Investors: Where’s our money?

From the print edition. Updated at 6:10 p.m. May 18.

U.S. investors who put tens of thousands of dollars into a Costa Rican teak company are becoming leery of their prospects, now that years have passed and the company has not paid clients promised investment returns. To add to their doubts, the company recently informed investors that the man charged with managing their investment is dead. 

The purported business model for Costa Rican corporation Tropical American Tree Farms apparently was to sell clients small teak trees that the company would grow and maintain. Those teak trees were to be harvested years later for wood to be sold on the lumber market, and proceeds returned to clients.

Teak is a popular and durable wood ideal for construction and outdoor furniture when it is cut at a mature age.

Many clients, especially those looking to support an “environmentally friendly” investment model, were drawn to the company and others like it, which began popping up in Costa Rica in the 1980s. An eight-part Tico Times investigation in 1993 found that as many as 30 tree companies existed in the country by the early ’90s.

The Tropical American Tree Farms’ website claims the company is one of the largest teak growers in Costa Rica. According to information provided by the company, the operation spans more than 5,500 hectares – about 0.1 percent of the country, the site claims – and is responsible for planting two million trees on a multitude of farms along Costa Rica’s Pacific coast.

But the most recent records from the National Registry show the company, under the name TATF S.A., owns only about 1,700 hectares split among 30 separate properties ranging in size and value, as well as industrial equipment and vehicles for its operation. It is unclear if the company owns more properties under different names.

The company’s owners, Steve Brunner, a former lawyer from Ohio who specialized in real estate, and his wife, Sherry Brunner, claimed to have had more than 3,000 individuals, companies and trusts enlisted in the project in 2007. Actual figures remain unclear.

One thing is certain: Many involved with the company are unhappy about their purchases. Those who have invested said payout dates have passed without the company making good on payments, and angry comments about the company fill online timber-investment forums, with some posters calling it an outright scam. Recent news of Steve Brunner’s death from cancer in late March added further confusion and uncertainty.

“You send them about $4,400, and in 20 years down the road, according to the experiences of most [of the] 70 or so people on this board and others, you get back nothing,” one forum member wrote. 

Other forum posts urged investors to file complaints with the U.S. FBI Internet Crime Complaint Center about the Tropical American Tree Farms’ website, which is used to attract tree purchasers from the United States.

A spokeswoman for the complaint center confirmed the agency received about a dozen complaints about the company, which they referred to the U.S. Securities and Exchange Commission. When asked in an email if the complaints had sparked any action or investigation, an SEC spokeswoman responded that as a matter of policy, the SEC declines comment on questions pertaining to investigations.

The company also found itself on a Costa Rica Tax Administration list published in February for failure to pay sales tax. The list indicates which companies the administration is pursuing through a legal collection process for unpaid taxes.

An agency spokeswoman would not comment on the list or provide any details about the company, but she indicated Tropical American Tree Farms has been submitting sales tax filings since 2007 through the current year, and salary tax filings from 2006 to 2011.

While doubt has been cast on the company’s claim to be one of the biggest teak operations in Costa Rica, the company has gained notoriety for being atop another list: Tropical American Tree Farms has failed to pay ₡674 million ($1.4 million) in mandated employee insurance premiums to the Costa Rican Social Security System (Caja).

“TATF has been delinquent on payments [to the Caja] for several years, and for us, this isn’t a new case. In fact, they are one of the companies with the biggest Caja debt,” Luis Diego Calderón, the Caja’s director of collections, told The Tico Times. “We’ve known about this case, and we’ve used all the strategies and tools at our disposal to collect from them.” 

Those strategies include filing 58 separate cases to the Caja’s judicial collection office, which attempts to collect from delinquent companies through a series of punitive actions. 

Calderón said the Caja also took action against Tropical American Tree Farms for illegally deducting Caja premiums from employee salaries and failing to transfer those deductions to the Caja. 

“We have filed 34 penal cases [against the company] for withholding ₡165 million [$331,000] from employees for Caja deductions that were never paid to the Caja,” Calderón said.

