Income reports

Arizona issued $22 million in bonds. Now investors are suing

California accused John Owen of misleading investors. The states of Washington and Maryland ordered his companies to stop improperly selling Arizona gold mining investments there.

A federal judge ordered Owen’s company to pay a daily fine for withholding documents from the U.S. Securities and Exchange Commission. The IRS demanded he cough up $1.6 million in unpaid taxes.

An online blogger accused his company of fraud and an appeals court twice supported those claims. At least two creditors sued Owen’s companies for failing to pay their bills.

But Owen received a warm welcome from the Arizona Industrial Development Authority in 2019.

Without fully checking his background, program manager Patrick Ray and the authority’s four-member board approved Owen’s pitch to convert mounds of sandy waste at a dormant goldmine in Congress, Arizona, into silica-based plant food, promising to help him secure up to $30 million in loans.

The authority took Owen at his word when he wrote “no” on a line in his application asking if he or his managers were ever charged with a civil or criminal offense relating to “the sale of any type of security.”

They left further investigation to the underwriters — Aegis Capital Corp. and Municipal Capital Markets Group Inc. Those are financial insiders who assemble and sell bonds — long-term, often tax-exempt loans — to investors. But investors, in a lawsuit, now claim that these companies, their attorneys and others were negligent when it came to providing information that was “complete and accurate and not false and misleading.”

In the “official statement” or prospectus detailing the potential deal for investors, the underwriters acknowledged some of Owen’s past problems. But the Arizona Republic found they didn’t include reference to his tax liens, an adverse court opinion against one of his companies or the warnings from state securities regulators in Washington and Maryland.

Investors claim the underwriters also failed to inform them about relationships between insiders involved in the deal.

“If nothing else, one would assume that would be disclosed as a potential conflict of interest,” said Anne Ross, chair of the National Federation of Municipal Analysts and Principal Consultant, Muni Credit & Compliance Advisors LLC. 

The high rates of return on the deal were also a red flag.

“Without even ‘cracking the book,’ the yields on this deal ranging from 7-14% are shockingly high compared to other non-rated high yield bonds,” Ross wrote in an email to the Republic. “They speak directly to the risk of potential non-payment.” 

In the absence of these disclosures, investors lent $22 million to Owen’s company — Harvest Gold Silica — and Gov. Doug Ducey, who made his name touting fiscal responsibility, personally signed off on Arizona’s behalf.

Two years later, Harvest Gold Silica (also referred to by management as Harvest Gold Organics) stopped making payments on its bond debt and two groups of investors sued the company claiming fraud, one of the groups was expecting millions of dollars in gold from the mine and the other millions of dollars from the sale of silica-based plant food.

“This is not a complicated case,” one group of investors claimed in a court filing. “Defendants are scam artists who make their livings selling worthless ‘interests’ in gold mines and non-existent gold production projects.”

Harvest Gold Silica Mine in Congress, Arizona
The Harvest Gold Silica mine in Congress, Arizona
The Harvest Gold Silica mine in Congress, Arizona
The Harvest Gold Silica mine in Congress, Arizona
MICHAEL BRAGA/THE REPUBLIC

Reached by a reporter, Owen declined to comment, deferring to a company officer.

Harvest Gold Vice President Misti Mathis said in email messages to the Republic that the first investor lawsuit against Owen’s companies was “meritless” and the second was “replete with misinformation and half truths.” 

“We have not committed any fraud,” she said, adding that she could not comment on pending litigation. “We look forward to addressing them in court.”

Mathis went on to attribute Harvest Gold’s financial difficulties to the coronavirus pandemic.

“Our company has struggled with the impact of COVID as it has impacted the pool of industrial customers, but we continue to work hard to achieve success at Harvest Gold Organics,” she said.

In spite of the high-profile bond default, Mathis confirmed Owen and his representatives are still working to attract new investors to the Congress mine.

“We are continuing to work on this project,” Mathis said. “We have met with potential partners and investors as we continue to seek institutional financing for our project and to recapitalize the company.”

For the Arizona Industrial Development Authority, a little-known state organization that has greenlit more than $8 billion in bonds for projects across the country over the past six years, Harvest Gold Silica marks its first major embarrassment. But it might not be its last.

