By Dr. Jim Dahle, WCI Founder

On March 23, 2023, I received an email from a white coat investor:

“Just curious if you have heard of this opportunity in carbon funds and ability to offset W-2 income. I have spoken to them but can’t seem to find any investors who I can directly speak to so that I can vet them appropriately.”

The WCIer forwarded an email from Dr. Eric Shelly (a dentist) soliciting an investment in a clean energy technology, including a link to more information.

 

Too Good to Be True

I spent two minutes looking at the email and the link and then replied:

“I don't know anything about it. Feels too good to be true, doesn't it? I wouldn't invest for that reason alone. I mean . . . if you get a 100% return every 18 months, that's the equivalent of an annualized return of 59%. At 59% returns, you would own the entire world in less than a lifetime. But the pro-forma shows a 29% average return. Still pretty darn high. With those sorts of returns, a doctor saving half his income could retire in like three years.

It doesn't give me a lot of confidence that they can't even spell “Executive Summary” right at the top of page 3 either.

This guy, Shelly, trained as a dentist and now seems to be involved in both build to rent real estate and this oil/gas carbon capture stuff. Kind of weird to be an expert in three fields. Not saying it's not possible, but there is a fair amount of risk here. Aside from the technology and manager risk, there's a fair amount of legislative risk here too.

Twenty-five percent of profits is a heck of a fee to the fund manager. There doesn't seem to be a preferred return to the investor either, which is kind of odd for these sorts of deals.

But might be interesting to look into for a blog post. Let me know how it goes if you decide to invest. And for heaven's sake, don't put more than 5% of your money into something like this.”

 

The Deal — Freedom Impact Consulting Offers Carbon Capture Technology

The email, titled “THERE'S STILL TIME to join our 2023 Carbon Funds!” looked like this:

I didn't watch it, but at the time of publication, the linked webinar was still available on YouTube. The link for additional information went to a 14-page brochure, which was still available as I wrote this blog post but no longer seems to be. The brochure included a few pages of very official-looking disclosures and a few pages explaining how the technology works and how it is going to boost revenue for oil and gas producers (a bit tough to follow). Then, it got into the projections.

It's all a little hard to follow, but the bottom line is that it projects really good returns despite paying really high fees. Its main selling point is “tax benefits;” i.e. depreciation/depletion being passed to the investor. Finally, it gets into some bios of the principals including the following:

I thought it was kind of weird that Eric seemed to have become an expert in dentistry, real estate, and now oil and gas. A true Renaissance man.

 

The Rest of the Story

My next communication from this WCIer came on June 28, 2023.

“Follow up

https://www.sec.gov/litigation/litreleases/2023/lr25712.htm

Scary stuff . . . glad I stuck with my instinct and stayed out. Thanks.”

So, what's at the link? Oh, just this:

Let's first acknowledge that Shelly and Hill are innocent until proven guilty. But if these allegations are true, they were just running a basic, run-of-the-mill Ponzi scheme. Given that Shelly was also a real estate syndicator, this was discussed on the Bigger Pockets forum. One poster, who apparently works in this space (presumably legitimately), said this:

“Wow! $155 million is a big raise Way outside current Crowdfunding limits a CF filing a company can legally Raise up to $5 million per year and in a Reg A filing a company can raise up to $75 million. 155 million and 500 investors is more like a 504 Reg D Seed round but then you usually would not see so many separate (500) investors. for the Carbon capture industry. do not know about the SEC suit and had never heard of them. But I'm currently in the Xprize Carbon removal competition sponsored by the Musk Foundation and the industry frowns on Carbon extracted from existing Oil and Gas refinement. Our Carbon Credits must also be verifiable by a third-party Audit with full LCA Accounting So if they are claiming to investors they get Carbon Dioxide from the existing oil and Gas industry doubt they would be allowed to sell it as actual Carbon credits. I do not know of an Entity that even could sell such Carbon Credits as it defeats the purpose of Carbon Removal. We've been explicitly advised not to include the existing oil industry as a source if we want to sell our Carbon Credits. We currently Remove Carbon in a bio-mineralization process from the Ocean.”

I'm no expert in this space, but it appears possible that the whole technology was a scam. Certainly, there was never a legitimate company. Check out these documents to see just how bad it was:

Whether the technology works really doesn't matter in this case, since it was never actually installed. Amazing that all of the employees knew it was an alleged Ponzi scheme, though. I wonder how much criminal liability they will have in this. Imagine being hired into a company and then realizing over time that it was just a big Ponzi scheme. Do you just leave? Do you call the SEC? Do you drop an anonymous tip? Do you call out your bosses on it? Do you tip off the investors?

 

Lessons to Learn from Ponzi Schemes

There are several lessons to learn from this case.

