Clearsign Combustion Corporation (NASDAQ:CLIR) "appears to be one of the first, if not the first, in the nation to make use of the new JOBS Act." (The Seattle Times) Perhaps this is only an ironic coincidence, but it's a shame that this new program had to start off this way: Clearsign has no credible inventors to account for its "revolutionary" technology, and that's why I believe that the Clearsign story has suffered a critical failure.
- Without a doubt someone in Clearsign has lied about the business and science experience of the Chief Science Officer ‒ the so-called "original inventor" of its technology. Without the inventor, what claim does Clearsign have for a "revolutionary" technology?
- Material information has been withheld from Clearsign investors: the co-inventor on Clearsign's "pending patent" found his name attached to a transparent technology scam. A recent attempt at a rebuttal to this exposure has misrepresented the facts.
Additional evidence that I have gathered presents other problems:
- Clearsign inked an agreement with John McFarland for Investor Relations work. McFarland was permanently barred from the securities industry.
- CEO Rutkowski and McFarland are both co-members of a separate investor relations company which was formed this last June, just after McFarland got more than $50,000 worth of Clearsign shares and which was above and beyond the original agreement. I have found no disclosures of this in Clearsign's filings.
- MDB Capital Group underwrote Clearsign's IPO, whose S-1 contains false and misleading statements.
- MDB Capital Group professes expertise with patents and claims to have done due diligence on Clearsign … yet Clearsign's original inventor faked patents. How could MDB not know this?
- MDB Capital Group claims to have helped Clearsign with investor relations during the same time period that Clearsign's banned investor relations agent was active. FINRA members such as MDB Capital Group are prohibited from having any association with barred members such as John McFarland.
(Unless otherwise provided, source material for the above and following can be found in the two slide shows, ClearSign's False and Misleading statements about David Goodson and ClearSign's Omission of Material Fact Regarding Thomas Hartwick. A larger report is also available. For more detail, please see my blog here.)
David B. Goodson
In a rebuttal to my article, Benjamin Padnos attempted to minimize the lies told in Clearsign's S-1 filing and prospectus:
I will say that in my research, I did find there may have been some exaggerations in David Goodson's biography in ClearSign's S-1 filing, as well as outright errors such as wrong numbers of specific patents he holds with the U.S. Patent & Trademark Organization (USPTO). I hate sloppiness, and don't have any inclination to excuse it in this instance. But this minor bit of sloppiness alone is not enough to discard the Company's fundamental story.
~ Seeking Alpha contributor Benjamin Padnos
But it is not just "sloppy." Someone has clearly lied in the S-1 Registration Statement - and in a very serious way. With more research one finds that the problems with Clearsign's original inventor and Chief Science Officer are not just with the false claim of having collaborated with Nobel Prize winners, nor with the false patent claims, but with almost every claim of having commercialized a technology. In fact, uncovering the history of Goodson's "electric field" technologies reveals a disturbing pattern of deceit - both to investors then and to investors now.
It matters because David B. Goodson is said to be the "original inventor" of Clearsign's technology: ECC. He is also listed as an inventor on Clearsign's pending patents ‒ he's a co-founder of the company, the largest shareholder, and a director. Here is a summary of false, misleading and highly improbable claims made in the prospectus and S-1 Registration Statement.
False Claims in the Prospectus that inflate Goodson's abilities
Conclusions from evidence
Source (besides SEC filings)
He once collaborated with Nobel Prize winners, Crick and Watson. False.
In the relevant time period, Crick and Watson had not yet won the Nobel Prize and were still obscure. Additionally, age differences and the fact that at the time Crick and Watson lived on opposite sides of the Earth make such collaboration extremely unlikely.
His numerous patents include the 4 mentioned in the prospectus. False and false.
Far from having "numerous patents," Goodson has less than even the four mentioned. Two of the four listed are false claims. A third patent expires early due to nonpayment of maintenance fees.
