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The executive who perpetuated a fraud at former Canadian energy darling Poseidon Concepts Corp. POOSF has been sentenced to three years in jail by the U.S. Department of Justice.

Joseph Kostelecky, Poseidon’s former top U.S. executive, pleaded guilty in October to falsely reporting approximately $100-million in revenue from purported long-term contracts with oil and natural gas companies that were said to be Poseidon’s customers.

Mr. Kostelecky also directed accounting staff at Poseidon’s U.S. office in Denver to record revenue from these contracts, and assured the company’s management team it was collectable. Mr. Kostelecky also admitted that his goal was to boost Poseidon’s stock price, which would benefit the shares he held, as well as his stock options.

On top of the three-year jail term, Mr. Kostelecky was ordered to pay US$406-million in restitution to investors, a figure determined by a formula that accounts for the total amount lost.

Poseidon emerged as a Canadian energy star in 2011 with a mission to build and test a new fracking-fluid storage system that was originally designed to save its former parent company, Open Range Energy Corp., money at its own drilling sites.

At the time, the shale oil and gas revolution was just taking off, particularly in the Bakken region spanning south Saskatchewan and North Dakota. The process of fracking helped to unlock oil and gas trapped in tight rock formations, and it was far cheaper than sucking crude out of the oil sands or drilling for oil in the ocean floor, but it requires a lot of water – millions of gallons per well –and it has to be stored on site.

At the time, roughly half of all fracking-fluid storage in the United States was in a so-called lined pit – basically a ditch covered with a tarp to keep the liquid from seeping into the ground. Because of environmental concerns, permits were hard to come by. Metal “beer-can tanks” were another option, although they were vulnerable to winter weather and were costly because they couldn’t hold that much fluid.

Poseidon’s novel storage products, meanwhile, could hold much more liquid, and often took only a few hours to set up using the company’s patented bolt-free installation system. Because the tanks were much safer than pits, they usually didn’t require permits.

Poseidon also offered something particularly important to retail investors: a monthly dividend. The company listed on the TSX in 2011 and its stock price took off. At its peak, Poseidon was worth $1.3-billion, and during its rise, executives cashed in their stock options.

But in November, 2012, Poseidon revealed it had “experienced some difficulty in collecting payment from certain customers,” and in one day, lost nearly two-thirds of its value.

Poseidon ultimately filed for bankruptcy, which caused more than $886-million in shareholder losses. The Securities and Exchange Commission charged Mr. Kostelecky with fraud in 2015.

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