A biofuels startup can't deliver on its promises (cont.)

By Patricia B. Gray and Justin Martin, FSB Magazine

A shady cast

As for Sharesleuth's claims about Taylor's murky past, a number of Xethanol's largest stakeholders, it turns out, are former Taylor business associates who have faced disciplinary action from either the SEC or the NASD. "The web of relationships is very incestuous and very disheartening," says Ian Horowitz of the New York City research firm Soleil Securities Group, the lone analyst now following Xethanol (soleilgroup.com).

"The paths of Taylor and these various associates have crossed many times in the past. Each time, they're walking away with bags of money."

In response, Xethanol officials maintain that Taylor's past associations prove nothing. Says Xethanol spokesman Richard Wilson: "This is a country of laws, and the fact is that [Taylor] isn't guilty of anything; he hasn't been charged with anything."

One longtime Taylor associate, William Scott Smith of Delray Beach, Fla., provided management services to Xethanol from 2001 through 2005. When Xethanol went public, filings showed that Smith owned 972,414 shares (7.3 percent of the company), making him the second-largest stakeholder, behind Taylor. This is the same William Scott Smith who in 1995 was charged by the SEC with setting up a Denver shell company called Melbourne Capital Corp. and defrauding investors out of $174,000. Smith settled the charges in 1995, paying $256,000. The SEC barred him from ever again serving as an officer or director of a public company. Smith did not respond to numerous attempts to contact him.

Taylor has been the subject of serious allegations more than once. In 1992 two of his former business partners sued him in federal court in Washington, D.C., charging that he had diverted $1 million in client fees from the trio's investment-banking firm into a new company he set up. Taylor settled the case.

In 1998 he was sued again, this time for $120,000 plus damages by a doctor from Poughkeepsie, N.Y., who accused Taylor and three associates of "racketeering activity." To help arrange financing for a medical-management company, the doctor says he paid $30,000 to a group that included Taylor. Even though no financing materialized, Taylor and his cohorts allegedly kept the fee. Once again, the case was settled for an undisclosed sum.

In August 2006, shortly after the Sharesleuth.com blog appeared, Taylor stepped down as CEO of Xethanol. The company says the move was part of a long-planned transition rooted in the need to replace a visionary founder with an operations-savvy top executive capable of scaling up the business. Taylor, however, had recently signed a three-year contract to be CEO. Taylor received as severance $100,000 and an extension on some of his Xethanol options. He was hired as a paid consultant and kept his seat on the board.

In the fall of 2006, shareholders began to file suits against Xethanol - eight at last count. The plaintiffs are seeking to recover the millions they lost as the stock plummet ed . Milton Ariail, a Xethanol stockholder, filed the first lawsuit. He charged management with making false claims to artificially inflate the stock's price during the spring of 2006, while cashing out its holdings. Ariail also accused Taylor of inflating his résumé, an allegation that had appeared earlier in the Sharesleuth.com piece.

"Taylor had fabricated his résumé and never worked at companies such as Northrop Grumman, Unilever and Reed Elsevier," Ariail asserted in the complaint. The companies Taylor said he had worked for either couldn't confirm his employment or refused to comment. Xethanol referred us to Taylor, who refused to comment on the issue.

Picking up the pieces

Besieged by shareholder suits and beset by allegations of fraud, Xethanol's seven-member board met on Nov. 9, 2006. By all accounts, it was a tense meeting, thanks to the presence of David Ames, 57, an Alpharetta, Ga., resident, former adman and founder of a cable-box maker that netted him tens of millions in the late 1990s.

Ames, who had joined the board only a month earlier, arrived with a proposal: Xethanol should press forward in its bid to become an experimental-ethanol maker, skeptics be damned. The company has licenses, he argued, so just let the engineers tinker with them. Eventually Xethanol would make good on its promises. "When you put ten engineers in a room and ask them to get from A to Z, they'll get there," he told FSB.

A rival board faction insisted that it was time for Xethanol to settle for being a small maker of corn-brewed ethanol. Ames won. The board endorsed his vision by electing him the company's new CEO by a vote of 4 to 3.

During the meeting one of the dissenters, Marc Oppenheimer, who was chairman of the audit committee, resigned. Interim CEO Bernstein followed later that day. Says Oppenheimer : "There's one tried-and-true way to make ethanol. You make it out of corn. Promising to make it out of waste? Well, you shouldn't promise what you can't deliver."

Five days after the board meeting, Xethanol completed the acquisition of a facility in Spring Hope, N.C. The plant cost $4 million, plus 1,197,000 Xethanol shares. Xethanol's new acquisition is an old, shuttered fiberboard plant. It has been sitting idle since 1998, when International Paper closed it down, laying off 200 people.

Here's how Xethanol describes the new facility in a press release: "We plan to reopen the facility in 2007 as a pilot plant to demonstrate the technical feasibility and economic viability of using wood chips as a cellulosic feedstock."

So what exactly does that mean ? "The first feedstock will be corn to get things up and running," explains Xethanol's Buller. When asked how that qualifies as a pilot plant for "cellulosic feedstock," an exasperated Buller finally replied, "We at least - damn it! - are making ethanol."

What does the future hold? CEO Ames says the complaints from former board members Oppenheimer and Bernstein are nothing more than "sour grapes." The SEC will not comment on whether it has launched an investigation. Horowitz of Soleil Securities, the lone analyst covering the company, has a strong sell on the stock.

In the meantime, Xethanol just announced that it has formed a new alliance with a company in Florida, and that it plans to start making an experimental kind of ethanol next year - from orange peels.

Are you thinking of starting a business? Got a question about financing, technology, taxes, team management, or any other topic related to launching or owning your own firm? Ask the editors of Fortune Small Business, and they'll help you get answers from the appropriate experts.

----------------------------

Helping cancer patients - and making $45M Top of page

To write a note to the editor about this article, click here.

Sponsors
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.