Maryland biofuel fraud case rattles industry

The case that has rattled the nation's renewable fuels industry began with some flashy cars.

As Rodney R. Hailey accumulated a string of vehicles, including a Rolls-Royce, two Bentleys and a Lamborghini, the Perry Hall man's neighbors became suspicious. They contacted Baltimore County police, who passed the tip to federal agents.

Within months, federal and local authorities raided the offices of Clean Green Fuel, the biodiesel business Hailey ran in Perry Hall, and searched his homes both nearby and in Anaheim, Calif., seizing cars and records and freezing his bank accounts. By last fall, federal prosecutors had charged him with wire fraud, money laundering and Clean Air Act violations — not for his car purchases, but for selling $8.4 million worth of phony renewable fuel credits.

Hailey, 33, is scheduled to stand trial Monday in U.S. District Court, where if he's convicted prosecutors seek to reclaim the millions they claim he got fraudulently. The nation's biodiesel producers, meanwhile, hope the case begins to clear up the scandal and uncertainty that has spread over their industry since it surfaced; at least two other companies have been accused of similar scams and a congressional investigation has been launched.

Hailey's attorney, assistant public defender Joseph Evans, declined to comment Friday, other than to say he's preparing for trial.

On the surface, Clean Green Fuel appeared to be just another in a legion of entrepreneurs to spring up in response to a federal push for renewable fuels from agricultural byproducts. Under the program, oil companies are required to either produce a fixed quantity of the fuel themselves or buy enough credits from other producers to meet their quotas.

According to its website, Clean Green Fuel produced a "unique blend" of clean-burning biodiesel made from vegetable oil. The company reported to the Environmental Protection Agency that it made 2.2 million gallons of biodiesel in the last three months of 2009, according to charging documents.

But even before Hailey's neighbors had tipped police about the cars, one of his competitors complained to the EPA that something wasn't right with his operation. So a pair of inspectors paid a surprise visit to the Clean Green Fuel office in Nottingham in July 2010. Hailey told them he produced biodiesel at a plant in Curtis Bay but couldn't show it to them that day. Nor could he supply them with the names of any of the 2,700 restaurants from which he said he collected used cooking oil.

The inspectors arranged to return the following week, when Hailey told them his operation was actually on Pulaski Highway in Perry Hall, but he'd recently stopped production. According to court records, the inspectors asked to see records of his sales, and he said he didn't have any because he gave the fuel away.

Hailey told investigators, according to pretrial court documents, that he produced biodiesel to match the credits, but gave it away at truck stops. When they asked about his renewable fuel credits — known as "renewable identification numbers" or RINs — he said he sold them to a New York brokerage firm. He led them to a warehouse on Pulaski Highway, where the inspectors found three empty tanks. He told them he'd sold the production equipment, but couldn't say to whom.

At the same time he said he was running Clean Green Fuel, according to documents filed by prosecutors, Hailey was collecting unemployment, and he used his government-issued debit card to put a $500 deposit down on a Rolls-Royce, one of 22 cars and trucks he bought. He also bought diesel fuel and green dye, according to prosecutors' filings.

Since Hailey's charging in October, federal agents have raided two Texas companies and the EPA has accused them in regulatory filings of similar scams. EPA has also cited 33 companies, including Exxon Mobil, BP and Shell, for relying on phony credits to fulfill their federally mandated quota of renewable fuels.

"This is something that is creating a significant disruption in our industry," said Ben Evans, a spokesman for the National Biodiesel Board. Uncertainty about the reliability of renewable fuel credits has contributed to a drop in their price in recent months and some small producers having trouble selling their credits at any price.

"You're seeing the petroleum sector be a little wary of buying RINs from producers they don't have an established relationship with," Evans said.

The slump in renewable fuel credit prices was one factor in the recent idling of Maryland's largest biodiesel production facility in Princess Anne, according to its owner. Jim Kingdon, president of Greenlight Biofuels, based in Charlottesville Va., said "friction" in the RIN market was a factor, though not the overriding one in halting production.

While the credit prices are just part of the income generated when producing biodiesel, even a small dip in prices "affects your margin significantly," Kingdon said. "There's not a lot of margin in biodiesel."

The upheaval has generated inquiries in Congress. Some of the companies cited by EPA, which faced millions in fines, complained to lawmakers that they had no idea the credits weren't valid. The Republican-led House Energy and Commerce Committee has questioned the EPA's oversight of this program, as has Sen. James M. Inhofe, R-Okla., ranking GOP member on the Senate Environment and Public Works Committee.

The EPA ended up settling with the companies for a fraction of the proposed penalties.

EPA spokesman David Bloomgren emailed a statement that the agency has acted to ensure the integrity of the program and to restore certainty to the market.

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