Manure Plan Fuels Only Lawsuits
As he sold investors on an improbable plan for turning Inland Empire cow manure into electricity, W. Patrick Moriarty had an answer for everything.
With a folksy delivery, the Orange County businessman promised cutting-edge technology, a respected engineering firm and tax-exempt financing to extract methane gas from mountains of manure and use it to generate enough power to light a small city.
“He told me categorically that we would get our money back with interest and that the project was as good as gold,” said Shmuel Erde, a Beverly Hills lender.
What Moriarty and his business partner, Wayne Stephens, didn’t tell Erde and numerous others who altogether invested more than $10 million was that their company, Chino Organic Power Inc., had no licensed technology, no equipment, no permits -- not even a guaranteed supply of manure.
Although manure-to-electricity plants have been used on a small scale to turn water-polluting cow waste into power, they are not particularly cost-effective and have never produced close to the amount of electricity Moriarty envisioned, documents and interviews show.
Another thing Moriarty didn’t tell Erde and the others was that he had gone to prison in the 1980s in what then-U.S. Atty. Robert C. Bonner called “the most significant corruption case in recent California history.”
Not surprisingly, the lofty energy plan has come crashing down, followed by a bankruptcy and accusations from angry investors, a number of whom have filed lawsuits alleging fraud by Moriarty and Stephens, a San Bernardino County businessman.
In interviews with 20 investors, many said they now believe the entire operation was a ruse to enrich the two.
A Times review of permit applications, court records and corporate documents shows that the Chino Organic Power plant never progressed much further than the sales pitch.
Both Moriarty and Stephens have acknowledged in recent interviews that their plan never got off the drawing board. But they said they didn’t defraud anyone, and they insisted that the electric plant would have worked if it hadn’t been hampered by an uncertain energy market and litigious investors.
“I am absolutely very sorry if anyone, including me and Wayne, lost money -- especially me,” said Moriarty, 75.
Moriarty grew up in Washington state and moved to Orange County in the 1950s to expand a fireworks business he had started as a teenager. By the 1980s, Moriarty and his associates contributed nearly $600,000 to California politicians, about half of it illegally laundered to mask the source of the funds.
He used money, free vacation housing, special investment deals and patronage jobs to buy support from politicians for legislation to benefit his fireworks firm, Anaheim-based Pyrotronics Inc., and to gain support for the Commerce Casino, which he helped found.
In a scandal that ultimately produced 10 convictions, Moriarty pleaded guilty to seven mail fraud counts in 1985.
He was sentenced to seven years in prison but served 29 months after the U.S. Supreme Court limited prosecutors’ use of mail fraud charges as a means of fighting corruption.
That led to a deal in 1988 in which five of the original counts against Moriarty were dropped; the two remaining counts related to kickbacks Moriarty paid to a bank official.
The roots of Chino Organic go back to 1989, when Stephens and a group of friends founded Chino Resource Recovery Inc. and set out to build a power plant fueled by cow manure. They, too, soon ran into legal troubles.
Moriarty entered the picture in 1996, introduced to Stephens by a mutual acquaintance. Soon, Moriarty became Stephens’ partner in a new firm, Chino Organic Power, with a far more ambitious business plan that called for more than $150 million in tax-exempt financing and a strategy for taking the company public, according to records and interviews.
An experimental, alternative energy source was now touted as an electric utility projected to generate 85 megawatts, enough for all the homes in Chino and Chino Hills, with power to spare.
Industry and academic experts cannot cite any manure-to-electricity plant in the country that is producing more than 2 megawatts. “It’s a huge, almost unbelievable plan,” said Norm Scott, an agricultural engineering professor at Cornell University who has worked on such projects.
Moriarty and Stephens told investors they needed short-term loans for engineering and other development work that would be repaid once government agencies issued the bonds, the investors said in interviews.
They allege that Moriarty was a master at creating the appearance of a can’t-miss project, gathering documents, letters and newspaper articles touting relationships he had with engineers, agencies and two officials who would go on to help sell the project.
