CTIC Investors Lose Patience

Hundreds of investors ponied up tens of millions of dollars for a chance to be in on the ground floor of a new technology, peddled by a Sherwood man with a checkered past, that promised to do everything from improving stealth aircraft to cleaning up nuclear waste.

More than a decade later, and with not a penny to show for their investments, some of the investors have concluded that W. Darrell Lainhart was an old-fashioned snake oil salesman — with one amazing plot twist:

They still believe, apparently with good reason, in the “world-changer” promise of the nanocarbon-producing technology owned and patented by Clean Technology International Corp.

Arkansas investors confirmed by Arkansas Business include Tom Strickland, Dr. David Wardlaw, Bill Birchard and Rex Robertson, all of Little Rock, Bill Matthews and Danny Harris of North Little Rock and Rick Andrews of Cabot. There are believed to be at least 300 and as many as 500 individual investors from Texas to Florida.

“I’m not the brightest guy in the world, but I’m not an idiot,” one of the early investors, Charles D. “Danny” Cross of Pensacola, Fla., said. “I attended most of the testing … and in my mind, there’s absolutely no question that the process works. And that’s why, if you talk to the shareholders, most of them are convinced that it works.”

Cross, 62, is a retired Marine colonel with a number of other successful businesses. If only his own money had been tied up for 11 years, he wouldn’t mind so much. But, Cross said, he was so impressed with the potential of CTIC’s “chemical decomposition and rehabilitation process” that he persuaded about 60 other people to give money to Lainhart.

“I’m guilty by exposing this fellow” to my friends, Cross said. “That’s why I’m doing what I’m doing.”

Cross, as have other investors, has complained to the Arkansas Securities Department, which has not taken action and can’t confirm even an investigation. Cross also set up a Web site to rally investors who believe much of their money — at least $25 million and possibly twice that — was actually used by Lainhart and his wife, Irene Mattie Fay Lainhart, to support an increasingly lavish lifestyle while stringing investors along with promises of an imminent initial public offering of stock.

The claims made on that Web site, CleanTechNanoShareholders.com, are the subject of a defamation lawsuit filed against Cross in a Texas federal court by CTIC, Lainhart and the man credited with developing the CTIC technology, Tony Wagner of Houston. Cross has countersued, accusing Lainhart of securities fraud and unjust enrichment.

History
Darrell Lainhart, described by investors as being in his 70s, has not responded to repeated calls and messages left during the past few weeks at various phone numbers associated with him and CTIC.

In 1986, then-U.S. Rep. Tommy Robinson told the Arkansas Gazette that he and Lainhart, a political contributor, had both been reared in the North Little Rock neighborhood of Rose City. Lainhart’s current address is 72 Shoshoni Drive in Sherwood.

Lainhart is best remembered in Arkansas business circles as the principal broker of Delta Financial Investment Corp., which was accused by the Arkansas Securities Department in 1986 of inflating its markups at the expense of bank clients. The Gazette reported that the National Association of Securities Dealers fined Lainhart and other Delta Financial brokers in September 1989, by which time Delta had been closed for almost two years.

According to another Gazette article, Delta was also “accused by the Kansas Banking Department in October 1987 of contributing to the collapse of two Kansas banks, which had sustained huge losses in the bond markets.”

A $1.55 million foreclosure on the Delta Financial building at West Markham Street and University Avenue in 1989 was one of three foreclosures filed against property owned by Darrell and Irene Lainhart in the years following the demise of Delta Financial.

At some point — maybe as early as the late 1980s — Tony Wagner, identified as senior vice president and science and technical officer for CTIC, developed a process that supposedly uses a molten aluminum bath to pull apart hazardous waste at the molecular level and render it into harmless aluminum ingots.

This process was subsequently patented, and Clean Technology International Corp. was, according to its lawsuit filed in U.S. District Court in Houston, incorporated in Texas in 1993.

Exactly when Darrell Lainhart became involved is not clear, but the lawsuit says Diamond Capital Corp., which Irene Lainhart incorporated in Arkansas in 1986, was an original shareholder of CTIC.

By 1998, as part of a settlement of a lawsuit between Diamond Capital and the then-majority shareholder in CTIC, Diamond Capital paid $1 million for the right to license the CTIC technology and then sold the licensing rights back to CTIC in exchange for 75 million shares of the company. When the Texas corporation was moved to Nevada in 2001, Diamond Capital was entitled to make a 3-for-1 trade of its “old” CTIC shares for 225 million shares of the “new” CTIC.

According to the amended complaint filed in November, Irene Lainhart was president and CEO of CTIC until cancer treatment forced her to resign. Darrell Lainhart was elected president and CEO on June 28, 2008.

Selling Shares
Starting in 1998, when Diamond Capital received its 75 million shares, Lainhart drummed up investments from anyone who would listen to his pitch, Cross said, although it seems many of the investors were actually recruited by someone else. Cross says Lainhart sold shares for between 33 cents and $5 each, and interviews with investors confirm that the price varied.

None of the investors interviewed by Arkansas Business knew of Lainhart’s run-ins with securities regulators before they bought their shares — or even thought to check.

