On April 18, 2012, the Environmental Protection Agency (EPA) reached settlements with 30 companies alleged to have used invalid renewable fuel credits — credits generated as part of an allegedly multimillion-dollar scam perpetrated by Baltimore, Md.-based Clean Green Fuels, LLC and Lubbock, Texas-based Absolute Fuels, LLC. EPA claims that more than 80 million renewable fuel credits, called Renewable Identification Numbers (RINs), were sold into the RIN market by Clean Green Fuels and Absolute Fuels without producing the corresponding volume of renewable fuel required to generate those RINs.
EPA’s Renewable Fuels Standard (RFS2) regulations are intended to ensure that transportation fuel sold in the U.S. contains a minimum volume of renewable fuel each year, as required by Section 211(o) of the Clean Air Act. The RFS2 program requires producers and importers of transportation fuels (called “obligated parties”) to meet renewable volume obligations (RVOs), which are determined by multiplying fixed percentages (which are set by EPA each year) by the total gasoline and diesel fuel produced or imported by each obligated party. Those obligations are then satisfied through retirement of RINs, which are fuel credits created for each gallon of renewable fuel produced for domestic use that qualifies under the program. EPA is required to administer and enforce the RFS2 program and, in 2010, established the EPA Moderated Transaction System (EMTS) to record and monitor RIN transactions. EPA has taken the position that the RFS program, since its inception in 2007, has been a “buyer beware” program, potentially subjecting the obligated party retiring invalid RINs to penalties of up to $37,500 per day/per violation. Given the expansion of an already complex program under the predecessor RFS1 program (i.e., the renewable fuel standard regulations in place prior to July 1, 2010) and the numerous recordkeeping and reporting requirements, the intent of the EMTS program was to help reduce errors and to assist EPA in the monitoring of RINs and compliance.
On Nov. 7, 2011 and Feb. 2, 2012, EPA issued notices of violation (NOVs) to Clean Green Fuels and Absolute Fuels, respectively, alleging that the two companies engaged in fraudulent schemes to sell more than $70 million in phony renewable fuel credits under the RFS2 program between September 2009 and August 2011. In the NOVs, EPA alleged that Absolute Fuels generated more than 48 million invalid RINs and that Clean Green Fuels generated more than 32 million invalid RINs — in both cases, without producing actual volumes of renewable fuel. On Nov. 8, 2011, EPA also filed a criminal indictment against the owner of Clean Green Fuels, Rodney R. Hailey, alleging wire fraud, money laundering and violations of the federal Clean Air Act. Among those affected by the fraud are refineries and other sellers of petroleum products, fuel credit brokers and other obligated parties under the RFS2 standard who sold and/or acquired fraudulent RINs from the companies and who themselves received NOVs from EPA alleging use of the invalid RINs. Most recently, on April 30, 2012, EPA issued an NOV to Green Diesel LLC alleging that all RINs Green Diesel generated between July 16, 2010 and July 15, 2011 are invalid because they did not correspond to actual produced volumes of renewable fuel.
Obligated Party NOVs and Settlements
Also on Nov. 7, 2011, EPA issued NOVs to 24 companies alleging that they used fraudulent Clean Green Fuels RINs to help meet their RVO requirements for 2010. EPA alleged in the NOVs that the RFS2 regulations forbid use of fraudulent RINs “regardless of the person’s good faith belief that the RINs were valid at the time they were acquired.” In the NOVs, EPA advised obligated parties to “exercise due diligence and use caution when conducting RIN transactions” and that “[a]n underlying principle of RIN ownership is still one of ‘buyer beware.’” EPA subsequently pursued settlement discussions with these and other obligated parties who had purchased the RINs generated by Clean Green Fuels and Absolute Fuels.
On March 14, 2012, EPA released an “Interim Enforcement Response Policy,” outlining how the agency would address alleged violations arising from the use of invalid 2010 and 2011 RINs for compliance purposes. The interim policy, among other things, specifies that EPA would be seeking to conclude administrative settlement agreements (ASAs) requiring penalties of $0.10/RIN for every invalid RIN used to meet an RVO and $0.20/RIN for the shortfall (if any) between the company’s RVO and the number of valid RINs used to meet the RVO caused in part by the exclusion of invalid RINs. The executed ASAs addressed alleged violations stemming from both invalid Clean Green Fuels and invalid Absolute Fuels RINs and imposed stipulated penalties ranging from several thousand dollars up to $350,000.
Ongoing Litigation and Enforcement
In addition to the ongoing criminal investigation and enforcement against Clean Green Fuels and Absolute Fuels, the RIN controversy also has spawned an additional level of litigation by some purchasers of the allegedly invalid Clean Green Fuels and Absolute Fuels RINs against upstream traders, middlemen and other companies who sold those RINs. These RIN buyers have pressed breach of contract and other claims against the RIN sellers, alleging that the sellers failed to replace the invalid RINs or reimburse the buyer’s replacement of the RINs as required by contract.
EPA also faces a federal lawsuit filed by RIN trader OceanConnect LLC in March 2012 regarding EPA’s handling of the RIN fraud. In its complaint, OceanConnect seeks to block EPA’s invalidation of fraudulent RINs OceanConnect purchased from Clean Green and Absolute Fuels, alleging that EPA failed to properly oversee the RIN program and de-register or stop those companies sooner before they sold millions of invalid RINs to OceanConnect and others. OceanConnect also requests a declaration that it has no legal liability to third parties to which it sold the roughly $6.7 million in invalidated RINs it purchased from Clean Green Fuels and Absolute Fuels.
Impact
Though the full impact of Clean Green Fuels’ and Absolute Fuels’ alleged RIN fraud continues to unfold with the ongoing enforcement and litigation, EPA has made clear to obligated parties that “buyer beware” continues to be the rule when purchasing and using RINs to satisfy obligations under the RFS2 regulations. Industry continues to take efforts to comply with the program, including considering the additional due diligence that may be necessary to protect parties on all sides while ensuring RIN availability and providing for a flexible RIN market. Furthermore, a task force, which includes representatives from EPA, the biodiesel industry and oil companies, has been formed to develop a framework for eliminating and preventing RIN fraud in the future.
This article was originally published by Bingham McCutchen LLP.