Caja officials also have moved to shut the company down on 12 occasions for failure of payment. TATF was closed four times, while seven other closing orders remain pending, Calderón said. According to Caja regulations, officials can only force a company to close for five days for each request. 

Caja officials also attempted to negotiate a payment plan for the company – allowed under Caja rules – but those efforts were unsuccessful, Calderón said.

Article 74 of the Caja’s charter requires government agencies to verify that companies are not delinquent with the Caja before issuing any type of permits, licenses, concessions or exemptions, among other bureaucratic procedures. Legally, Tropical American Tree Farms is barred from obtaining permits from municipalities, health and environment ministries, or any other government agency, until it cancels its million-dollar debt to the Caja. 

On Wednesday, Tico blogger and whistleblower Roberto Mora – who has publicly denounced several Costa Rican companies and organizations for accumulating unpaid debt with the Caja – circulated an email stating that two weeks ago, TATF cut “an enormous quantity of teak trees” from a 60-hectare section of farm in Río Naranjo, Quepos, on the central Pacific coast. Mora noted that in order to cut the trees, the company would have required a certificate of origin from the Quepos office of the Environment Ministry (MINAET), and to transport trees, they would need a permit from the Costa Rican Agricultural Engineers Association’s Forestry Attorney’s Office. 

The Tico Times was unable to independently verify Mora’s statements. But in an email, MINAET’s director of the Central Pacific Conservation Area, Carlos Vinicio, clarified that certificates of origin are not permits to remove trees, but rather to transport them, and they are issued by forestry engineers registered as regents with the Agricultural Engineers Association, not MINAET.

“The National System of Conservation Areas [under MINAET] receives the certificate of origin and a report from a registered regent,” Vinicio said. “Therefore, the Agricultural Engineers Association and the forestry regent [handling the case] are responsible for checking to see if [TATF] had a debt [with the Caja]. For this kind of paperwork, which is not a forestry permit, Article 74 of the Caja’s charter does not apply, because we are only receiving information,” Vinicio said.

In response to questions about TATF, the Caja’s Calderón said if officials do not abide by Article 74, the Caja could file a complaint with the Comptroller General’s Office to see if government officials broke the rules, in which case the Comptroller General would get involved. “We’ve done that before,” Calderón said.

Regardless, the company’s unpaid debt to the Caja is bad news for investors, as it means the company may be legally blocked from marketing clients’ trees until it is no longer delinquent with the Caja.

Déjà vu?

Some Costa Rican teak companies have run into legal trouble in the past. In 1993, during the teak boom, the SEC filed a lawsuit in a Florida federal court against a Costa Rican teak company, Bosque Puerto Carrillo, an operation of at least 3,000 hectares, for selling unregistered securities to U.S. residents. The SEC accused the company of providing misleading and overly optimistic investment information to investors.

Several clients accused the Tropical American Tree Farms of similar practices, but unlike Bosque Puerto Carrillo, TATF is not publicly traded and deals in direct sale of young trees, which it sells by way of certificates. One teak farm owner said the distinction between tree buyers and investors is important, because additional rules regulate investment firms.

Tropical American Tree Farms is not registered to make public offerings, according to the Superintendence of Securities (SUGEVAL), Costa Rica’s securities regulatory agency. The company also is not registered with the SEC on their website database, although companies raising less than $1 million are not required to register.

Phone calls and emails from a Tico Times reporter to Tropical American Tree Farms went unanswered. A lawyer who represents the company would not comment for this story.

A great offer

In the early ’90s, financial planner Virginia Moran, now 78, was one of the first investors in Tropical American Tree Farms, a start-up plantation that had approximately 500 clients at the time, according to company publicity. Moran, from Golden, Colorado, in the U.S., bought 100 teak trees, planted in 1993, for $3,500. The 2011 price for teak, listed on the company’s website, is $5,365 per 100 trees.

In exchange for her purchase, Moran received a certificate of tree ownership from the farm.

Certificates are only one of the methods used by teak farms to signify a stake in the company. Some firms sell the land the trees are planted on, while others issue shares in the company itself.