An early investor was Rex Robertson, a McDonald’s franchiser in Arkansas and Oklahoma who owned a Surfside Resorts condominium in Destin, Fla. Robertson told Arkansas Business that he was “just an investor” and declined to answer any more questions.

Cross, however, believes he was one of about 100 investors whom Robertson brought to Lainhart.

In 1998, Cross was chairman of Surfside Resorts. He said he and Robertson had been friends for several years when Robertson first told him about CTIC and its process for neutralizing hazardous waste.

At first, Cross dismissed the pie-in-the-sky tale. But a few weeks later, Robertson told Cross that the CTIC process — using a prototype that the company now calls its “smaller machine” — was going to be demonstrated in Little Rock. Using some connections, Cross was able to obtain some hazardous waste from a Superfund site in Florida to be used in the demonstration.

Cross said he paid to have independent laboratory testing of the untreated waste material and a sample that had been run through the CTIC machine. “The original waste had dozens of different materials, but [after treatment] every element came back ‘BDL’ — below detectable levels,” Cross said. “At that point, it got my attention. I decided to go back to Little Rock and meet with Mr. Lainhart in person.”

Lainhart made a presentation to “eight or nine” people assembled by Robertson. Cross initially invested $100,000 of his own money and rounded up hundreds of thousands more from other investors — money that CTIC supposedly needed to market licenses for its waste treatment technology to various government agencies. Agreements filed in evidence in the Texas case indicate that Cross, through his Duncan Fidelity Investment Inc., solicited Diamond Capital to sell him $500,000 shares at $1 each in September 1998 and another 547,200 shares at $1 per share in February 1999.

Friend of a Friend
Pat Scucchi of St. Charles, Mo., told Arkansas Business that her husband, Paul, also met Lainhart through Rex Robertson, who was a friend of Paul Scucchi’s brother, James Scucchi of Dermott. (James Scucchi didn’t respond to a message left on his home answering machine.)

Paul Scucchi is now 72 years old and a patient in a nursing home near their home. But in September 1998, days after Cross made his first buy, he wrote a check for $10,000 to Diamond Capital Corp. And he did it twice more — $10,000 each in August and September of 2000.

“We took money from our IRA fund to give to [Lainhart],” Pat Scucchi said. “That’s terrible. And every time [my husband] talked to him, oh, it’s going to go on the market, 60 to 90 days.”

In 2002, after CTIC was re-incorporated in Nevada, the Scucchis were able to trade in their shares for three times as many shares in the new corporation. “When it went 3-for-1, we thought, oh, we’re really going to get rich now.”

But the Scucchis have not seen any return on their 11-year investment.

“Oh, not a penny,” Pat Scucchi said. “And the reason I’m really angry is my husband has Alzheimer’s and I could use the money.”

Other investors tell similar stories. Bill Birchard, a part-time preacher, said he attended an Assembly of God congregation with Lainhart but mainly knew him as a customer of his Bill’s Tire & Mufflers on Highway 107 in Sherwood.

“This was the beginning of the dot-com boom, and everyone was talking about stocks,” Birchard said. “It was real exciting.”

Birchard said he made a “substantial” investment — he wouldn’t be more specific — in CTIC stock.

And he told other people about it.

One of the first was Rick Andrews, now an employee of the Arkansas Public Service Commission, who said he made out a $25,000 check to Diamond Capital Corp. in 1997 on the strength of his faith in Bill Birchard and his wife, Ann, owner of Ann’s Health Food Store, which is next to Bill’s Tire & Mufflers.

“Had it not been for their recommendations … I probably wouldn’t have even messed with it,” Andrews said.

Dr. David Wardlaw, a Little Rock orthodontist, heard about CTIC from his father, Fay Wardlaw, who heard about it from a man who was dating his daughter. David Wardlaw said he put “tens of thousands” of dollars into CTIC stock at $5 a share in 2000 — stock that later was split 3-for-1. As did the others, he made the checks out to Diamond Capital Corp.

“I had a problem with that and was concerned about it, so I asked the question. And [Lainhart’s] explanation was good enough, in my mind, that it made some sense. In retrospect, you should probably go with your gut feelings.”

Unfortunately, Wardlaw says, he also recruited about five more investors.

“You don’t know how bad I wish I could answer that question ‘no,'” he said.

Bill Matthews, a disabled veteran living in North Little Rock, said he was a customer of Ann’s Health Food Store and was introduced to Lainhart by the Birchards.

In 2000, he wrote a $10,000 check to Diamond Capital in exchange for 2,000 shares of CTIC stock at $5 a share. In 2004, he said, he gave Lainhart $26,750 in cash and another check for $15,000 to buy 25,000 more shares of the new CTIC stock, then at the 3-for-1 price of $1.67 per share.

In early 2001, Danny Harris, a district manager for Shelter Insurance, bought the first of two lots of CTIC shares from Lainhart, to whom he was introduced by Bill Birchard.

“A little later, when it looked like things were imminent about going public, I bought a little more, said Harris, who said his total investment was between $20,000 and $25,000.

