THE FAKE FACTORY THAT PUMPED OUT REAL MONEY...(long read)

Making High-Quality Bio-Diesel is hard. Getting paid $100 million To Not

Make It Was Kind of a snap.

The biodiesel factory, a three-story steel skeleton crammed with pipes and valves, squatted on a concrete slab between a railroad track and a field of storage tanks towering over the Houston Ship Channel. Jeffrey Kimes, an engineer for the Environmental Protection Agency, arrived there at 9 a.m. on a muggy Wednesday in August 2011.

He’d come to visit Green Diesel, a company that appeared to be an important contributor to the EPA’s fledgling renewable fuels program, part of an effort to clean the air and lessen U.S. dependence on foreign fuel. In less than three years, Green Diesel had reported producing 50 million gallons of biodiesel. Yet Kimes didn’t know the company. He asked other producers, and they weren’t familiar with Green Diesel either. He thought he ought to see this business for himself.

Kimes, who works out of Denver, was greeted at the Green Diesel facility by a man who said he was the plant manager. He was the only employee there, which was odd. “For a big plant like that, you’re going to need a handful of people at least to run it, maintain it, and monitor the process,” says Kimes, a 21-year EPA veteran. The two toured the grounds, climbing metal stairways and examining the equipment. The place was weirdly still and quiet. Some pipes weren’t connected to anything. Two-story-high biodiesel mixing canisters sat rusting, the fittings on their tops covered in garbage bags secured with duct tape. Kimes started asking questions. “They showed me a log, and from that you could see they hadn’t been producing fuel for a long period of time,” he says.

An attorney for Green Diesel showed up. Kimes asked how he could reconcile the lack of production with what Green Diesel had been telling the EPA. The attorney said he didn’t know, he’d been hired only the day before. “It was obvious what was going on,” Kimes says.

The next day, he appeared at Green Diesel’s office in Houston’s upscale Galleria neighborhood, 15 miles from the plant, hoping to collect production records and other information. Someone stuck him in a conference room. Soon he was on the phone with the lawyer from the day before, who told him not to speak with any more Green Diesel employees.

Kimes went back to Denver and started calling Philip Rivkin, Green Diesel’s founder and chief executive. He wasn’t available. And he never would be. That fall, Rivkin left Houston to live in Spain with his wife, their teenage son, a $270,000 Lamborghini Murcielago Coupe, and a $3.4 million Canadair Challenger jet. A passport Rivkin obtained in Guatemala, where he moved after living for an undetermined period in Spain, shows him with dark hair, a double chin, a lazy eye, and an impassive look. It’s one of the few publicly available photographs of the man. Now serving a 10-year sentence at the federal prison in Bastrop, Texas, Rivkin declined through his lawyer, Jack Zimmermann, to be interviewed for this story. He remains a bit of a mystery. But he is, for now, the king of the latest government playground for con artists. Biodiesel scams are puny compared with Medicare and Social Security fraud. For sheer moxie, though, it’s hard to beat Phil Rivkin.

Rivkin is a short, stocky 51-year-old who grew up in Atlanta, the son of a surgeon. He started Green Diesel in October 2005, two months after President George W. Bush signed legislation creating the Renewable Fuel Standard program. The law directed the EPA to oversee a regulatory regime designed to foster production of alternative transportation fuels, including corn-based ethanol, as well as biodiesel derived from vegetable oils, animal fats, and used cooking grease.

The Green Diesel factory.Courtesy EPA

The statute was a boon to renewable fuel makers—and an irritant to gasoline and diesel refiners—because it required refiners to blend at least 4 billion gallons of ethanol (for gasoline) and biodiesel (for diesel fuel) into their products in 2006, with the amount rising to 7.5 billion gallons by 2012. The program now calls for 36 billion gallons in 2022, with varieties of ethanol representing the bulk of the requirement. Each year, the EPA sets obligations for individual refiners. Most years, ExxonMobil is on the hook to blend the largest amounts of renewables.

How Rivkin made his way into the green fuel business is unclear. A résumé he gave federal investigators said he was vice president at an Atlanta investment company at the age of 18. He doesn’t appear to have graduated from college. Investigators couldn’t confirm his employment at several of the companies listed on his résumé. Public records don’t indicate any past criminal record.

Former Green Diesel employees describe him as a bright man who was fond of boasting about building a $500 million company without any debt. He favored flip phones and loathed the smell of cigarette smoke. Interviewing a job candidate, he might mention that he hadn’t flown commercial in years. He liked to talk about the vintage photographs and fine Bordeaux wines he collected. He also had a temper—and a tendency to express frustration in ALL CAPS e-mails, former employees say.

