Dreams from the Opium Den

This is the third article in a series about Terry McAuliffe and GreenTech.

by James A. Bacon and Carol J. Bova

When partners Xiaolin “Charlie” Wang, Anthony Rodham, and Terry McAuliffe banded together in 2009 to finance and build an electric vehicle enterprise known as GreenTech Automotive, they thought big. Very big. In a 2009 offering memorandum pitched to Chinese investors, they stated they aimed to grow their flimsily financed start-up into an automotive behemoth eventually capable of generating up to $33 billion in revenue.

“If full production of one million vehicles is realized,” elaborated the document, GreenTech’s manufacturing facility in Tunica County, Miss., would be “one of the largest automobile manufacturing plants in the world.”

In retrospect — after GreenTech went bankrupt having produced only a handful of cars, burned through more than $140 million, and left barely $6 million behind for investors and creditors in the bankruptcy settlement — such aspirations seem wildly disconnected from reality. Whether McAuliffe and his partners believed such targets were remotely realistic is a question only they can answer.

Looking at GreenTech from the outside, some described the business as a scheme to snooker millions of dollars from naive Chinese investors. A more charitable explanation is that the GreenTech partners genuinely believed their own hype, hoping they could bootstrap one fund-raising effort into enough progress in building the enterprise that they could make it to the next fund-raising round with a better story, raise some more money, make more progress, and hook the next round of investors. In other words, in such a view, their business plan was fake until you make it.

Whatever the thought process, it was an abject failure. Chinese investors lost almost everything, they felt cheated, and the three principals opened themselves to accusations of fraud.

Wang, McAuliffe and Rodham went into business together in 2009, right after Wang had wrested control of GreenTech Automotive (or Hybrid Kinetic Automotive as it was known then) from co-founder Benjamin Yeung. (See Part II of this series.) They set up a cluster of holding companies and operating companies with interconnected directors and ownership. Rodham was CEO of Coast Management LLC, which raised the money from the Chinese investors and then lent the funds to GreenTech. McAuliffe was 25% owner of GreenTech. And Wang, who had an interest in both ends of the business, provided the connective tissue.

Gulf Coast was a lucrative enterprise. The company charged a $55,000 administrative fee on top of the $500,000 investment from each of its 283 investors. Before the enterprise collapsed, Gulf Coast would have raked in more than $15.5 million in commissions, and that doesn’t include the 1.5% annual management fees charged on the loans from Gulf Coast to GreenTech.

Between 2009 and 2013 the fund-raising endeavor brought in $141.5 million in four investment offerings, according to GreenTech’s bankruptcy filing. To raise the funds, Gulf Coast distributed private-placement offering memorandums that made the case for investing in GreenTech. Court testimony suggests that the Chinese investors, many of whom did not read or speak English, never referred to these documents, relying instead upon verbal representations from Gulf Coast and press clippings ginned up by the McAuliffe PR machine. (We’ll have more to say about this in Part IV.)

The investors should have read the offering memoranda. Although the documents opened with narratives touting the incredible potential for growth and profits, they were carefully lawyered. As required by U.S. securities law, the memoranda detailed risks that would have set off loud, clanging alarm bells. If Wang, McAuliffe and Rodham read their own material, they would have been fully cognizant of the overwhelming odds against them.

Bacon’s Rebellion bases the following analysis on the memorandums for two of the four offerings.

Round One: A million vehicles or bust. In August 2009 an offering memorandum from the Gulf Coast Automotive Investment Fund A-1, the first of the four tranches, sought to raise $50 million. GreenTech, said the memorandum, had acquired an option to purchase a manufacturing site in Mississippi, was “finalizing” engineering designs for four hybrid vehicles, and was “finalizing” tax and fiscal incentives from the state of Mississippi.

The memorandum conveys an attitude of wild-eyed optimism:

GreenTech Automotive seeks to raise $2 billion in construction and operating capital, and will attempt to raise up to $10 billion in total. … The targeted full production capacity is 1,000,000 vehicles per year, with four expected production lines: subcompact cars, compact cars, midsized cars, and SUVs.

GreenTech, the document continued, planned to build hybrid cars incorporating “state-of-the-art energy efficiency and emission reduction technology.” The company had partnered with “several leading European automotive technology companies” to develop the technologies. The memorandum opened the possibility that GreenTech might “establish R&D centers in the U.S., Europe, and Asia to collaborate globally in its R&D efforts.”

In GreenTech’s assessment, there were “significant limitations” on the mass production of affordable, fully battery-powered electric vehicles. The price of a full-battery car would exceed $100,000, more than most consumers could afford.

“In view of these limitations, GreenTech Automotive’s first generation of vehicles will not be completely battery powered. Instead, they will be powered by a combustion engine assisted by a hybrid-electric motor.” GreenTech did say, however, that it aimed to produce plug-in battery vehicles in the future.

