out there. **Beware of poor liquidity**

Posted by: idoru | August 10, 2006 08:36 PM

Hey guys, Great work. A very in depth and illuminating story indeed. Hell of a first issue. Keep on sleuthing!

Posted by: hamdogthirty | August 10, 2006 09:52 PM

Found the report interesting. Being your first I hope it is a homerun-slam dunk. You appear to have done the DD. Good "sleuth"ing.

I love exposé style reporting and look forward to your future reports. Also I acknowledge the rights of anyone to short any stock in the markets. It is the odd synergy of the 2 I have issue with not the idividual parts - shorting and negative sleuth reporting.

This is just one man's opinion and I am not making accusation of any wrong doing by Mr. Cuban or Mr. Carey. I welcome comments that can poke holes in my logic. I always enjoy the reponses that DO NOT agree with me more that those that do agree with me.

I see a huge contradiction in providing information on what you personally believe to be a scam (in escence, posting a "do not enter" sign) but then on the other hand potentially making a financial gain (shorting the company stock). Essentially, it seems, indirectly partaking in the named fraudulent operation and knowingly so. This is even magnified by the fact of Mr. Cuban shorting the shares PRIOR to the report that it appears he has direct input.

In the report D’Arnaud-Taylor and his wife are demonized for selling the company shares into the open market, and maybe rightly so. But how are the buyers of Mr. Cuban's short sell any less a victim than the buyers of D’Arnaud-Taylor sells? If both are aware that the underlining business that the shares represent to be a perversion of truth are they not each participants? (though Mr. Cuban on lower level understandably so). Is not the instrument of the fraud the stock itself?

Does Mr. Cuban bother to call the person about to buy shares and inform them of the information he has in hand PRIOR to making the short sell? Does it bother him who might be on the other end of the transaction?

Here is a analogy. I become aware of a supplier of vitamins and supplements. I order some samples but after doing a little scientific testing find in reality nothing more than placebo. Still I order a big shipment on credit with the supplier. Then sell the product on Ebay. After doing so I contact my buddy at XYZ Daily with the scoop. The supplier is turned into the FDA and shut down. I don't have to pay back my credit. I reimburse the buyers that bother to go through the effort which turns out to be about half and pocket the difference. And everyone should be thanking me for exposing a fraud.

It seems the reporting is more - "Hey here is the latest scheme. Participate while you can, I am." opposed to - "Mr. Yuck says don't drink."

All just my opinion.

Posted by: elvistcb35_77 | August 10, 2006 09:57 PM

Here is another analogy.

I see a group of thugs burglarizing the local jewelry store. But they make off before I can stop them. Thinking quick I call the police, report the crime and tell them I can pick these guys out in a lineup. The cops tell me to wait at the scene and they will be there in 5 mins. Spotting my chance I quickly select a nice expensive watch for myself. The cops show up, the bad guys are nabbed, I am the local hero, and the old guy who owns the store sends me a nice bottle of wine. Oh, and I have a nice new watch.

JMHO

Posted by: elvistcb35_77 | August 10, 2006 10:16 PM

I have haerd from Tobin Smith of ChangeWave Investing Alert. He believes this is somewhat of a slam job. He will be in New York tomorrow to obtain further details. I agree it is questionable when those doing the slam also position themselves to proffit. I must also say that there does appear to be an overly involvement of questionable characters involved in this biz. Also that many stated projects are not in existence or no where near what is claimed. It looks as though a higher level of legal investigation is needed. Does anyone recall a so called mining & exploration company which I believ was named BreeEx ? I understand they were the cause of the downfall of the Vancouver Stock Exchange.

Posted by: infojoe | August 10, 2006 10:32 PM

What if I told you I knew a guy that made $1,000,000 in profit last year, would you have a problem with that?...

Now what if I told you he made his money by wooing little old ladys out of their life savings? In essence a con-artist. So, watch out for grandmother?...

Now what if I tell you I am turning evidence over to the authorities that will hopefully lead to his capture? Am I a hero?...

Now what if I tell you for me to finance my investigation and get the dirt (unbeknownst to him) I had to particpate with him in a few of the house calls? And with whatever leftover I do not return to grandma but pocket the difference.

Am I providing a service to society? Do I deserve these kickbacks?

