The Cello Energy Fraud Case

They called it grassoline but it isn’t. Bradford Plume of TNR says “In 2007, a tiny Alabama start-up called Cello Energy was telling people that it had devised a way to produce cellulosic ethanol at $16 per barrel, using material like hay, switchgrass and wood chips. Investors listened and invested millions of dollars in the venture. Cellulosic ethanol is a promising concept as it is a low-carbon biofuel that would not have the problems associated with using corn or soy as feedstock. It isn’t quite commercial yet but scientists are insisting it’s just around the corner.”

Scientific American reports “In late June 2009, a federal court ordered Cello Energy to pay $10.4 million in punitive damages for fraudulently claiming it could produce cheap diesel-like fuel. Cello’s owner, Jack Boykin, allegedly built a sham facility and lured pulp producer Parsons & Wittemore Enterprises to invest $2.5 million in an ownership stake in 2007”. Josie Garthwaite from Earth2Tech says “Several months later, it received a $12.5 million investment and a pledge for up to $25 million for construction and operation of additional plants from Khosla Ventures. Cello agreed to use discounted wood waste from the company as feedstock but a string of witnesses testified that samples of the fuel allegedly produced at Cello’s facility were derived entirely from fossil and not renewable sources.”

Some points:

  • Though Khosla put over $12 million into the firm, it was not listed on his VC firm’s website. Transparency issue here? Other cellulosic ethanol companies are listed in his portfolio though (yes, there are also other cellulosic ethanol companies out there).
  • Jack Boykin and his son Allen founded the firm. Jack was Alabama’s former state ethics chairman! So be careful.
  • Not only P&W and Khosla did not do due diligence on Cello, it seems that Environmental Protection Agency (EPA) may not have done its due diligence either. The EPA is expecting 100 million gallons worth of cellulosic ethanol to be produced in 2010 as part of its policy but the agency was depending on 70 million gallons to come from Cello Energy. So now EPA has to either offer up new subsidies to ethanol makers or revised its targets. Source: Bradford Plume of TNR
  • P&W also sued Khosla! P&W claims the venture firm committed “tortuous interference”, basically meddling with its business relationship with Cello and reducing its value as Khosla’s investment was made without P&W’s knowledge, thus diluted the value of P&W stake. Source: Josie Garthwaite from Earth2Tech
  • Cello claimed they could make $16 per barrel fuel from cellulose. This works out to be 38 cents per gallon. Anytime anyone promises to produce renewable fuel for $1 per gallon or less (it’s too cheap?!), you’d better be very careful!!!
  • So do your homework and due diligence. Get an expert in the field to verify the technology. Check out the plant/company and with registrar/regulators to make sure your investment exists and is legal. Don’t get into legal mess!

Sources:
Lessons from the Cello Energy Biofuel Fraud Case: Do Your Homework
Plaintiff’s lawyers try to discredit Baldwin company’s biofuel-making process
How big a deal is the Alabama biofuel scandal?
Biofuel fraud case could leave the EPA running on fumes
Cello Energy leaves 50m-gallon gap in Fed’s ethanol targets

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2 comments

  1. Pingback: Khosla Ventures « Co-Creation & Collaboration
  2. George · August 10, 2011

    August 9,2011 … God Bless Jack Boykin for setting the record straight … the criminals here need to be held accountable …
    Josie Garthwaite should update this story and clear the false aligations insinuated in the above article.

    JUSTICE in 2011 !!
    When is AMERICA going to protect it`s SCIENTISTS ?

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