Milton Ariail, Et Al. V. Xethanol Corporation, Et Al. 06-CV-10234

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK } } MILTON ARIAI' L, Individually And } CIVIL ACTION NO . 46-10234 On Behalf of All Others Similarly Situated, }} } } Plaintiff, } CLASS ACTION COMPLAINT FOR VIOLATIONS OF } FEDERAL SECURITIES LAW S vs, ) XETHANOL CORPORATION, LAWRENCE } S. BELLONE, CHRISTOPHER D'ARNAU D- } TAYLOR AND ,IEFFERY S. LANGBERG, ) JURY TRIAL DEMANDED Defendants . ) INTRODUCTIO N This is a federal class action on behalf ofd pu rchasers of the common stock of Xethano l Corporation ("Xetllanol" or the "Coinpany") between January 31, 2006 and August 8, 2006 , inclusive (the `Class Period"), seeking to pursue remedies under- the Securities Exchange Act o f 1934 (the "Exchange Act") . As alleged herein, defendants published a series of materially fals e and misleading statements that defendants knew and/or recklessly disregarded were materiall y false and misleading at the time of such publication . and that omitted to reveal materia l information necessary to make defendants' statements, in light of such material omissions, no t materially false and misleading OVERVIEW 1 Xethanol engages in the production and marketing of ethanol and its co-product s in the United States . Ethanol. a clean burning, renewable fuel, is used as a primary gasolin e additive. As a result of the recent rise in gasoline prices, to over $3 .00 per gallon in man y places, during 2006, alternative energy companies such as Xethanol suddenly received th e attention of the national press, and became a favored investment for many shareholders . ?. Helping to propel the trading price of its shares, throughout the Class Period . Xethanol distinguished itself from other ethanol producers by its ability to develop and optimiz e "biomass" as the substantial raw material for ethanol production ; as well as corn, the mor e traditional raw material used in ethanol production. This distinction was critical to investor s because biomass ethanol production has a distinct competitive advantage over corn ethano l production . Biomass - - generally post-industrial food or paper production waste - - has no cos t (or even negative cost), it is available locally in markets where demand for ethanol is alread y high, and it does not require the use of additional valuable resources or energy for its production . 3 .. At all relevant tines, Xethanol portrayed itself as an early-stage biomass ethano l production company that utilized a business model predicated upon the commercialization o f biomass produced ethanol. Defendants repeatedly stated that Xethanol's plan called for th e Company. first, to sustain itself on revenues produce(] from traditional corn ethanol production . and with the money raised fro n both public and private investors . defendants consistently state d that Xethanol was entering its second phase of development . The second phase of developmen t for Xethanol called for the Company to conirnercialize biomass ethanol production in th e immediate near -term. 4. Thus, to reach its clear-term business objectives, throughout the Class Period, defendants purported to own and operate two ethanol plants in Iowa - - Xethanol BioFuels i n Blairstown and Permeate Refining in Hopkinton . The first of these plants was a corn based plan t that was in operation at all relevant tinges . The second, the Permeate Refining plant . purported to have previously used candy production waste to create biomass ethanol . According to defendants, however, by the inception of the Class Period, this second plant had been "temporarily" shut down as part of Xethanol's growth plan, so that it could be "refurbished ." updated and returned to service as a multi-stream, or pure-biomass ethanol production facility . 5 . In addition to the two Company-run plants, throughout the Class Period , defendants also reported that Xethanol had formed joint ventures to expand its ethanol production locally and regionally . The announcements of Xethanol's Joint ventures were also very important to investors because they represented the Company's first regional strategic alliances - - formed to develop and execute business opportunities outside the corn-belt of Iowa .. These .joint ventures represented critical milestones in the Company' s evolution, because they purported to evidence Xethanol's ability to produce ethanol locally, using post consumer, or post industrial bio€nass waste streams. 6 . The statements concerning the Company's plant. as well as the announcement of its joint ventures, served to bolster investors' belief that Xethanol was operating according to plan and was alrendv reaching its second stage of development - - the commercialization o f biomass ethanol production . In addition to the foregoing, throughout the Class Period . defendants also stated that Xethanol maintained a complex system of internal controls an d procedures that reasonably assured the veracity and completeness of'the Conmpany's statement s and disclosures. 