BTW, this is all hypothetical.

Posted by: elvistcb35_77 | August 10, 2006 11:58 PM

Now that's what I call a thorough investigation. I'm looking forward to the next one. I would hope that this site strikes fear into all the fraudulent operations out there. Finally somebody with the financial resources of Mark Cuban has the courage to go after these people. It's too bad that the SEC can't (or wont)do the same thing.

I don't see the problem with shorting the stock as long as he tells you up front that is what he had done. Maybe that can help defray the cost of the investigative work and the web site to expose these people.

You can bet that if he can't back up what he says he will get sued.

Thanks Mark and Chris, this has been sorely needed for a long time

Posted by: TraderBubba | August 11, 2006 01:08 AM

Oh BTW infojoe I almost forgot. When you hear from Toby Smith again don't forget to ask him about how he used to brag about recommending Enron to his subscribers.

Before the scandal was exposed naturally.

After the scandal broke the reference to the Enron recommendation somehow got deleted from his brochures.

Posted by: TraderBubba | August 11, 2006 01:13 AM

My comments below are not directly related to this article, but to this site in general:

On the outset, it appears that you have good intentions Mr. Mark Cuban. Your plan is to uncover the "dirt" on companies to save investors from losing out, correct?...So this might make you a "hero" to some people...and I might agree with that EXCEPT for the fact that you appear to be making a decent profit on all of this negative hype you are building up. In a sense, you are profiting off of the unsuspecting shareholders (like me), who have put their trust in the companies you are digging up "dirt" on.

The honorable thing to do would be to NOT trade on the companies that you write about, thus giving your readers a chance to exit...or if you do trade wait for 30 days after the article has been released.

If you happen to uncover true "dirt" about a company, and that company is truly an "evil" company, than the shareholders are victims, correct? So, in essence, what you are doing now is profiting off of victims before they have an opportunity to escape.

Posted by: XethanalShareHolder | August 11, 2006 01:50 AM

TraderBubba,

"I don't see the problem with shorting the stock as long as he tells you up front that is what he had done."

Telling you he has shorted the stock is actually the last thing he does.

The order is:
1. Short the stock
2. Publicize the piece
3. Disclose at the end of the article

Hardly upfront. Upfront, IMO, would be this order:

1. Publicize the piece
2. Disclose intent to short the stock
3. Wait a reasonable amount of time for public comsumption of article
4. Short the stock

Under your test, you WOULD appear to have a problem.

The ramifications of all this remain to be seen. Some may have ethical or philosophical objections, but legally there may be nothing here.

What I find so interesting is the brazen upfront nature of the policy. No apologies attitude... you know - whatever it takes.

Should Mr. Cuban ne applauded for being honest with what, IMO, happens everyday - collusion between market participants and "journalist"

I have no problem with Mr. Cuban making a profit, but this whole project will no doubt create some interesting philosophical, ethical, and legal debates.

Posted by: elvistcb35_77 | August 11, 2006 02:01 AM

elvistcb35_77

I find your three analogies to be not only wrong, but disturbing.

In each of your three comparison you are specifically commiting a crime - you are knowingly breaking the law.

Are you suggesting that Mr. Cuban is committing a crime when he does top notch research on a company, finds out that they have not been operating on the on the level, shorts the stock, then lets the world know of the problems with the company at the same time that he reveals his position in the company?

I hope not.

In your vitamin comparison, you commit a crime by knowingly and fraudulently selling a vitamin product which you have found out is nothing more than placebo.

In your jewelry store comparison, you commit a crime by stealing a piece of jewelry.

In your old lady con artist comparison, you commit a crime by teaming up with the con artist to con the old ladies out of their money.

Please think a little before attempting to make such disturbing analogies.

Posted by: the_worm06 | August 11, 2006 04:04 AM

the_worm06,

I do not know if there is anything illegal about the venture and I am not making the accusation. BUT I also am not comfortable giving my stamp of approval with a short post - "Hey great job Mark! YOU ROCK!" - like all Cuban wannabes will do IMO.

Exposing fraud is a good thing. Hopefully this project will do just that. But I have ask what you think the instrument of the fraud is? If the company is truly a scam than is not the instrument the publicly traded stock? Is not the REAL story here how crooks can get a company's stock traded on a public market in the first place?

