What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in the past. We've covered a lot of cases of corporate frauds and ponzi schemes. In fact, we have an entire playlist dedicated to that topic. A ponzi scheme is a form of investment fraud where the perpetrator uses funds raised from new investors to pay off earlier investors, ponzi schemes usually promise higher returns and lower risk than traditional investments such as stocks and bonds.

They also tend to target unsophisticated investors such as retirees who can't tell the difference between a legitimate and a fraudulent investment opportunity. But if you want to make real money as a ponzi schemer, you have to fool large institutional investors. Perhaps the largest and most sophisticated such investor is warren buffett. His company berkshire hathaway has a market cap in excess of 600 billion dollars.

He's built a track record over many decades, as perhaps the greatest investor in modern history, but not all of his investments have been winners. In the 2010s berkshire hathaway invested 340 million dollars in an innovative green energy company called dc solar. It would later turn out that this company was a massive ponzi scheme and scammed, almost one billion dollars from institutional investors in this video, we'll look at what dc solar was and how they were able to scan buffett out of 340 million dollars in 2008. The california auto mechanic by the name of jeff karpov, decided to start a solar energy company called dc solar, and he actually had a pretty good idea.

He created so-called mobile solar generators or msgs. An msg is a trailer with solar panels mounted on it. It can easily be transported to a customer's location and be used to generate electricity. This could be very useful for critically important outdoor infrastructure, such as cell phone towers.

If a tower ever experienced a power outage, a dc solar msg could be placed at the tower's location to power it until the outage is resolved. It could also be used for outdoor sports stadiums to power their lights during games with such a promising new technology. It was natural to seek outside investors to help the company turbocharge. Its growth and wall street was happy to accommodate this for a profitable new solar company.

Between 2011 and 2018 dc solar raised about 1 billion from various institutional investors. One of these investors was warren buffett's, berkshire hathaway, who shelled out 340 million dollars, but dc solar, wasn't selling stocks or bonds to these investors. They were offering much more exotic securities that offered tremendous returns with very little risk. In january of 2020, the sec filed a complaint against the company which outlined the securities that they sold to investors.

There were two different types of securities investment fund contracts and sale leaseback contracts. Under both arrangements, the investors paid to purchase generators from dc solutions, while simultaneously leasing them to dc distribution dc distribution. Would then purportively arrange to sublease the generators to end users. The investors expected to profit from the investments due to tax credits, depreciation on the generators and lease payments.

Importantly, investors played an entirely passive role in the process, and dc solar would be responsible for all the day-to-day operations. This is how the scheme worked. The investor would buy a solar generator from dc solar, giving them cash up front, but they would never operate it themselves. They would instead immediately lease it back to the company dc.

Solar would then sublease that generator to an end customer such as a sports stadium or telecommunications company that would use it to generate power. The end customer would pay dc solar a fee for using the generator and finally dc solar would use this money to make lease payments to the investor who technically owns the generator. This was a very convoluted process. Why does dc solar need to sell lease and then sublease to generators? It seems like it would be a lot simpler just to lend them directly to the end customer.

The federal government has various tax credit schemes to encourage investment in renewable energy, such as solar panels. Because of the solar nature of dc's generators, the investors could claim lucrative tax credits for technically buying these generators. This was the crux of their pitch to investors. For the investors, including berkshire hathaway, the investment appeared to be a slam dunk based on their due diligence.

It appeared that dc solar was a legitimate company with real generators and real employees and by the mid-2010s they appeared to be incredibly successful. They even used part of their massive profits to sponsor a nascar team with the dc solar logo prominently placed on the side of the car. Karpov now found himself sitting on hundreds of millions of dollars from investors, but there was a problem. His high promised rates of return created a lot of demand from investors to buy the generators, but there is very little demand from the end customers to actually use them for the generators that they sold to investors.

Most of them just sat in a warehouse doing nothing with most of the generators not earning any income. They had no way of paying the investors. The lease payments, at least not through legitimate means dc, solar fabricated, financial statements and lease invoices that were supposedly from end customers. They showed these two investors to prove that their business was doing well.

While you can make fake financial statements, you can't make fake cash in order to fund the payments to older investors. They would raise money from new investors by selling new generators, and since these generators weren't going to be used by end customers anyway, they figured there was no point in making them in the first place of the 17 000 generators that they sold to investors. They only actually manufactured about one third of them. Naturally, the investors wanted to see the generators in person, so they could know they're, actually real dc solar engaged in elaborate scheme to shift around their generators and replace their identification numbers, so they could pass the old ones off as new.

While all this was happening, jeff karpov and his wife paulette used the money they raised from investors to find an incredibly lavish lifestyle. They bought a grand total of 148 luxury cars. Karpov had a love for sports, so he bought a minor league baseball team and sponsored a nascar team. He bought a subscription to a private jet service and finally, they spent tens of millions of dollars on luxury real estate in locations, including, but not limited to, california, nevada, the caribbean and mexico.

According to the department of justice, the karpov expropriated at least 140 million dollars from dc solar to fund their luxurious lifestyle, the karpovs lived in this manner since they started selling their fraudulent securities to investors in 2011.. It wasn't until a full, seven years later in 2018, that the fbi were finally tipped off about the scheme and rated dc solar's california headquarters. They quickly found out that the business was a complete fraud. The government seized their assets and started auctioning off their mobile generators.

In an effort to raise funds to return to the victims, but in all likelihood they will only be able to recoup a small fraction of the 1 billion that dc solar raised over the years. Both jeff karpov and his wife paulette were criminally charged with running the largest ponzi scheme in the history of the eastern district of california, facing an insurmountable volume of incriminating evidence, both pled guilty to conspiracy to commit wire fraud and money laundering in november of 2021. Jeff was sentenced to 30 years in prison. The fact that berkshire hathaway lost 340 million dollars on dc solar shows how cunning and sophisticated it was.

They were a real company that in fact produced thousands of generators and in the early days, jeff karpov was probably trying to run it as a legitimate business, but when it turned out demand for their generators was far lower than expected. Instead of shutting down the business like, he should have done, jeff decide to keep things going and live the highlight for as long as he could. This is the case for a lot of corporate frauds. For example, parmela started off as a legitimate milk business in italy and developed some very valuable brands, but when the business wasn't doing as well as the ceo expected, he orchestrated a massive fraud to hide the company's losses and once you start committing fraud, it's almost impossible To reverse it, you have to make more and more fake profits to keep the sham afloat until eventually collapses on its own way.

Alright, guys that wraps it up for this video. What do you think about the dc solar scam? Are you surprised that berkshire hathaway fell for it? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe, so you don't miss future uploads as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.