The loan to Harvest Gold is one of at least seven troubled bonds, according to data provided to the Republic by research firm Municipal Market Analytics. That’s out of a total of 115.

Since taking the reins in October 2017, Ray has presented larger and riskier deals to the authority’s board of directors. Meeting minutes show the board has approved these deals quickly, unanimously and with little debate.

In its desire to make life easier for companies to do business in Arizona and have greater access to tax-free financing, the authority has opened the door for people with questionable backgrounds to get loans approved by the state and for middlemen to profit. 

While Arizonans won’t be liable if any of the deals go bad, the state’s embrace of risky projects is far from harmless. When the overheated municipal bond market eventually cools and problems pile up, investors could become skeptical of bonds issued by a government body that was reckless during years of prosperity, jeopardizing the Arizona Industrial Development Authority’s ability to draw new money to its projects.

An independent expert was also critical of the deal.

“This is a broken financing that maybe the AZIDA could have prevented,” Matt Fabian, a partner at Municipal Market Analytics, said of Harvest Gold. “So the question is: Did they know it was broken? And if they didn’t, maybe that’s worse.”

The Arizona Industrial Development Authority is not a party to any of the lawsuits.

After the Arizona Republic presented Ray with its findings about Owen’s past, he committed to talking to the board about strengthening the authority’s standards for backgrounding potential bond recipients. 

But not too much, he said, lest he discourage future applicants from applying for financing. Ray’s bond factory has been a modest moneymaker for the state, and it has lined the pockets of underwriters who assemble the projects, attorneys who sew them together and Ray himself. The authority’s public documents don’t show how much Ray — an independent contractor and not a state employee — earns, but he said in an interview he might have taken home $1 million in fees earned from deals since becoming program manager.

“Maybe, maybe not,” he said. “I don’t know.”

inherently speculative, something that was acknowledged up front in marketing materials issued by Owen’s companies. And even one of the principal litigants suing Owen and his colleagues acknowledged there is still value at the Congress Mine — it’s just that Owen has been unable to extract it.

Thus far, Owen’s company has delivered less than 1% of the revenues he predicted, Reiger said.

Revenues for Harvest Gold’s first two years came in under $1 million — that’s far below the $84 million the company projected. Instead of $17.9 million in profits, Harvest Gold logged more than $9 million in losses.

Rieger says he wants retribution.

“It’s my job as a businessman,” Rieger said, “to see to it that this person doesn’t cause any further damage to the people who read your newspaper or to anybody else.”

All that glitters 

Lawsuits and securities actions filed against Owen and the tangle of companies he controls repeatedly claim he has exaggerated over the past 20 years to separate investors from their money.

A bio included in one of his investment packages attached to a lawsuit says he was once the owner of a commercial construction company that worked on highway and bridge projects in the New York City area. But investors challenged those claims in a lawsuit, saying they could find no evidence of Owen’s company or his work on two of the major projects he cited.

Owen later moved to Texas and another of his companies claimed to have rights to at least five Arizona mines including the Chastain Mine in La Paz County, according to an investor lawsuit.

In 2003, Owen’s company International Energy and Resources hired Shield Environmental Associates to determine how much gold might be buried at the Chastain Mine and how much it would cost to unearth it.

Shield, which later sued Owen’s company for failing to pay $240,000, recommended building a test mine. But Shield warned that its assessments should not be used to attract investors.

Owen’s company was accused of doing just that.

According to Shield’s lawsuit, Owen’s company falsely claimed the Chastain Mine held more than $400 million in proven gold reserves, and that Shield was on board with the project.

This was a dangerous assertion, Shield argued, because “investors might believe that a proposed $15 million investment in a property ‘evaluated’ at $419 million was a no brainer.

Shield said in its lawsuit that the Chastain Mine never had anywhere near that much in proven reserves. The actual figure was more like $3.7 million, and it was “only by lumping unproven resources with verifiable reserves did (Owen’s company) come up with the higher figure.”

Shield Environmental Associates sued John Owen's company.
Shield Environmental Associates sued John Owen’s company.
Filed in U.S. District Court
Shield Environmental Associates sued John Owen’s company.
Filed in U.S. District Court

By 2004, Owen and his associates were suggesting that the Chastain mine could produce $50 million a year from gold mining operations and another $20 million from gravel, according to a lawsuit filed by investors in October.