“He always considered himself the smartest guy in the room,” says Ken Columbia, who worked for Rivkin for 11 months exporting renewable fuels made by other companies. (Rivkin ran multiple businesses out of his offices, buying and selling various fuels in the U.S. and Europe; Columbia wasn’t involved in the crimes that landed Rivkin in prison.) Columbia says his old boss “believed he had an answer for everything and he would never get in trouble.”

Making biodiesel is simple enough that high school students do it in chemistry class. In a process called transesterification, producers use a chemical catalyst such as methanol to separate methyl esters—the scientific name for biodiesel—from glycerin in such feedstocks as poultry fat. (The leftover glycerin can be used to make soap.) Rivkin designed his plant as a system of interwoven tubes that would churn out biodiesel 24 hours a day and be more efficient than conventional plants. He imported equipment from a company in India and reassembled it on land he leased from Westway Terminals, a bulk liquid storage provider that offered the ability to pipe ingredients into the plant and move finished product into storage tanks for shipping out. He kept a miniature, stainless-steel working model of it in his office. “I could put vegetable oil through it and get a cup of the most beautiful biodiesel you ever saw,” Harvey Greenwood, Green Diesel’s former director for engineering, says of the model.

The methodology never translated to the full-size factory, however. In late 2008, Green Diesel produced a batch of about 130,000 gallons of biodiesel—the last it ever made, EPA investigators say. The quality was too poor for commercial sale, and Rivkin never figured out how to remedy that. Thus the disabled plant Kimes would discover in 2011.

Fortunately for Rivkin, the government had provided an appealing alternative to the hassle of making fuel. Per EPA rules, each gallon of ethanol or biodiesel produced is assigned a 38-digit number—a renewable identification number, or RIN—that travels with the product as it moves from producer to refiner to end user. Ethanol RINs generally remain fixed to their respective gallons throughout the process. But the EPA allows biodiesel makers to strip RINs off their product and sell them separately as tradable credits. Refiners who fall short of blending the statutory minimum of biodiesel into their refined products must buy RINs to make up the difference or pay penalties.

These credits have become their own sort of currency. In theory RINs are as tradable as hog futures, but there’s no formal market used by traders. Swaps are usually agreed upon between companies, traders, and brokers via e-mail, phone, texts, and chat-room messages. Prices for biodiesel RINs in their early years fluctuated from 40¢ apiece to as much as $1.98 at one point during 2011, according to Bloomberg data. In the past three years, the price for a RIN has bounced from $1.98 in September 2013 to 57¢ one year later to $1.04 as of July 11.

In the early going, sellers sent the EPA spreadsheets listing RINs sold, strictly for record keeping. Skeptics wondered whether this system would work in the real world. Michael Hubbard, a former EPA special agent for criminal enforcement in Boston, says, “Folks like me would sit in the room with senior leadership, and they’d be saying people are going to self-report, and we would be rolling our eyes.”

All an unscrupulous biofuel trader really needed in the early RIN years was a talent for Microsoft Excel. Over a phone or a computer, he’d negotiate with a refining company or a third-party broker to sell RINs at an agreed-upon price. Then he’d generate some numbers, send them over, and get paid. No fuel exchanged hands. And the onus was on buyers to make sure the numbers were associated with gallons of actual fuel; if the RINs proved fraudulent, the holder had to purchase new credits to replace phony ones. A man named Rodney Hailey sold $9 million in counterfeit RINs from his Maryland garage without even trying to make biodiesel. When EPA inspectors wanted to visit the plant he didn’t have, he told them he had recently removed all the equipment and sold it. When they asked who the buyer was, he said he couldn’t remember. He did send pictures of the plant before it was dismantled—but those turned out to be images he’d found on the internet. He was convicted in June 2012 of selling fraudulent RINs and is serving a 12 ½-year prison sentence.

In February 2009, shortly after Green Diesel produced its last fuel, Rivkin registered a user ID, PRIVKIN2, and an e-mail, pjr@dollarbill.net, with the EPA. Nine months later he reported that Green Diesel had produced 22.1 million gallons of biodiesel. The next year, the EPA began phasing in an electronic system for reporting RIN trades. From October 2010 through July 2011, Rivkin logged into the tracking platform at least 25 times and laid claim to more than 45 million RINs, the federal criminal complaint said. During the same period, he sold $48.5 million in sham RINs.