At the time Moran bought her trees, teak was being used in Costa Rica as a potentially profitable crop to facilitate the reforestation of hundreds of thousands of hectares that had been stripped for cattle-grazing. Statistics show that between 1966 and 1986, one-sixth of the nation’s land – more than 800,000 hectares – was deforested.

 The idea of reforestation was so popular that high-ranking officials, from former presidents to government ministers, promoted the practice, according to the 1993 Tico Times investigation. In the ’80s, the government offered tax incentives for teak reforestation projects, despite the market being so new and largely untested in Costa Rica.

Moran based her investment decision on company projections that promised a final return of $43,000 in 20 years and $60,000 in 25 years. Those figures were calculated based on the assumption that teak prices would increase annually by 6 percent. But even without an increase in market prices, the company promised Moran a minimum $30,000 return in 25 years.

Moran was excited about the projections, and spread word to her Colorado clients, friends and acquaintances, as well as other investment planners specializing in “green” projects. She also personally visited the farms three separate times, spending various nights in a cabin on one of the plantations and touring the grounds on horseback.

“It all looked pretty good,” Moran said. “Although the projections looked a little optimistic, even if they did half of what they projected it would have been a good investment.”

On Moran’s recommendation, up to 30 others bought trees from the company, with some investing more than $15,000, she said. In 1997, Tropical American Tree Farms awarded her 300 additional trees for referring clients. 

Today, her first batch of trees is nearly 20 years old, but Moran claims neither she nor any of the others she referred to the company has been paid. She said she is having second thoughts about the company and her role in promoting it.

“There’s a definite possibility that this has been become a very elaborate Ponzi scheme, and they’re taking the money from the sale of trees,” Moran said. “I have not been suspicious to that level until this year. I had a highest level of trust in [the Brunners].”

Moran said that on three trips she visited company-owned tree farms near Uvita, a beach town in southern Costa Rica. She became close with the Brunners, and described them as seemingly trustworthy Christians. She even invited the couple to visit her church in Colorado and give a presentation about their project.

She said she’s sorry to hear of Steve Bruner’s death, but that doesn’t negate the years of promises the company made to her. She said almost 10 years ago, she received notice from the company that money was credited to her account from an early harvest, but when she tried to call the company office to collect she was told by a secretary that there was no way for her to receive the payment.

She has called the company’s office phone and left messages repeatedly in the past three years, but calls were never returned.

“The money isn’t coming as promised, and they have not been communicating,” Moran said. “It’s beginning to not look good at all.”

A steady market

Teak industry experts in Costa Rica say there is a way to invest safely and effectively in tropical hardwoods. 

One tree farm owner in Costa Rica, Fred Morgan, a U.S. citizen who has lived in Costa Rica for nearly a decade, said some of his clients also own trees with Tropical American Tree Farms. 

Morgan’s Finca Leola, near Arenal, in north-central Costa Rica, is 10 times smaller than the advertised size of Tropical American Tree Farms, and has existed since the early 2000s.

Morgan claims to have already paid his early tree buyers, and has a policy to respond to communication from clients within 24 hours. But he worries that some investors’ bad experiences with investing in tropical hardwoods could reflect on the rest of the industry. 

“If it doesn’t go well, everyone says it’s a fraud and nobody invests in it anymore,” Morgan said. “It’s like someone saying you should never buy a used car. A lot of people have success with buying a used car, but some people get ripped off.”

Morgan said selling wood has been difficult after the global economic downturn, which hit the construction sector hard. He said prices for wood dropped by 20 percent after 2009.

However, Juan María Solera, president of the Costa Rican Forestry Chamber and manager of teak company Panamerican Woods, touted the teak market as stable and profitable, much more than the stock market.

He said recently added regulations on harvesting wild teak in countries such as Myanmar have boosted worldwide demand and increased the profitability of growing the crop in Costa Rica.

Costa Rica’s gross wood exports, including teak and other species, valued more than $47 million in 2011, versus $13 million in 2007, according to statistics from the Foreign Trade Promotion Office.

Other factors such as rising land prices and the deterrent that forestry is a considerably longer-term investment when compared to pineapple production or other agro-businesses have contained teak industry growth in Costa Rica, Solera said.

