Trading Company Sues EPA Over Handling of Scandal

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A trading company ensnared in the fallout from massive fraud uncovered in the U.S. renewable fuel mandate has filed a lawsuit against the U.S. government for its handling of the scandal.

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OceanConnect, a firm that facilitates trades of renewable energy credits, said in a complaint filed in federal court last month that the Environmental Protection Agency's response to the fraud has undermined the government's goal to encourage growth and innovations in the biofuel industry.

The EPA has refused to honor credits bought from a company registered with the agency as a biofuel producer that turned out to be fake, leaving OceanConnect and other companies on the hook for millions of dollars.

CLEAN GREEN SCAM

Biofuel producers and oil refiners were roiled last October when the federal government charged Rodney Hailey, the owner of Clean Green Fuel, with carrying out a $9 million scam involving the distribution of 32 million fake credits, or renewable identification numbers.

Oil companies are required to purchase RIN credits from producers of renewable fuel to comply with federal targets for biofuel output.

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OceanConnect bought more than 27.7 million credits from Clean Green Fuel between November 2009 and December 2010, some of which it later resold to various companies.

Companies that used the fake credits from Clean Green Fuel, including Exxon Mobil and Royal Dutch Shell, to meet their renewable fuel obligations, were served with notices of violation from EPA in November of last year and now face fines of up to $37,500 a day per violation.

Earlier this year, another company, Absolute Fuels, was also cited by the EPA for issuing more than 48 million fake credits.

DUE DILIGENCE?

The EPA has maintained that companies are ultimately responsible for ensuring that the credits they purchase are valid.

The agency declined to comment on the OceanConnect lawsuit, but pointed out that 30 of 33 companies that used the fake credits to meet the renewable target have agreed to settle with the EPA and pay "modest" penalties.

"When fuel credits are used that do not represent actual renewable fuel, regardless of a company's good faith belief that the RINs were valid, it undermines Congress' goals in creating the program, creates market uncertainty and is a violation of the standard," the EPA said.

With some OceanConnect customers demanding to be reimbursed for the fake credits, OceanConnect has charged that the EPA did not properly vet Clean Green.

"As traders in these financial instruments we did our due diligence, unfortunately EPA didn't do its due diligence in registering these individuals," OceanConnect President Eric Rubury told Reuters.

In its lawsuit, OceanConnect said the EPA was aware of the possible fraud for months before it notified market participants, and during some of this time Clean Green continued to sell fake credits.

The EPA's approach to fraud in the RIN market has been that companies have to replace the invalid credits that they may have used, Rubury said.

"It is really nothing more than a fine on the parties who did no wrong, broke no laws, violated no regulations," he said.

The government's response has basically frozen the market for renewable energy credits, threatening the survival of small biodiesel producers, Rubury added.

Top Republicans on the House Energy and Commerce committee and the Senate Environment and Public Works committee have raised concerns about the EPA's oversight of the renewable energy mandate since these fraud cases were revealed.

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