7 .. The combination of defendants' positive statements about the Company as well as Xethanol's representations concerning its management and its internal controls, caused Xethanol shares to trade above $15 .00 by late-April 2006.. Moreover, during the Class Period, there was a large spike in Xethanol trading volume, as Company shares suddenly and regularly trade d several hundred thousand units, and even several million units, per day . 8 . Unbeknownst to investors, however, throughout the Class Period, Xethanol shares had been artificially inflated and the statements made by defendants, as well as the representations concerning the Company's systems and controls were either patently untrue, o r these systems were providing defendants with information throughout the Class Period that the y knew or recklessly disregarded, was in stark contrast to the statements concerning ; the Company's strength and profitability .. 9 . Throughout the Class Period, the Company was suffering from a host o f undisclosed adverse factors that were negatively impacting Xethanol's business . In fact, amon g other undisclosed problems, at all times during the Class Period : It was not true that the Company was being run by management with credibility and a high standard of ethics . nor was it true that defendant Taylor had significant management experience at major domestic corporations . In fact, defendant Taylor had fabricated his resume, and many of the Conmpany s initial investor's had prior histories of stock fraud, market abuse . breach of fiduciary duty and breach of contract . Defendants had misrepresented the true state of: the Company's Hopkinton, Iowa plant.. In fact, at all relevant tines, this plant was not being refurbished but, rather, it lay abandoned and neglected with no current water or sewer service and no employees working at the site . 0 Defendants had omitted disclosing a host of related party transactions, as well as associations with several early stage investors that had alarming records of stock f aud, market manipulation, breach of fiduciary duty and shareholder abuse .. It now appears that defendants utilized a reverse merger into a shell corporation to avoid disclosing many of these relationships and its related parties . 4 Defendants had materially overstated the Company's profitability by under- reporting Xethanol's true cost of completing a biomass to ethanol production facility and by falling, to make proper, timely adjustments to the Company's stated financial reports and balance sheet . • Throughout the Class Period, it was also not true that Xethanol contained adequate systems of internal operational or financial controls, such that Xethanol's operational and financial reports were true, accurate or reliable .. e As a result of the foregoing, it also was not true that the Company's financial statements and repo rts were prepared in accordance with GAAP ad SEC rules . In addition, because of the lack of true independence between the Company and many of its business partners and Joint venture partners. and because of other material omissions and misrepresentations, the risk of investing in Xethanol was materially higher than defendants disclosed, and than investors could disce rn through a reasonable due diligence investigation . e As a result of the aforementioned adverse conditions which defendants failed to disclose, throughout the Class Period, defendants lacked any reasonable basis to claim that the Company was operating according to plan, or that Xethanol could achieve the near-tens commercialization of biomass ethanol production . or achieve the guidance sponsored and/or endorsed by defendants,. 10. It was only at the end of the Class Period, however, that investors ultimately learned the truth about the Company after a forensic securities investigations Internet websit e called ShareVeuth com published a widely circulated report that was highly critical ol'Xethano l and its management. Among other things, this report stated that there was little evidence Xethanol had produced significant amounts of ethanol from hioina .ss to claim that it could achieve commercialization, and that substantial related party associations had not been disclose d including the fact that ,nafit' of the Company 's ear°lty investors had been disciplined bt ' regulatory agencies. and that diferrdrnlt Taylor had hlatantIjy lied about his work experience and qualifications on his resume . 11 . As investors now know, defendants were motivated to, and did, conceal the tru e operational and financial condition of Xethanol, and materially

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