Biofuel fraud case puts industry under scrutiny

On its website, Clean Green Fuel offered customers "a unique blend of biodiesel" made from vegetable oil that would produce less air pollution and help reduce the nation's dependence on petroleum.

But according to federal charging documents, company owner Rodney R. Hailey didn't produce any biodiesel. Instead, prosecutors charge, he generated and sold more than $9 million worth of credits for nonexistent renewable fuel, using the proceeds to buy a five-bedroom house in Perry Hall, diamond jewelry and more than two dozen cars and trucks, including a Rolls Royce, a pair of Bentleys and a Lamborghini.

Hailey, 33, of Perry Hall, is scheduled to be arraigned Thursday in U.S. District Court on charges of wire fraud, money laundering and violating the Clean Air Act. If convicted, he faces up to 20 years in prison, depending on the charge. The government also is seeking to seize his house and other property.

Biodiesel industry members said they believe this is the leading edge of a crackdown by the federal government on fraud and abuse of the Renewable Fuel Standard, a 6-year-old program meant to encourage the domestic production of ethanol and other environmentally friendly "biofuels" made from agricultural byproducts.

For some, the dragnet is long overdue for a confusing, complicated program that they contend suffered for years from lax oversight. Erroneous reporting of renewable-fuel credits was frequent, critics say.

"The system, frankly, was too easily scammed," said Clayton McMartin, president of the New Mexico-based Clean Fuels Clearinghouse, which helps businesses comply with the federal rules.

Created by Congress in 2005 as part of broader energy legislation, the renewable fuels program initially focused on stimulating production of ethanol from corn. Congress expanded it two years later to promote "advanced biofuels" that would generate fewer climate-warming greenhouse gases than petroleum-based diesel motor fuels.

The renewable fuels standard requires that 15 billion gallons of corn-based ethanol, 1 billion gallons of biodiesel and 16 billion gallons of cellulosic fuels made from plants or trees be produced annually by 2022. So far this year, about 600 million gallons of biodiesel have been produced, according to industry figures.

Under the program, gradually increasing production goals have been set for each type of fuel, and oil companies have been required to either produce the renewable fuel themselves or purchase enough credits from other producers to meet their quotas. Failure to meet the goals can result in costly penalties for the oil companies.

McMartin said he has warned, practically since the program's start, that it was flawed and ripe for abuse. For one thing, he said, renewable-fuel producers were allowed to generate their own credits — Renewable Identification Numbers, or RINs — which could be bought and sold multiple times as batches of biodiesel were shipped around the country and blended with other fuels.

His own business has rejected "numerous" RINs, he said, because of suspicions they weren't valid.

"Hell, anybody could make up RIN numbers," McMartin said. "In five minutes, I could show you how to do it."

That's just what the federal government alleges Hailey did at Clean Green Fuel. U.S. Attorney Rod J. Rosenstein said in a statement released at the time charges were filed that Hailey "specialized in producing 38-digit 'renewable identification numbers,' each of which supposedly corresponded to the production of two-thirds of a gallon of biodiesel fuel.''

In fact, Rosenstein added, "Mr. Hailey did not produce any renewable fuel; he just made up RINs."

Attempts to reach Hailey were unsuccessful, and his defense lawyer, Andrew C. White, did not return phone calls or an email.

One person not surprised by the charges is Costas "Gus" Apostolou, whose energy services company was next door to the Pulaski Highway warehouse where Hailey told investigators he produced his biodiesel. Since federal agents and police raided the place several months ago, Apostolou said, he has moved his business into the space.

"We were here for about a year," Apostolou said, "and there were three huge fuel tanks in here, and three big tractor-trailers outside." He said he's never seen a delivery of fuel at Clean Green Fuel.

Besides the fuel tanks, the warehouse held what Apostolou estimated were $3 million-$4 million worth of cars, which he said were hauled away a short time before the government raid.

But in the time he was next door to the fuel business, Apostolou said, he never saw any fuel processing there. "The only thing they did was wax cars, and change tires and shine 'em."

According to the charging document filed in federal court, Hailey reported to the EPA that he had produced 2.2 million gallons of biodiesel in the last three months of 2009. Two EPA inspectors paid a visit to Clean Green Fuel's offices in Nottingham in July 2010, responding to what court papers said was a complaint alleging the company was selling false renewable-fuel credits.

When the inspectors asked to see his production facility, Hailey told them it was on Shell Road in Curtis Bay, court papers say. He told the inspectors his employees and contractors collected waste vegetable oil from 2,700 restaurants in a three-state area to convert to biodiesel.