 

#1 You Can Avoid All This

The first lesson is that you can avoid all of this simply by investing in boring old index funds from large, well-established companies like Vanguard, Fidelity, Schwab, State Street, and Blackrock. These “accredited investor” investments are completely optional.

More information here:

How This Financially Literate Doctor Got Scammed Out of $75,000

Beware of Pump-and-Dump Schemes

 

#2 Do Your Due Diligence

If you do decide to invest in these sorts of investments—whether real estate, oil and gas, small businesses, cryptoassets, etc.—recognize that the due diligence burden is all on you. You had better do it. And if something doesn't feel right or smell right, remember that there are no called strikes in investing. You can always just watch from the sidelines. There was nothing keeping any of the investors from doing what the SEC did—going to the office and warehouse, looking around, and asking questions.

 

#3 Beware of Investments Sold Primarily for the Tax Benefits

Don't let the tax tail wag the investment dog is an investing maxim for a reason. Some of us get so mad when we write those checks to the US Treasury and fill out those ridiculous returns that it causes us to do stupid things to try to reduce the bill. An investment needs to stand on its own. It needs to produce a solid return at a reasonable level of risk. Any tax benefits should be icing on the cake. This “investment” never really took off until the promoters started pushing that tax angle.

 

#4 Know What Reasonable Returns Are

Part of the reason Bernie Madoff was so successful in his long-running Ponzi scheme was because he did NOT promise ridiculously high returns. Anybody who does should immediately cause a red flag in your mind. Long-term stock returns are around 10%. Bonds are less. With leverage, a solid real estate return may be in the 12%-16% range, but it's frequently only in the 6%-12% range.

Yes, occasionally you'll find something that does exceptionally well, at least for a few years. WCI and other successful small businesses grew much faster than that for a few years. A really good rental property may get returns into the 20% range if purchased for a great price, especially if attached to a short-term rental business. Lots of cryptoassets had a great run. But trees don't grow to the sky. When something sounds too good to be true, it usually is.

 

#5 Maintain Diversification

Diversification protects you from what you don't know and from what you cannot know. Losing 5% of your portfolio sucks, but it isn't going to affect your financial life long-term. Losing 50% will. If you decide to spice up your portfolio a bit, limit your investment in esoteric asset classes and try to diversify even within that asset class as best you can.

More information here:

7 Tips to Avoid Investment Scams

Can You Spot the Unbelievably Bad Financial Advice on These TikToks and Tweets?

 

#6 Fees Matter

Hedge fund fees are famously “2 and 20”, i.e. 2% a year plus 20% of profits. Syndicated real estate tends to charge something more like 1% a year plus 20% of returns above a preferred return of 6%-8%. And these fees all seem REALLY high compared to the expense ratio on the average mutual fund, much less a low-cost index fund. It's true that this isn't truly an apples-to-apples comparison (particularly with real estate), but when you see fees that are even higher than a typical hedge fund, that should be a big tipoff for you.

 

#7 Scammers Can (and Do) Associate with Legitimate Companies and People

I found an online bio for Dr. Shelly from what looks like the very beginning of a blog he started a few years ago. He mentions all kinds of groups he has been associated with:

  • Freedom Founders Mastermind (This is David Phelps's group; he noted that they went their separate ways in 2019 after Shelly broke a group rule about self-promotion)
  • The Pennsylvania Academy
  • President of a Homeowner Association
  • Exchange Club of West Chester
  • PAGD Cares
  • Nation of Smiles
  • The Academy of General Dentistry
  • Community Volunteers of Medicine Dental Clinic
  • Dental Society of Chester and Delaware County
  • Academy of General Dentistry

All these great organizations! Whether this illustrates that nobody is all good or bad, that this was all a front for a nefarious alleged scammer whose primary goal was enriching himself, or that Shelly was the protagonist in a Shakespearean tragedy as he allegedly turned bad over time, I cannot say. But it demonstrates that there is no guarantee that just because someone associates with good people and organizations that they won't steal your money.

The end of the bio is eerie. It reads, “His passion is clinical dentistry and helping his colleagues achieve success in their practices and in their financial security.” Change it to emergency medicine, and I could have written that.

There are plenty of scams and scammers out there in the world. They generally thrive in the spaces where it is easiest to hide:

  • Cryptoassets
  • Private real estate
  • Trading (stocks, commodities, whatever)
  • Options and other derivatives
  • Oil and gas
  • Small businesses
  • Hedge funds
  • “New and exciting” investments

When looking into these areas, keep your head on a swivel, trust but verify, maintain diversification, follow your plan, and don't get greedy. And even if you do get scammed once or twice in your life, you're going to survive.

What do you think? Have you been involved in a Ponzi scheme or other scam? What happened? What tips do you have for others to avoid these or for those who fear they may be involved in one?