AUTOS:

X Prize winner has checkered financial past

On a sun-splattered morning in Washington, D.C., last month, a team of engineers from Li-Ion Motors Corp. posed for cameras holding a giant check for $2.5 million -- one of the biggest awards in the history of super-fuel-efficient cars.

On that same day in San Mateo, Calif., an attorney for Li-Ion Motors had a less glamorous task. He was negotiating a settlement with a customer who said his electric car wouldn't start when it was delivered.

The customer, Barrett Lyon, agreed to drop his suit for a $75,000 payment. Since then, he's found there is a catch. Li-Ion cannot finish paying the settlement because company officials are still waiting on the the real $2.5 million check from the Progressive Insurance Automotive X Prize.

"This just seems so wrong and against the spirit of the contest in the first place," said Lyon, the CEO of a California tech startup.

The story of Lyon's lemon shows a startling contrast between the world-class innovation sought by X Prize sponsors -- including the Obama administration -- and the questionable finances of Li-Ion Motors, a money-losing company that has been accused of underwriting "pump and dump" penny-stock schemes.

Court documents, interviews and the company's regulatory filings with the Securities and Exchange Commission paint a picture of an erratic enterprise that has vacuumed up $50 million from stock holders in 10 years with little to show for it until the Sept. 16 X Prize ceremony. But they also raise questions about whether Li-Ion Motors meets key criteria for the X Prize: the ability to mass-produce a car.

The company's accountants have repeatedly cast doubt on its ability to "continue as a going concern." It owes more than $250,000 to the IRS for unpaid payroll taxes. Company officials have said they need another $5 million to "commercialize" the cars they have designed.

And some see more than just red ink in Li-Ion Motors' books. The company has twice been investigated by the SEC. A lawsuit accused the company of spending nearly $2 million in one year on "junk faxes" as part of a pump-and-dump scheme. The week before Li-Ion won the X Prize, its trading was halted by Canadian securities regulators who allege it broke a rule targeted at flagging companies that engage in "abusive practices" in the penny-stock market.

The pump-and-dump allegations were never tested or proved in court. The SEC has not taken enforcement action against the company. The action by Canadian regulators is under appeal. Startup companies often lose money at first. Li-Ion Motors officials say their losses fall within "expected standards."

And Li-Ion's futuristic, lime-green Wave II achieved the equivalent of a remarkable 187 mpg in the X Prize trials. It has won acclaim, doing a luxury promotion with Sam's Club, delivering a car to NASA and starring in an episode of the History Channel's "Modern Marvels."

But Li-Ion (pronounced "lion") has an odd history for a world-class innovator. It started 10 years ago, selling shares in a Canadian gold-mining operation. It has since jumped from that to gourmet coffee in China to oil in California and dabbled in Internet phone service, none of which has "produced meaningful revenue," before settling on electric cars, according to regulatory disclosures. The company and its shareholders pay to have glowing "news" about the company touted in penny-stock tipsheets. But the tips sometimes turn out to be misleading.

The company's "entire modus operandi is to manipulate the securities market in order to assure their continued existence," wrote Arizona lawyer Peter Strojnik, who leveled the charge in a 2008 federal lawsuit.

And then there is Barrett Lyon's lemon.

"It was dead on arrival," Lyon said. His PT Cruiser, converted to electric power by Li-Ion engineers at the company's production facility in Mooresville, N.C., he said, is "rotting" in his driveway. "The car I have," he said, "is not a production-ready car."

Li-Ion officials say the company is a "startup R&D enterprise," and whatever difficulties they have had were put behind them when they won the X Prize.

"We are energized by the momentum gained from winning the X Prize competition," the company said in a written response to questions, which was prepared by the company's Winston-Salem, N.C., attorney Jeffrey Patton. "Li-Ion is the leader in class, we have proven it, and we are committed to achieving the goal."

