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Knowing that the surest way to make a move upward in CAPS is not to mindlessly replicate the picks of those ahead of you, but rather going long stocks they are short or short stocks they are long, I started to look at a company that ordinarily would not have attracted my attention even one little bit.

 

Sulphco is a company that seems to be a favorite short here and elsewhere. Their basic claim is to invented a technology that uses sound to crack (separate) oil into distillates with greater efficiency and lower quantities of sulfur. (These qualities turn out to go hand in hand.) Among the current or former partners in this project are or have been: Chevron, some Korean refining outft that Sulphco has lent its name to, and some independent refiner in the UAE.

 

Sulphco is headed by one old man Gunnerman, who is a white haired octogenarian with many patents to his name. His son, young man Gunnerman - and a history major some would have you know - is the President of its operations. The old man Gunnerman was involved in a prior project for fuel (A-55) that would emulsify water with fuel to run engines at lower temperatures and on less fuel. The status of this enterprise is, at this time, shrouded in mystery for me. But notable associates of this venture included Catepillar, Paccar, Clark Oil, Sinclair, and Chevron.

 

The price history of this company is really interesting. The price rose to a high a nearly 20 before falling to under $5, where it now sits, presumably after publication of a Barron's article by Bill Alpert calling into question Gunnerman's checkered past. One of the most interesting things about this article is that it never really gets at any kind of critique of the technology itself and instead chooses an approach that is directed at Gunnerman's character. Okay, that's interesting for me. Perhaps it just belonged in the "too hard" pile. Perhaps Alpert knew that innuendo alone could send the stock careening into the doldrums of stock hell. I dunno, but it's even more to be interested by since on my view it demonstrates a true lack of research. (BTW, it's the same fallacy that momentum investors make - overeliance on inductive rather than deductive methods.)

 

Among the stuff that stuck on Gunnerman is that his formal education credentials are lacking. This is interesting and yet certainly not in and of itself good enough. (One - or some - of the patents in the portfolio came from a PhD at USC.) The patent office seems to have found many of his innovations worthy of patent, which is some validation as well. The bureaucrats who run the patent office as we all know are often not quite up to their jobs so this isn't at all conclusive of much. Further adding to my interest here is that Gunnerman and his projects have been able to partner with so many big companies. I mean it's one thing to fool the gullible folks who move around in penny stocks and another thing altogether to fool the scientists at these large outfits. But again, perhaps their names were attached to his projects through deals that gave them no financial downside, in which case, these associations would mean little or nothing. Though strange indeed is that Chevron has now been a partner to both the A-55 project and the sonocracking project, since if Chevron thought his inventions were entirely worthless, then they probably wouldn't have wasted the management time, even if no direct outlay of funds was required. (Though they've now passed twice.)

 

Now add to the interesting pile that Gunnerman's holdings of 30 million shares haven't been touched. The man who owns about 40% of the company didn't even bother to sell small blocks of these shares when the stock took off to hit $20. If his aim was to make a fast buck off of some sketchy stock promoters, then one would think that he'd at least have sold a share or two when the stock quadrupled in value during its run over a couple of months at the end of last and the beginning of this year.

 

So now that brings you up to speed. My next move has been to check out Westlaw to see what sorts of lawsuits have been brought. These are indeed informative about what a slimeball Gunnerman has been in his business dealings. The cases that have made their way to appeal all decided against him after summary judgement motions against him at the lower level. In one case, Gunnerman challenged the most obvious plain reading of a contract that granted rights to use his A-55 fuel in aviation. That the contract was clearly written on one page and that any lawyer would have known he didn't have a chance in hell to win on appeal after summary dismissal in the lower court didn't seem to stop him. And again to add interest to the story, neither party seemed to challenge the commerical viability or technological utility of the license.

 

There's enough of interest for me that I am going to keep digging. My first impression of this situation is that his technology must be bunk since the energy efficiency of the cracking process itself sounds so amazingly suspect to me. Like light, conversion of energy to sound is not a very efficient transfer. Then I also know intuitively that using sound to separate requires the absorption of energy by the petroleum molecules from the sound. The problem here is that sound waves are directional, while organization of the petroleum liquid to be separated is not (unlike it would be in say a crystal). This objection may present no barier because the apolar nature of the petroleum (??), but my random thoughts about this is that it just shouldn't be an energy efficient way of doing things. (This objection would go the heart of the supposed innovation, since it's really quite meaningless that you can rescue more usuable product from sour crude if you are going to expend a ton more energy acquiring it.)

 

This whole thing is a huge mystery to me right now, and is a first-class investors' mystery story. Perhaps the doubters are right and certainly the odds are with them, if one takes out all of the material facts. But I personally have seen enough dodgy business practices in even the most hallowed of Fortune 500 companies - and had it verified by stories of those I know who work in and around such places - to know that no matter what kind of prior record we are working worth, there's never ever any guarantee that the sun will set on a given future day.

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