Federal investigators think Rivkin stopped dealing RINs sometime in late 2011, though some of his falsified numbers were still being traded by others months later. In return for the hollow credits, ConocoPhillips paid Green Diesel $18 million, according to court documents. Shell got stung for $14.4 million, BP for $13.6 million, Marathon Oil for $12.4 million, Exxon $1.2 million. All these companies also were forced to buy new RINs to replace Rivkin’s phony ones.

It isn’t hard to see how Rivkin was able to snooker Fortune 100 companies. To them, Green Diesel—or some equally innocuous broker that had bought RINs from it—was merely an entry on a computer offering to make a problem go away. The refiners needed RINs, Rivkin was selling, and the price was trifling. In 2011, BP had revenue of $375.5 billion. The $13.6 million it paid Rivkin represented 19 minutes’ worth.

 

“I was expecting a raid any day,” says a consultant who worked for Rivkin. “We were kind of looking forward to it”

On the Friday evening after Kimes visited his office, Rivkin summoned police to his home, a six-bedroom Mediterranean in Houston’s Royal Oaks neighborhood. He told them that two men dressed in ninja-like apparel had broken in and held him and his wife, Thida Aung Rivkin, at gunpoint. A Houston Police Department report says the men stole smartphones, credit cards, $900,000 in jewels, $200,000 in gold coins, and a $168,000 Bentley.

Rivkin’s then-assistant, Angela Hall, saw him the next day. “He was very shaken,” she says. He told her he no longer felt safe in Houston. A few weeks later, Hall accompanied Rivkin to Geneva for meetings with bankers. He also looked at houses for sale there, she says. Again in November, she helped him house-shop in Barcelona, where he was attending an industry conference. After Hall returned to Texas, she says, “I never saw him again.”

To federal investigators, the home invasion looked like a ruse. No one was ever arrested. The Bentley and a single diamond reappeared soon after the supposed burglary (the Bentley a few blocks from his home, undamaged), but the other loot was never found. “It’s a lot easier to make a coin collection disappear than a Bentley,” says Lea Bauer, a senior special agent for the U.S. Secret Service who investigated Green Diesel. “We could not determine whether the burglary legitimately happened.”

Photo illustration by 731; Photos: Getty Images (2)

Rivkin was living in Spain when the EPA sent Green Diesel a formal demand for information. It was December 2011. He responded with a pile of falsified documents saying he’d altered his business model and was now importing biodiesel for resale, using a barge listed as HMS 1024. Investigators took to calling it the HMS Pinafore. “It didn’t exist,” says Leslie Lehnert, the U.S. Department of Justice attorney who prosecuted the case.

Rivkin employed about 20 people, including a driver and a jet pilot, but he kept Green Diesel’s financial information to himself. “He’d go into his corner office and shut the door and do his trades,” Columbia says. An unnamed employee cited in court documents told authorities that “money would come in and he would move it out.”

In early 2012, the Internal Revenue Service and the Secret Service joined the investigation. With Rivkin in Spain, Green Diesel was being inundated with payment-demand letters and unpaid-tax notices. “I was expecting a raid any day,” says Martin Brau, a consultant who worked for Rivkin from August 2011 to March 2012. “We were kind of looking forward to it.”

Armed agents from the EPA, IRS, and Secret Service showed up at Green Diesel’s offices the morning of July 24, 2012. With the help of Rivkin’s employees, they spent the day removing computers and boxes of documents. Meantime, the Secret Service’s Bauer was combing through thousands of pages of Green Diesel bank records. It took six months, she says, because Rivkin had churned tens of millions of dollars through dozens of bank accounts.

Bauer noticed a large number of payments to Sotheby’s and other art dealers. She and a colleague did some digging and learned Rivkin had been buying photographs—more than 2,000—at prices as high as $675,000 (for an Alfred Stieglitz portrait of Georgia O’Keeffe). To Bauer, it appeared he was laundering his illegal gains. Another agent, scouring Houston art storage facilities, discovered that Rivkin’s photos had been shipped to Newark, N.J., by truck. Fourteen crates of photos were in New York being readied for a trip to Spain in the summer of 2012 when the Justice Department won a court order to confiscate the cache, estimated at $15.8 million. Rivkin did nothing to stop the seizure. Justice told a federal judge that Rivkin had enough money stashed abroad that saving the photos “was not worth his time or effort.”