Company founder Salim Rana strenuously denied the allegation that the company is part of a stock-manipulation scheme.

"Absolutely no!" Rana said. "Everyone now knows it has proven technology and is No. 1 in the world."

Patton called the allegation "ridiculous, and insulting to the employees and management who are dedicating themselves to building a special future." The charge, he added, "is completely undermined by the actual business and success of the company."

Patton also said Lyon is not being paid with X Prize money.

"There is no "X Prize money" versus "other company money," so to suggest he is being paid with prize money makes no sense," Patton wrote.

But an e-mail from the company's California attorney, obtained by Greenwire, clearly indicates the company was awaiting the prize money so it could pay Lyon's settlement.

X Prize officials say they have no doubt that the company submitted a credible plan last year to manufacture 10,000 electric cars at its plant in Mooresville.

"They showed a very clear understanding of the industry," X Prize spokeswoman Carrie Fox said. "They had a very solid financial position, and thorough manufacturing and production capabilities."

Last year, the company defaulted on multimillion-dollar loans from two Belize-based financial firms, Crystal Capital Ventures Inc. and Wyndom Capital Investments, according to regulatory disclosures, issuing millions of shares of stock to the firms to cover the debt. As a result, Crystal Capital and another Belize company, Liberty Financial Group Ltd., wound up controlling 72 percent of Li-Ion's stock.

Also in 2009, the company's auditors, as they have done repeatedly since the firm was founded, stated there was substantial doubt about whether the company could continue as a "going concern."

The company itself has said it is past the startup phase. It has been in business for 10 years, and in the electric-vehicle business for seven. In July 2009, the company reported to the SEC that it no longer considered itself a "development stage" company "as planned principal operations have begun in its primary line of business."

When the prize was announced, three teams split $10 million (Greenwire, Sept. 9). Edison2 won $5 million in the "mainstream" four-seater category and X-Tracer Team Switzerland won the other $2.5 million for the alternative tandem (motorcycle) category. Li-Ion won in the "alternative side-by-side" category, though it has agreed to share $800,000 with the competitors it narrowly beat (Greenwire, Oct. 18). Edison2 and X-Tracer have gotten their award money, but Fox said Li-Ion's is still "being processed."

The prize money was put up by Progressive car insurance. The Department of Energy gave the contest a $5.5 million grant from the American Recovery and Reinvestment Act, commonly called the stimulus package.

Among Li-Ion's fellow X Prize winners and finalists, one other company is publicly traded. ZAP is also traded on the over-the-counter "bulletin board." A 2008 cover story in Wired magazine dubbed the company "The Hype Machine." The article, headlined "Searching for ZAP's Fleet of No-Show Cars," detailed grievances from stockholders and distributors that company executives thrived on stock options inflated by press release claims that rarely came true.

ZAP's most recent quarterly report indicates it is handing over its Santa Rosa, Calif., headquarters to a company headed by a former director of the company, Eqbal Al Yousuf of Dubai. Yousuf's company had sued ZAP for failure to make required payments.

Rana's role

Behind Li-Ion Motors' Wave II and its distinguished award is a tangled web of companies with connections to Li-Ion's founder, Salim Rana.

Rana, a Calgary, Alberta, venture capitalist, started the company in Las Vegas in 2000 as Whistler Investments Inc., touting "copper-gold" and/or "gold-silver" mining on an island in British Columbia.

Since then, the company has changed its name from Whistler to Hybrid Technologies Inc. and then to EV Innovations. It has subsidiaries with names like JavaKing Coffee, Zingo and Superlattice.

Four days before Christmas last year, the company changed its name to Li-Ion Motors.

The company's ever-mounting losses have been funded by selling stock to investors on the over-the-counter market, also called "penny stocks" or "microcap" stocks.

Despite those losses, Li-Ion makes payments to companies operated by Rana. For example, on Feb. 26, Li-Ion entered into a $2 million loan agreement with Frontline Asset Management, with a fixed interest rate of 12 percent. Rana had incorporated the company in Nevada two days earlier and is Frontline's sole officer and director.