Tom Strickland of Little Rock was also recruited by Bill Birchard, with whom Strickland had previously attended the Bible Church of Little Rock.

In 2002, Strickland said, Birchard called “out of the blue” and told him about a company that was going to go public soon at a price that would give Birchard and his wife, Ann, the financial freedom to do full-time Christian mission work.

Strickland kicked in $100,000 over a period of about a year, he said.

Buying Property
At about the same time that most of these investors were buying CTIC shares from Diamond Capital Corp., Irene Lainhart was buying real estate.

According to public records, Diamond Capital — of which Irene Lainhart was the sole shareholder, according to the lawsuit filed in Texas — bought $1.25 million worth of property in Garland County in 2001. The next year, the deeds were transferred into Irene Lainhart’s name.

In total, the purchase included about 550 acres, including some 470 acres off Malvern Avenue in Hot Springs, just south of the Lakeside school complex, and 80 acres at Lonsdale.

Various investors claim Darrell Lainhart has also amassed a collection of antique cars. No cars are currently assessed in his name in Pulaski County, but Irene Lainhart assessed in March nine cars, two trailers and a boat. (One of those vehicles is a 1977 Rolls-Royce.) Another entity using the 72 Shoshoni address, Capital Heritage Irrevocable Trust, this month assessed 12 vehicles and a 35-foot car hauler.

No vehicles are assessed by either of the Lainharts in Garland County.

Nanospheres
Over the years, investors say, Lainhart made repeated promises that CTIC would be going public in a matter of months. They might have run out of patience much earlier had it not been for one astonishing development: CTIC discovered that a material left over from its primary process of encapsulating hazardous waste in aluminum bars was a unique form of pure carbon in nearly perfectly round shapes called nanospheres.

Here’s how CTIC described the discovery of this new — and, potentially, much more lucrative — use of its technology in the lawsuit filed in Texas:

“From on or about 2004 through 2006, samples of the carbon nano material produced using the smaller machine were sent for testing to various University chemistry departments and laboratories, most significantly the University of Cincinnati, to help determine the type and quality of the nano-carbon produced. The results of this testing were used to identify potential applications for such materials.”

Indeed, the disgruntled investors regularly invoke the name of Dr. Vesselin Shanov, co-director of the Nanoworld & Smart Materials & Devices Laboratory at the University of Cincinnati, in explaining their continued enthusiasm for CTIC.

Shanov did not return messages left at his home and UC office. But the August 2007 study of CTIC nanospheres that he co-authored is available on the Internet. It concluded that the carbon nanosphere chains produced by CTIC “may have hundreds of applications in components where smart nanocomposites can be used for multifunctional properties improvement, self-sensing of damage, and possibly limited self-repair of the material.”

A much bigger machine — with a capacity of 80,000 pounds of molten aluminum — was built in Houston, and investors got excited all over again. Not only did CTIC have nano material that might be used to make lighter, stronger aircraft and automobiles, improved surgical equipment and infinitesimally small electricity-conducting threads — it had lots of it. In an industry in which products are measured in grams, CTIC could turn it out by the barrel.

Tom Strickland wrote another $100,000 check.

“For a couple of days there, when the big machine was first kicked on, there were 50 or 60 gallons of this material produced. That’s unheard of,” Strickland said. “That’s what makes you want to beat your head against the wall.”

Patience Depleted
Danny Cross, the Florida investor, spent months between 2006 and 2008 working for CTIC in Houston as a volunteer. Both sides agree on that much. But in their lawsuit against Cross, CTIC, Lainhart and Wagner say he “effectively sabotaged” the project and “caused a delay of from 15 months to 24 months in CTIC’s ability to bring its product to market.”  

However, Cross does appear to have gained the support of several other disgruntled investors.

Cross went back to Florida and started his campaign to remove the person he believes is the real impediment to fulfilling the promise of CTIC: Darrell Lainhart. One day last July, he said, he laid out all his documentation — much of it now available on his password-protected Web site — before investigators for the Arkansas Securities Department.

His documentation of Lainhart’s history of run-ins with securities regulators and a suspicion that CTIC research and development was not funded by money invested with Lainhart have persuaded many of the investors to join Cross’ effort to install new management and to move the company forward.

A number of investors were scheduled to powwow in Houston over the past weekend to discuss the future of their investment and the company whose technology they still believe in.

“That’s what bothers you: Had this money been spent to do what we thought it would do, we’d have another outcome,” investor David Wardlaw said. “This was described as being a world-changer as far as a problem that was darn near unsolvable.”

Rick Andrews agreed.

“I think the technology, based on what Danny Cross has told me and a couple of other people, is viable. But the greed just took over and the company never materialized,” he said.

“The technology is real,” Bill Matthews said with total confidence.

With a real CEO and a real corporate structure, Strickland said, “I still think this could have significant potential for Little Rock, especially on the nano side.”

And Bill Birchard has an idea about who could realize that potential.

“Col. Cross, he’s got really good knowledge of these things. He’s the one who should be running the company, in my opinion,” Birchard said.