The first was Bob Feenstra, head of the area’s dairy industry lobbying group, the Milk Producers Council. He was Moriarty’s link to the raw material: wet cow manure.
In a 2003 lawsuit filed by Erde in Los Angeles, the Beverly Hills lender alleged that Moriarty never told investors that Feenstra was a handsomely paid consultant.
A February 1999 letter from Stephens to Feenstra, now part of the court record, describes the $10,000-a-month consulting arrangement, and company checks obtained by Erde’s attorneys show that Feenstra was paid more than $200,000 from 1999 to 2002. Chino Organic also bought a $4-million “key man” life insurance policy for Feenstra that shows he was poised to become its general manager.
Feenstra responded in a court declaration that he was never paid to attract investors and said he never misled anyone. He resigned from the Milk Producers Council in October.
Moriarty’s other important relationship was with Richard Atwater, the chief executive of the Inland Empire Utilities Agency, which runs water and sewer lines and had an obvious interest in keeping manure from polluting the groundwater.
“Atwater became extremely important to the deal,” Moriarty said. “It was an absolute home run for them and for us.”
In 2001, Atwater signed an agreement supporting Chino Organic’s purchase of property near the agency’s headquarters for $8.8 million. If Chino Organic defaulted on its loan to buy the property, the agency would buy the property instead.
But the purchase guarantee was never approved by the agency’s board and was meaningless, Jean Cihigoyenetche, the utility’s attorney, told The Times.
“Atwater didn’t have the authority to sign that agreement and bind the board to that,” he said.
Atwater responded that he got approval from the board in a closed meeting, but he could not produce documents to show that such approval was granted. He said he had done nothing improper through his involvement with Moriarty.
“All I said was that renewable energy is a good idea with merit,” he said. “I don’t provide investment advice.”
Investors suing Moriarty and Stephens allege that they used the document to entice investors, saying it showed they had support from an important agency. Moriarty also told investors he was in escrow on the land, an old dairy farm, they said.
But a $10,000 check Moriarty wrote to Inland Empire Escrow in December 2000 securing the land bounced, meaning he never controlled the site, according to Linda Cooper, the president at Inland Empire Escrow.
“It looks really good once you have a property in escrow, and you have receipts saying you deposited this much money, whether the checks bounce or not,” she said.
Despite his criminal record, Moriarty continued gathering investors from Southern California to Michigan.
Moriarty persuaded Erde to raise money by arranging a meeting with Feenstra and Atwater, who vouched for the project, Erde said. He ultimately brought in more than a dozen other investors who together sank more than $1 million in Chino Organic.
Reaching back to his troubled past, Moriarty also tapped Newport Beach lender Edgar Pankey for $3 million. Pankey had been involved in a number of projects with Moriarty in the 1980s, including the Commerce Casino and the Bank of Irvine.
Moriarty and Stephens also pitched Chino Organic to several contractors and engineers who invested funds and expertise.
Dave Olson, a La Jolla consulting engineer whom Chino Organic hired to help launch the project, became an early believer. He made a $45,000 personal loan and wound up contributing more than $400,000 in consulting services from 2000 to 2002. Olson said he decided he didn’t like the way the business was being run and quit.
“When you’re in the industry long enough, you smell the real credible guys and the not-so-credible guys from a mile away,” Olson said. “These guys weren’t credible. They were greedy.”
Absent from Chino Organic’s ledgers were expenditures that could have brought the project closer to fruition, records and interviews show.
In January 2000, the company compiled a list of more than a dozen permits it might need. But no applications were filed for air quality, water quality or even basic building permits, according to officials at those agencies.
The licensing agreement Chino Organic said it had secured from a British engineer for methane gas extraction technology was never executed. Beyond the absence of land, technology, engineering or a purchase agreement for any electricity produced, the project lacked something even more basic: manure.