Rana said he does not own or run Li-Ion, and he stressed in a telephone interview that he owns less than 5 percent of the company's stock. He said he now serves as an adviser and consultant.

"When they need advice, I'm there to advise the company," Rana said. "If they need funding, I'll help them out with funding."

But when Li-Ion was awarded the Automotive X Prize on Sept. 16, Rana was prominent even in his absence. His son, Salim Rana Jr., helped accept the award.

And Li-Ion chief engineer Ron Cerven, who led the company's X Prize efforts, thanked Rana "for his ongoing support in helping us be here today." No other company executive or stockholder was mentioned.

Rana said he was recognized at the ceremony because he advanced money to the company when it could not get funding anywhere else.

"That's why they thanked me at the X Prize ceremony and I am happy they recognize that," Rana wrote in response to e-mailed questions.

Mining, real estate, SEC subpoena

Though it was founded in 2000 to develop a mining interest in British Columbia, the company wound up jumping into the Las Vegas real estate market.

In April 2002, Whistler paid $4.15 million to a company owned by Rana, Salim S. Rana Investments Corp., for a shopping center in Las Vegas. Nine months later, according to regulatory filings, it sold the shopping center at a loss of more than $700,000. A month after that, investors filed suit against Rana and others involved in developing the project.

It was around that time, according to the company's financial statement, that the company "began to focus our efforts on the development and marketing of electric powered vehicles and products."

As it moved forward into making electric cars, the company found itself explaining its past. In July 2004, it disclosed in regulatory filings that the SEC had undertaken an "informal inquiry" and was seeking "voluntary production of documents and information."

The SEC was looking for documents about how the company issued stock, its agreements with consultants, the purchase and sale of the Las Vegas shopping center and the British Columbia mine, according to a regulatory filing.

"We fully cooperated and have received no further requests," the company wrote.

But in 2006, a subsidiary called Zingo got its own request for documents. The stakes rose when Zingo then got a subpoena from the SEC.

The subpoena demanded information on a "broad range" of matters, according to a regulatory filing, including compensation paid to consultants, the drafting of press releases, minutes of board of director meetings and records of the securities and options the company had issued.

Zingo CEO Holly Roseberry provided testimony on the matter to the SEC, according to a regulatory filing. At the time, Roseberry was also CEO of Hybrid Technologies, which is now Li-Ion Motors.

Rana said nothing has come from either inquiry.

"The SEC conducted an investigation based on things that were said in the past and walked away," Rana said in a telephone interview last month. "If there were any news releases that said anything that were inaccurate, you would have heard about it."

Last year, Roseberry was replaced as CEO by Stacey Fling, who had run a company called A&S Holdings, of which Rana was the president and sole director. Roseberry, who had been the manager of Rana's Las Vegas shopping center before heading Zingo and Hybrid, remains a director of Li-Ion.

Such connections are common in the records of Li-Ion. Though Rana is not listed as a board member or an executive, his name and companies he controls, such as Frontline Asset Management and Salim S. Rana Investments Corp., are woven throughout the transactions detailed in Li-Ion's financial filings.

Promoting penny stocks

Li-Ion's over-the-counter stocks are bought and sold on electronic "bulletin boards" rather than conventional exchanges, such as the New York Stock Exchange.

Such penny stocks, or micro-cap stocks, are a good way for small companies without access to traditional credit to obtain capital. But the penny stock market is less regulated than stock exchanges and is known as a common place for fraudulent maneuvers like "pump and dump" schemes, in which a company gets stock promoters to "pump up" a stock with rosy tips and press releases rather than actual results. The owners or promoters can then sell their stock at a profit -- "dumping" it -- before the stock declines.

