Alleged Ponzi Scheme Ensnares Mashpee Inventor
By: Brian Kehrl
On a Friday afternoon in early November, Mashpee resident Oskar H. Klenert was up in New Hampshire to meet with some business partners about their investment in his invention, an innovative technology designed to control erosion.
He had been asked to bring the financial records for Earth Protection Systems to the New Hampshire office, since one of the partners wanted to add some information to the books, Mr. Klenert said in a recent interview.
So after a meeting to talk about the status of the venture, he sat down to review the financial records with Donald E. Dodge, one of the business partners, Mr. Klenert said. Mr. Dodge was a close associate of Scott D. Farah, another business partner of Mr. Klenert, an investor in Earth Protection Systems, and a longtime family friend of Mr. Klenert.
But soon after they began their task of reviewing the financial records, Mr. Dodge got a telephone call and told Mr. Klenert that there was an emergency that he must attend to. Mr. Dodge asked Mr. Klenert to leave the books at his office and once he finished his additions, he would mail them back to Mashpee, Mr. Klenert said.
Mr. Klenert did not think twice about leaving the records. “Why would I? I trusted him,” Mr. Klenert said in an interview at his condominium off Lowell Road this week.
The books were never returned as promised.
The Monday after Mr. Klenert’s visit, the two businesses owned by his partners closed, the New Hampshire office was shuttered with the Earth Protection Systems financial records inside.
The following week, the FBI, the US attorney’s office in New Hampshire, and the New Hampshire state attorney general announced an investigation into the two New Hampshire-based firms, Financial Resources Mortgage Inc. and CL & M, as well as other related businesses. The firms were forced into bankruptcy on November 20.
In the weeks since, investigators, news media in New Hampshire, and a bankruptcy trustee assigned to the case by the New Hampshire governor have begun to shed light on what appears to be a massive Ponzi scheme operated by the supposed investors in Mr. Klenert’s technology. According to the bankruptcy trustee, the Ponzi scheme allegedly involved approximately 500 investors and upward of $100 million, a smaller-scale version of the scam perpetrated by convicted former financier Bernard Madoff.
Mr. Klenert’s nascent business has been brought to a halt.
“I was sick at first. But I got over it. I don’t have time to feel sorry for myself,” Mr. Klenert, a German-born engineer who speaks with an accent, said. “I have made such good progress [on the invention]. I was ready. But the worst thing people can do at a time like this is feel sorry for themselves. You pick up the pieces and you move forward.”
Family Friends, Investors
Mr. Klenert said his direct involvement in the companies began a year and a half ago, when Mr. Farah agreed to put up $250,000 of his own money to finance the final development and distribution of the erosion-control technology, known as the Earth Rib Module.
But the path to that investment began decades ago, when Mr. Klenert became friends with Mr. Farah’s grandfather and father. Mr. Klenert declined to provide details on how he came to know the Farah family, other than to say that he met the elder Farahs when they both lived in Massachusetts.
It was Scott Farah’s father, Robert Farah, who several years ago suggested Mr. Klenert get in touch with Scott Farah to discuss the possibility of investing in Earth Protection Systems, Mr. Klenert said.
“He told me ‘Scott has money, he may be able to help,’ ” Mr. Klenert said. So he took the business as far as he could without a significant capital investment, and then returned to the younger Mr. Farah to arrange a business partnership, with Financial Resource Management, headed by Mr. Farah, and CL & M, headed by Mr. Dodge.
Mr. Farah indicated that the $250,000 would be his own money, with no mention of additional investors, Mr. Klenert said.
But, according to Mr. Klenert, Mr. Farah would go on to raise at least $2.5 million from more than two dozen investors based on a prospectus of the Earth Rib Module.
Exactly what Mr. Farah told those investors is not clear. Nor is it clear what happened to the $2.5 million, beyond the approximately $500,000 that went back to investors in the form of interest payments. Mr. Klenert says he received only small payments for travel and expenses related to his development and marketing of the technology.
But increasingly clear is that Earth Protection Systems was one small part of a larger investment scheme operated by Mr. Farah and Mr. Dodge.
According to information released by Steven M. Notinger, the bankruptcy trustee assigned by the New Hampshire governor to unwind the financial knot tied by Mr. Farah and Mr. Dodge, the two businessmen had been running a fraudulent operation since June and July of 2005, when Mr. Farah appears to have pulled $1.1 million from his business, which served primarily has a mortgage servicing firm.
“It is inconceivable to us, from what we have seen, that the company had the ability to do that. Therefore, that money was taken from investors who put money in,” Mr. Notinger said in an audio recording addressed to the investors involved with Mr. Farah’s and Mr. Dodge’s companies. “This was a giant scam.”
Mr. Notinger said there is loads of financial information missing from the two firms, but he did find a promissory note that Mr. Farah borrowed $21 million from the company.
