A fraudulent scheme pretending to sell Air Conditioners to BHP and promising a “10 times” return to investors has led to jail time for a man who swindled some of the biggest names in Australian business.
Key points:
- A state treasurer and former AFL chair were among investors caught up in a scam about efficient air conditioners
- Steven Phillip Heaton was jailed after falsely telling investors that BHP was going to buy thousands of the units
- The technology might actually work, but more research is needed
An unsolicited LinkedIn message and some doctored emails took in sophisticated investors, including a former AFL chair, a former state treasurer, a banking boss, and a leader at a global mining company.
Steven Phillip Heaton of South Melbourne is in jail after duping the financial heavyweights and an investment fund by suggesting the mining giant would eventually buy 1,800 of his energy-efficient air conditioners.
Just two test units were delivered to a BHP site two hours inland of Mackay in Queensland.
They were never plugged in.
A who’s who of Australian business
The list of high-flying victims is an astonishing roll call of some of the most eminent business figures in Australia, including:
- Mike Fitzpatrick, formerly the chair of the AFL and a director of Rio Tinto
- The former CEO of Merrill Lynch Australasia, Robert (John) Magowan, who was also an economist at the Reserve Bank
- Telstra’s former chief economist Geoff Frankish, also the former head of infrastructure at investment bank Goldman Sachs and who previously worked for Credit Suisse and the Victorian Department of Treasury and Finance.
- The former senior vice-president of global mining company Bechtel, Andrew (Andy) Greig
- The former treasurer of Victoria, Robert Jolly
The scam also took money from a Melbourne City Council sustainability fund.
There is no suggestion the people noted here have done anything wrong, just that the judgement lists them as investors who were taken advantage of by Heaton.
The ABC has attempted to contact all of the people noted in this article, via current and former employers.
The ABC has not been able to contact Mr Magowan, who is noted in the judgement as “currently semi-retired”.
How it worked
Heaton started a company to try to produce an invention that could save a lot of energy and money by pre-cooling the air entering air conditioners. It was known as “IP Hybrid” or “ERK”.
He reached a verbal agreement with BHP to give them some units to try for free, to get field data about any energy and efficiency savings.
BHP also wanted the test data as part of the company’s due diligence in case it wanted to consider buying the system in the future.
According to the judgement in the County Court of Victoria, in April 2016, BHP received two of the units at the company’s Caval Ridge mine site in Queensland.
The power meters needed to install them weren’t received with the air-conditioning units, and never arrived.
Collecting a group of investors
A year earlier, in mid-2015, Heaton sent an unsolicited message to former Victorian treasurer Rob Jolly.
Mr Jolly has a strong interest in technology solutions to stop climate change. He’s currently the deputy chair of start-up Capricorn Power, which is trying to commercialise technology that converts waste heat into energy.
A university alumni profile noted his tenure as a board member of the Alternative Technology Association and EcoCycle Victoria.
When the pair met, Heaton told Mr Jolly he wanted the former treasurer to chair the companies involved and later showed him a signed BHP purchase order — a promise to buy 100 units.
But it was a fraud. No-one at BHP had signed the order or agreed to buy the air conditioners.
When Mr Jolly met Mr Frankish later in 2015, he told him about the technology.
Mr Frankish said he was part of an “investor group” that included Mike Fitzpatrick and Robert Magowan.
A series of meetings was set up between Heaton and the investors. At the meetings, he told them BHP was buying the units.
Mr Grieg was recruited to invest in early 2016 by a former colleague. During the discussions, Heaton put to him “there was a likelihood of making 10 times the money invested”.
The beginning of the end
In May 2016, Heaton asked his BHP contact to sign and place BHP’s letterhead on a letter that he had drafted, stating that BHP had installed the two units and they were achieving energy savings.
Despite the fact the units hadn’t even been plugged in, the BHP contact assumed what was written was correct.