If I esentially have proof that a company is a fruad (essentially the stock is worth $0) Am I not in some indirect way participating in the scheme (though maybe not bound legally) by selling the stock to a potential unsuspecting buyer? Would it make it different if it was not in electronical form but an actually physical certificate? (that is my placebo reference)

Do you think the buyer of Mr. Cuban's short sell has any legal recourse? Do you think the buyer of the "insider's" short sells has any legal recourse?

As best I can tell the expose will be on companies that were a fraud form the get go. So why do we continue to let these companies to go public?

Like I said, the marriage of the 2 is where I see potential problems. But isn't someone with knowledge of a crime being committed obligated to notify the authorities in the first place. Does holding back the information for a period letting Mr. Cuban take a short position bother anyone?

I am just trying to ask thought provoking question. These are not accusations as even some of the questions I ask I do not have the answers to.

Thanks!

Posted by: elvistcb35_77 | August 11, 2006 08:48 AM

Dear elvistcb35_77

By a word count you have written nearly as much literary material on this website as the owner and author and probably far exceed the number of Mark's words.

The problem with this is you have you have contributed next to nothing. In relation to the topic, your analogies make no sense whatsoever, you have very little knowledge regarding how the markets work and your posts are nearly devoid of any worth to anyone.

More succinctly, you are arguing with yourself. If you feel the need to see your words on a computer screen you should be saving your words in Word rather than making umpteen-dozen posts on a site the rest of us are trying to use.

If you have an opinion about the site email the owner. Sharesleuth is exactly what it purports to be. Trying to pick arguments here about its mission is an abuse of your "comments" privilege.

Your ego is oozing all over this section of the site and for those that accept the sites function we have no need for all the clutter.

This is not the first shot in a flame war but rather a finger pointing you the direction of the door. I think they can probably start deleting your posts if you persist.

You didn't read the front page of this site...

"Today we begin our grand experiment -- independent Web-based reporting aimed at exposing securities fraud and corporate chicanery. Call it journalism. Call it investigative blogging. Call it what you will.

Sharesleuth.com will pursue stories based on their journalistic merit, their potential public impact and their entertainment value.

My goals for Sharesleuth.com are to shine a spotlight on questionable companies, to build an audience through unique, compelling stories and to generate multimedia content."

You are raising non-issues.

Please do not take this as a personal attack, for the simple reason none of us know who you are. Just do some more homework and reading before you sign-in, otherwise you may find it won't work.

Regards

Bitstream

Posted by: Bitstream | August 11, 2006 10:49 AM

Bitstream,

If your objection is strickly based on what you call "clutter" by virtue of the # of words used in my posts than I apologize to you and anyone that feels the same. My intention is not to "ooze my ego". My intention is to provoke discussion, so thanks for the reply.

But I have to ask if you would be opposed to my thoughts if I was not so critical and questioning of this venture here?

If the owners feel my login needs to be disabled and/or my post deleted because they bring no value to the conversation, than so be it. But if it would come to that as they suggest - "...Call it journalism. Call it investigative blogging. Call it what you will." I will call it what I will.

http://en.wikipedia.org/wiki/Censorship

JMHO, thanks for your time.

Posted by: elvistcb35_77 | August 11, 2006 11:28 AM

I think the questions (maybe not the analogies) that elvistcb35_77 bring up are very valid.

Look at any reputable financial news letter. They either do not take a position in the companies mentioned or only after a couple days after publishing the report (not 30).

Regardless, I applaud the premise of the site and significant dd required to put this together.

I am also a subscriber to the news letter mentioned above (ChangeWave) and have e-mailed stating that the sharesleuth details are significantly more believable then the rebuttal from the company.

Posted by: Zipp | August 11, 2006 12:33 PM

Zipp,

Exposing fraud is good and I hope that aspect of this venture is a success.

I hope all parties will do their best effort to make sure no apsects of forthcoming expose get "leaked". Or does that even matter? i.e. If a select few are given the report a few days ahead of posting on this blog?

I just think someone with more brainpower than me and more elegant in tongue could argue a valid case under SEC Rule 10b-5 of Securities Exchange Act of 1934.

JMHO
Thanks for your time.

