SEC Charges Six Individuals with Misrepresenting and Overvaluing Clean Energy Projects

October 2019
View PDF

In June 2019, the SEC charged four former executives of Blue Earth Inc. (“Blue Earth”), a now-bankrupt energy company, alleging that the executives overvalued a construction in progress (“CIP”) asset that purportedly reflected seven combined heat and power plant projects that it claimed would transform the company from an unprofitable venture to a profitable one. The SEC also alleged that the executives repeatedly misrepresented the company’s construction, ownership, and operation of the projects when in it had only secured contracts for two power plants and had limited prospects of actually performing those contracts or obtaining additional contracts. In addition to charging the former Blue Earth executives, the SEC instituted related settled administrative proceedings against a former accounting consultant to the company and its external auditor. Both individuals have been suspended from appearing and practicing before the SEC as accountants, and one of them also agreed to pay a $70,000 penalty.

  • Inflated CIP Valuation – Blue Earth valued the CIP asset at $44 million, which according to the SEC’s complaint, was inflated by more than 400% and made up more than half of the company’s balance sheet. This valuation was based on a discounted cash flow analysis prepared by the company’s former CFO, which reflected a number of false assumptions, including that Blue Earth had entered into definitive agreements to construct all seven plants and that it had secured full financing to construct and operate the seven plants. The SEC alleged that the company’s former CFO further manipulated other inputs, including the discount rate and forecasted overhead expenses, to arrive at a higher valuation. The former CFO also failed to adjust the analysis to account for subsequent developments that would have reduced the valuation.
  • Failure to Allocate Goodwill – The SEC alleged that Blue Earth improperly recorded the entire $44 million asset to CIP when most of the asset should have been allocated to goodwill, where it should have been periodically tested for impairment, because the valuation was based solely on indefinite future cash flows, and not any identifiable assets. According to the SEC order, Blue Earth should have tested the asset for impairment after it experienced a “triggering event,” namely when subsequent developments materially increased the risk that contracts would not be signed for the construction of additional plants.
  • Focus on Individual Accountability – The SEC’s complaint includes charges against four former Blue Earth executives, including the CEO, CFO, president and chief operating officer, and vice president of corporate development and investor relations. The SEC seeks permanent injunctions, civil penalties, and penny stock and officer and director bars from each defendant. Notably, as of the date of this writing, the SEC has not brought charges against the company, presumably because it is bankrupt.

The SEC’s complaint against the former Blue Earth executives can be found here.

The SEC’s settlement order with Blue Earth’s former accounting consultant can be found here.

The SEC’s settlement order with Blue Earth’s former external auditor can be found here.

View the full Accounting & Financial Reporting Enforcement Round-Up