Gemmax Solutions’ Belated Admission About Carbon Credits Bought by Retail Clients of Gemmax’s Brokers

We absolutely support and have assisted and will continue to assist any action taken by the authorities in respect of the fraudulent selling of Carbon Credits. We believe this is a vindication of the business model employed by Gemmax Solutions (and Carbon Neutral Investments before it) of providing a clearing mechanism for the settlement of carbon credits. The service provided by Gemmax Solutions guarantees a delivery versus payment mechanism ensuring cash is exchanged for an asset. This removes the ability for the fraudulent selling of a non-existent asset by a brokerage firm.

– Gemmax Solutions, (but my bolding)

By Richard Smith

I commented in my last post:

Gemmax Solutions’ ‘business model’ doesn’t stop scammers selling wildly overpriced assets, though, which is the real problem in this market. In fact, the Gemmax ‘business model’, if it works at all, facilitates such sales.

In practice, the Gemmax business model may be even worse.

Another recently issued Gemmax statement (early November, by all appearances) suggests that the Gemmax ‘business model’ doesn’t work at all. The result is hair-raising:

…the current situation regarding the credits you hold is;

1. We, along with a number of other parties, still have credits in the closed CDC Registry.  VCSA and the Registry’s have imposed an audit requirement on these credits to prove beneficial ownership and we have appointed Crowe Clark Whitehill to conduct this.  Some clients with credits held in CDC may have received a letter from Crowe Clark Whitehill asking them to confirm certain transactions.  The credits in CDC cannot be delivered or retired at the moment until the audit is completed.  At the successful completion of the audit we believe either APX or Markit (or maybe both) will open an account for us into which we will be permitted to deliver the CDC credits.  At this stage it is not clear to us what we will then be permitted to action on the account however it would be reasonable to assume we will be allowed to conduct Retirements and possibly infra-registry transfers.  We are unclear on this because VCSA, Markit and APX have not confirmed.
2. Because we were unable to open a direct Registry account and have also been unable to open a more formal custody relationship with an entity that does have a direct Registry account we have had to hold credits via parties who have supplied credits to the platform. These originated as informal agreements because we anticipated being able to open a Registry account.  They were provided based on the relationship the supplier had with those parties.  However because we have now not been able to open a Registry account or an account with a Custodian the credits are still being held in the same way.  Because of the time delays none of the suppliers is willing to provide a “full service” relationship.

This means we are unable to execute retirements or deliveries of credits at this time (this is because they will only deliver all the credits they hold for us or none and are not interested in making partial deliveries). Clearly because of both situations we are also currently unable to accept deliveries of credits from customers. We continue to discuss a solution with VCSA and the Registries but we are not confident of a successful outcome in the near future. We believe the cartel of VCSA, Markit and APX are seriously disadvantaging you and your holding of carbon credits. Because they have made it impossible for us to hold your credits in a proper manner we are unable to offer a number of services;

• We cannot provide serial numbers for your credits
• We cannot deliver your credits
• We cannot retire your credits should you wish to do
• We cannot receive credits on your behalf from other service providers

We would urge you to email the VCSA, Markit and APX on the email addresses listed below to lobby them to resolve this situation and allow us to fully protect your assets.

Let’s try to make sense of one statement: “We cannot deliver your credits”. It appears to imply that, if  investors originally purchased their credits via a broker that happened to be clearing via Gemmax Solutions, or via Carbon Neutral Investments, then, since this market purportedly works by delivery versus payment, any such investors who now want to sell simply can’t get money for their carbon credits at the moment, and may never get any. Perhaps Gemmax Solutions would like to clarify this point. It is one that investors will care about.

I could try to parse the other bullet points too, but that will do, I think. Rather than joining in with Gemmax in pointing the finger at the registries, I’ve chopped out the email addresses: I have much better ideas about contacts that concerned investors should try. More on that later, once we’ve reconstructed the history that led to this problem, and got a ballpark idea of the scale of it. More from the Gemmax statement:

When we commenced this business back in 2011 a Registry account was opened with Caisse de Depot et Consignations (CDC Climate).  This operated very well for about six months when suddenly CDC announced they were closing the Registry.

This actually makes sense. We can see from duedil (free registration required) that AGT Investments, predecessor of Carbon Neutral Investments, predecessor of Gemmax Solutions, got its name in July 2011. Towards the end of January 2012, by which time AGT Investments has been renamed Carbon Neutral Investments, CDC makes its “sudden” announcement, giving an undemanding-looking deadline of 22nd December 2012 for users to find a new registry. But Carbon Neutral Investments fritter that time cushion away in fruitless negotiations:

We entered into discussions with them regarding purchasing the Registry but it become clear it was only the Registry software for sale and we would have to proceed with Verified Carbon Standards Association (VCSA) approval to become a Registry and meet the financial requirements ($15m net assets) to do so.  In parallel with this strategy we also applied to both the Markit and APX to open accounts with their Registry’s.  Both Registries declined to open accounts so attempts were made to use third-party Registry accounts on an open and disclosed basis via a custodian agreement.  We spoke to a number of potential custodians who could provide the service again with no success.  Despite repeated attempts and ongoing discussion with the CEO of VCSA we are unable to get any traction on opening a Registry account.

Through discussion with VCSA we understand this is totally attributable to us providing a service for Retail holders of VER’s.  This continues to be the case up to and including today.

Come the 22nd December 2012, credits still at CDC are frozen, including any put there by Carbon Neutral Investments in its capacity as clearer.

Yet, somehow, it apparently takes another 11 months for Gemmax to get around to telling its clients what’s happened.

Nor is there any sign that Gemmax has warned its brokers to stop selling the credits after 22nd December 2012. So, after that date, if the Payments kept coming in, there was no Delivery to the retail investors, after all. I wonder if Gemmax ever thought it might be a good idea to tell the Financial Conduct Authority about this little embarrassment. On the face of it, none of this history looks great from the perspective of the FCA’s view on Meeting your Obligations.

Now to get an idea of the scale of the problem. Consolidate these broker lists of Gemmax taken from the two web sites that Gemmax has operated since April 2013,

www.gemmaxsolutions.com 24th April 2013

www.gemmaxsolutions.com 23rd June 2013

www.gemmaxsolutions.com 28th June 2013

www.gemmax.co.uk, 13th November 2013

Then consolidate a snapshot of Gemmax’s predecessor company, Carbon Neutral Investments,

24th April 2013,

…just in case it doesn’t coincide line for line with the 24th April 2013 Gemmax snapshot. You will see that we are in the vicinity of 100 brokers.

We saw in a previous post that ~20 brokers equate to 1,500 clients. On that admittedly sketchy basis, 100 brokers could mean another 7,500 clients caught up in this, with the purchase cost of the credits about £120 million. Mind you, AGT (Advanced Global Trading) of Dubai, another user of Carbon Neutral Investments’ clearing services, might account for 1,000 clients and £100million, all by itself. So it’s hard to get a good idea of the scale of the problem, just yet.

Which agencies should concerned investors contact?

Since Gemmax is authorised by the FCA (firm number 540545, Gemmax Solutions Limited), and has apparently made a phenomenal mess of  its one of its core business processes, carbon credit registration, I suggest that investors should address their emails to consumer_queries@fca.org.uk, including the full text of Gemmax’s above statement, and stating, if possible 1) which credits they bought, 2) when, 3) from which broker, and 4) most important, probably, to which bank branch account name, branch and number they sent payments for the credits.

Investors who suspect a scam will doubtless want to give the same info to Action Fraud (it can take half an hour to feed all the info in, but then: it is, or was, your time and your money).