Even with Feenstra’s ties to the dairy industry, it’s not clear that dairy farmers in the area would have paid to haul wet manure to Chino Organic’s electric plant. Geoffrey Vanden Heuvel, a veteran dairy farmer and Milk Producers Council board member, was among several major dairy farmers who told The Times they were never approached by Feenstra to contribute manure.
The first sign many investors had that something was seriously amiss with the project, they said, came when checks Moriarty sent them as partial repayment of their loans bounced. More than 60 creditors received bounced checks from Moriarty or one of his companies, according to financial records reviewed by The Times.
From 1999 to 2004, Moriarty bounced at least 150 checks, many to Chino Organic investors, those records show.
As he raised money from investors, Moriarty moved money freely from Chino Organic’s account to other accounts he controlled, including one from his old fireworks company, Pyrotronics, according to checks now in court records.
The checks drawn on those accounts show he mingled personal and business expenses, which he acknowledged in the interview.
For example, Erde gave Chino Organic a check for $200,000 in November 1999. A day later, subpoenaed bank records show, $100,000 from Chino Organic was deposited into the Pyrotronics account. Moriarty then wrote a check for $832 to his wife and a check for $2,000 to himself.
Overall, while Moriarty wrote nearly $1 million in checks to others that bounced, he wrote just as much in checks to himself, his family members and for cash that cleared.
Responding to allegations by investors who lost money on Chino Organic, Moriarty told The Times that he covered most of the bounced checks, but he did not provide bank statements as confirmation. As for the checks to himself and his family, he said he was drawing the money out of the company accounts as if it were his salary.
“All the money that I put into that company is far more than any money that I took out to pay my rent or to make a car payment or anything else,” Moriarty said.
To boost investors’ spirits, Chino Organic would occasionally send out newsletters rife with misinformation. In March 2001, a newsletter said, “Ten Million dollars has been made available to Chino Organic Power, Inc. by the State of California, for this project.”
The state agency in question? “The California Green Energy Department.” There is no such department, and state officials said no state funding was ever guaranteed for the project, a fact Moriarty and Stephens acknowledged in the interview.
In 2002, anger among lenders reached a boiling point. They began filing lawsuits against Moriarty and Chino Organic -- lawsuits that Stephens and Moriarty blame for the company’s failure.
The estate of Moriarty’s late associate, Edgar Pankey, alleged that Moriarty had covered “unauthorized, improper and excessive business and personal expenses” using Chino Organic funds. Moriarty responded in court that Pankey stalled the project. A judge agreed with Pankey’s claim and awarded the family $3.8 million in 2004. The judgment has not been paid.
Erde, who had invested about $600,000, filed suit in 2003, saying he had been defrauded. The case is pending. Moriarty says Erde has been paid back everything he was owed.
A third group of lenders filed suit in March in Santa Monica. They, too, say they were defrauded and are asking for $5 million in a pending case. Moriarty has not responded, and the court is expected to enter a default judgment against him this week, a court official said.
William Sandors, a Los Angeles chauffeur among the Santa Monica plaintiffs, lent Chino Organic $74,000 at a time when his mother needed at-home nursing care. When the promised payoff never came, he sold stocks, cashed in his 401(k) and borrowed against his house.
“When it finally started crashing down, I couldn’t sleep at night,” Sandors said. “I would end up just sleeping on the floor because, for some reason, it felt good to be on solid ground.”
The Chino project, in any event, is dead.
Stephens filed for Chapter 7 bankruptcy protection in 2005. But Moriarty, ever the optimist, said last week that he intended to keep fighting to build some version of a manure-based power plant in California.
“It’s still a good project,” said Moriarty, sipping a screwdriver at a Laguna Beach bar. “There are a lot of people who I got into this deal who I am responsible for, and I want to make sure they get their money back. Maybe we won’t be able to build it in Chino, but there are still dairies in other places and there’s still manure that needs a place to go.”
Times staff writer Ralph Frammolino contributed to this report.
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