Many penny-stock tip sheets, including those touting Li-Ion and its predecessors, are paid to promote certain stocks and benefit financially if the stock price rises. The conflict of interest is disclosed deep in the fine print, far below headlines promoting their clients as "stocks to watch."

For example, a July 14, 2008, Market Pulse news alert proclaimed "investors need to be watching Hybrid Technologies Inc."

The tip sheet called Hybrid "an emerging leader in the development and marketing of lithium-powered vehicles." Among other claims, it stated the company has "signed contracts" with "the City of New York, the U.S. Navy" and others.

But the New York City Taxi and Limousine Commission had returned the electric cab that Hybrid had provided for testing, after it could not last a full shift and performed poorly in cold weather. The company reported that in 2004 it had delivered a "lithium-ion conversion project" prototype to the Navy. But the Federal Procurement Data System, which logs all federal contracts lists no contract between Hybrid Technologies Inc. and the Department of Defense.

The Market Pulse advisory said the organization that publishes it "attempts to assure itself of the accuracy of the information contained analyses it publishes." Only further down does it note, that the organization "has been compensated $25,000 from a third-party shareholder for its coverage of Hybrid Technologies. In addition, MP has pending $50,000 from a third-party shareholder for its coverage of Hybrid Technologies."

Another tip sheet "redhotpennystock.com" on Oct. 16, 2006, touted Hybrid Technologies' collaboration with the "United States Military (Special Operations) ... to produce a high output, all lithium reconnaissance vehicle (CERV)." It does not list which service's "special operations" was collaborating with Hybrid Technologies. No such contract is listed by the Federal Procurement Data System, and the Defense Department website has no mention of a "high output, all lithium reconnaissance vehicle" or a CERV.

Redhotpennystock.com readers who clicked to another website for its disclaimer would find the disclosure that "they may from time to time have a position in the securities mentioned herein and may increase or decrease such positions without notice" along with a list of how much the tipsheet was paid to tout companies' claims.

In 2008, Dow Jones Newswires reported that Hybrid Technologies had issued a "misleading" press release stating Frito-Lay Inc., the snack food unit of PepsiCo Inc. had agreed to purchase a fleet of lithium cars. But Dow Jones reported that neither Frito-Lay nor PepsiCo authorized the release.

Also in 2008, Strojnik, the Arizona lawyer, sued Hybrid Technologies and its spun-off subsidiary Superlattice, alleging that the companies were part of a scheme to use junk faxes to promote the company's stock, artificially inflating the price in a pump-and-dump scheme.

His suit charged that Hybrid Technologies spent nearly $2 million in 2008 alone, paying more than a dozen junk fax companies to promote its stock. His motion cited a undisclosed "membership-based organization" as his source. Attorneys for the companies blasted it as "hearsay evidence from anonymous sources."

Hybrid and Superlattice did acknowledge hiring QualityStocks.net, filing an affidavit from a company executive who stated the firm was not hired to send junk faxes.

The class-action suit Strojnik brought under the Junk Fax Prevention Act of 2005 was dismissed in December 2008 for lack of jurisdiction because Strojnik could not prove a substantial business tie to Arizona. Li-Ion attorney Patton said the case is irrelevant.

"This action was dismissed quite some time ago, and it is rather irresponsible to raise a discussion over allegations that were asserted in a frivolous lawsuit," Patton's statement said. "Instead of looking at accusations, we point to results."

But Strojnik is not the only monitor of penny stocks to have gone after the company.

Securities regulators

The British Columbia Securities Commission (BCSC) issued a "cease trade" order halting trading in Li-Ion stock on Sept. 8, the week before the Wave II won the X Prize. The commission charged that the company had violated a rule it adopted in 2008 to deal with companies in the over-the-counter stock market "that engage in abusive activities," according to commission documents.

In explaining the rule, the commission noted that "these markets are legal and are home to legitimate businesses, but they are vulnerable to abuse because the level of regulatory scrutiny is very low." It said it was taking action because a "disproportionate" number of players who engage in abusive activities in the U.S. over-the-counter market have connections to British Columbia.

