Smog-Credit Trader Under Investigation

The Los Angeles region’s beleaguered smog-credit trading program is under a legal cloud as investigators probe a Pasadena broker that several businesses say cheated them during transactions intended to clean the air.

The South Coast Air Quality Management District, which manages the program, has launched an investigation, although district officials insist there has been no adverse effect on air quality.

The regional office of the U.S. Environmental Protection Agency, which regards the credit-trading program as a potential model for pollution reduction efforts nationwide, is also looking into the matter.

The complaints about the program stem from a market-driven pollution cleanup program set up nine years ago that placed 300 of Southern California’s major polluters into an emissions credit-swapping bloc.

Now, some participants in the program contend in lawsuits that a key middleman in the program defrauded them.

“It’s kind of like disbelief,� said attorney Malcolm C. Weiss of Los Angeles, who represents Aera Energy LLC, which says it lost credits valued at more than $4 million in today’s market. “We entrusted our property to somebody who was supposed to assist the company and apparently has misplaced it or is unwilling to account for the property.�

Commenting on the EPA’s investigation, Jack Broadbent, administrator for air programs in California, said the agency “is clearly concerned about this. There’s enough of these [allegations] that it’s causing us concern, and we’re going to look at this.�

Broadbent added, “We need to decide if the integrity of the program was affected or if there are any air quality implications.�

At stake are millions of dollars in pollution credits, which can be bought and sold in the Regional Clean Air Incentives Market, or RECLAIM. Companies count the credits as assets, and their circulation is crucial to business expansion.

Air quality officials say the program helps stimulate technological innovations and low-cost smog reductions in the most polluted region of the country.

The availability of the credits allows companies that buy them to avoid more costly pollution reduction measures. The credits are sold by firms that have cut their emissions below what is required by law.

The program has been slow to deliver emission reductions, and last summer was sideswiped by the state’s power crisis, which pushed the price of credits beyond the reach of many participating companies.

At the center of the current controversy is Anne Sholtz, a former Caltech economist and an architect of the RECLAIM program who established an Internet-based auction house where buyers and sellers can swap pollution credits.

Sholtz is president of Automated Credit Exchange, which handled about 8% of the pollution-credit exchanges in RECLAIM last year, according to AQMD records.

The exact amount of money in dispute is not clear because the value of the credits fluctuates on the open market. So far this year, a nitrogen oxide pollution credit in Los Angeles trades for an average of $3 per pound, according to the AQMD.

Three businesses that enlisted Sholtz or her company to conduct pollution-credit swaps during the past year charged that they lost millions of dollars in credits. Their allegations are contained in lawsuits filed in Los Angeles and the Bay Area.

In an interview from her Pasadena office, Sholtz said the disputes arose from “a few accounting problems� that have since been corrected with new safeguards. She said she and her company have been honest brokers in the pollution-credit trading market.

“There are allegations that are completely false, and there are things people don’t understand about what was going on, and we showed them what was going on. It’s not as deep or involved as you might think. There’s a lot of stuff floating around out there that’s absolutely false,� Sholtz said.

In one case, InterGen Energy Inc., a Massachusetts-based power producer, says it paid Automated Credit Exchange $4 million to purchase 237 pounds of emissions credits for a power plant proposed near Palm Springs. But the company alleges that Sholtz’s firm did not deliver the credits and broke an agreement to refund all of the money. InterGen filed a lawsuit in October, and in April a U.S. District Court judge in Riverside issued a $4.3-million judgment on behalf of the power company.

Competitor’s Allegations

In court records, attorney Howard Madris of Los Angeles, representing Automated Credit Exchange’s parent company, maintains that InterGen was seeking to put Automated Credit Exchange out of business to benefit a competitor, Coral Energy. Coral, like InterGen, is affiliated with Shell Oil Co., and trades energy credits, making it a “direct competitor� with the exchange, the court documents show.

In another case, San Jose-based Calpine Corp. announced last week that it was restating its earnings for 2001 after it learned that “emissions reduction credits it purchased in 2001 were not available.�

The company said its earnings were reduced by $11.5 million, or 3 cents per share. Officials at Calpine said they sued the Automated Credit Exchange in March, alleging negligence and breach of contract, but settled the case for an undisclosed amount.

The Automated Credit Exchange’s parent company, Delaware-based EonXchange, filed for Chapter 11 bankruptcy protection in May. According to court documents, EonXchange replaced Sholtz & Associates, which was doing business as Automated Credit Exchange. Records indicate that EonXchange is run by three members, including Sholtz and her mother.

The AQMD issued Sholtz a notice of violation in May 2000, alleging that the Automated Credit Exchange “knowingly made� a “false statement� to air-quality officials regarding the purchase price of 106,050 emissions credits for Chevron Corp.

Bob Wyman, one of Sholtz’s attorneys, said the dispute is a misunderstanding over dates when credits transferred. He said in an October 2000 letter that the “allegation is false� and the mistake was “completely inadvertent.�

But the AQMD disagreed and levied a $1,000 fine against Sholtz.

Barry Wallerstein, executive officer for the AQMD, said alleged problems at the Automated Credit Exchange have not harmed air quality.

“Whatever may have gone on here does not affect air quality. We are the keeper of the records, [and] we know precisely how many credits there are, and there are only the amount of credits prescribed under the RECLAIM rules.

“This is simply a matter of an allegation of potential fraud between parties trading credits,� Wallerstein said.

Nevertheless, Wallerstein said the allegations are serious enough that, to ensure the integrity of RECLAIM, the AQMD has launched an investigation.

“We believe that the credit program, from an air quality perspective, has operated properly, but we cannot ensure that there isn’t some fraud at some point in time between parties in terms of financial transactions,� Wallerstein said. “If there are, we will prosecute them under the full extent of the law.�

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Times researcher Tracy Thomas contributed to this report.