Air of Deceit

By Published On: September 4, 2009

By Chip Jacobs Editor's Note: As climate change makes its way back onto the Congressional agenda later this month in the Senate, the prospect of a federal carbon cap-and-trade market moves front and center. California too is advancing its own carbon market. Some experts believe white-collar fraud and manipulation are a certainty if history is any guide. Demonstrating the need for shrewd oversight to keep market-based regulations free of systemic impropriety is the rise-and-fall of a former pollution-broker from Pasadena. Anne Sholtz was an adviser in the early 1990s when the South Coast Air Quality Management District instituted the world’s first smog cap-and-trade market. Today, she’s a convicted felon. Her story-- presented here in two parts over the next two-weeks in shortened version--is a cautionary example for a carbon market. The demise of Anne Sholtz’s old life is evident in the smaller things. It’s there in the GPS-tracking bracelet--standard issue for felons in home detention--looped around her ankle for a year. It’s traceable in her pillow, which rests today in a leased home miles from the $5-million hillside estate that trumpeted her transformation from Caltech economist to business phenom. Where the picture turns as murky as Southern California’s whiskey-brown smog was how Sholtz could deceive the very air-pollution market she helped conceive, and the lessons that holds for keeping financial crooks out of the trillion-dollar, greenhouse-gas trading system that President Obama has proposed as a key to curbing global warming. Last April, a federal court convicted the former Pasadena emissions-broker of fraud relating to a multimillion-dollar deal for credits in Southern California’s novel smog-exchange, known as RECLAIM. Despite pleas that she sock Sholtz with years behind bars, U.S. Central District Court Judge Audrey Collins gave her just a year in home confinement. Fortunate in that courtroom, Sholtz lost plenty outside of it, most notably her chance to build a lucrative pollution-trading business, with access to Obama or Governor Arnold Schwarzenegger as an industry confidante. Those opportunities gone, she now drives her mom’s car instead of a Mercedes and checks in with her probation officer. Her unraveling has been no bonanza for others either. Between criticism over its secretive, mixed-bag prosecution of her and evidence of Sholtz’s role in a scheme to extract millions in overseas U.S. aid with men purporting to be American intelligence and military operatives, the Department of Justice’s Los Angeles office probably wishes she would just fade away. Local smog regulators at the South Coast Air Quality Management District (SCAQMD), whose market-based regulation proved vulnerable to her deceptions, can relate. Trouble is some events are just too big to disappear. And the Sholtz case fits that mold, because it underscores the need for vigorous oversight of environmental markets against nearly inevitable Wall Street-style chicanery. Recently, Sholtz, 44, gave her first public comments in seven years. These days, she’s a freelance auditor examining white-collar fraud (ironically, for the federal court system that processed her case) and proclaims herself “happy” and “debt-free.” Just don’t mistake that resilience for satisfaction. Sholtz said she’s “disappointed” in how prosecutors and bankruptcy officials treated her, and is perplexed why the whistleblower tips she furnished them went apparently un-pursued. “Years ago I was depressed I’d made bad decisions, which led to one disastrous deal and my companies’ unraveling,” she said. “The only reason I’m speaking is because I’m tired of the misperceptions.” If two Republican lawmakers skeptical about Obama’s carbon-cutting plan have their way, her story may capture national attention. This spring, U.S. Representative Joe Barton of Texas and Greg Walden of Oregon demanded the U.S. Environmental Protection Agency provide a welter of information about the Sholtz case to them. “We believe this case has great relevance in the context of the pending legislation on climate change,” Barton and Walden wrote in a May statement. L.A.’s implacable smog problem stood to make Sholtz rich and maybe more influential. A dark-haired woman with wide-set eyes, she grew up the brainy daughter of an aeronautical engineer. Schooled in Minnesota and elsewhere, Sholtz said her aptitude in math and science earned her countless honors and early interest from NASA. It was a job offer teaching economics at Caltech that pulled her from the Midwest. Her timing was superb. The Cold War had just ended and California’s recession was buzz-sawing thousands of