Though coal’s central role in American energy production has declined in the last 20 years as the demand for natural gas and renewable energy grow, the industry has sought to preserve its status by developing technologies that will strip harmful chemicals from coal emissions. These efforts gained the slogan “clean coal” in the 1980s.
The earliest iteration of these technologies were filters called “scrubbers” installed on top of the smokestacks at coal-burning plants. The scrubbers removed some emissions, such as sulfur dioxide, but not carbon dioxide. As technologies developed further, both coal gasification and Carbon Capture and Storage (CCS) emerged as options. However, both technologies were rarely cost-effective.
The last decade is littered with abandoned CCS projects, such as Boundary Dam in Canada and the Kemper County Energy Facility in Mississippi. Proving unmarketable, however, is not the same as knowingly selling technologies that don’t work. The latter can fall under the wide banner of securities fraud.
However, without inside information, it can be difficult to determine whether companies are knowingly selling non-functional products. To encourage those with inside information to step forward, the Dodd-Frank SEC Whistleblower program allows whistleblowers, including non-U.S. citizens, to confidentially report companies who are fraudulently selling technologies, and whistleblowers who provide original information that leads to successful SEC prosecution can receive between 10% and 30% of monetary sanctions.
As the coal industry faces increasing financial challenges and contends with environmental regulations, it is possible that it will place a strong emphasis on clean coal technologies to demonstrate its continued viability. However, as a previous case shows, there is a chance that not all these technologies will be functional.
Bixby Energy Systems’ Coal Gasification Machine
Bixby Energy Systems, a Minnesota-based alternative energy company, was founded in 2001 by businessman Robert Walker. Walker sold investors on a machine that would convert carbon from coal combustion into gas or carbon byproducts used in oil extraction, or “coal gasification.”
The process of coal gasification has existed for decades, but initially was less economically viable. The technique is also quite complicated. Two prototypes produced by Bixby failed to perform. Yet Walker “lied repeatedly about the capability of the company’s coal gasification machine, characterizing it as “proven” and “ready for market,” when, in fact, the technology had never worked,” according to a Justice Department press release.
Despite the company’s dire financial condition and inoperable prototypes, Walker continued to raise money from investors around the world, all the while spending company money on a lavish lifestyle. After a decade as the Chief Executive Officer, he was forced by Bixby’s board of directors to resign in 2011, after which the company collapsed, causing more than $56 million in losses to some 1,800 investors.
Walker was indicted in 2012 by a federal grand jury on nine counts of mail fraud, five counts of wire fraud, four counts of securities fraud, and one count of conspiracy to commit mail fraud. His case went to trial in 2014, during which witnesses described a panoply of fraudulent behavior by Walker such as receiving kickbacks on fundraising commissions and lying to investors about taking the company public. Walker was convicted on four counts of mail fraud, nine counts of wire fraud, one count of witness tampering and three counts of tax evasion. He received a 25-year jail term and was ordered to pay $56 million in restitution.
Other Bixby executives were convicted of financial fraud as well. Chief Financial Officer Dennis Desender pleaded guilty to securities fraud in 2011, and fundraiser Gary Collyard pleaded guilty the following year to conspiring to commit securities and bank fraud. The men admitted to concealing or providing false information to investors in order to secure funds, for example telling them the coal gasification machine was ready for market.
While other “clean coal” projects may have proved expensive or inefficient, knowingly misrepresenting technologies as operational when they are not constitutes fraud. The Bixby Energy Systems case exemplifies this distinction. All three executives pleaded guilty to securities fraud along with their other charges.
As the coal industry faces increasing financial challenges and seeks out new technologies, executives could be tempted to misrepresent the state of company products. What the case of Bixby Energy Systems shows is that while some executive may see this as solution, it is financial fraud – one that can be prosecuted using powerful enforcement mechanisms like the SEC whistleblower program.