It’s Not Easy Being Green: Feds Indict Biofuel Executives For a $100 Million Fraud

The government loves to encourage us to be “green.” Drive a Prius and get a tax credit. Put solar panels on your house and get a tax credit. Heck, buy the right kind of heat pump for your house and get a tax credit.

But these are small scale. The federal government also thinks big in this regard. The Energy Independence and Security Act of 2007 required the EPA and IRS to encourage the use of renewable fuels. One way is by offering—you guessed it—tax credits.

The tax credits offered are not insubstantial. If fuel companies blended biodiesel (the “green” type of fuel) with regular diesel, they could receive a $1 per gallon tax credit (called a “blender’s credit” or a “blender’s tax credit.”). This can really add up for a large fuel companies.

Of course, it is illegal to claim that you are selling blended fuel and claim the tax credit, if you did not actually blend the fuel or if the fuel is not actually blended at all. The fuel blender has to submit “Certificates for Biodiesel” to the IRS to obtain the tax credits.

Foreshadowing: those Certificates are statements to the government. Which can be false.

How the Tax Credits Work

The purpose of these tax credits is to increase the amount of renewable fuels that are produced. Here’s the process:

  • Petroleum refiners and importers are required to have a certain amount of renewable fuel in their products. These refiners and importers are called “obligated parties.”
  • Obligated parties could purchase such fuel from renewable fuel producers. The renewable fuel amounts have “RINs” (renewable identification numbers) assigned to them.
  • Renewable fuel producers can generate RINs to sell to obligated parties by generating a certain volume of renewable fuel. The RIN would be assigned to that particular volume of fuel and buying the RIN meant buying the fuel itself.
  • All RIN transactions are recorded on an on-line database operated by the EPA and unique numbers are assigned to each transaction.

But You Have To Follow the Rules

There are also rules about how RINs may be generated or sold:

  • A renewable fuel producer may not generate a RIN for a volume of fuel that has not actually been produced or when it was not produced according to EPA regulations.
  • Producers have to report to the EPA about their production process; it is illegal to make false statements in these reports.
  • Under EPA regulations, though, sometimes a RIN could be separated (or “stripped”) from a particular volume of fuel. After the separate, the RIN could be bought and sold without buying or selling the fuel itself.
  • If the RIN was stripped from the fuel, however, the fuel could never be used to generate another RIN.

Other Investigations Under The Program

A quick search for other cases under this tax credit scheme turns up a few recent cases. According to Forbes

Last fall, the EPA accused two companies in Maryland and Texas of selling fraudulent biodiesel RINs – about $40 million worth over a three-year period.  In April 2012, the EPA issued a notice of violation to another Texas producer, alleging the fraudulent generation of 60 million bad RINs (equivalent to 40 million gallons of biodiesel) over a 2-year period.

After the trial of the owner of the Maryland company, “Clean Green,” ended in a conviction, the owner was sentenced to 12 years in prison.

So, the government is not joking around here.

The Indictment

That was a big build up to a relatively straightforward indictment.

A company called E-Biofuels LLC was an IRS-registered biodiesel producer. Its biodiesel was called “B100.” Sometimes, the company doing the blending would (legally) mix only a small amount of regular diesel with B100 and the resulting product was called “B99.”

Defendant Craig Ducey was the President of E-Biofuels; defendant Chad Ducey was the COO of E-Biofuels and defendant Chris Ducey was the logistics manager of E-Biofuels. Shot in the dark here, but I’m pretty sure they are related.

The three Duceys were indicted, along with E-Biofuels and a few other companies and their principals, for a fraud scheme involving these tax credits in the Southern District of Indiana.

According to the indictment, they conspired to make false claims to the United States for the blender’s tax credit for biodiesel that E-Biofuels had not produced, blended or even sold. The government claims that the defendants would purchase RIN-stripped B99 produced by someone else and sell it as E-Biofuels-produced B100 with assigned RINs. They would charge a premium for the fuel because they claimed it had a RIN assigned to it.

During the scheme, the defendants “conceal[ed] and attempt[ed] to conceal the fact that E-BIOFUELS – a biodiesel plant – was buying B99.”

According to the indictment, the defendants would send what they called “ghost loads” or “phantom loads.” These were tanker trucks of RIN-stripped B99 and were sent directly to customers. The defendants apparently falsified paperwork to “trick customers and regulators into believing that this fuel was B100 with assigned RINs that had actually been produced by E-BIOFUELS.”

The false paperwork included false Certificates for Biodiesel that were sent to the IRS. Ergo: false statements. A lot of them.

The indictment claims that the co-conspirators realized a gain of $55 million in profits from the scheme and that customers were defrauded by over $100 million.

The defendants were charged with 66 counts, including wire fraud, conspiracy, false statements and obstruction of justice.

How Does It Look?

This indictment is meticulous and backed up with a lot of detail, particularly compared to some indictments out there. The government lawyers who drafted it did their homework, to be sure. There is not a lot of room for a motion to dismiss on it.

Other fuel companies that participate in this tax credit program would be well advised to watch how this case progresses. Assuming it results in plea deals along the way, the government may decide this is an area ripe for further investigations and indictments.

This entry was posted in Conspiracy, Criminal Investigation, Environmental Crimes, False statements, Indictment, Obstruction, Wire Fraud and tagged . Bookmark the permalink.

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