Fake biofuel credit pushes trading firm into bankruptcy

A trading firm that accidentally sold millions of dollars worth of fake biofuel credits has filed for bankruptcy, fueling pressure on environmental regulators to fix the fraud that has infected the market.
OceanConnect, LLC of White Plains, New York, filed for Chapter 7 protection on February 8, the kind of bankruptcy that allows a court-appointed official to dismantle a company’s operations, after facing a handful of lawsuits from top gasoline refiners who have demanded to be reimbursed after purchasing the fake credits through OceanConnect’s brokerage operations.
In court papers, OceanConnect said it ended last year with a US$1.7 million loss. In its bankruptcy petition, the company said it still had about US$350,000 worth of biofuel credits on hand.
Tesoro Corp., one of the country’s largest oil refiners, and Phillips 66 Co. have both filed lawsuits against OceanConnect, which sold more than US$6.7 million worth of biofuel credits from Clean Green Fuel, LLC beginning in 2009, according to bankruptcy court papers and a federal lawsuit that OceanConnect officials filed last spring against the U.S. Environmental Protection Agency.
The Clean Air Act calls for major oil refiners to blend a certain amount of renewable fuel with diesel fuel or gasoline.
However, big refiners can buy credits to fulfill their legal requirements from a biofuel company that makes fuel from alternative sources like corn, cooking oil or soybeans. As those companies churn out biodiesel, the producers simultaneously create a tradable credit, which is assigned a 38-digit number so that it can be tracked on the secondary trading market.
OceanConnect, founded in 2008, brokered the deals between refiners who needed to buy credits and biodiesel producers, according to its lawsuit.
Federal investigators began to uncover fraud within the credit-trading program several years after it began.
In 2011, the owner of Clean Green Fuel, the firm that sold credits to OceanConnect, was indicted for making up credits that he sold from a fake factory in Maryland, according to the lawsuit. Clean Green Fuel owner Rodney Hailey was convicted on June 25, 2012, of fraudulently selling about US$9 million of phony credits. He is awaiting sentencing.
In the wake of the scandal, major oil refiners that were forced to purchase additional credits to make up for the fake ones they previously purchased turned to OceanConnect, which then looked to federal regulators for help.
Last year, OceanConnect filed a lawsuit against the EPA, asking a federal judge for measures that would stop penalizing participants in the credit-buying market “for relying on invalid Clean Green” credits, the lawsuit said.
“EPA’s refusal to grant credit for [the credits] purchased in good faith injures OceanConnect and all other downstream purchasers of [credits] to the tune of tens of millions of dollars,” OceanConnect attorneys wrote in the lawsuit. The agency’s lack of action, “also injects unreasonable uncertainty and confusion into a program that many entities throughout the nation have relied on.”
OceanConnect also said that the confusion has hurt smaller biofuel producers as credit buyers turn to, “large, established renewable fuel producers to meet” their needs, the lawsuit said.
The lawsuit was dropped in July without explanation. (February 9, 2013)