Rivkin was busy, too. According to flight tracking logs kept by aviation company FlightAware, his Challenger jet made stops in the Colorado Rockies, Bermuda, the Bahamas, Portugal, the Dominican Republic, and Toronto from 2012 into 2014. Authorities believe that by late 2013, he was living in Guatemala under the name Felipe Poitan Arriaga and trying to start a biodiesel business there.

Federal agents were watching, as was Houston attorney David Fettner. He’d been appointed by a court to find and seize Rivkin’s property on behalf of commodities trader VicNRG, which had sued Green Diesel and other Rivkin companies for selling it $3.8 million in bogus RINs. “Rivkin left a trail of unhappy people behind him,” he says.

Fettner tracked Rivkin’s jet on FlightAware and made a bid to grab it in Guatemala. But the Challenger was gone by the time he got through legal channels. On June 3, 2014, he took two pilots and two mechanics to Panama. The jet was stowed at a private airport, due to fly out at 8:30 the next morning.

Fettner and his crew showed up early that day. The jet was blocked in by two other aircraft. One of Fettner’s guys bet the locals they couldn’t get the planes out of the way. Fifty bucks later, Fettner was aboard the Challenger, taxiing. A voice on a loudspeaker insisted the plane didn’t have clearance to take off. Fettner’s pilot took off anyway, shouting, “Close that hatch, and let’s get out of here.”

Zimmermann, Rivkin’s attorney, says Fettner stole the plane: “He should have had a mask and gun.” Fettner calls the seizure perfectly legal, because he had a court order to grab Rivkin’s assets. He liked the jet: “It had the Pininfarina leather, like they put into Ferraris,” he says. “Supple leather.”

 

Illustration by 731

Two weeks later, Rivkin boarded a commercial flight from Guatemala to Houston’s George Bush Intercontinental Airport. He’d been expelled from the country after authorities learned about the passport he’d obtained under the assumed Arriaga name.

Unbeknownst to Rivkin, two U.S. Secret Service agents were also on the flight, watching. He looked gaunt and disheveled, with a salt-and-pepper beard and graying hair, when the agents took him into custody upon landing. A grand jury indictment charged him with 68 counts of mail fraud, wire fraud, money laundering, and violating clean-air laws. The government said Rivkin had sold more than 60 million invalid RINs for at least $78 million and illegally claimed an extra $21 million in biofuel tax credits, for a grand total of almost $100 million in criminal gains. That’s close to half the value of the $220 million in biofuel scams uncovered by the EPA since the program started.

Facing the possibility of more than 20 years in prison, Rivkin pleaded guilty to two counts. “If we thought there was a defense, we would have raised a defense,” says Zimmermann. This March, a federal judge sentenced Rivkin to 10 years in prison and ordered him to pay restitution of $87 million. Christie’s started auctioning off his confiscated photo collection. Proceeds will go to Rivkin’s victims.

The EPA says scams involve less than 1 percent of the value of the billions of RINs produced under the program. But the agency, whose traditional expertise is in oil spills and air pollution, has all it can handle with sophisticated financial criminals. It recently sought assistance from the Commodity Futures Trading Commission—which is itself stretched thin because of its responsibilities under Dodd-Frank. Refiners, which have been trying for years to persuade Congress to undo the renewable fuel mandates, are eager to call attention to the EPA’s struggles. “It doesn’t take much to look at the program and see that it’s broken,” says Chet Thompson of the American Fuel and Petrochemical Manufacturers, a Washington-based trade group.

In 2014 the EPA created a “quality assurance program” under which agency-approved third-party auditors validate biodiesel makers and the RINs they generate. Still, many nonaudited suppliers remain. Fresh twists on biofraud keep cropping up, with one new case scheduled for trial next year and two men currently awaiting sentencing in Florida after pleading guilty to money laundering and wire fraud conspiracy. At least three other cases are under investigation. “Things have gotten dramatically more sophisticated,” says Doug Parker, the recently retired director of the EPA’s criminal investigation division. “The agency is adapting, but the fraud losses will grow, in my view.”

Even the hucksters have gotten burned. During the Rivkin investigation, federal agents stumbled over a peculiar link between their target and Rodney Hailey, the Maryland biodiesel felon. In 2009 and 2010, Rivkin bought several batches of bogus RINs from Hailey, for a total of $687,830.

By Mario Parker, Jennifer A. Dlouhy, & Bryan Gruley

—With Brian Louis

original story HERE

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