Breaking the smog bank

Aformer Pasadena businesswoman convicted of engineering a fraudulent cap-and-trade pollution credit deal involving millions of dollars and one of the world’s biggest oil companies is at the heart of a congressional inquiry into the government’s latest response to global warming.

Republican Congressmen Joe Barton of Texas, a ranking member of the House Energy and Commerce Committee and one of the Capitol’s leading critics of global warming, and Greg Walden of Oregon, a ranking member of the Oversight and Investigations Subcommittee, want to know more about Anne Masters Sholtz, who in the early 2000s bilked investors out of millions of dollars through her now-defunct Old Pasadena-based companies EonXchange and Automated Credit Exchange.

Sholtz — as the Pasadena Weekly’s Chip Jacobs has reported — ultimately pleaded guilty in Los Angeles federal court in 2005 to one count of wire fraud related to a transaction in which Sholtz represented to New York-based energy trader A.G. Clean Air that Mobil Corp. (now ExxonMobil Corp.) needed a large number of credits to operate in Southern California.

In 2000, Sholtz, as Jacobs reported, convinced A.G. that it could profit by selling approximately $17.5 million in credits to the oil giant through her. A.G. bought from Sholtz $12.5 million in credits that she promised to resell to Mobil. But there was no deal and Sholtz’s supposed contract with Mobil was a “fraudulent document,” federal officials concluded. Jacobs reported that Sholtz paid A.G. $9 million. When the remaining portion went unpaid, A.G. started asking questions.

That was one of six possible counts that Sholtz faced. In her 2003 bankruptcy filing — a year after federal investigators started looking at what was going on and two years before she pleaded guilty to one count of wire fraud — creditors registered between $54 million and $80 million in claims, Jacobs found through records and interviews with victims.

What the two Republican congressmen want to know now is: Where were EPA regulators while Sholtz was operating what amounted to a Ponzi scheme to defraud investors? Further, Barton and Walden are asking why it took so long to sentence Sholtz — three years after she was convicted. The two lawmakers also want to know why much of the proceedings in the Sholtz case were sealed by US District Judge Audrey Collins, and how they can be unsealed. Collins sentenced Sholtz to one year of home detention and five years probation, the longest sentence possible under newly established federal guidelines.

But what Barton — perhaps best known for verbal confrontations with former Vice President Al Gore in 2007 and most recently newly appointed US Energy Secretary and Nobel Prize-winning scientist Stephen Chu over their beliefs that global warming is both real and manmade — and Walden really want to know about in the Sholtz case is the ability of the EPA to adequately regulate such cap-and-trade pollution credit deals.

“We believe this case has great relevance in the context of pending legislation on climate change,” Barton and Walden wrote in a prepared statement issued last week. Walden is also known for battling with Gore, only in his case over Gore’s insistence last month that biomass from federal forests not be considered a renewable energy source in the energy bill being considered by Congress.

“It is important that Congress assess not only whether the EPA has an adequate regulatory regime and surveillance capacity over pollution credit trading, but also whether there are any factors [e.g., resources, legal restrictions] constraining federal law enforcement in combating criminal cap-and-trade fraud.”

During the 1990s, Sholtz was one of few women involved in the newly created world of pollution credit trading. In 1993, the South Coast Air Quality Management District established the Regional Clean Air Incentives Market, or RECLAIM, program, which involved allotting refiners, power plants and other large manufacturers a yearly distribution of credits for their emissions of nitrogen- and sulfur-oxides. Companies that reduced discharges, typically by installing cutting-edge equipment, could sell unused credits to firms that needed them.

Although the only crime Sholtz admitted to in a special deal with prosecutors occurred in 2000, the EPA became a player in the case in 2002, when the SCAQMD notified the agency about complaints from nine companies alleging that Sholtz’s companies had defrauded them of millions of dollars, Jacobs reported.

“With the prosecution seemingly over, there are unanswered questions galore. Why didn’t the government bring charges against her for the Ponzi and international financial schemes uncovered in the investigations? Why also were the accusations of so many other ex-clients excluded?” Jacobs asked at the conclusion of his third and final story for the Weekly about the Sholtz affair.

In a separate letter to EPA Administrator Lisa Jackson, Barton and Walden ask some of the same questions, and a few others. They include:
•    When and how did the EPA come to learn about the allegations against Sholtz of potential criminal misconduct?

•    What are the procedures and mechanisms in place for EPA to ensure the integrity of the RECLAIM program?    

•    How much money was Sholtz alleged to have swindled victims out of in connection with the RECLAIM program?

•    How many EPA criminal investigators were involved in investigating the Sholtz case?

•    How much time and resources does the EPA currently assign to monitoring and detecting fraud in connection with the RECLAIM program?

•    Does the EPA have sufficient authority and resources to monitor and deter fraudulent conduct in the RECLAIM program?

•    Are there any other filed EPA criminal cases involving emissions trading programs, including the RECLAIM program? 

A spokesman for the EPA’s San Francisco office could not be reached for comment. Sholtz’s attorney, Richard Callahan of Pasadena, also could not be reached.

“We are concerned with the difficulties that EPA and other federal authorities have in preventing, investigating and or prosecuting fraud in relatively small pollution-credit-trading markets, and how EPA would help ensure the integrity of a proposed cap-and-trade market that would be enormous in scale,” the congressmen wrote in their May 7 press release.

“Our hope,” Lisa Miller, Republican communications director for the House Committee on Energy and Commerce, wrote in an email, “is that Reps. Barton and Walden are able to get the answers from EPA for which Mr. Jacobs had been searching. It is certainly unusual for such a case to be shrouded in secrecy, with even the sentencing a closed proceeding. That in and of itself is a concern to the congressmen.”

But in addition to satisfying Jacobs’ requests, “Our hope is that Speaker [Nancy] Pelosi and Rep. [Henry] Waxman will think very carefully about implementing economy-wide a scheme that seems to be so easily manipulated,” Miller wrote.