Thursday, September 19, 2013

Corruption: Seven Individuals and Three Corporations Charged in Indiana-Based Biofuels Fraud Scheme

U.S. Attorney’s Office 
Southern District of Indiana   

INDIANAPOLIS—U.S. Attorney Joseph H. Hogsett, along with Robert G. Dreher, Acting Assistant Attorney General for the Justice Department’s Environment and Natural Resources Division, announced today the return of two indictments against six individuals and three companies for offenses involving federal renewable fuel programs, allegedly creating losses to victims totaling more than $100 million. An additional defendant was charged today by federal information and has petitioned the court to enter a plea of guilty and cooperate with investigators. The 88 counts included in the three charging documents include allegations of conspiracy, wire fraud, false tax claims, false statements under the Clean Air Act, obstruction of justice, money laundering, and securities fraud.

“This morning, federal agents brought into custody individuals who allegedly operated the largest tax and securities fraud scheme in Indiana history,” Hogsett said. “This case represents a collaborative effort on the part of law enforcement to hold fully accountable those who seek personal profit at the taxpayer’s expense.”

“Congress enacted incentives for the production of biofuels to make the United States stronger and more energy independent,” said Dreher. “Fraud by parties claiming such incentives threatens these important public policies. The Justice Department will vigorously prosecute those seeking to line their pockets using scams like those alleged in this indictment.”

The Law

The Energy Independence and Security Act of 2007 created a number of federally funded programs that provided monetary incentives for the production of biodiesel. A dollar-per-gallon tax credit was available only to the first person to blend the pure biodiesel (known as B100) with petroleum diesel. After the biodiesel was blended and the tax credit claimed, the resulting product was generally known in the industry as B99, meaning that it was approximately 99 percent biodiesel and one percent petroleum diesel. Additionally, biodiesel producers could generate and attach credits known as “renewable identification numbers” or RINs to biodiesel they produced. Because certain companies need RINs to comply with regulatory obligations, RINs have significant market value. These two incentives were available only once for any given volume of biodiesel. For these reasons, a gallon of B100 with RINs and an available tax credit was worth much more than a gallon of RIN-stripped B99. At times during the conspiracy, a gallon of B100 with RINs was worth up to $2 more than an equivalent gallon of B99, effectively doubling its value.

The Defendants

Four of the defendants—Craig Ducey, Chad Ducey, Chris Ducey, and Brian Carmichael—operated E-Biofuels, a Middletown, Indiana company that held itself out as a producer of biodiesel from “feedstocks” such as animal fat and vegetable oils. The government alleges that these defendants conspired with Joseph Furando and Evelyn Katirina Pattison—two executives with a pair of related New Jersey-based companies that operated under the names Caravan Trading Company and CIMA Green—to purchase RIN-stripped B99 from third parties, pretend that E-Biofuels had produced that fuel at its Middletown facility, and fraudulently resell that fuel to customers as B100 with RINs and an available tax credit. While the E-Biofuels facility was capable of producing B100, at times during the conspiracy it was producing no fuel of its own but instead was simply acting as a pass-through facility for fuel purchased elsewhere.

The Alleged Conspiracy

The indictment alleges that beginning in July 2009 and continuing until May 2012, these defendants fraudulently sold more than 35 million gallons of RIN-stripped B99 to unwitting customers who paid an inflated price, thinking they were purchasing B100 with RINs and an available tax credit. All told, the customers were allegedly defrauded of more than $55 million as a result of these activities, and the Internal Revenue Service was exposed to as much as $35 million in false claims.

The government alleges that the defendants delivered the fraudulently mislabeled fuel to the victims in one of three ways. In some cases, the biodiesel was transported from fuel terminals to the E-Biofuels facility in Middletown where it was unloaded into a holding tank. A short time later, the biodiesel would be reloaded into tanker trucks and delivered to unsuspecting customers along with fraudulent paperwork that misidentified it as B100 with RINs produced by E-Biofuels. On other occasions, the truck drivers did not unload the fuel when they arrived at Middletown plant. Instead, they simply picked up paperwork falsely stating that the truck contained a load of B100 with RINs that originated at the E-Biofuels facility. The truck drivers referred to this procedure as “flipping a load.”

