Fraud Case Shows Holes in Exchange of Fuel Credits

Source: By THEO EMERY, New York Times • Posted: Thursday, July 5, 2012

Matt Roth for The New York Times. Gary L. Miller said the garage behind his was the site of a fraudulent biofuel operation.

WHITE MARSH, Md. — Gary L. Miller knew something was afoot in the garage rented out behind his auto equipment business. Through an open door, Mr. Miller glimpsed piles of pipes, polyethylene tanks and pumps. But nothing was hooked up. Nothing was being made.

So it came as a surprise — to say the least — when he learned that the tenant, Rodney R. Hailey, had told a federal agency that he would produce millions of gallons of biodiesel fuel there.

“Not out of here. Not out of a few plastic tubes,” Mr. Miller said, standing outside the tiny ramshackle building.

Mr. Hailey never made a single gallon of fuel. But that did not stop him from selling more than $9 million of fake fuel credits through a federal program critics call deeply flawed. Mr. Hailey, 33, was convicted in federal court on June 25 on 42 counts of wire fraud, money laundering and Clean Air Act violations. His prosecution highlighted one of several schemes connected to the energy credits known as renewable identification numbers, or R.I.N.’s.

Mr. Hailey’s fraud was the first that the Environmental Protection Agency revealed, though two companies in Texas have also been accused of selling counterfeit fuel credits, for a total of about 140 million fake credits — roughly 10 percent of the annual credits. Many observers believe that more fraud is likely to emerge, and the cases have led to stricter oversight, both within the industry and from regulators.

“Hailey may not be the only one who did that, but he was the first one to get caught,” said the United States attorney for Maryland, Rod J. Rosenstein.

Congress created the fuel credit program in 2007 to help wean the nation off foreign oil and bolster the fledging biofuel industry by requiring oil producers to either blend their fuel with biodiesel or buy credits.

Biodiesel producers registered with the E.P.A., and every gallon of fuel they produced generated a number known as an R.I.N. The numbers are bought and sold by traders, who broker deals with petroleum companies that need to fulfill their renewable fuel obligations.

But Mr. Hailey and at least two other companies discovered that they could sell credits without making any fuel.

Mr. Hailey registered his Baltimore-area company, Clean Green Fuel L.L.C., with the E.P.A. in 2009, claiming that he would produce 20 million gallons of biodiesel each year in the garage by recycling cooking oil purchased from thousands of area restaurants.

He set up a convincing Web site and began making sales through traders, many of whom were young and eager to enter a fledgling market. Mr. Hailey sold more than 32 million credits’ worth, about $9 million, to companies like ConocoPhillips.

He bluffed to buyers, bragging in a recorded call about his state-of-the-art technology and (fictitious) engineering background. E.P.A. inspectors visited his properties but found no sign of production. The United States attorney’s office filed charges late last year, and a unanimous jury took less than two hours to convict Mr. Hailey. Sentencing is in October.

Mr. Hailey’s fraud had almost comic elements to it. There was the spasm of outlandish spending on diamond jewelry and charter jets to Hawaii and Florida. He snapped up real estate. He amassed a fleet of luxury cars, including a Rolls-Royce, three Ferraris, two Bentleys, a Lamborghini, a Maserati and more than a dozen others, and parked some of the cars in front of his house in a Baltimore suburb, according to prosecutors. He so upset his neighbors that they called the county police, who conferred with a federal financial crimes task force. As it turned out, the E.P.A. had been investigating Mr. Hailey for months.

“There is no prize for being the least clever criminal on your block,” the prosecutor, Stefan D. Cassella, said in his closing arguments.

The scheme, and others like it, has had serious repercussions for both the biofuel industry and for conventional petroleum manufacturers.

Fraud like Mr. Hailey’s has sown distrust of all biodiesel producers, virtually freezing the market for credits, and putting many small producers in danger of shutting down.

“This has been an absolutely devastating blow to our industry,” said Jennifer Case, chief executive officer of New Leaf Biofuel L.L.C. in San Diego, who testified in Mr. Hailey’s trial.

The two other companies accused of issuing fake credits have not been charged.

Charles T. Drevna, president of American Fuel and Petrochemical Manufacturers, said the fraud had hurt the case for credits.

“The question for the industry is, who do you trust?” he said. “We can’t trust some of the R.I.N. producers. We can’t trust the E.P.A. registry.”

Petroleum producers were incensed to find out that the agency had been allowing Clean Green trades to continue even while investigating Mr. Hailey.

Environmental officials declined to comment beyond a statement released after Mr. Hailey’s guilty verdict, which the agency called “a significant step forward in ensuring the integrity of the renewable fuels credit market.”

Ben Evans, a spokesman for the National Biodiesel Board, a trade group, said the program was “working very well,” but he admitted that such cases had disrupted the industry and acknowledged there might still be undiscovered fraud.

He pointed to safeguards his organization had instituted, such as a new monitoring and auditing system that biodiesel producers were required to use.

“Some bad actors came in and took advantage of an industry and a public program set up to do public good,” he said. “We’re going to crack down on it and move on.”