“There are now zero dollars in the bank accounts,” Mr. Notinger said.
“Let me tell you something that really demonstrates that you don’t have what you think you have,” he said. “Just like Madoff gave people statements showing they had interest in all these stocks, it is just a piece of paper. Even if it is a note or a mortgage, it is just a piece of paper. It is where the money went that matters. And the money, from what I have seen, was comingled at best, was stolen, and didn’t go to the specific loan that you lent on.”
“You were lending money to them, and they were doing what they wanted to do with it,” he said.
No criminal charges against Mr. Farah or Mr. Dodge have been filed.
Mr. Notinger and another attorney at his New Hampshire-based law firm did not return calls seeking additional information about Earth Protection Systems.
Attorneys on record as representing Mr. Dodge and Mr. Farah in US Bankruptcy Court in New Hampshire both did not return messages left this week.
Ties To South Cape Beach
Mr. Klenert said he was nearing completion of his end of the deal with the younger Mr. Farah: to guide the design through specialized tooling and product manufacturing—both steps that he completed—and get five units installed as pilot projects in the field. South Cape Beach in Mashpee was meant to be one of the five.
Mr. Klenert’s invention, a system meant to prevent beach erosion and protect coastal property, was introduced to the town earlier this year, when he offered to donate the materials to install it at South Cape Beach, if the town would oversee the permitting and provide the installation labor.
The proposal was given the blessing of the Mashpee Conservation Commission, but was called off by the state Department of Environmental Protection due to questions about its compliance with state coastal zone development regulations. The proposal was dropped this summer.
Mr. Klenert said he has also been pursuing two other inventions through Earth Protection Systems, including a wastewater treatment system being tested at the Massachusetts Alternative Septic System Test Center on the Massachusetts Military Reservation.
To push the pilot projects through, Mr. Klenert had moved to hired a lobbying firm, headed by a former director of the state Department of Environmental Protection. That move, however, gave Mr. Klenert one of the first and only signs that there might be trouble with his business partners.
He had signed a contract with the lobbying firm and sent a request for payment up to New Hampshire.
“I did my job down here. [Scott Farah] was supposed to do his job up there,” Mr. Klenert said.
But that payment request was never processed. It was sent shortly before Mr. Klenert’s visit with Mr. Dodge to modify the financial records.
“One thing that should not be overlooked are the obstacles created by bureaucratic environmental officials,” Mr. Klenert said. The lobbyists and some of the additional expenses for fighting to get the technology permitted would not have been needed if the state would allow more flexibility in allowing experimental erosion technologies to be installed in pilot projects, he said.
Faith In The Technology
Mr. Klenert said he feels sympathy for the individual investors who got caught up in the scheme. “It is a sickening feeling for some of the elderly, the people who have lost all of their life savings,” he said. “I feel worse for the investors than for myself.”
But he also struck a stern, pragmatic tone when speaking about the losses they experienced, arguing that individuals should never invest more than they can afford to lose.
He said he has received about a half dozen e-mails from those investors, some of whom have accused him of benefiting from the scam, some who have sought commiseration as fellow victims of the fraud, and others who have expressed interest in continuing to support Earth Protection Systems.
When the investigation gets sorted out, Mr. Klenert said he hopes the financial ties to the New Hampshire companies will be severed. And when his company gets going again, he said he hopes to be able to make good on those investments by returning to the alleged victims some of their money. “I don’t feel like I have to. But it is a wish,” he said.
Mr. Klenert said he has not been interviewed by investigators, but he did testify last month in a court hearing for Robert Farah, a minister who has been tied to the fraud. According to news reports of the hearing, a judge ordered that all of the elder Mr. Farah’s assets be frozen.
Mr. Klenert said that since the New Hampshire businesses were closed, he has heard once from the younger Mr. Farah, in a strange telephone call. “He seemed deranged. He was speaking fast. He did not make any sense,” Mr. Klenert said. It was clear that he was in some sort of psychiatric treatment facility, Mr. Klenert said.
Mr. Klenert said he e-mailed Mr. Dodge with a question about the business, and Mr. Dodge responded that he did not have access to his records and so could not answer the inquiry. Mr. Klenert said Mr. Dodge offered to get back to him later.
In the approximately 90-minute interview with The Enterprise, Mr. Klenert repeatedly expressed devout optimism about the future of the Earth Rib Modules and his businesses. He described the mess in New Hampshire as a sort of temporary obstacle en route to the release of his design, which he noted has received positive reviews from scientists and fellow engineers over the course of nearly 20 years of development. He pointed to a home on Nantucket that recently fell into the water when the cliff it was perched on collapsed. “That should not have happened,” he said.
“I refuse to condemn anyone until I know the full story. But you have to accept the facts. So you got screwed. It’s not the end of the world. Because there is still the technology. There is still ingenuity. There is still the entrepreneur,” he said.
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