Finally, in the most egregious instances, the truck drivers hauled RIN-stripped B99 from fuel terminals directly to customers. Because these loads never went to the E-Biofuels facility, they were known as “ghost loads” or “phantom loads.” In those cases, the defendants faxed or e-mailed the false paperwork to the truck drivers along their routes between the fuel terminals and the customer locations.

In an information filed today in federal court, Brian Carmichael was charged with one count of conspiracy to defraud the United States. Carmichael has filed a petition with the court indicating his willingness to plead guilty to this charge. Carmichael faces up to five years in federal prison if convicted.

The Alleged Securities Fraud

In May 2010, E-Biofuels was purchased by Imperial Petroleum, a publicly traded company based in Evansville. After the acquisition, E-Biofuels accounted for more than 97 percent of Imperial Petroleum’s operating income. Defendant Jeffrey Wilson was the president and chief executive officer of Imperial Petroleum.

The government alleges that Jeffrey Wilson and Craig Ducey knew that E-Biofuels was purchasing biodiesel from third parties instead of making its own biodiesel. They hid this fact from Imperial’s investors, shareholders, and outside auditors by falsely stating that E-Biofuels produced biodiesel from chicken fat and other feedstocks. They made these and other related false statements and omissions in Imperial Petroleum’s annual and quarterly reports filed with the Securities and Exchange Commission and in written and oral communications with Imperial Petroleum’s investors and outside auditors.

The Process

If found guilty, the six individuals charged by indictment face up to 20 years in federal prison on some counts, as well as significant fines. The three companies indicted today also face significant fines and other regulatory action. The defendants will have initial appearances before a federal magistrate judge today at 1:30 p.m.

The case is being prosecuted by Senior Litigation Counsel Steven D. DeBrota of the U.S. Attorney’s Office, along with Senior Counsel Thomas Ballantine of the Environmental Crimes Section in the Department of Justice’s Environment and Natural Resources Division, and Jake Schmidt, a Special Assistant U.S. Attorney at the U.S. Attorney’s Office and Senior Attorney for the Securities and Exchange Commission.

An indictment is only a charge and is not evidence of guilt. All defendants are presumed innocent and are entitled to a fair trial at which the government must prove guilt beyond a reasonable doubt.

Law Enforcement Partners

The collaborative investigation that led to today’s arrests was the result of work by the Environmental Protection Agency’s Criminal Investigation Division, the Internal Revenue Service Criminal Investigation, the Federal Bureau of Investigation, and the Securities and Exchange Commission, as well as the U.S. Department of Agriculture and the Indiana Department of Environmental Management.

In response to the federal grand jury indictments, the following law enforcement partners issued statements:

Cynthia Giles, Assistant Administrator for Enforcement and Compliance Assurance, Environmental Protection Agency:

“The Renewable Fuel Standard Program was designed to achieve greenhouse gas emission reductions, promote energy independence, and expand our nation’s renewable fuels sector. Today’s action supports these goals by protecting the integrity of the biofuel market. Those that cheat the system are breaking the law and undermine our commitment to protect public health and the environment.”

Robert A. Jones, Special Agent in Charge, Federal Bureau of Investigation:

“We are proud to work with our federal partners to identify and investigate groups that manipulate and utilize federal government programs to line their pockets by fraud. In doing so, they deceive their customers, their shareholders, and the American public. The FBI will continue the fight against this dishonest and fraudulent behavior which harms the American people and the American economy.”

James C. Lee, Special Agent in Charge, IRS-Criminal Investigation:

“The indictments returned today send a loud message that IRS-Criminal Investigation operates year-round to protect the integrity of our tax system and today is a victory for the American people. Together with the cooperative efforts of our law enforcement partners, we were able to identify and vigorously investigate the fraud involved in this scheme.”