jobs. Legislators, lobbyists and boosters, convinced that costly air-quality rules were suffocating manufacturers, saw their chance to emasculate SCAQMD’s power. To neutralize the threat, placate industry, and help the area meet federal Clean Air Act standards, the air district proposed an air pollution cap-and-trade market. Under the now 15-year-old RECLAIM regimen, 332 of the area’s heaviest polluters of oxides of nitrogen and sulfur dioxide are allotted credits based on their aggregate emissions. Companies falling below their cap, typically because they’ve added new pollution controls, can trade unneeded credits for profit to those requiring more than their allotment. So far, there have been 5,170 trades worth $980 million, and SCAQMD leadership contends RECLAIM has met its emission-cutting goals. Trades are made company to company, or through broker-type middlemen. Here’s where symmetry ends. During the RECLAIM design phase, the district solicited technical expertise from lawyers, academics, and others. The Pacific Stock Exchange and Caltech received contracts doing market analyses and Sholtz was on the team. It was there she hobnobbed with SCAQMD staff and there she promoted two concepts of her own. One would’ve deterred fraud by assigning credits identifying numbers so officials could track their movements. The district spurned it. Jack Broadbent administered RECLAIM for the district back then and remembered Sholtz. “She came across in a very professional manner, pretty slick, part advertising, part substance,” said Broadbent, now executive officer of the Bay Area Air Quality Management District. Few seemed as poised to capitalize on RECLAIM as the ever-hustling Midwesterner. While still working out of her apartment and teaching at Caltech, she founded a smog-credit exchange allowing buyers and sellers to arrange favorable deals. Every RECLAIM transaction in this eBay-like auction made her a 3 percent to 6 percent commission. Her company, Automated Credit Exchange, touted itself as the first-ever electronic trading system for pollution credits. Unlike traditional brokerages, Sholtz’s system relied on analytical, NASA space-exploration software to create optimal trades. Industrial heavyweights like Disney, Northrop-Grumman, Chevron and the Los Angeles Department of Water & Power signed up as clients. The trading floor of her company consisted of a solo desktop computer sitting on an oriental rug in an empty room. In February 1996, her firm celebrated auctioning a record 2.4-million RECLAIM credits in a single week. With money and publicity flowing, she appeared destined for the cover of Forbes. There were trips to the United Nations, meetings with Al Gore, and exhilaration for what lay ahead. It was a Horatio-Alger-meets-green-entrepreneur fairytale. Unfortunately, some fairytales end miserably and in 2002 nine of Sholtz’s clients complained to SCAQMD that the fast-riser knowingly had defrauded them in what would become a convoluted bankruptcy of her firms, with claims in the $80 million range. The U. S. EPA was summoned, and its agents zeroed in on one particular transaction involving A.G. Clean Air. It stemmed back to 1999, when Sholtz informed A.G. Clean Air, the New York-based energy trading firm, that then-Mobil Corporation (now Exxon-Mobil) needed to purchase about $17.5-million in RECLAIM credits to operate in the Los Angeles area. Mobil indeed had an option contract with her to acquire those credits, and if A.G. sold them to the oil titan through her, it could make a bundle. Under an agreement with A.G., Sholtz had a contractual obligation to supply the New York trader with enough credits to complete the transaction with Mobil or an equivalent deal. But she was unable to do so. To trick A.G. into believing she could still consummate the deal, Sholtz staged an act, court records show. From November 2000 to April 2002, she emailed and faxed fraudulent sales documents to A.G., including phony invoices showing Mobil owed her about $16 million when in fact it did not. The fakery was intended to stall for time until she could unload A.G.’s credits to someone else besides Mobil and pay A.G. what it could’ve made if the original deal could’ve been completed. Eventually, A.G. caught on to the stonewalling, technically known as “lulling,” and demanded to be paid in full. A.G. and Mobil declined comments. All along Sholtz has insisted that her downfall resulted from her entanglements with a smooth-talking Texas financier named Jimmy Keller. He was on her payroll from 1998 to 2000 before she fired him, and Sholtz said she last spoke with Keller in 2002. (One of her ex-associates said he died several years ago.) Sholtz said it was Keller who