Posted by: elvistcb35_77 | August 11, 2006 01:08 PM

It appears as though ChangeWave has given a green light to Xethanol. I just checked their web site and find 7 references when I run a search on Xethanol on Toby's site, however I'm unable to access them without a subscription so I don't know what I would find in the reports, but I'm going to go out on a limb here, and guess that it isn't negative. And the last thing I'm going to do is to subscribe to a stock tout that gave out Enron as a play.

Speaking of good ol' Toby did he just get a new set of choppers or has he been using the whitening strips on his teeth?
Check out that picture of him on his front page in the Ask Toby ad. That is the toothiest grin I've ever seen and those are the whitest teeth I've ever seen. But I digress.

The issue is whether or not ChangeWave (the same folks who gave you Enron) will admit to giving out another bad tout.

Posted by: TraderBubba | August 11, 2006 01:49 PM

I don't understand all the fuss.

The media has been making a killing off of selling airtime and pseudo reporting that makes a company look good with little to no background checks on the information they provide.

Here we have a case of independently verified information being posted with full disclosure of all related parties involvement. The only problem it would seem is that the information is derogatory instead of a glowing review.

While it would be nice if Cuban would hold off on making his move until after an article is published, it's not as if he's using inside information gathered during a closed door session with the media. The information provided is the same that anyone could get with some thorough research. I thank him and sharesleuth.com for sharing this information with the investing public.

It's also worth noting that while there's been much to do about Cuban's involvement and the timing of his shorts, I have yet to read one article that pokes a single hole in the information in the original article. Even Xethanol's public reply is nothing more than a carefully worded denial that provides no evidence whatsoever that any of the information was false or misleading.

Posted by: Coitus | August 11, 2006 05:03 PM

It would be nice if sharesleuth had stock quote links to monitor stock activity.

Posted by: infojoe | August 11, 2006 06:25 PM

The number of Mark's words? I don't think anyone thinks for a moment that Cuban is doing the investigating here, much less writing the articles. Carey's said publicly that he decides on the editorial content and then tells Cuban and, call me foolish, but I believe the guy. He's got no professional record to suggest ortherwise.

As a former reporter, I know that the venues and funding for investigative work in print have dried up. Carey's trying to do solid investigative reporting and has said he will not personally trade on any of the info. He'd be stupid to lie about it. Too easy to prove. If HE traded on the stuff, then we'd have a real problem on our hands, I think. Cuban's not the writer, not the editor, not the journalist.

From what I've heard, Carey needed a financial backer and Cuban signed on. Cuban's a business guy through and through so he's looking to make a profit from his investment. I read somewhere he says he's going to put all that profit back into funding more reporting. How come nobody is mentioning that?

It's not insider trading for him to short the stocks before the story is published because he's not with Xethanol. Is it an ethical or wise approach? I'm not sure about that, either. What I do know is that this whole thing is a unique approach to online journalism. Not sure if it will succeed or not or if the concerns about Cuban's investment interests will undermine Carey's reporting. I hope not. It's an interesting experiment, to say the least. And its an interesting experiment that's uncovering some major crapola, it looks like. Let's not lose sight of that in the shuffle.

Speaking of interesting, here's a blog posting that discusses Xethanol's "response" to Carey's article: http://i-r-squared.blogspot.com/. Really hits the nail on the head in re: the company's failure to actually dispute or refute anything in the Sharesleuth report.

Posted by: LucyH | August 11, 2006 10:47 PM

Personally, I agree with those who affirm that Mr. Cuban has every right to take a position based upon investigations that he has funded.

However, by doing so prior to publication, the media, the message boards, and the public are focusing on "Mark Cuban this" and "Mark Cuban that". Very few are talking about Xethanol, and even fewer are talking about the great research done by Chris Carey.

In reading the chat room boards, it seems to me that the lesser informed investors, the people most likely to be hurt by stock fraud, are not even learning the great lesson that could be taught to them by Sharesleuth: "Know what you own" (or sell, as the case may be). They are simply assuming that Sharesleuth is just another "pumper/slammer" rag sheet, motivated by personal greed.

I hope Mr. Cuban and Mr. Carey can work out another way to fund this operation, so that the public's focus will be on the writing, and the subjects of the writing, NOT on Mr. Cuban's personal portfolio.