The SEC has also warned about "microcap fraud schemes," such as "the classic 'pump and dump' scheme."

The British Columbia commission's order remains in place, but company officials have filed an appeal.

Attorney Michael Paige, who handles SEC issues for Li-Ion, said he expects the problem to be easily resolved, because the company has no presence in the province that would trigger the reporting requirements Li-Ion allegedly violated.

"They don't have any contacts with British Columbia," Paige said. "These guys just went in with no notice."

A BCSC spokesman would not disclose what the alleged company connection was to British Columbia but said the commission wouldn't have issued the order if such a connection didn't exist.

Paige also said warnings from Li-Ion's auditors about the company's ability to continue as a "going concern" are routine disclosures for small, development stage companies that do not have enough cash to pay their bills 12 months out.

"They've always been financing as they go," Paige said.

Tom Archer, a securities litigator in the Washington office of the Gallup Johnson & Neuman law firm, says that the detailed amount of disclosure that Li-Ion provides is a good sign that the company is seeking to keep its stockholders fully informed.

"The fact that those disclosures are detailed indicates they've gotten some legal advice and are seeking to comply," Archer said.

But, Archer added, the move by the BCSC to halt trading of Li-Ion shares is a "horrible" sign.

Li-Ion's management has also undertaken some unorthodox stock maneuvers.

For example, the company has done several "reverse stock splits." Regular stock splits are considered a good sign of a profitable company. Correspondingly, "reverse" splits, in which the company consolidates its stock, are considered a bad sign. The move is often used to prop up a company's stock price.

Most regular splits are 2-for-1. The company has done reverse splits as dramatic as 1-for-10.

"That's a lot," Archer said. "The real question is whether they're engaging in that as part of a business strategy or for promoters to manipulate the stock price."

Ability to mass-produce cars at issue

X Prize officials emphasize their contest is designed to yield production-ready cars, "not science projects or concept cars." So contest rules require "there must be a credible plan to manufacture, sell, and service 10,000 vehicles (or conversions) per year by 2014."

"They passed all the hurdles and they proved that they had the tools necessary to produce their vehicles in the quantities needed," said Fox, the X Prize spokeswoman.

Li-Ion's business plan (submitted in 2009 when it was still called EV Innovations) said the company would manufacture the 10,000 cars in its own facility in North Carolina.

But in its years in business, the company has never delivered a car built from the ground up. It has finished only prototypes and conversions of cars built by major carmakers.

And some of the company's customers have found its claims less than credible, even on a much smaller scale. The company has about 25 cars on the road, but some, such as the PT Cruiser offered as a New York cab, have not met expectations.

Lyon said that even after company technicians flew to California to get his car running, it never got the distance that had been advertised, and at one point the plug melted while it was charging the car.

Company officials declined to comment about Lyon's complaint, except to criticize him for posting details on the Internet.

"We will instead let the results of the X Prize competition serve as our response to his allegations," Patton's statement said.

In addition, a Pennsylvania businessman has complained that he never got the company's Inizio electric-powered sports car that he bought as part of a Sam's Club promotion called a "Once-In-A-Lifetime Package." Car and Driver Magazine reported in November 2008 that the car had sold, but "ahem ... the car doesn't exist yet." The company was working on a prototype, but the first cars were supposed to go on the market in mid-2009.

"We'll believe that, well, never," the magazine wrote.

The company statement said of the customer's complaint that "it is our understanding that this matter is stalled and not moving forward." The Pennsylvania man's attorney, Frederick Stellato, asked specifically about the Inizio situation, said he could not comment because, "I'm subject to a confidentiality agreement."

