Warren Buffett seems to always make smart decisions. He knows to say no to just about everything. He knows how to to hire the right people. He believes wholeheartedly (pun intended) in the importance of deciding whom to marry.
But -- like the rest of us -- he doesn't get every decision right.
Case in point: Berkshire Hathaway's $340 million investment in DC Solar, the solar generator company founded by Jeff and Paulette Carpoff, that filed bankruptcy earlier this year after the FBI and IRS raided its headquarters last December.
DC Solar sold mobile solar generators to a number of investors who, according to court filings, put down $45,000 up front for a unit and then claimed a $45,000 tax credit for that invetment, as well as tax deductions for depreciation (since, as with many capital expenditures, the equipment has a limited usable lifespan.)
The FBI accused DC Solar of basically running a Ponzi scheme, paying back "old" investors with money received from new investors.
In its first-quarter financial report, Berkshire Hathaway said:
"In December 2018 and during the first quarter of 2019, we learned of allegations by federal authorities of fraudulent income conduct by the sponsor of these funds. As a result of our investigation into these allegations, we now believe that it is more likely than not that the income tax benefits that we recognized are not valid."
And, as a result, took a $377 million charge -- which basicaly means Buffett has written the investment off.
Of course Buffett isn't alone; authorities claim DC Solar sponsored fraudulent funds that total $810 million.
And other people also took a hit. DC Solar had signed on to sponsor the #42 car of Chip Ganassi Racing for the 2019 season of the XFINITY Series; the company's bankruptcy not only eneded the partnership, it ended that team, suddenly putting a number of people out of work.
Including Ross Chastain, whose 3-race trial in 2018 in the #42 car resulted in being named the team's driver for the 2019 season... and then was left scrambling for a ride.
Other NASCAR-related entities also took a hit. DC Solar had become a major sponsor not only of teams but also racetracks. (And had placed scores of solar generators at facilities tracks across the country.)
So how did investors like Buffett get fooled? Partly because, as federal officials claim, the firm leased solar generators to end-users like telecom companies... but that investor money still made up more than 90 percent of the funds DC Solar recorded as lease revenue.
According to the complain, DC Solar "appear(ed) successful, and the leases appear legitimate, when, in reality, leasing the equipment generated little income and early investors were paid from funds contributed by later investors."
Not all of later investors' money went to early investors, though: According to filings, the Carpoffs spent:
- More than $40 million on 25 properties in places like Las Vegas and Lake Tahoe
- More than $6.1 million on at least 90 vehicles
- $19 million on NetJets partial plane shares
- $780,000 on a luxury suite in the Las Vegas Raiders' new stadium in Nevada
- $1 million on a Ford Mustang (it's a GT 500 Super Snake, but still. $1 million?)
All of which leads to one simple point.
Even if you're Warren Buffett, it's easy to forget that when something sounds good to be true... it probably is.
Allegedly, of course.