Biofuel fraud case puts industry under scrutiny

Perry Hall man charged with selling $9 million worth of credits for nonexistent renewable fuel

October 12, 2011|By Timothy B. Wheeler, The Baltimore Sun

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."

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