The FBI is investigating the now defunct Solyndra in connection with allegations of financial statement fraud. Solyndra, which received over $500 million in government loans from the Department of Energy (DOE) as part of the stimulus package. When Solyndra filed bankruptcy at the end of August 2011, the government realized that Solyndra was not as healthy as it had presented itself in financial statements submitted to obtain and then renew government financing.
The primary focus of the financial statement fraud investigation for the moment is allegations of inflated sales backlog presented to the DOE to secure financing. Regulators are also looking into allegations of corruption on the part of senior executive, who for the moment are asserting their fifth amendment rights and refusing to answer questions on bonus awarded to senior executives.
The Solyndra bankruptcy sheds a harsh light on government oversight of stimulus money. Several red flags were overlooked when Solyndra’s financing was renewed at the end of 2010, including:
- Ballooning inventory, specifically raw materials. From the 2009 financial statements, the last set made available to the public, Solyndra reported an increase in inventory in the period between January and October 2009 from $3 million to $11 million. Perhaps most concerning, finished goods inventory during that period was stagnant remaining in the $650,000-700,000 range. While raw materials grew from $2 million to $9 million. One would hope that a DOE official would have asked by the cause for the increase in raw materials. Reports that Solyndra suffered from unproven automated manufacturing process that ultimately failed, leaving an excess volume of raw materials. To add to Solyndra’s problems, the built-to-suit manufacturing equipment was ultimately scrapped. In spite of all of this, Solyndra invested (taxpayer money) in building a second factory while inventory ballooned.
- Revenue recognition was also suspect. In Solyndra’s 2009 public filing, it defined its revenue recognition policy as recognized when “persuasive.” Such loose terminology does not approach the preferred standards of transfer of ownership and minimal rights to return.
- Sales backlog: if product sales required a deposit, the liability for customer deposit would grow. An area investigators are likely to look at is the handling of such deposits to be sure advances were appropriately recorded as deferred revenue (a liability) rather than sales revenue.
In spite of these red flags and mounting operating losses and cash deficits, the DOE doubled down on its bet by agreeing to continue helping Solyndra going as far as to accept a secondary creditor position to new any money received after Dec. 2010 intended to save Solyndra. The FBI investigation joins Congressional hearings set to explore the extent of fraud perpetrated by senior executives of Solyndra.