Posted by: Datasource2000 | August 12, 2006 05:40 AM

Congrats to ShareSleuth...A few points

1) Mr Cuban's latest venture highlights a much greater crisis emerging throughout the so called modern democracies...that is the lack or outright extinction of investigative journalism (financial, political or other)...do you really think that Paula Zann making 5m a year wakes up in the morning with the intention of asking the hard hitting questions...Bergdoff Goodman here I come

2) some of the posts have questionned the morality of shorting a Co. that appears at the surface to be an outright scam...I think those posts merit an indepth discussion...the same way a citizen who witnesses somebody being attacked on the street would at the very least called the police...in other words maybe the right thing to do would be for Mr Cuban to contact the Amex(in this case) and have them review his investigation, after which the Amex (the police in this case) would decide either to halt the stock (pending answers from the Co.) or maintain the open market process (ie you are free to Short)

3) I cannot help but to burst into laughter at the Co. response to the piece by ShareSleuth and I quote: "Xenathol considers it a source of pride that it has obtainded the benefit of what it beleives to be Valuable without either time delay or the expenditure of cash necessary for internal R&D"....right...I met I guy at a bar who had a fully tested chemical refining process that would revolutionizes the way the whole planet consumes energy and all I had to do was buy em a beer

Posted by: polen1 | August 12, 2006 11:12 AM

polen1 again:

several posts have mentionned the BreX scam...if you recall at one point Barrick Gold was asked to come into the picture has the potential leading mining contractor...they went and conducted their own Due Diligence(ie checked out the assays) and quietly turned down the offer...it is only several months later that another independent assay revealed the scam...my point being did Barrick have a fiduciary duty to the market authorities if it uncovered the non existence of proven reserves...philisophical Mr Watson

Posted by: polen1 | August 12, 2006 11:24 AM

The two things that stifle most investigative journalism are threats of lawsuits and political pressure.

Those are also the same things that scare off most watchdog agencies such as the SEC and the exchanges themselves. So expecting either one of them to pursue these things with the same tenacity as sharesleuth.com is unrealistic.

Rest assured that every company they expose will have their lawyers threaten sue the pants off supersleuth. That's why you need a good independent investigator like Chris Carey and a fearless businessman like Mark Cuban with the financial capability to fund the operation.

Posted by: TraderBubba | August 12, 2006 01:50 PM

The power of the Web and Blogosphere is awesome. By creating his own news, Cuban can manipulate markets to make even more billions. They are probably tracking any stocks you search for on their site as well.
I agree with the Xethonal Shareholder- Cuban should follow Cramer/TheStreet.com, etc. policies. They tell you about the stocks they like or don't like before they take any kind of stake in the companies. I think what Cuban is doing is highly unethical- but hey, like he did with Broadcom- he is laughing at all of you all the way to the bank.

You know most of our Congressmen and our President have run companies into the ground just like the Xethanol board might have done- its business-as-usual in America.

Posted by: bongomundo | August 12, 2006 08:11 PM

Mr. Mark Cuban:

A site like this is long overdue. Thank you for the information and keep up the good work.

Thank you for helping this gentlemen in his efforts.

Fortunately, with the help of this site more people will get out early on. In addition, fewer people will fall victim to companies like Enron, Paceco Financial Services, as well as others mentioned on this site.

Dirk Atkinson

Posted by: DirkAtkinson | August 13, 2006 01:11 PM

Down 9.77% today YEEHAW
Grab your a$$ scam artists you're about to learn the meaning of "what goes around comes around".

Posted by: TraderBubba | August 14, 2006 05:21 PM

So this is suppose to "help" people avoid investing in poorly managed companies or just plain bad companies...unfortunately the average investor got the info too late. I was down over $1200 by the time I was "informed". Mr. Cuban I appreciate your work, but a little heads up for the little guy would have been nice. I know $1200 may only be lunch for you, but it is a lot more than that for most people. I love the Mavs, I love you, but this hurts. That's just $1200 less I have to spend on Mavs tickets this year.

Posted by: OuchThatHurt | August 14, 2006 10:05 PM

The main point to remember is that Xenathol is not the only crooked company in this world. Mark and Chris give us a fine demonstration as to how to research a company.