He commercialized electro-optic polymer technology. False.
Goodson's electro-optic polymer company fails. "Astronomical delinquency" -- creditors, employees, and associated organizations were not paid.
He commercialized advanced combustion systems technology. Probably False.
Available information is scarce. The technology did not have a big footprint. Goodson's company was dissolved by Washington state 2 years after its patent was issued and the patent itself expired early, in under 5 years, due to failure to pay fees.
He commercialized fermentation technology. False.
Goodson's fermentation company fails. Creditors and employees were not paid. In the beginning, investors were told that the technology had been tested, but later, to fend off creditors, Goodson claims that his inability to demonstrate the technology led to the company's collapse. Projections for revenue in the 100 s of millions were made, but later Goodson tells creditors that he's living off of food stamps and public assistance.
His company, Air Pollution Systems, was sold to the Linde division of Union Carbide in 1978. False.
After receiving Air Pollution Systems' corporate file, I found no sign of such a transaction. There was no change in management or company name from 1977 through 1979. Air Pollution Systems changed its name in 1982 and then was dissolved in 1987 due to failure to file.
Goodson was actively managing AERA when the prospectus was filed. False.
This nonprofit company had been dissolved due to failure to file during the IPO. Since my publication of this inconsistency, the license has apparently been renewed. Very little effort is necessary to see through AERA's "science." See aeraenergy.org.
[Please see the slide show for more detail.]
Dr. Thomas Hartwick
Thomas Hartwick is the top-listed Technical Advisor for Clearsign's technology. He is also listed on Clearsign's pending patents as co-inventor. But Hartwick was also the technical advisor for John Rivera's technology scam at Sustainable Power Corp. John Rivera was convicted of fraud, and central to the SEC's case were the false claims about his technology ‒ the same technology that Hartwick was tasked with summarizing for investors.
Hartwick in SSTP Press Release
John Rivera, in Federal Court
"'When I was approached to review the SSTP process and the utilization of the proprietary catalyst, I spent nearly five weeks reviewing the technical data before I agreed to accept the position as scientific and technical advisor. Only after I became convinced that the technology was based on sound scientific principles would I accept this position,' stated Dr. Thomas Hartwick." ~ Sustainable Power Corp. Appoints Dr. Thomas S. Hartwick as Scientific and Technical Advisor to the Company Dec 14, 2009
"The central fraud alleged involves claims by Rivera that USSE could produce viable commercial biofuel and fertilizer products." (Page 2.) (USSE = US Sustainable Energy Corp.)
"Rivera was also the principal shareholder of SSTP. According to the Commission, Rivera used SSTP for misconduct similar to that alleged in this case." (Page 3, Note 2)(SSTP = Sustainable Power Corp)
"The defendants also argue that two purported contracts filed with their response demonstrate that USSE (or, later, SSTP) was commercially viable." (Page 20)
~ Summary Judgment against John Rivera in July 2011, (Case 5:08-cv-00245-DCB-JMR) An exhibit in the case included the same Texas A&M study that Dr. Hartwick was tasked with. That report was submitted as an exhibit.
Seeking Alpha contributor Benjamin Padnos quotes Hartwick, telling us that Hartwick and Rivera were not contemporaries. Hartwick supposedly even says that SSTP's technology worked better than Rivera had claimed.
In Dr. Harwick's own words:
Regarding SSTP, Berry's assertions are totally incorrect. Rivera, the former CEO, was thrown out by the good guy directors who wished to rehabilitate the company. First, they had to find out if the technology was worth saving. So they got a contract with Texas A&M to measure and characterize the conversion process and got me as referee/advisor to critique the A&M results and comment on the business viability. Surprise! The basic technology was even better than the Rivera claims, but the company was too far gone with the lawsuits to recover. I never received my full compensation. I was on the team opposing Rivera, not supporting him. He was thrown off the board in Spring of 2009 before I even signed up to scrutinize the manufacturing process in October. Any contention that I was in league with Rivera is hardly credible...never even met the man. All of this is fully documented and available for scrutiny.
