Smog Credit Trader Held in Fraud Case

The suspect helped design a program to cut pollution. She allegedly used it to steal millions from energy firms.

By Miguel Bustillo and David Rosenzweig
Times Staff Writers

June 17, 2004

Federal authorities arrested an architect of one of Southern California's most ambitious clean air programs Wednesday, culminating an investigation into claims that she defrauded companies of tens of millions of dollars.

Federal agents apprehended Anne Sholtz, a former Caltech economist, at a Monrovia gym after she had left her home in the gated Bradbury community.

A decade ago, Sholtz helped the South Coast Air Quality Management District design a controversial pollution program called the Regional Clean Air Incentives Market, or RECLAIM. It allows more than 300 companies, including some of the region's largest businesses, to trade ''pollution credits'' among one another, while capping the overall amount of unhealthful exhaust they are allowed to emit from their factories and power plants.

The year the program was launched, 1993, Sholtz started a Pasadena-based auction house where companies could buy and sell the pollution credits. Federal prosecutors now allege that she made fraudulent trades and other illegal transactions while acting as a broker in the system she helped establish. According to investigators, the bogus transactions proved costly to dozens of large oil and power companies, including Sempra Energy and Reliant Energy.

Officials of the AQMD insisted that local air quality was not affected.

At a detention hearing in Los Angeles federal court after Sholtz's arrest, Assistant U.S. Atty. William Carter said the 39-year-old suspect ''ran what was essentially an $80-million Ponzi scheme.'' He added, ''We're not saying she pocketed all that money.''

However, Carter told U.S. Magistrate Judge Patrick Walsh that $13 million passed through Sholtz's personal bank account at Wells Fargo during 2002 alone. The magistrate ordered Sholtz held until she can post a $100,000 bond secured by property owned by a sister and brother-in-law in Minnesota.

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Though Sholtz has been living in a $5-million home in Bradbury and her mother in a $4-million house in the same community, the titles to both homes have been transferred to other individuals, Carter noted. He described Sholtz as a ''very manipulative person,'' adept at ''picking up the phone and getting people to give her their money.''

During her bail hearing, Sholtz said she could not afford an attorney and was appointed counsel, Michael Crain, who said he was still learning the case's details. In a 2002 interview with The Times, Sholtz denied allegations that she had engaged in illegal transactions. The accusations were surfacing then in a series of lawsuits by her former corporate clients. She attributed the disputes to ''a few accounting problems'' and said they had been resolved.

According to the criminal complaint against her, Sholtz engaged in a ''scheme to defraud'' numerous companies. In one instance, the complaint states that she misled a New York broker of air pollution credits by falsely stating that Mobil Oil Corp. had agreed to purchase more than $20 million in air credits from the broker through her.

Sholtz faxed the New York broker a copy of the purported contract as proof, but, according to the complaint, investigators with the U.S. Environmental Protection Agency determined that the signatures of the Mobil employees had been forged. One of the employees no longer worked for the company at the time of the contract.

Investigators familiar with the probe said the criminal complaint was expected to grow in coming days to include more allegedly fraudulent transactions involving other companies.

Business groups say ''cap and trade'' programs such as the AQMD's RECLAIM give companies incentives to cut pollution because they can sell their surplus credits for a profit. At the same time, a company that exceeds its emission limits, instead of paying a fine, can buy credits from a firm that has reduced its pollution.

Prosecutors said they believed the case was the first criminal action in the nation involving the trading of air pollution credits, which are now widely swapped like commodities in financial markets around the country. The EPA has touted the AQMD's program as a model for other regional pollution authorities to follow.

But many environmentalists have criticized the programs, saying they are prone to mismanagement and fraud.

''This highlights one of the problems with a pollution trading program. When you are basically buying and selling the right to pollute, it is going to lead to some unsavory people trying to work the system to make money for themselves,'' said Scott Kuhn, an attorney for Communities for a Better Environment, which has sued AQMD alleging mismanagement of the credit trading program.

''When you have all of these credits being traded several times over in New York and Chicago, who is really keeping tabs on all of this?'' Kuhn said

In her capacity as a private businesswoman profiting from a government program she helped design, Sholtz first ran into legal trouble three years ago. Several companies filed lawsuits against her in 2001 and 2002, alleging that she could not account for pollution credits worth millions of dollars, kept their money or charged them for credits she could not produce.

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One company, energy producer Calpine, announced an $11.5-million revision to its earnings in 2002 because it was missing air pollution credits it had been counting on to stay within clean air rules.

''We went to use'' the air pollution credits, ''and they weren't there,'' recalled spokeswoman Katherine Potter.

EonXchange, the parent company of Sholtz's brokerage business, Automated Credit Exchange, filed for bankruptcy protection in 2002. The business was run by three people, including Sholtz and her mother.

Court filings in the Chapter 11 bankruptcy contain millions of dollars of claims by companies that did business with Sholtz. A.G. Clean Air Holdings filed a claim for $12.8 million; Aera Energy was seeking the return of more than $10 million, and Intergen North America said it was owed $4.26 million.

''There are a lot of people that got hurt by this,'' said Malcolm C. Weiss, an attorney for Aera Energy. ''Frankly, my client feels she should see her day in criminal court. Aera feels it was ripped off very badly, and is concerned about what she did not only to the RECLAIM program, but to [the goal of] cleaning the air. We think some awful deeds have occurred.''

After receiving complaints from unhappy clients, the AQMD, which had fined Sholtz for making false statements regarding the price of air pollution credits, began looking into more of her trades. They found numerous ''fishy transactions,'' said Peter Mieras, the district's in-house prosecutor, including cases that appeared to indicate that two different companies believed they had purchased the same set of credits from Sholtz.

Air district officials then notified the criminal branch of the EPA, which launched a full investigation, leading to Sholtz's arrest.

''What we were seeing had all of the earmarks of criminal activity,'' Mieras said. ''The same RECLAIM credits were committed to numerous parties. We found that one party was filing the credits at the same time that another party was filing the credits. That raised a red flag.''