But those projections never panned out. 

Owen never brought an ounce of gold or gravel out of the ground at the Chastain Mine because he never received permission to operate the mine from the U.S. Bureau of Land Management, investors say in their October lawsuit. The company’s vice president said “this historic claim is not true” but did not provide any record that contradicted the investors’ allegation.

That didn’t stop Owen and his associates from claiming that their mines would produce more gold than everyone else had ever discovered in Arizona — 19.8 million ounces — since the late 1800s. In the entire history of statehood, only about 16 million ounces have ever been unearthed.

The claims were “very surprising and difficult to accept by comparison to historic data,” according to a 2006 report, included in court documents, by Nyal Niemuth, a geologist at the Arizona Department of Mines and Mineral Resources. 

Owen and his associates still appear to stand behind the numbers, though. 

In the history of Arizona, only 16 million ounces of gold have been unearthed.
In the history of Arizona, only 16 million ounces of gold have been unearthed.
California Department of Corporations
In the history of Arizona, only 16 million ounces of gold have been unearthed.
California Department of Corporations

“Historic production is not indicative of future production and does not take into account technological advances or new mineral discoveries,” said Mathis, Harvest Gold’s vice president in one of her emails to the Republic.

By September 2005, securities regulators started taking aim at Owen’s companies.

The Washington State Department of Financial Institutions charged Owen’s company with deceiving investors by making “hugely inflated” financial projections, according to an investor lawsuit. Two months later, the company settled the civil matter and agreed not to illegally sell securities and pay a $5,000 fine. The company neither admitted nor denied the regulators’ findings.  

The state of California got into the act shortly after. It found that Owen’s company made “extraordinary unsubstantiated claims about recoverable gold assets in its mines;” that it misrepresented to investors it was permitted to mine 1,000 tons of ore a day from the Chastain Mine when the Bureau of Land Management had denied its permit; and that it had failed to disclose to investors the state of Washington had instigated fraud proceedings.

As punishment, California ordered Owen and his associates to stop illegally selling securities to investors in the state.

Less than two years later, Maryland joined the scrum. It objected to false statements made by Owen’s company. Maryland told Owen’s company to stop illegally selling securities within its borders and to pay $75,000 in civil penalties.

In an email, Harvest Gold vice president Misti Mathis said Maryland and Washington did not find Owen’s company violated state securities laws. As for California, she said: “As CEO of his company John Owen entered a stipulated order with the State of California to resolve this issue, wherein he agreed he was ultimately responsible for the actions of his employees even though the employees violated company policy and acted without his knowledge or consent. Those employees were terminated shortly thereafter.” 

Owen’s company was found in contempt by a federal judge in 2007 and fined $1,000 for each day it failed to turn over documents to the SEC for its investigation into “possible violations of the registration and antifraud provisions of the federal securities laws in connection with the offer, purchase, or sale of securities related to purported gold mining interests in Arizona.”

The Harvest Gold official statement presented to bond investors in 2019 doesn’t mention the fine, just that the SEC investigated and “indicated by letter in November 2007 that they did ‘not intend to recommend any enforcement action by the Commission.’”

Golden dirt in Arizona

By 2016, Owen was ready for another ambitious venture.

This time, Owen and his associates at a new company — Vast Mountain Development — estimated that huge piles of pink and slate-colored mine waste pulled from deep in the earth a hundred years ago would yield more than $100 million in gold and silver, according to investment literature attached to a lawsuit. They anticipated another $78 million from sales of silica, which could be used for foundry molding, fiberglass, ceramics, putty and a variety of other products.

At first, Owen focused on the gold to entice investors, bragging they would not just double or triple their money within the first four years but could earn six times what they put in. 

As further incentive, investors were informed that they could either take their earnings home in cash or in gold and silver bars.

Promotional material filed as part of an investor lawsuit offered payment in gold bars.
Promotional material filed as part of an investor lawsuit offered payment in gold bars.
John Owen informed investors they could take their earnings in cash or gold and silver bars.
John Owen informed investors they could take their earnings in cash or gold and silver bars.
John Owen informed investors they could take their earnings in cash or gold and silver bars.
Filed in U.S. District Court

About a year later, Owen doubled down on silica. 