~ Seeking Alpha contributor Benjamin Padnos
Second, Rivera was indeed active in the winter of 2009 and beyond. He was the largest shareholder of SSTP and his involvement was contemporary with Hartwick's involvement. We have a very good inside-view of this technology scam, because at the precise time of Hartwick's involvement, the SEC case against Rivera was ongoing. We have depositions and exhibits that we can download from PACER.GOV. As for Rivera's involvement during Hartwick's time, here are my two favorite pieces of evidence. These events take place during and after Hartwick's name is used by SSTP.
- The CEO sends an email to Rivera, conferring with him about a press release in which Hartwick himself is featured.
- Rivera grants voting rights by proxy to a newly appointed chairman. Then in a dispute Rivera revokes that proxy and the now former chairman declares that he never really had any power, but only took on additional liabilities. And the best part ‒ when he resigns he feels it necessary to include Rivera in his notice.
These are events that occurred during and after Hartwick's presence. Needless to say, Rivera was a de facto leader in this company.
Mr. Padnos investigates the "timeline" of Hartwick and Rivera's involvement, by asking Hartwick. However, the evidence gathered from the court case presents a very different perspective and perhaps explains why Hartwick was brought in at precisely this point in time.
The SEC had requested an onsite examination of Rivera's technology. This was to be performed by Tunstall Adams, Inc ‒ the SEC's expert witness in the federal case. Was this a crisis point for those who knew that false claims were being made about the technology? I ask because, the very next month, SSTP rushes out and signs an agreement with some researchers from Texas A&M. They are to perform a research study of their own. Now SSTP is in a race with the SEC.
Texas A&M finished its report in the fall of 2009. That's when Hartwick was brought in to put together a "summary," to validate the technology, and to explain it to the layman. But it wasn't your ordinary summary ‒ it was a kind of substitute report. See, the original Texas A&M report was not shown to investors. It was declared "confidential." (Who would fall for this?) What the investors received was a "summarized" version put together by SSTP's science team, of which Hartwick was the head. Using Hartwick's name and prestigious history, SSTP now declares that its technology has been validated and that it is preparing the reactors for the commercial production of bio-fuel.
Then the SEC commissioned report comes out. It states very clearly that Rivera's technology was not commercially viable.
[SSTP] "... got me as referee/advisor to critique the A&M results and comment on the business viability. Surprise! The basic technology was even better than Rivera claims." ~ Hartwick, according to Padnos.
"In conclusion, USSE/SSTP does not produce an approved or certified liquid or gaseous fuel that is suitable for commercial sale and use in reciprocating and combustion turbine equipment." ~ SEC commissioned study which was submitted as an exhibit in the case against John Rivera: Case 5:08-cv-00245-DCB-JMR Document 61-28.
According to Padnos, Hartwick was quoted as saying that he was there to verify the technology's business viability. Hartwick also said that the technology worked better than Rivera claimed. But just when you think things couldn't get worse for the Hartwick story, we find that the report by the SEC's expert witness included the very Texas A&M Report that Hartwick's team "summarized" for investors. (Not commercially viable, see the full Tunstall Adams Report.)
"Dr. Hartwick will be elaborating on and consolidating some of the vast scientific test data that has been compiled. He will assist the Company and potential investors in interpreting the data and advise the company on how to present the technical information to finance sources and commercialize the technology."
"USSE, SSTP has not developed processes for refining the crude organic liquids and gases produced by the pyrolysis processes. No such equipment is known to exist. Results from independent analyses of the products originating from the company's pyrolysis process indicate that the products do not meet any known standard for use in reciprocating engines or power turbines and were different from product test results reported in the USSE press releases." ~ SEC commissioned study which was submitted as an exhibit in the case against John Rivera: Case 5:08-cv-00245-DCB-JMR.
