With the recent announcement of a coordinated action against CQC Impact Investors and its former senior executives, the Department of Justice (DOJ), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) showed that the federal government is serious about fighting fraud in the voluntary carbon market.
The Enforcement Actions
This month, the DOJ unsealed an indictment against Kenneth Newcombe, the former Chief Executive Officer, and Tridip Goswami, the former head of the carbon and sustainability accounting team, charging them with falsifying the data that CQC used to obtain millions of carbon credits. Jason Steele, the former Chief Operating Officer, pled guilty and cooperated with the government.
The CFTC and the SEC filed civil enforcement actions against CQC at the same time.
Carbon Credits and the Voluntary Carbon Market
CQC developed projects to reduce carbon dioxide emissions, earning credits for those reductions. CQC then sold to companies that wanted to reduce their carbon footprint.
To obtain carbon credits, a project developer must quantify the reduction in emissions caused by their projects and submit those results to a third-party reviewer and carbon credit registry. Once verified, the credits are often referred to as verified carbon units (“VCU”) or voluntary carbon credits (“VCC”). Each credit represents one metric ton of removed carbon dioxide.
CQC developed dozens of projects involving the distribution of fuel-efficient stoves in sub-Saharan Africa, Central America, and Southeast Asia. To generate carbon credits, CQC calculated the amount of firewood fuel that the stoves would save, versus more traditional cooking methods, and then the amount of carbon dioxide that would not be released based on the fuel savings. For each metric ton of carbon dioxide not released, CQC received a carbon credit.
The Alleged Carbon Credit Fraud
The indictment alleges that after the stoves were distributed, CQC conducted field surveys to quantify the total amount of emissions reduced by their cookstoves. The surveys showed that the stoves did not reduce emissions as much as CQC claimed and many of the stoves were broken or sat in disuse.
Instead of accurately reporting the survey results, Newcombe, Goswami, and Steele are alleged to have conspired to falsify their data and reported the fraudulent data to a carbon credit registry. As a result, CQC received 6 million carbon credits, worth tens of millions of dollars, that it was not entitled to. Newcombe and Goswami are charged with wire fraud, commodities fraud, and conspiracy to commit those crimes. Steele pled guilty to an information charging wire fraud conspiracy, commodities fraud conspiracy, and securities fraud conspiracy.
The CFTC settled civil charges against CQC and Jason Steele for engaging in fraud in connection with the sale of carbon credits and providing false or misleading reports to the carbon credit registry. Because of CQC’s cooperation, the CFTC fined the company only $1 million. Ian McGinley, the Director of Enforcement, emphasized that the action “exemplifies the value the Division of Enforcement and the CFTC place in substantial cooperation in the division’s investigations and appropriate remediation, as reflected here in a reduction in penalty for CQC.”
The CFTC has meanwhile filed a civil complaint against Newcombe, also alleging fraud in connection with the sale of the carbon credits.
Although the CFTC has recognized carbon credits as commodities, fraud in the voluntary carbon market may implicate areas of concern for other regulators. In this case, the SEC initiated an enforcement action because CQC used the falsified data and carbon credits obtained through fraud to induce a $250 million investment from a private equity fund. CQC avoided a monetary penalty by admitting to engaging in securities fraud and cooperating with the investigation. In recognition of this assistance, the SEC entered a cease-and-desist order but did not impose a fine.
Whistleblowers Uncovered the Fraud
The falsified data was discovered by employees of CQC, who reported the fraud to the Board of Directors. The Board of Directors launched an internal investigation, which confirmed the whistleblowers’ findings. CQC then self-reported to the federal government and cooperated with the ensuing investigations.
As discussed in our prior blog post on the voluntary carbon market, that market is unregulated and there is little transparency surrounding the effectiveness of carbon projects. Whistleblowers are critical to discovering and reporting fraud.
If you know about in the voluntary carbon market and would like to speak to an experienced whistleblower attorney, contact Phillips & Cohen for a free, confidential review of your case.
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