In a December 2017 letter to investors, Owen said the silica at the Congress Mine was “worth at least $150 million, double what we originally projected.”

“With the explosive growth in the cannabis market in the U.S. and Canada, and the strong demand that we are seeing for our silica as a growth supplement in the early stages of exploring this market, we can possibly derive a higher price point,” Owen claimed.

Soon Owen’s company was producing slick marketing videos that not only talked about how silica could make plants grow, but how Harvest Gold was cleaning up the environment.  

Investors could get rich and feel good all the way to the bank.

A lawsuit filed by an investor points to the notion that gold and silica recycling operations would be up and running in 2016 or at least by late 2017, but Owen kept coming up with excuses for why that wasn’t happening.

In a December 2017 letter to investors, Owen explained that because of crew shortages, it took four months longer than expected to complete the “big plant,” which separates silica from the mine waste. There were also issues with the plant’s design that needed correcting and the delivery of gold leaching equipment from Canada was delayed because a procurement agent got the wrong delivery date.

For the silica to retail for top dollar, cyanide used in the original mining process had to be washed off and neutralized, and investors claim Owen knew by 2016 he might need an environmental permit.

But for years, Owen and his associates did not secure an aquifer protection permit from the Arizona Department of Environmental Quality, the department said. Without a permit, the investor lawsuit claimed, Owen’s company would face either being shut down by the state, or extensive delays that would make them miss their financial targets, “even if the Project were otherwise not a fraud (which it was).”

Owen and his associates initially failed to tell investors about negotiations with state environmental regulators. When they finally got around to it, they didn’t give investors the full story, according to investor court filings.

In a 2018 report, Owen and his associates told investors that they had been working with state regulators on a satisfactory solution to the permits and the issue would be resolved in 60 days. Owen added that it’s “important to note that the production of Harvest Gold Silica is not impacted at all by the Congress (aquifer protection permit) situation.”

As investors waited for the mine to gear up, Owen and his associates kept boasting about pending sales.

$80 million purchase order, but investors now say in their lawsuit it was fabricated.

There was also a 2,850-ton sale highlighted in a July 2018 report that was suspect because the price was 40 times higher than Owen’s original quote.

“The purported $2,000 per ton price, for a very large order, could not have been legitimate,” the most recent investor lawsuit says. “At no point has there ever been demand for silica at anything close to such an absurd price point.”

Owen’s company originally estimated Harvest Gold would sell silica for about $50 per ton.

Bottom line: Investors claim “promised orders and sales did not exist, and never had.”

“The project was an abject failure,” investors concluded.

Owen disputes the accusations. 

In response to one of the investor lawsuits, his attorneys claim the plaintiff “concocts a false narrative of half truths supported by incomplete and out-of-context quotes from the operative documents to pressure the return of his investment.”

Help the environment and get rich

Patrick Ray remembered Owen visiting the Arizona Industrial Development Authority with a fertilizer sample and well-honed pitch.

“He actually made a presentation to the board a couple of times,” Ray recalled. “Pretty compelling presentation.”

The day of Harvest Gold’s first approval, meeting minutes show the authority’s board spent 18 minutes considering financing for the company along with financing for four other companies that would receive approvals totaling $261 million. The board asked a single question about Harvest Gold, then voted unanimously to approve a multimillion dollar bond.

“It’s a manufacturing facility in Congress, Arizona … They’re rare as hens’ teeth,” Ray told reporters in October.

Ray now wishes he had spent more time checking into Owen’s background.

“Nobody wants to be involved in a default,” he said, adding: “Drives me nuts.”

Ray described how the bond buyers, not the Industrial Development Authority, are the ones really responsible for researching the borrowers. But he said he likes to make sure the companies and executives that his authority backs can pass “the front page test” — Would he be embarrassed to see a borrower’s past featured on the front page of the local newspaper?

Ray concedes their vetting process in this case fell short. A simple google search reveals much of Owen’s track record.

“Where were they in this?” he asked. “Why didn’t they figure this out?”

“I don’t recall getting any information from anybody on the buyer side that there was a problem with John Owen.”

Rieger, chairman of the company that invested in Harvest Gold bonds, blames the underwriters. 

His lawsuit claims they are among entities which omitted information investors needed to make an educated decision on whether to buy the bonds.

They said nothing about the relationships between key people involved in the gold and silica mining operation at the Congress Mine.