The EPA inspectors returned a week later to inspect the production facility, court papers say, and were told at that time it was in the 7500 block of Pulaski Highway. Hailey later told government officials, according to the court filing, that he had ceased production by June 2010 and had removed all the equipment from the warehouse and sold it, though he told investigators he could not remember to whom.

Instead, according to charging documents, Hailey's business consisted of generating false renewable-identification-numbers on his computer and peddling them to brokers and oil companies.

Among those buying allegedly false renewable-fuel credits were, an international fuels brokerage with U.S. offices in White Plains, N.Y., which paid $6.5 million, according to court documents. Another large purchaser was ConocoPhillips, the Houston-based oil company, which paid nearly $1.7 million.

Calls to's offices were not returned. A spokesman for ConocoPhillips declined to comment.

Some industry observers and representatives say they wonder if the charges against Hailey are just the beginning of a broader crackdown by federal authorities.

Kirista K. McIntyre, a lawyer in Boise, Idaho, said some of the companies she represents have received inquiries from the EPA seeking records and sworn statements that they are complying with the renewable fuel regulations.

Companies that buy invalid or false credits can be liable under the federal Clean Air Act for penalties of up to $37,500 per day, she noted, though they may be able to escape hefty fines by producing or acquiring enough renewable fuel or legitimate credits to replace the bad ones.

Industry officials say they've grown concerned about the potential for abuse of the credits to undermine public confidence in their fuel and potentially even threaten the continuation of federal tax credits and other government incentives.

The National Biodiesel Board, an industry group, has a link on its website for anyone to report suspicions that someone is generating phony renewable fuel credits. Board spokesman Ben Evans said the link has produced about a half-dozen tips in the year it's been up, which he said were passed along to the EPA.

"The integrity of our business, our industry, depends on the integrity of this program in a very large way," Evans said. "We don't want petroleum companies to be turning in [credits] that aren't valid. We want them to buy biodiesel from legitimate companies rather than one doing a paper transaction."

Hailey's Clean Green Fuels was a member of the biodiesel board until earlier this year, the group's spokesman acknowledged.

The company's website, which was offline Wednesday, also said it is a Maryland-registered minority business enterprise. The state Department of Transportation said that it is not and never has been. A spokesman for the state comptroller's office said the firm's business license was revoked in July, though he said tax confidentiality laws prevent him from saying why.

McMartin, the early critic of the EPA's oversight, said he believes the agency has tightened up in the past year by revising its regulations and setting up its own online reporting system.

The EPA's public affairs office did not make anyone available to answer questions about the agency's oversight of the program. Instead, the EPA emailed a pair of brief statements, one of them declining to comment on the criminal case or any enforcement activities the agency is undertaking. The EPA also asserted that its new "moderated transaction system" cuts down on erroneous reporting of fuel credits and makes traders more confident they are valid.

Some, though, think the government hasn't done enough.

"There needs to be more checks and balances," said Shashi Menon, a partner with EcoEngineers, an Iowa-based firm that helps renewable fuel producers prove their credits are valid.

One lingering concern industry officials have is a discrepancy between the number of credits the EPA has logged and the amount of renewable fuel reported produced by the U.S. Energy Information Administration.

Jeff Hove, vice president of RINAllliance, an Iowa firm that helps fuel businesses that are blending biodiesel, said the EPA's tally of renewable fuel credits shows a record production of biodiesel, but "the industry out here, blending the product, we're not seeing those gallons."

"It gives the industry an entire black eye, and probably worse" Hove said of the allegations against Hailey. "You've got a lot of good players out there, a lot of guys who've been working hard to try to get biodiesel off the ground."

But to have a biodiesel company accused of fraud casts public suspicion on the entire industry, its members say, even as they're struggling to meet the ambitious production goals set by Congress.

"You would expect EPA would watch ever more closely how this framework is implemented," said McIntyre, the Idaho lawyer. With Congress' unwillingness to enact federal energy or climate-change legislation in recent years, the renewable fuels program is the only way the Obama administration has to stimulate alternatives to petroleum and fight the climate-changing impact of burning motor fuels, she said.

"It starts to raise eyebrows about whether the government has a system in place that can track whether it's happening for real or not," she said of the Baltimore case.

Hailey's property

According to criminal information filed in U.S. District Court by the U.S. attorney's office, the following were among the property bought by Rodney R. Hailey with funds from the sale of bogus fuel credits:

Vehicles included: 2 Bentleys, 3 Ferraris, 1 Rolls Royce Phantom and more

Home: $645,000, five-bedroom stone-front house on a corner lot in the Fields of White Marsh, with a two-story screened porch

Jewelry included: 3.75 ct white gold diamond ring, tennis necklace with 23.94 ct in diamonds and more