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Myke Feinman Refine Fuels Reporter

Thursday 09/19/13

SEC Charges Indiana Biodiesel Producer in Fraud Scheme

STREATOR, Ill. (DTN) -- The Securities and Exchange Commission charged a company in Evansville, Ind., and several executives and suppliers for posing to investors as a legitimate biodiesel production business while concealing the extensive illegal activity that accounted for 99% of its revenues, the SEC said in a news release Wednesday.

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 renewable fuel from raw agricultural products such as 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. 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.

"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."

Ben Evans, director of public affairs and federal communications for the National Biodiesel Board, said this latest RINs case pre-dates recent efforts to put safeguards in place to prevent fraud.

"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," Evans said.

"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.

"Unfortunately, no industry is safe from criminals who will try to game the system, whether it's an Enron or a small business. 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."

The SEC's complaint filed in federal court in Indianapolis charges Imperial Petroleum and Wilson as well as three former owners of E-Biofuels -- brothers Craig and Chad Ducey of Fisher, Ind., and Brian Carmichael, who now lives in Bend, Oregon. The complaint also charges three New Jersey-based companies -- Caravan Trading LLC, CIMA Green LLC, and CIMA Energy Group -- and their operators Joseph Furando and Evelyn Pattison, also known as Katirina 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.

In a separate action, the U.S. Attorney's Office for the Southern District of Indiana today announced criminal charges.

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, the end of the fiscal year. More than 99% 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, according to the SEC complaint. 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 Environmental Protection Agency 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" or 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 power-point 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," SEC said.

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.

"The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and permanent injunctions against further violations of the securities laws," SEC said.

The SEC seeks to bar Wilson, the Duceys, and Carmichael from acting as officers or directors of a public company.

The SEC's investigation is continuing. The investigation of the criminal action was conducted by the U.S. Attorney's Office for the Southern District of Indiana, the Department of Justice's Environmental Crimes Division, the Federal Bureau of Investigation, the Environmental Protection Agency, the Internal Revenue Service, and the Department of Agriculture.

(ES/)

Posted at 4:22PM CDT 09/19/13 by Myke Feinman
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