Biodiesel and Ethanol Investing

Two weeks ago, Sharesleuth.com reported that they had researched Xethanol’s ethanol production and, contrary to the company’s claims, they could not find that the company had actually produced ethanol from the cellulosic materials - even though the Xethanol announced last month that they would be developing a new ethanol plant that produced ethanol from cellulosic materials.

They also noted that one of Xethanol’s large shareholders was charged by the SEC in 1995 for defrauding investors, and that one of Xethanol’s ethanol plants has not produced any fuel for one year and that it in fact does not even have active water or sewer service though those services are needed in order to produce ethanol.

The water and sewer service not being active is an indicator that the plant was not temporarily shut down. Based on the information Sharesleuth provided, the Iowa ethanol plant seems to have been deserted.

Xethanol caught our eye in a CNN article from six months ago titled Six hot inventions from entrepreneurs. In that article, CNN reported that the company had operated two ethanol plants in Iowa since 2003, and that the company intended to make cellulosic ethanol commercially viable by introducing a process that could refine waste products such as grass clippings and old newspapers into ethanol fuel. CNN even touted the fact that the company had discovered a new form of yeast that facilitated the ethanol production process.

CNN’s report, dated February 28, sparked our interest in Xethanol and may have lead many other investors down the same road. Perhaps the article was a springboard for the stock too - as Xethanol shares took off in the following weeks, from a low of around $5 in late February, to a 52-week high of $16.18.

Sharesleuth is majority-owned by billionaire Mark Cuban, the Dallas Mavericks owner who has sold short 10,000 shares of Xethanol stock and has already made about $70,000 from doing just that. Cuban also happens to be a very, very savvy investor - and Sharesleuth’s research into this company has definitely found some serious issues:

The company has characterized its plant in Hopkinton, Iowa as a testbed for evaluating potential feedstocks and technologies.. But that statement directly contradicts the company’s SEC filings, which note that the plant in Hopkinton suspended production in April 2005. When we paid a visit to the operation June 30, we found the doors locked, the building dark and no employees present.
-from ShareSleuth.com

Xethanol responded to Cuban’s Shareslueth via a news release about two weeks ago, which included a quote from their CEO stating, “the ShareSleuth.com posting were so egregious that we felt we had no alternative but to respond.” The news release did not address the Hopkington, Iowa ethanol plant though it did provide numbers for several other ethanol plants.

Hemscott now reports that Xethanol has fired its Chief Executive Officer, Christopher d’Arnaud-Taylor, and replaced him with a company director temporarily until a permanent replacement can be found. Louis Bernstein, the director who is now Xethanol’s interim CEO, has 30 years of experience as Pfizer’s in-house counsel.

In their news release today, Xethanol announced the firing of Christopher d’Arnaud-Taylor as CEO as having been the result of “significant expansion plans”, and that it was really part of “plans to further enhance senior management”. It is unclear to us as to how Pfizer’s former counsel could make a better CEO than the entrepreneur profiled on CNN just a few months ago, so we look forward to reading more details from the company as the situation unfolds.