Although none of GreenTech’s principals had any experience in automobile manufacturing, the memorandum projected that the Mississippi plant would produce 150,000 vehicles by 2012. Volume would increase steadily until it reached an astonishing one million cars by 2015-17.

Hiring and training 25,0000 workers might be a challenge in a rural corner of Mississippi, the memorandum acknowledged, but GreenTech had a plan for that. “If workforce availability issues arise, the company will also hire a large number of contract workers. Hiring contract workers gives the company flexibility to right-size its workforce if needed.”

The targeted price range for a subcompact would range between $6,000 and $10,000 per car. The company offered no forecasts on how much each vehicle would cost to produce. Rather, the memorandum suggested that the economics would get better as the level of production climbed. Economies of scale would lower the fixed cost per unit and increase GreenTech’s bargaining power with suppliers, while the quality of the workforce would improve.

After full production was achieved, the memorandum said, the company planned to sell 70% of its cars in North America while exporting 20% to Asia and 10% to Europe.

After laying out business plan that could not have been more vague and fanciful had it been sketched on the back of a napkin, the document did acknowledge numerous investment risks. The economy was recovering from a recession, and GreenTech was an unproven startup. Fluctuations in the price of gasoline could affect demand for hybrids. Government regulations might delay new product launches, and the market might not accept the cars. Furthermore, the company relied upon third-party parts suppliers over whom it had no control. Perhaps most concerning of all, GreenTech had not yet developed a distribution system for its cars, no one on its management team had any experience in the area, and the company could not guarantee it could establish such a nationwide dealership network before it started production.

Gulf Coast did not raise the $50 million it was aiming for in the first round. But it did bring in $28.5 million from 57 investors. The sum might have been totally inadequate to turn its vast stated ambitions into reality, but it was enough to keep the enterprise afloat for a while. Wang, Rodham and McAuliffe took the money and prepared to raise some more.

Round Three: 150,000 vehicles or bust. GreenTech pulled in another $17.5 million in its second tranche. And then, in an offering memorandum dated March 13, 2013, the company sought to raise another $60 million. McAuliffe had announced his campaign for Virginia governor in December 2012, and he had officially resigned his position as chairman of GreenTech. But he still owned 25% of the company. Moreover, the offering memorandum listed him as “chairman emeritus” with the following explanation.

Terence R. McAuliffe, Co-Founder, has been the Chairman of GreenTech Automotive since October 2009 and has been Chairman of GreenTech Automotive, Inc., since November 2, 2011. Mr. McAuliffe is currently the largest individual shareholder of the Company. On Dec. 5, 2012 Mr. McAuliffe announced his plans to run for Governor of the State of Virginia. Following his announcement, his position changed from Chairman to Chairman Emeritus.

Until the election, Mr. McAuliffe will dedicate his full time to the election campaign but will remain as a shareholder of GTA’s (GreenTech’s) Parent. If Mr. McAuliffe becomes Governor of Virginia, federal and state law requires that he resign all positions with GTA and appoint a representative to vote his shares of GTA’s Parent.

By this time, GreenTech had ditched plans to manufacture a hybrid vehicle. The company’s future was electric vehicles.

The market for EVs was still wide open, the memorandum explained, and GreenTech sought to develop a market niche that had few competitors. “Other electric vehicles are either 1) golf cars or similar vehicles with low cost and poor amenities or 2) full speed electric vehicles that are priced significantly above the average MSRP (Manufacturer’s Suggested Retail Price) and remain largely out of reach for a majority of consumers.” GreenTech’s market-entry strategy was creating a vehicle with a “compelling price proposition” — between $13,500 and $28,000, depending upon the size of the battery — that met the needs of consumers driving fewer than 30 miles per day.

Expectations in this offering were considerably more muted than in round 1. There was no more talk of raising billions of dollars and manufacturing a million cars.

The company had launched its “MyCar” electric vehicle, a cute, brightly colored little two-seater that was designed to have a 60- to 115-mile range on a single battery charge and a speed of up to 50 miles per hour. The original model of the car had been designed by a “world-renowned Italian designer,” Giorgetto Giugiaro, and an updated version had been “engineered by GTA (GreenTech)” and two engineering partner companies.

GreenTech planned to use the $60 million proceeds to “increase production of our vehicles, further the development of newer, energy efficient vehicles, expand our markets in the United States and other countries, create new assembly lines and for other corporate purposes.”

GreenTech said it planned to produce 50,000 cars annually in Phase 1, 100,000 cars in phase 2, and 150,000 in phase 3.

The sole tangible accomplishment toward designing and building an electric vehicle was the May 2010 purchase of EuAuto Holdings Limited in exchange for shares of preferred stock. (No price tag was given for the transaction.) The Hong Kong-based EuAuto produced an early version of the MyCar.