Solera said according to industry calculations – because no current official surveys exist – about 30,000 hectares of land are devoted to teak in the country. He said about 10 large companies exist here, but the actual number of players in the teak market is hard to estimate, as small-time producers grow stands of less than 15 hectares.

He said he had no recent knowledge of Tropical American Tree Farms, but added that the company formerly was affiliated with the Forestry Chamber and used to operate a furniture factory and mill near Dominical. He said he hasn’t had contact with the Brunners for several years.

Solera acknowledged the industry was known for scams in the past, but he said the market is generally safe today.

 “It’s a good market,” he said. “But in my opinion it’s more the responsibility of the shareholder to check where he’s putting his money.”

Solera said his company provides audited financial statements to its roughly 400 foreign and domestic shareholders.

Left in the dark

Not only does Tropical American Tree Farms not provide audited financial statements, it’s hard to get the company to respond to an email, said Hal Brill, an investment coach from Colorado.

Brill bought trees from Tropical American Tree Farms in 2002 and referred clients to the company. He said neither he nor his clients have been paid yet, and their faith is dwindling.

Looking back, Brill said, there were several red flags.

Brill said Steve Brunner refused to disclose his financial information to investors, would not take the proper steps to receive a sustainable forestry certificate and made short-term projections that seemed too high. The projections Brill received from the company included paybacks at years six, nine, 12, 16, 20 and 25.

Industry experts explain that in a typical 20- to 25-year teak cycle, a large number of trees are planted, about 800 per hectare, depending on the landscape. As the trees mature and compete for light, smaller trees are cut five to seven times, a process called a raleo in Spanish.

If done correctly, only 250 to 300 trees are left for the final harvest. But if thinning is neglected, an entire harvest can be stunted because trees compete for resources, and the economic viability of an entire stand can be lost.

Part of Tropical American Tree Farms’ business plan was to create a subsidiary, Raleo Designs, which would sell high-end furniture taken from younger teak trees cut during thinning to boost short-term returns. Brill said the intermediary plan was not sure-fire, but even if Raleo Designs didn’t pan out, and even if half of what was projected in the long-term harvest was returned to investors, he said it still looked to be profitable. Brill and his wife took a trip to visit the farm and were happy with what they saw.

So, despite warning signs, the couple bought 500 trees with the company in 2002. They also recommended the company to several other investors.

Initially, he said, he and others were enthusiastic about their decision. But recently, he said poor communication has plagued his relationship with the company.

Most notably, he said, news from the Brunners dropped off in the past three years, and the couple failed to return Brill’s emails and phone calls. In the past, the Brunners would respond promptly to inquiries, and they sent periodic newsletters to investors, he said.

One of the last times investors heard from the Brunners was an email sent in December stating that thousands of trees were damaged or lost during rainy-season floods. Experts say teak trees must be planted on land with proper drainage, as they are susceptible to flooding. Brill said the company didn’t respond to requests for more information about the alleged damage.

“I just don’t know if the Brunners are alive or if they’re even in Costa Rica,” Brill said.

On April 16, Brill and other investors received an email from Sherry Brunner stating that Steve had died following a lengthy battle with cancer. The email didn’t provide any details of the death. Brill said he hadn’t seen an obituary, and he wondered why the news wasn’t announced earlier.

The Tico Times independently confirmed that Brunner died March 25 in Costa Rica.

Brill said Brunner’s illness may partially explain the downslide in communication and productivity on the part of the company. 

He said he hopes tree owners can unite and find a way to reclaim their purchases. Brill said he pins his hopes for some settlement on a four-day trip he took to the farm a few years ago, when he saw the trees he purchased.

“That’s what has sustained me through this,” he said. “There are great trees in Costa Rica … with our initials on a sign in front of them.”

This story was corrected from an original version to include comments from the Environment Ministry’s director of the Central Pacific Conservation Area, Carlos Vinicio. An original version of the story said Vinicio did not respond by press time. However, Vinicio did respond promptly to The Tico Times, but due to a technical error, a reporter did not receive comments before going to print.