Xenathol's executives have done a great disservice to its shareholder. They should be ivestigated and prosecuted to the fullest extent if need be.

Thank you Mark. Thank you Chris. Please post more articles.

Posted by: Mike Vadon | August 15, 2006 01:50 AM

Did you get back in at the bottom? Now "X" is up 3.5%. Time to short? I am all for Democracy Now style investigative reporting on scumbags selling vaporware but I still say it is market manipulation when you short, say, the "airline industry" and then exclaim, "the sky is falling". Or, light a fire in a theater and then yell, "fire!"

Posted by: bongomundo | August 15, 2006 10:17 AM

bongomundo

please help the readers a little.

Why don't you tell us how much is required to short every publicly traded stock in the airline industry in order to "manipulate" them into decreasing, say only 10%-20% in stock price, on average?

thanks

Posted by: the_worm06 | August 15, 2006 03:35 PM

Bongomongo raises the issue of market manipulation, but the analogies made don't make any sense to me. Shorting stocks and discussing the stocks being shorted on a blog does not constitute manipulation anymore than promoting a stock with a buy rating does. They are both merely opinions.

As for the shorting issue in general raised by others on this site, it has been around nearly as long as the markets have because it is seen as a necessary counter balance to a market with an upward bias. When a stock is plumetting sometimes the short sellers are the only ones buying as they cover. This actually slows a stocks decent. Shorting also adds liquidity to the market, reducing volatility. Why not make money in the market in both directions?

Hats off to Mark and his staff for this bold endeavor.

Posted by: softee | August 15, 2006 08:55 PM

Bongomundo
Sorry I got your name wrong on the previous post.

Posted by: softee | August 15, 2006 09:00 PM

Insider trading is not an issue with sharesleuth.com. The information provided in the report was public information that anyone can access online.

The only issue with sharesleuth I can see is market manipulation, or a violation of rule 10b-5. A case could be made that Sharesleuth could be a fraudulent scheme to artificially deflate the price of a stock, allowing Cuban to profit by buying it back at a lower price later. I think if Cuban covered into the selling pressure created by a Sharesleuth report (covering within a few days after the release of a report) it would be an obvious violation of rule 10b-5.

However, if Cuban waited a few days to cover untill the selling pressure subsided, and the stock stabilized or rebounded, it seems to me that the SEC's case would weaken substantially. I would love to hear comments on this theory.

Posted by: Tony | August 15, 2006 10:39 PM

Tony

I have a few comments regarding your statements.

When you say "fraudulent scheme" you are implying that fraud has been committed. Why don't you point out to us where the fraud is?

Does the report include any information that is materially false and misleading to warrant this fraudulent label?

I am sure that you have read the Company's rebuttal to this report. Not much proof that any of the report was false and misleading.

When you say "artificially deflate the price of the stock" you are implying that the stock has temporarily decreased from its "intrinsic" value due to the information contained in the report.

Is it not possible that the stock was already "artificially inflated" above what its "intrincsic" value should be?

It is very possible that the lack of easily available negative information, combined with positive press releases and public statements by the company has caused the price of the stock to be in an "artificially inflated" level before the report was publish.

As time passes by, more detailed "research" will be done on the Company, its oprations, it's Management and its partners that will allow the investment public to get a better feeling for the value of this Company.

Posted by: the_worm06 | August 16, 2006 03:31 AM

Tony
Could you please elaborate on rule 10b-5 for those of us who are not familiar with it? Aren't you implying that the information would need to be deliberately fraudulant for this rule to apply? This article seems to have strived to adhere only to the facts. Mark Cuban would have a lot more to lose if he deliberately put forth false information, he is much smarter than that. I think he is entitled to profit (if that is what he is doing,) by taking the risk and expenditure to provide this information. If more people were doing this, we would have less phoney or just plain badly run companies profiting at others expense; they would have no place to hide.

Posted by: softee | August 16, 2006 06:57 AM

Tony
Well said. Worm6 also makes some good points. I have wondered about the junk faxes I receive regarding "the latest hot stock" I should get in on. This seems like a similar strategy to what this site could become. Do the junk faxers hope to get the hype up on a stock with the fax attacks, then short the stock when reality sets in?
Could this site do the same thing- find a company, buy into it, then slam it-for a healthy profit?

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