Otherwise, the list of achievements was exceptionally meager:

  • In August 2011, the company had entered into a distribution agreement with Greenabout A/S, a Danish distributor of energy-efficient vehicles.
  • In July 6, 2012, GreenTech had unveiled the MyCar (produced in China) at a ceremony at its Mississippi production facility, in which former President Bill Clinton appeared as a guest speaker.
  • In November 2012, the company had sold five cars for use at the U.N. Conference on Climate Change in Doha, Qatar.
  • In February 2013, GreenTech had signed a distribution deal with Spijkstaal Electro B.V. to sell MyCars in the Netherlands and 11 other European countries.

Aside from that, the company had “begun discussions” with LG Chem, a lithium-ion battery producer to supply a powertrain system, and was “exploring opportunities” to partner with a Chinese manufacturer to build and sell MyCars in China. GreenTech, which had yet to produce a car at its U.S. manufacturing facility, would “provide technology and know-how to manufacture electric vehicles” to the Chinese. The memorandum also alluded to a “facility” in Dongguan, China that functioned as a “supply checkpoint” to check supplies for “accuracy” before shipment to the Mississippi assembly plant.

While GreenTech struggled to assemble the pieces of a viable auto company, the offering memorandum conceded that the company faced stiff competition from established automakers — from Ford and GM to Nissan and Mercedes — with plans to enter the electric vehicle market. This chart summarized the competition.


The list of business risks also mentioned the following:

Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Virtually all of our competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, almost all of these companies have greater operating histories and greater name recognition than we do. … We believe our exclusive focus on electric vehicles as well as our design and competitive pricing are the basis on which we can compete in the global automotive market….”

Despite these extensive reservations, the offering managed to raise $44.5 million from 89 Chinese investors, which passed through Gulf Coast as a loan to GreenTech. The fourth and final tranche raised another $51 million from 102 investors later that year.

By the end of 2013, having raised $95 million that year (and $141.5 million in all), GreenTech should have been flush with cash. But far from manufacturing and selling 50,000 MyCars, there is no evidence in any document reviewed by Bacon’s Rebellion that GreenTech generated any revenue beyond the sale of the five cars to the Doha climate conference and a pittance in engineering fees.

Reality: Zero vehicles and bust. The most caustic assessment of GreenTech’s business came from a disgruntled competitor, Plastech Holding Corporation, which filed a lawsuit alleging that GreenTech had fraudulently broken up its business relationship with Chinese auto manufacturing JAC Motors. Plastech asserted that it had invested “millions of dollars” helping JAC’s cars penetrate the U.S. automobile market, but GreenTech had swooped in and cut its own deal with JAC. A judge would dismiss the lawsuit on the grounds that Plastech had fabricated a key supporting document, but Plastech’s appraisal of GreenTech as a business enterprise rings true.

GreenTech, charged the Plastech lawsuit, was “essentially a series of shell companies that existed to raise financing” through the EB-5 program. GreenTech had “no product to sell.” Referring to the hybrid car GreenTech touted in its first round of financing, Plastech contended, “no such vehicle ever existed.” As for its ambitions to become a leader in electric vehicle R&D, GreenTech had been issued a single patent for its MyCar design and one for unrelated hybrid technology.

The MyCar, purchased from EuAuto in 2012, was a joke, in Plastech’s estimation. U.S. regulations classified the vehicle as a Neighborhood Electric Vehicle due to its small size and low speed. “There is no market demand in the United States for a Chinese-made vehicle that looks like a Chinese sedan powered by a speed-governed electric motor that cannot be used on the majority of public roads in the United States.”

No automobile dealership would be interested in selling the MyCar. As a consequence, despite the vaunted relationship with the two European distributors, sales were “virtually or completely non-existent.” In Plastech’s belief, GreenTech had not sold a single car to a third-party customer.

The partnership with Hong Kong-based JAC, announced in 2013, had one main purpose, Plastech alleged: to artificially create jobs to satisfy the federal EB-5 visa program and the terms of Mississippi’s loan to GreenTech. “The cars are an excuse to create phony jobs that will paper over the fact that when it took investor money, GreenTech knew it could not create jobs from the investors’ money.”

“GreenTech is widely known in the automobile industry as a company that does not manufacture anything and is consistently reputed to be a front for wealthy Chinese visa investment machinations,” Plastech charged. “It is widely known that it has no electric or indeed any kind of technology, and has never been associated with a legitimate United States automobile dealer.”

When Plastech filed its suit, Terry McAuliffe was no longer affiliated with the company. After winning his gubernatorial campaign in November 2013, McAuliffe announced that he would divest his holdings in GreenTech. Documents contained in legal filings indicate that Wang became the sole GreenTech owner, which implies that he purchased McAuliffe’s shares. It is not known how much McAuliffe reaped from the sale or how Wang and/or GreenTech financed the purchase. It is not known if he, in the words of the March 13 offering memorandum, appointed “a representative to vote his shares of GTA’s Parent,” either in his blind trust or otherwise.

McAuliffe played no role in GreenTech’s disagreement with Plastech. That was Wang’s doing. But his penchant for hype and puffery as chairman of the company would reverberate long after his departure.