Cello Energy Biofuel Fraud: The Strongest Argument for Technical Due Diligence We’ve Ever Seen
We quite often see cases where investors could have saved a great deal of money by applying more thorough technical due diligence, but the recent Cello Energy fraud case is one of the most clear-cut and dramatic examples that anyone here has ever come across. From Reuters:
Jurors in a federal court have ordered Cello Energy, a biofuel startup run by Alabama’s former ethics chairman, Jack Boykin, and backed by both Silicon Valley cleantech investors Khosla Ventures and pulp maker Parsons & Whittemore Enterprises, to pay more than $10.4 million in a fraud case.
Cello agreed to use discounted wood waste from [Parsons & Whittemore] 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”
Apparently the investors were entirely mislead about Cello’s technology. The point that sticks out is that a “string of witnesses” could be found to verify the fraud. Of course, these experts should have been involved at the due diligence stage, not on the witness stand of a court case that will recover a fraction of the funding that Cello has received.
Not everyone sees the value in technical due diligence, and when we’re proselytising the benefits to clients we tend to emphasise the positive aspects, such as the potential for technology analysis to uncover unforeseen opportunities to profit in other ways from the product. But clearly due diligence is also about reducing risk, and this case brings that point home very powerfully.