committed the credits that could’ve stopped her prosecution by encumbering them in a phony, high-yield investment scheme involving bank notes “I wasn’t panicked--I was angry,” Sholtz said. “I should have just said, ‘I will find a way out,’ and admit I messed up. I could’ve sold my part of the company and learned a big lesson … I didn’t have the courage or maturity to ask for help.” Because SCAQMD regulators were blind originally to what had transpired, Sholtz continued barreling forward. Among other actions, she solicited money from new investors to pay off existing ones in a “Ponzi-type” scheme, Howard Grobstein, the court-appointed bankruptcy trustee, wrote in filed documents. In February 2001, while still misleading A.G., Sholtz assisted the Netherlands in testing its own nitrogen-oxide emissions-trading program. Months later, she tried playing white knight when RECLAIM credit prices soared during the California electricity crisis by offering to stabilize trading through a centralized auction similar to hers. Gov. Gray Davis had ordered power plants statewide to generate electricity however they could, even from high-polluting machinery. Traders and speculators from Texas to New York seized the opportunity, hoarding credits to sell to utilities frantically buying more than their allotment; Reliant Energy alone spent a record $40 million on RECLAIM credits. With RECLAIM nearing meltdown, district brass temporarily pulled utilities from the market. They also spurned Sholtz’s rescue plan. The next year, her companies flopped into bankruptcy, and it got messier. Investors claimed losing retirement accounts, college funds, and nest eggs in the collapse. Multimillion-dollar settlements were cut with two large energy entities, Calpine and Intergen. Her mansion was sold. Where she was once hailed as brilliant, foresighted and charming, she was now portrayed as dishonest and, according to one official, “manipulative.” U.S. EPA agents arrested her at a Monrovia gym in 2004, and Sholtz said she suspected the theatrics of it were meant to intimidate her. The incarceration of a niche celebrity chummy with SCAQMD brass at the Metropolitan Detention Center rattled others, too. Inside local environmental and regulatory circles, feelings of betrayal, fury and anguish swirled. She’d eventually be indicted on six federal counts stemming from the A.G.-Mobil deal. One knowledgeable source said Sholtz lucked out, because federal investigators had turned over to the Justice Department enough evidence for more than 80 counts. Charges filed, the white-collar case seemed to turn invisible, as if the region’s murky air--still the unhealthiest in the nation for ozone and particulate matter--had swallowed it. Four years lapsed from her 2004 arrest to her 2008 sentencing, and even then her punishment warranted no Justice Department press release. The two prosecutors handling the case have steadfastly refused comment for more than 16 months. Adding to the mystery in United States v. Anne Sholtz, many of the key court documents, the transcript of her sentencing hearing among them, remain quarantined by judicial order. Justice Department spokesman Thom Mrozek said one reason is that her case involves “under seal filings” that might signal ongoing investigations into other areas. At her April 2008 sentencing hearing, Sholtz wept and foretold of family harm if she were given hard time. But what mattered to Collins, according to numerous people present that day, was that Sholtz’s companies had paid A.G. so it actually turned a profit in its trade-dealings with her over time, in spite of her misleading actions. (Sholtz estimates that amount at $28 million.) Citing that and other factors, Collins stunned the Justice Department by giving Sholtz a skimpy one-year of home detention as part of her five years of probation, plus a conditional ban on AQMD emissions trading. Even so, environmentalists and others say it’s incumbent on regulators to learn from Sholtz’s crime so it’s not repeated on the bigger carbon stage. “We definitely see [this] fraud as a cautionary tale for the state and the country as we move toward greenhouse gas regulations and potential market mechanisms,” said Bill Magavern, director, Sierra Club California. “In discussions about it, I’ve brought up the fact that there has been outright criminal fraud and I find that most people don’t know about it.” Author’s Note. A full version of this story was first published in the Pasadena Weekly August 20. Chip Jacobs is the author, with William J. Kelly, of Smogtown: the Lung-Burning History of Pollution in Los Angeles. Their blog is Chip can be reached at Edited By:

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