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  • Securities Fraud 2: AEHI's Land Value Estimate

    If you'd like to hear more about AEHI visit 

    One of AEHI claims that has raised eyebrows is that the land in Payette County which it intends to purchase for $5 million will be worth $1.5 billion when the NRC has approved it for construction of a nuclear power plant. And that's before the construction even starts! 

    Let's think about that for a moment: why should the value increase? The reason is that one could bring a power plant to market four years earlier than if starting from scratch (assuming four years for the permit process).

    However $1.5 billion is a mind-boggling number and you've probably wondered how they come up with it. Well, wonder no more. A potential investor who was equally curious asked the company for the justification when considering a private placement. Here's the appraisal the company provided.

    J. Eric Cooper (Doctor of Philosophy, no less) is the author and we learn that AEHI was actually very conservative in the number it uses with investors: Cooper comes up with a range of estimates between $1.5 billion and a whopping $13.5 billion.

    Cooper uses a 1600 MW power plant and assumes 94% availability.

    The appraisal references a couple of papers two of which we provide for convenience:

    1. "The resurgence of nuclear power in the U.S."
    2. "Monte Carlo Methods for Appraisal and Valuation: A Case Study of a Nuclear Power Plant"

    A quick look at them reveals that they are concerned with the valuation of nuclear power plants, not just the land on which they are built. The appraisal does not provide any further details on how "Monte Carlo" or "Comparable Sales" were used to arrive at the given results. The resulting numbers for the land are higher than what the cited papers come up with as value for entire nuclear plants so lets just say some reasonable doubt exists about the claims.

    In one area however Cooper does go into enough detail that we can reverse engineer the argument: NPV and IRR at EBITA. That's finance vocabulary for determining today's value of the cash the plant would generate during the first four years (remember by buying the land a power producer could bring a plant online four years earlier). 

    The IRR is the interest the company wants to earn on its investments (Cooper uses 20%), so the first years cash is discounted by dividing by 1 + 20%, second years by dividing by ( 1 + 20% ) * ( 1 + 20% ) and so forth. Applying that to the $1.185 billion in cash (EBITA) per year yields a total present value of $3.07 billion, just as he provides in the appraisal.

    Sounds good, right?

    Well, until you look at the assumptions: 

    1. Cooper assumes 12c per kWh for electricity but the current market price in California is 3.5c per kWh.
    2. Cooper uses EBITA (Earnings before interest, taxes and amortization) as cash per year. However interest for a $5B power plant is a very real cash outlay. 

    Let's see if we can fix the calculation:

    First what's a realistic interest on a 30 year loan? The US government pays 4.78%. Lets just say AEHI gets really, really lucky and gets a loan of $5 billion for 7.5%. That'd be a yearly cash outlay of $375 million. That's 2.7c per kWh.

    Then lets look at the other costs. Here's a good paper on the topic. Operation and maintenance is currently at 3c per kWh and fuel costs are at 1.5c per kWh for a total cost of 2.7c + 3c + 1.5c = 7.2c per kWh.

    Now lets look at our profits: for each kWh we sell to California we get 3.5c and pay 7.2c. For a loss of 3.7c per kWh or $487 million per year. And a current present value of - drum roll - negative $1.26 billion.

    In other words if you had the power to force AEHI to build the above plant and sell the electricity to California it would make sense for them to pay you $1.26 billion so they could start incurring the losses four years later!

    Maybe a doctor in philosophy is not the right background for appraising nuclear power plants after all? 

    After we've shown that the only verifiable calculation is completely off base, and if only to show that AEHI's associates are not only crooked, but also intellectually extraordinarily challenged, let me point out the following logical problem in Coopers appraisal:  

    Cash flows will only be generated once the plant is operating, so after its construction is complete. Even in AEHI's rosy world construction takes four years. So any cash flow will start coming in four years after the site's been acquired and needs to be discounted by dividing by 1.2^4 = 2.07.

    In summary: 

    1. Cooper assumes electricity will sell for 343% of its current price in high priced California.
    2. He ignores the interest on the loans required to build a plant.
    3. He underestimates the maintenance and fuel costs by 1.5c per kWh.
    4. He ignores the construction time which cut the value of the property in half. 

    And this document is used in context of selling securities to an investor. Should sound familiar, because just like yesterdays case this is an "untrue statement of a material fact" "in connection with the purchase or sale of any security" (illegal according to rule 10b-5). Or just simply Securities Fraud.

    Dec 08 10:46 AM | Link | 2 Comments
  • AEHI Commits Securities Fraud - Broadly Violates Rule 502(c) And 10b-5
    As already teased yesterday I have discovered a truly egregious transgression by AEHI and Don Gillispie. You will remember that as I've outlined here and here "Don - no-comp - Gillispie" is on a crusade to con individual investors into purchasing shares from what can only be assumed to be insiders of the company.

    In my view yesterday's paid promotion in which Don stated that "I can rival Exxon Mobil in profitability" was clearly misleading and fraudulent. But what would turn this into a full blown violation of rule 502(c) and rule 10b-5 is a general solicitation of investors to purchase publicly traded stock or contact the company about private offerings.

