After a long investigation, the U.S. federal government, including the U.S. Securities and Exchange Commission, the Justice Department’s Environment and Natural Resources Division and the U.S. Attorney’s Office for the Southern District of Indiana, charged a company in Evansville, Ind., and several executives and suppliers with 88 counts of conspiracy, wire fraud, false tax claims, false statements under the Clean Air Act, obstruction of justice, money laundering and securities fraud, for involvement in an illegal biodiesel scheme that bilked victims, including investors, customers and the government, out of more than $100 million.

The SEC alleges that when Imperial Petroleum purchased Middletown, Ind.-based e-Biofuels LLC as a subsidiary in 2010, e-Biofuels’ owners falsely represented that they were producing biodiesel from soybean oil and chicken fat. e-Biofuels received significant government incentives based on its biodiesel production representations. But e-Biofuels actually used middlemen to buy finished biodiesel and portrayed those purchases in fake invoices as the raw “feedstock” needed to produce biodiesel. e-Biofuels later sold the purchased biodiesel for as high as double the price it paid for it. 

The government alleges that Craig Ducey, Chad Ducey, Chris Ducey and Brian Carmichael operated e-Biofuels and conspired with Joseph Furando and Evelyn Katirina Pattison (aka Katirina Tracy)—two executives with a pair of related New Jersey-based companies that operated under the names Caravan Trading Co. 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.

When Imperial’s CEO Jeffrey Wilson learned that e-Biofuels was not producing biodiesel from raw materials, he allowed the scheme to continue instead of taking corrective action. Imperial’s annual revenue increased from $1 million to more than $100 million and its stock price soared as the company falsely told investors that e-Biofuels was in the business of environmentally friendly biodiesel production. Imperial’s stock price plummeted to less than 10 cents per share after the scheme fell apart, resulting in a market loss of approximately $60 million.

The SEC’s complaint filed in federal court in Indianapolis charges Imperial Petroleum and Wilson as well as Craig and Chad Ducey and Carmichael, who now lives in Bend, Ore. The complaint also charges Caravan Trading LLC, Cima Green LLC, and Cima Energy Group and their operators Furando and Pattison (Tracy) for acting as the middlemen in the scheme. They allegedly provided false and misleading documents to deceive government regulators and attract investors to Imperial.

“This investigation has been underway for at least two years, and we commend the EPA and other federal authorities for moving it closer to resolution,” said Ben Evans, director of public affairs and federal communications for the National Biodiesel Board. “In two other known cases of similar fraud from this period, the perpetrators are now serving significant time behind bars. If these charges are true, we hope to see similar justice in this case.”

“Imperial Petroleum and its executives outright lied to investors about how their company turned a profit,” said Robert Burson, associate director of the SEC’s Chicago Regional Office. “When their illegal scheme collapsed, investors paid the price.”

If found guilty, the individuals charged by indictment face up to 20 years in federal prison on some counts, as well as significant fines. The defendants were scheduled for initial appearances before a federal magistrate judge today.

An additional defendant was charged today by federal information, and has petitioned the court to enter a plea of guilty and cooperate with investigators. 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.

According to the SEC’s complaint, Imperial falsely stated in its annual reports for fiscal years 2010 and 2011 that e-Biofuels produced and sold more than 28 million gallons of biodiesel from May 24, 2010 (the closing date of Imperial’s acquisition of e-Biofuels), to July 31, 2011 (end of the fiscal year). More than 99 percent of Imperial’s revenues came from e-Biofuels during this time period. Wilson, the Duceys, Carmichael, and others under their direction misrepresented to customers that the product they were selling was valid renewable fuel produced by e-Biofuels. In reality, the vast majority was biodiesel bought from the New Jersey companies and fraudulently recertified with new incentives and tax credits. The biodiesel was purchased and then resold unchanged to customers for more than $100 million. 

The SEC alleges that the scheme generated gross illicit profits of more than $50 million by buying the biodiesel at or near market price, fabricating invoices describing the transactions as the purchase of soybean oil or some other legitimate type of feedstock, and falsely certifying to the EPA that e-Biofuels had produced biodiesel. On some occasions, e-Biofuels pretended to blend the biodiesel in order to receive improper tax credits, or sold the fuel with the tax credits to end users. From November 2009 to January 2012, e-Biofuels created more than 52 million fraudulent renewable energy credits and $35 million in false tax credits. This illegal business model was never disclosed to Imperial’s investors or auditors.

According to the SEC’s complaint, Wilson knew by at least mid-June 2010 that e-Biofuels was not operating in the manner described in its annual report for 2010. Nonetheless, he signed and certified the accuracy of the 10-K filing. For the next three quarters and in the 10-K a year later, Imperial filed similar disclosures falsely describing the business as “biodiesel production” and misrepresenting that it used raw feedstock—primarily “premium white grease (chicken fat)”—to produce biodiesel. Wilson signed and certified the accuracy of these reports. Wilson also gave a false portrayal of the company when he had direct contact with prospective investors, including a Powerpoint presentation with a video about e-Biofuels purportedly producing biodiesel from waste oils and greases. In reality, e-Biofuels’ business was almost entirely illegal and unsustainable. 

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.  

The SEC complaint charges Imperial with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 and various rules thereunder. Wilson, the Duceys, and Carmichael are charged with violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b) of the Exchange Act, and various rules thereunder. They also are charged with aiding and abetting violations of the Exchange Act. The complaint charges Furando, Pattison, and the three New Jersey companies with aiding and abetting violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5.

“Unfortunately, no industry is safe from criminals who will try to game the system, whether it’s an Enron or a small business,” Evans said. “RIN fraud, while isolated, has been incredibly damaging to the biodiesel industry and others in the fuels marketplace. We have worked diligently with the EPA and the petroleum sector to address it head-on, and we believe the new regulations that are now being finalized by the EPA, as well as increased vigilance in the industry, will prevent it moving forward. These cases should certainly send a strong signal that this kind of fraud will be punished severely. Overall, let’s remember that federal policies are working to reduce our dependence on petroleum and reduce air pollution, helping diversify our fuel supply with more than 1 billion gallons of clean, American-made biodiesel in each of the past two years.”