[Please see the slide show for more detail.]
CEO Richard Rutkowski
Here are some of the official documents that shed light on the situation:
- http://disciplinaryactions.finra.org/search.aspx insert document text number 2007007138002, see the Letter of Acceptance, Waiver and Consent.
- http://brokercheck.finra.org/Search/Search.aspx for BrokerCheck report select individual then insert "JOHN CHRISTOPHER MCFARLAND" or CRD# "2313648"
- McFarland's supervisors are also caught up in the mess. http://www.sec.gov/about/offices/ocie/aml/finra-awc-turnerbaumanmeyer.pdf
It is very difficult to make the excuse that Rutkowski might not have known about McFarland's past. Just this last June, Rutkowski and McFarland joined up and formed a separate Investor Relations company called, Ormont LLC. This might cause some problems.
- First, I have not found a disclosure of Rutkowski's relationship with McFarland.
- Second, there is a sudden increase in McFarland's compensation in April, above and beyond what was outlined in Clearsign's agreement. McFarland was to receive 4,500 shares for March (and each quarter thereafter), but a later filing declares that he received 18,000 shares for March and April. That's 13,500 shares on top of the agreement. At $4 a share, that would be more than a $50,000 bonus. Then in June, McFarland and Rutkowski suddenly show up on the original formation record for an investor relations company. Given that starting a business takes some planning, how many months before the June formation of Ormont did Rutkowski and McFarland agree to become partners in an investor relations company? How close together was this agreement and McFarland's increase in compensation?
- Third, McFarland's regulatory penalty, in legal terms, is called a "statutory disqualification" and with that there are certain exemptions that Clearsign and McFarland may not qualify for. There are also business relationships that FINRA members are not allowed to have. For example, MDB Capital said that it performed IR and PR services for Clearsign, but how could they do that without teaming up with Clearsign's investor relations' man ‒ John McFarland?
It would take a legal team and an inside look into McFarland's role with Clearsign, MDB Capital, investors, and retail brokers to know the extent to which Clearsign and others might be legally vulnerable.
I don't wish to make light of the preceding, but I have to say however that one of the first red flags for me was just the simple fact that Rutkowski, with no apparent experience with combustion science, listed himself as an inventor on the first expression of Clearsign's technology. What was he thinking? ECC was supposed to be a "revolutionary technology." What is his name doing there? As an investor relations man, he is perfectly aware of the role that the words "Patent Pending" have in boosting a stock price. After listing his name on the patent ‒ as an inventor ‒ why should we believe anything he has to say?
What's a little more than ironic is that MDB Capital professes expertise with patents, says it has its own patent database and patent experts. MDB Capital Group also claims to have done due diligence on Clearsign and to have advised it on IP strategy. Yet Clearsign's original inventor faked patents. How could MDB both take its due diligence seriously and not know this? A simple Google patent search was enough to expose the lie.
MDB Capital's analyst claimed, "No existing technology currently competes directly against ECC." (MDB Capital: ClearSign Combustion Corporation Research Initiation) Yet many inventors have already patented inventions which apply electric fields to flames. More irony: Clearsign itself has a duty to supply a list of relevant patents to the USPTO as part of its patent application. This form is called the "Information Disclosure Statement" (IDS). Click here to see Clearsign's IDS and how the listed patents conflict with MDB Capital's report (slide #5). In short, Clearsign's technology is not alone and these patent-pros should know it.
Sometimes I wonder if Clearsign and MDB are just having a lot of fun at everyone else's expense. Nonetheless, at its core, Clearsign is a fairly simple case. Clearsign has no credible inventors to account for its technology. This critical failure in Clearsign's story has yet to be addressed: how is it possible to have a technology without an inventor? I believe that the Clearsign story has suffered a critical failure.
(For more detail, please see my blog here.)
Disclosure: I am short CLIR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.