Texas Man Bilks Oil Refiners in $78 Million Biodiesel Fraud

A Houston man who amassed a fortune selling renewable fuel credits given for producing biodiesel, although he never actually made any of the alternative fuel, has pleaded guilty to federal criminal charges.

Philip Joseph Rivkin, 50, defrauded major oil refiners of as much as $78 million, and his activities contributed to temporarily destabilizing the biodiesel production industry’s system for selling and trading renewable fuel credits.

Rivkin managed to escape regulatory scrutiny for years while he sold phony biodiesel production credits, known as renewable identification numbers, or RINs.

Investigators believe that, from as early as 2007 until 2012, the globetrotting, high-rolling Rivkin pulled off a massive fraud promising oil refiners and importers that he would produce millions of gallons of biodiesel at his Houston-based plant.

But Rivkin’s company, Green Diesel, never produced a drop of biodiesel — even though Rivkin somehow convinced major U.S. oil companies that his RINs were legitimate.

“He was a very shrewd fraud artist,” Doug Parker, director of the Environmental Protection Agency’s criminal investigation division, told Transport Topics. “He had a lot of resources, and he bounced around the world. He also brought some experience of the fuel and energy industry and found an area to exploit when the [RINs] market was much less mature.”

Biodiesel blends are widely used in trucking as a way to moderate fuel prices and to reduce regulated emissions.

In 2014, there were 1.8 billion gallons of biodiesel consumed in the United States, said Ben Evans, a spokesman for the National Biodiesel Board.

Four states have mandates for B10 blend or higher — Minnesota, Oregon, Pennsylvania and Washington.

But in many cases, truckers aren’t even aware they’re using biodiesel.

“Biodiesel is certainly heavily used in the trucking industry,” Evans said. “A lot of biodiesel is just blended into the diesel pool. Up to 5%, it’s usually not even marked at the pump.”

In contrast, 40 billion gallons of straight diesel were used last year, Evans said.

Last month, Rivkin pleaded guilty to mail fraud and making a false statement under the Clean Air Act. His plea calls for Rivkin to make restitution totaling $51 million.

Rivkin is scheduled to be sentenced in November and faces up to 20 years in prison on each of the two counts.

Rivkin also is being forced to forfeit to the federal government $29 million in cash, 2,200 works of original art valued at $18 million; a $3.4 million, 22-passenger jet aircraft; and three automobiles: a $269,000 2009 Lamborghini Murcielago Coupe, a 2010 Maserati and a 2010 Bentley.

Investigators with the EPA, IRS and Secret Service found evidence that Rivkin had run a total of $219 million through his biodiesel company accounts, and they are still tracing his financial transactions across the globe.

The aftermath of Rivkin’s fraudulent activities for a time seriously reduced liquidity in the RINs market and left biodiesel producers, refiners and EPA officials blaming each other for the market mess he created.

“Refiners had to scramble and find some valid RINs,” said Tim Hogan, director of motor fuels for the American Fuel and Petrochemical Manufacturers. “So refiners got chastised, and EPA said, ‘Buyer beware; you bought these invalid RINs, and you should have been more vigilant.’ ”

Hogan said it took EPA a year to investigate Rivkin, but the agency never alerted the industry to the ongoing fraud.

The RINs market was authorized by Congress in 2007 to offer refiners and importers flexibility in meeting annual blending volume targets through credits.

They are valid for the year in which they are generated, and up to 20% of a year’s mandate can be met with RINs generated in the previous year, according to the Department of Energy.

Rivkin and two other fraudulent RINs sellers “did a lot of damage to the market,” said Jeff Hove, vice president of the RIN Alliance, a Web-based program offering RINs compliance assistance to its blender and marketer members. “Back when all of that was happening, the question was, ‘Can the renewable fuel standard survive this amount of fraud?’ It did.”

Some of the smaller biodiesel production companies have alleged that federal regulators were too slow at investigating a series of frauds that were generated mostly from 2009-2011.

Some producers have even said the phony RINs sales were such clear acts of fraud that regulators could have uncovered them “by making a few phone calls.”

But by late 2011, EPA was onto the fraud sales, opening investigations on Rivkin and the two other men who conducted massive RINs frauds, according to court documents.

While EPA was working on the two other scammers who each ran their own operations, Rivkin bolted the country, moving to Guatemala to seek citizenship.

When the government there discovered Rivkin had used fake documents to become a citizen, Guatemalan authorities deported him.

He was arrested in June of last year when he returned to the U.S. on a flight to Houston.

In the meantime, federal agents discovered Rivkin’s art collections in crates stored in a New Jersey facility being prepared to be shipped to Barcelona, Spain.

By then the two other men who sold phony RINs were in prison.

In December 2012, Jeffrey Gunselman, owner of Absolute Fuels, LLC, pleaded guilty to an indictment charging 51 counts of wire fraud, 24 counts of money laundering and four counts of making false statements in violation of the Clean Air Act.

The following March, Gunselman was sentenced to more than 15 years, and ordered to pay more than $54.9 million in restitution.

In June 2012, Rodney Hailey, the owner of Clean Green Fuels, LLC, was found guilty of wire fraud, money laundering, and violating the Clean Air Act by generating and selling fraudulent RINs.

Hailey was sentenced in February 2013 to more than 12 years in prison and ordered to pay restitution of about $42 million to over 20 companies and to forfeit $9.1 million in proceeds from the sale of fraudulent RINs.

With the three men dumping millions of fraud RINs on the market, the oil refineries were curtailing their purchases of RINs, especially from small producers.

“I would say that the misconduct destabilized the market for a period of time,” EPA’s Parker said, “but the enforcement actions helped wake up companies. The combination of in-creased due diligence and EPA’s enhanced regulatory approach helped right the ship when it was pretty wobbly. “

Like share prices, RINs trading values can vacillate. Because sellers or buyers of fraudulent RINs can be penalized up to $37,500 a day, a significant number of refiners that purchased Rivkin’s phony RINs were forced to pay not only to replace the bogus RINs but also heavy penalties, Hove said.

“It’s been like pouring salt in a wound,” Hove said.

EPA said the discovery of Rivkin’s fraud, and the other recent scams, marked a turning point in its enforcement of the multibillion-dollar RINs trading market. As of Jan. 1, a new EPA rule requires increased compliance measures for biodiesel producers and greater due diligence for companies purchasing RINs.

In comments on the new EPA rule, Jennifer Case, president of San Diego-based New Leaf Biofuel, said a lack of RINs auditing created a “buyer beware” world.

“The obligated parties simply did not look into the integrity of the RINS they were using for compliance, and they paid dearly for it,” Case wrote. “Something clearly had to change, and it did.  Today, RINS are not traded freely and clearly, but are traded only after being subject to detailed auditing procedures.”

Charles “Shorty” Whittington, a former chairman of American Trucking Associations, called the early RINs era an “interesting cesspool.”

Whittington, president of Indiana-based hazardous materials carrier Grammer Industries,” also owns a biodiesel plant.

“After the big guys finally got caught in the bear trap, we’re starting to get regulated,” Whittington told TT. “We had an audit here the other day at the plant and the feds came in like you couldn’t believe.”