But by April 2017, the units still hadn’t been installed and Heaton’s contact at BHP had become aware that further emails and documents, purporting to be from BHP, had been “fabricated or ‘doctored'”.
That month, while overseas, Mr Jolly was told about the “falsity of BHP’s purported involvement” in buying the units.
After learning both the order and the test results had been falsified, Mr Jolly resigned as director and chairman of the companies.
It all fell apart from there.
A ‘devastating’ impact
Mr Jolly said the fallout of the fraudulent scheme had been devastating.
“I’m extremely disappointed and disturbed that people can get away with these things and that they’re able to use sophisticated methods of doctoring to create assets in such a way,” he said.
“It’s devastating when you run up against an individual like this.”
The former treasurer said he did extensive due diligence ahead of the investment, including speaking to the CEO of the Clean Energy Finance Corporation about the company, which had just won the Smart Cities award at the Australian Technologies Competition.
“All the conditions were there that suggested things were right. Unfortunately, the invoice (from BHP) was false, the emails,” he said.
While he says the ordeal had made him “more suspicious” of potential new ideas, he’s excited about his involvement in the Barton Engine technology created by a former CSIRO scientist.
Capricorn Power, where Mr Jolly is deputy chair, flags the machine as an efficient way to convert heat — from sources such as waste, incinerators and any waste heat source — to energy.
“I’m still positive about the world, that’s why I’m involved in start-ups. It’s high-risk but we have a drastic need to reduce carbon emissions,” he said.
‘Fraudulent’ investments and a guilty plea
Heaton pleaded guilty to two charges.
The first was “obtaining a financial advantage by deception” because he secured a $117,500 loan from the Sustainable Melbourne Fund by falsely representing that BHP Billiton had agreed to purchase and install 100 of his ERK heating/cooling units for its Caval Ridge mine site.
The second was “fraudulently inducing persons … to invest money”. The five men – Mr Jolly, Mr Frankish, Mr Fitzpatrick, Mr Magowan and Mr Grieg – invested a total of $975,000.
That was, Judge Peter Rozen wrote in his judgement, “by making statements, promises or forecasts which you knew to be misleading, false or deceptive”.
The statements, in emails doctored to look like they were from BHP, said the mining giant had installed “ERK Heating Ventilation and Cooling retrofit units”, provided feedback on them, the units were showing positive results and the company had agreed to buy a lot of them.
This all happened in a 17-month period between August 2015 and January 2017.
‘Negligible’ impact on investors
Heaton’s lawyer submitted that the impact on the five investors had “been negligible”.
In his judgement, Judge Rozen said that while he couldn’t “accept the impact was negligible” he was “unable to reach a firm conclusion about the impact of your offending” on the investors.
The judgement notes the substantial and powerful positions held by the investors who lost money.
The following information was not noted in the judgement, but Mr Greig took the Australian Tax Office to court in 2018 to argue that $11.8 million in losses from shares could be deducted against his income for tax purposes.
He lost the case.
The judge was clear about the impact on one person: Heaton.
“What is clear is that you benefited from receiving their money and that you did so dishonestly,” Judge Rozen said.
A high-tech twist
While a man is now in jail, and investors lost almost $1 million between them — the technology might actually work.
One of the reasons Heaton’s lawyer submitted that the impact on the five investors had “been negligible” was because the value of the patents for the technology are the subject of ongoing court cases.
None of the investors submitted a victim impact statement, making it difficult to know how tough the hit to their finances has been.
The judge called it “not straightforward” and Heaton’s lawyer put forward that it shouldn’t be concluded that the losses were the same as the $975,000 they invested.
Heaton’s wife Dr Ana Licina has repaid most of the money that was borrowed from the Sustainable Melbourne Fund.
Heaton was sentenced to six months’ imprisonment on April 19, and will be required to complete a two-year community corrections order on release.
Mr Jolly doesn’t know if the technology has a viable future — but it might.
“The results from the air conditioners were “spotty (and) inconclusive,” he said.
“Further research is required to ascertain how effective it is”.
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