    Get this: AEHI distributed this flyer on Saturday, 11/13, to all 210,708 readers of the Investor's Business Daily, a national investor oriented newspaper in the US. The newspaper confirmed the advertisement and provided it by fax to me (excuse the low quality).

    Please read it in full, but here are a few excerpts:

    "Our plant is estimated to generate about $3 billion dollars a year."

    "Be part of it. Turn this page to learn about investment opportunities."

    "Other sources like coal and hydro are being closed down at dramatic rates, which makes nuclear power the only option that can fill the void. It also means nuclear becomes a tremendous investment opportunity with excellent return potential." 

    "In addition to the opportunity to purchase publicly traded stock, there are a number of investment options - with participation from direct investments between 100 million USD and two billion USD and approximately eight billion USD in financing."


    Other than a statement that this is advertisement there is no disclaimer whatsoever. 

    If this isn't an offer by general advertising in "Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio" I don't know what is (illegal according to rule 502(c)).

    And together with the claims in yesterday's promotion and the fraudulent claim of $3B in annual profit it's clearly an "untrue statement of a material fact" "in connection with the purchase or sale of any security" (illegal according to rule 10b-5).

    We're entering the end game. To borrow from "Monopoly" it will soon be: Go to jail. Go directly to jail. Do not pass go, do not collect $200.

    Disclosure: I am Long AAPL.

    Additional disclosure: Also short AEHI, but system wouldn't accept the symbol
    Dec 07 7:38 AM | Link | 1 Comment
  • AEHI Paid Distribution: The Third Factor In Penny Stock Fraud
    Let's see how far we've come: I summarized some of the misrepresentations behind AEHI. In a sense this is the original sin in penny stock fraud. I also talked about how technical market manipulation is used in the case of AEHI to directly manipulate the share share price.


    But if you want to make money selling shares to retail investors you also need to get the news in front of them. Let's call that aspect "Distribution", it's mostly accomplished via email, fax or mail. Paid distribution is related to astroturfing which AEHI is also engaged in as we've discussed in an earlier post.


    It's important to note that paid distribution's only purpose is to drive up or hold up the price for someone who's selling.


    No real company would engage in paid distribution campaigns for the following reasons:


    1. They hurt the company because of the direct costs.
    2. They hurt incoming shareholders long term because they buy at inflated prices.
    3. They don't bring in money for the company, only for the sellers.
    4. They are unethical and borderline illegal.

    Luckily paid distribution campaigns without disclosing compensation are illegal. That makes it easy to identify them. But the disclosures are buried in the fine print so you do have to look for them.


    Lets look at the news coverage about AEHI on Google Finance. In addition to the exaggerated, fluffy and misleading releases of the company we find the following releases:

    2. 12/2/10: Lucky Picks of The Day: (PINKSHEETS:MMUH) - (OTCBB:AEHI ... 
    4. 11/30/10: Lucky Picks of The Day: (PINKSHEETS:SPPH) - (OTCBB:ECRY)- (OTCBB:AEHI
    5. 11/22/10: OTC Tip Reporter: Hall of Fame Beverages, Inc. (PINKSHEETS: HFBG), China Medicine Corporation (OTCBB: CHME), Alternate Energy Holdings (OTCBB: AEHI)
    6. 10/14/10: Lucky Picks of The Day: (NASDAQ:GNBT) - (OTCBB:AEHI)- (OTCBB:MNDP
    7. 1011/10: OTC Stocks with Top News: AEHI, GMTD, NUBL and MXOM 

    Most of these releases are distributed by email to anybody who signed up to their mailing lists. And lets see whether AEHI paid for these distribution campaigns:

    • AEHI — Alternate Energy Holdings, Inc.: We have been compensated $5,000 from Alternate Energy Holdings, Inc.
    • AEHI — Alternate Energy Holdings, Inc.: We have been compensated a total of $10,000 from Alternate Energy Holdings, Inc.
    • Otc Advisors: AEHI - Alternate Energy Holdings, Inc.  We have been compensated a total of $10,000 from Alternate Energy Holdings, Inc.
    • Otc Tip Reporter: Doesn't disclose compensation by company. However the release itself contains this disclosure: Since receives compensation and its employees or members of their families may hold stock in the profiled companies, there is an inherent conflict of interest in statements and opinions and such statements and opinions cannot be considered independent.
    • OTC Stocks with Top News: Because Omni receives compensation for LBNEWS’s dissemination of the Information (as disclosed in our Compensation Disclosure Section), predominately in the form of common stock shares (the”Shares”), our publicy disseminated publications should not be regarded in any manner whatsoever as independent. 

    In summary there's overwhelming proof that AEHI does in fact use paid distribution to entice retail investors to purchase its stock.


    Note how the promotions have become more intense recently, just as the technical manipulation, yet none of the two have created a sustained advance in the stock price. These are signs that we're close to the end of the life cycle of this operation. There are other signs which I'll discuss in a later post.

    Dec 05 9:18 AM | Link | Comment!
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