The company also hyped the New York Taxi and Limousine Commission's 2006 decision to test its converted PT Cruiser for use as a cab. But the taxi commission confirmed a blog report that the car performed poorly in cold weather, could not last for a 10-hour shift and lost its charge after 40 miles, while the average cab in New York averages 100 miles per shift. The commission returned the car to Hybrid Technologies.

Even as Li-Ion engineers in North Carolina labored to prepare the Wave II for the X Prize competition in the spring, the company's financial statements described a company financially unprepared to mass-produce its cars.

"The company presently does not have sufficient liquid assets to finance its anticipated funding needs and obligations," the company stated in a first-quarter filing. "Our current operating funds are less than necessary for commercialization of our planned products, and therefore we will need to obtain additional financing in order to complete our business plan."

The filing said the company needs $5 million in working capital to introduce its products, and it noted that figure did not include the money needed to pay people with judgments against the company.

Nor would it cover what the company owed the IRS. On March 3, the company was served with a tax lien for $251,928.14, including delinquent payroll taxes, according to the same filing. The filing added that it has a payment plan in place with the IRS. "The company went through a difficult period financially," Rana said, "as did many others at that time."

Within a month, Li-Ion announced a 20 percent stock dividend and announced its plans to roll out its Inizio "Supercar." The company's stock saw its highest trading volume of the year that day -- May 24 -- with the stock price spiking to $2.16.

Despite the doubts expressed in regulatory filings about its lack of assets, a company press release said the car "will be manufactured at [Li-Ion's] 40,000-square-foot facility in North Carolina."

It added, "Li-ion Motors and its shareholders can now look forward to steady revenues with the production of this cutting edge world class vehicle."

Since that day, there has been no Inizio rollout, and the stock price has fallen below 90 cents.

X Prize provides little help for stock

In another effort to find money, the company hired a Washington lobbying firm in February 2009 to help it apply for a "multimillion dollar stimulus package." The company said it planned to use the assistance from a Department of Energy loan guarantee to create 500 jobs making Inizios and Waves. Four loans have been granted under the program, according to DOE, but none to Li-Ion.

The X Prize victory boosted the company's stock far less than the press releases about the stock dividend and rollout. By the day of the award, Sept. 16, it closed at $1.12. Five days after the prize was awarded, the stock peaked at $1.15.

Lyon bought his LiV Surge, a converted PT Cruiser, in 2008. First it was delivered late. Then it would not start, according to the lawsuit he filed in California. Lyon had to pay for it to be towed to his home.

The car sat unused for two months. After two visits by a technician from North Carolina (the first technician did not have the parts to fix a defective battery cell), Lyon says it runs, but takes 40 hours to charge when it is supposed to take eight. It was supposed to go 120 miles on a charge, but goes less than 80.

Lyon said he found that the car's batteries are set up like old-style Christmas lights. If one of the dozens of cells goes bad, the whole chain fails. That may work in a setting like the X Prize track where there is a pit crew, Lyon said, but it can be dangerous on a California freeway.

On Sept. 16, luminaries such as House Speaker Nancy Pelosi (D-Calif.) and White House science adviser John Holdren took the stage on the lawn of the Historical Society of Washington, D.C., to congratulate the X Prize winners.

On the other side of the country, Lyon's attorney and the lawyer Li-Ion retained in California negotiated a settlement to his lawsuit, to be paid by Oct. 5. But on the deadline, the company had paid $20,000. Li-Ion's attorney wrote to explain.

"On the day of the settlement conference, Stacy Fling the CEO was in Washington, D.C. to receive the Progressive Insurance X-prize," Li-Ion's attorney wrote in an e-mail, provided on the condition that the attorney who wrote it not be named. "This prize is valued at $2.5 million. At the time of the award and our contemporaneous settlement, Li-on was lead to believe that it would receive prompt payment of the award, and thus be able to fulfill its obligation under the settlement.

"They have not received their payment, but been advised that it will be received by November 1, 2010."

Lyon still hasn't gotten the rest of the money.