$14.4 million of the $22 million in bonds was to be used by Harvest Gold Silica to purchase buildings and equipment from a mine operator called Vast Mountain Development, the underwriters didn’t disclose that Owen, his family and longtime associates owned both companies, according to the investor lawsuit filed in October.

That means the $14.4 million was essentially being passed from one of their pockets to the other, as investors would later point out in their lawsuit.

Municipal Capital Markets Group president Fred R. Cornwall had no comment regarding the lawsuit. A representative for Aegis Capital did not respond to a request for comment. 

Neither company has filed a response in court.

Underwriters also omitted reference in the Harvest Gold prospectus to securities actions brought by the states of Washington and Maryland against Owen’s companies.

The underwriters mentioned in their official statement that Owen was the target of anonymous online messages in 2010 accusing him of running a Ponzi scheme, and that he won a lawsuit against the individual involved. But underwriters made no mention of a similar lawsuit, identified by the Republic, against a blogger in 2017 that ended differently.

In that case, a blogger accused Owen’s company of fraudulent activities and running a Ponzi scheme in 2016. Owen filed a defamation suit in Maricopa County, winning a summary judgment that ordered the blogger’s identity to be revealed. But the blogger appealed and a three-judge panel unanimously agreed on two occasions that, although the blogger made mistakes in his reporting, the essence of what he wrote about Owen and his companies was not false.

In its final January 2019 ruling, the three-judge panel concluded that  “the record does not show that Owen’s company was engaging in a Ponzi scheme … but whether (Owen’s companies) engaged in a Ponzi scheme does not render (the blogger’s) statement substantially untrue.” 

“Evidence supports (the blogger’s) statement that (Owen’s company) committed fraudulent activities and any inaccuracy in the statement does not alter its ‘substantial sting,’” the appeals court said .

Owen’s company entered into an undisclosed settlement with the blogger the following month. All of this information would have been online prior underwriters publishing their official statement for investors in July of 2019.

As he thought back on the deal in a Republic conference room in October, Ray described how borrowers usually pay their fee to the authority up front, because they get a discount for doing so.  

Ray said Owen chose to pay in installments and the bills he sends to Owen go unacknowledged.

“So I invoice him on his annual fee for Harvest (Gold). Crickets,” Ray said, adding: “I never get stiffed on fees. That’s just not acceptable.”

Mathis, Harvest Gold’s vice president, said in an email the company is working to get this bill paid in December.

‘A lot of show and no go’

On a weekday afternoon in October, the Congress Mine didn’t appear to be operating. An employee maintaining heavy equipment at the site allowed two Arizona Republic staff members onto the property with permission to take photos.

The mine is bordered by ranch houses that climb the adjoining hill, including the home of Loren Nelson.

Chatting on his back porch that overlooks the mine, Nelson, 72, described the facility as loud and dusty, and he was skeptical of its ability to produce.

“All it is, is a lot of show and no go,” he said.

Harvest Gold produced glossy videos showing off the old timey mine and touting the purported plant benefits of silica.

In one video, TV host Art Edmonds expounds on how the product has supercharged the plants on the home improvement show, “Military Makeover with Montel.” 

“Any soil combined with Harvest Gold Organics instantly becomes a better soil to grow your plants,” he said in the ad.

He confirmed to a reporter that the product has done good things for his plants, but underscored that he has little to do with the product. 

“Whenever we have a need for gardening on the show, I reach out to Harvest Gold and they generously provide product,” he wrote in an online message. “Beyond that and a few television appearances, I do not have any association with them.”

Harvest Gold’s product is still listed on Amazon and Lowes’ website. But one neighbor to the mine said in October that trucks carrying bags of silica hadn’t departed the property for a while.

Going forward, Ray committed to tightening up his board’s backgrounding process to make sure another Owen doesn’t get through. That may mean hiring an investigator on “weird deals” so there’s one more layer of oversight besides just asking those involved to be transparent about their past.

But Ray said he doesn’t want to make the process so tough that companies stop viewing this board as a pleasant place to do business. He accepts they may endorse another troubled company like Harvest Gold. 

“We try to find a good balance…” he said, adding: “But not so onerous that we’re scaring away all of the applicants who can go elsewhere and have a more user-friendly experience.”