Polygamists admit $512M fraud for fuel-tax credit

Four family members belonging to a Utah polygamist group admitted defrauding the U.S. of $512 million in renewable-fuel tax credits, with the leader saying the mastermind was an Armenian immigrant who owns a small oil and gas empire in Southern California. That businessman now faces trial alone.

The leader, Jacob Kingston, who was the chief executive officer of Washakie Renewable Energy LLC, pleaded guilty July 18 in federal court in Salt Lake City. He said his company falsely claimed that it produced or blended biodiesel fuel to qualify for tax credits. He also admitted laundering more than $100 million in fraud proceeds in Turkey, obstructing justice and tampering with witnesses.

Kingston is a member of the Davis County Cooperative Society, which is known as the Order and is one of the largest Mormon polygamist clans in the U.S. In agreeing to pay back the $512 million, the Kingstons will forfeit their WRE plant along the Utah-Idaho border, dozens of properties in Utah and Turkey, several luxury cars and various bank accounts.

A motorist fills his vehicle with gasoline at a Pilot Travel Center gas station in Cornersville, Tennessee.
A motorist fills his vehicle with gasoline at a Pilot Travel Center gas station in Cornersville, Tennessee U.S., on Monday, Sept. 19, 2016. Photographer: Luke Sharrett/Bloomberg

“We are hoping that he and his family are shown leniency by pleading guilty before trial,” said Marc Agnifilo, a lawyer for Jacob Kingston. “He just wants to get this situation behind him.”

The other Kingston family members who pleaded guilty in the largest biofuel-fraud case ever in the U.S. were Jacob’s brother, Isaiah, the company’s finance chief; his wife, Sally; and his mother, Rachel. In pleading guilty, Jacob Kingston said the fraud began in 2010 but accelerated at the direction of Lev Dermen, who owns a string of California gas stations and truck stops and was indicted with the Kingstons.

“In early to mid-2013, at the direction of Lev Dermen, I began to file false claims in larger and larger amounts,” Jacob Kingston said in court papers. “Dermen not only directed me on what amounts to file for, which would be protected by his ‘umbrella’ of federal law enforcement contacts, but he also agreed that I should use my staff and contacts to create fake business transactions.”

Dermen, who’s been in custody since August, has pleaded not guilty and denies playing any role in the fraud or money laundering. An attorney for Dermen, Mark Geragos, didn’t respond to requests for comment about the guilty pleas.

Dermen had been scheduled to face trial with the Kingstons on July 29. At a hearing on Monday, a judge set a tentative trial date of Aug. 19, court records show.

Trial acquittals

Dermen fled Armenia with his parents and older brother when he was 14, settling in Los Angeles. He dropped out of Hollywood High School in the 10th grade to work at the family gas station, eventually building a prosperous string of businesses. Dermen was previously acquitted at trials accusing him of fuel-excise-tax fraud and assaulting a police officer.

In arguing that Dermen should be locked up pending trial, prosecutors argued that he projected an air of menace that intimidated witnesses. Dermen also drove in armored vehicles and traveled with security. Geragos said in court filings that Dermen needed such protection after a July 2016 incident in which a gunman ambushed a car carrying Dermen’s son, thinking Dermen was the passenger. Dermen’s son wasn’t hit, but the driver was shot five times and survived.

Dermen has frustrated investigators for years. In 2017, a Los Angeles task force suspected him of biodiesel fraud and raided his home and businesses, seizing potential evidence, including his $1.7 million Bugatti Veyron. Geragos persuaded the judge to return what was seized. Prosecutors later ended that investigation as the Utah probe progressed.

In his guilty plea, Jacob Kingston said that Dermen directed him on buying biodiesel that wasn’t eligible for $1-a-gallon tax credits from the Internal Revenue Service or for renewable identification numbers, or RINs, that correlate to fuel batches and can be traded.

Rotating fuel

Kingston admitted he worked with co-conspirators to create fake business transactions to make it appear as though his company produced or purchased fuel that qualified for tax credits or RINs. One such scheme involved rotating at least 100 million gallons of fuel among tanks in Texas, Louisiana and Panama, he said.

With the fraud proceeds, Kingston and Dermen bought property in Belize for a casino and land in Washington State to open a marijuana grow house, Kingston said. Dermen bought a Utah mansion for Kingston, and Kingston bought Dermen the Bugatti, court papers show. Both men owned a lender called SBK Holdings USA, but Dermen controlled it, Kingston said.

Dermen directed Kingston to buy him a luxury house in Huntington Beach, California, transfer $70 million to Turkey for investments, and remain as the nominee owner, court papers show.

“Dermen instructed me to keep some of this money and investments in my name as his ‘white boy’ face of his Turkish investment activities,” Kingston said.

The plea deals cap Jacob Kingston’s prison term at 30 years, Isaiah’s at 20 years, and Sally’s and Rachel’s at 15 years.

Fraud proceeds

In his guilty plea, Isaiah Kingston admitted that he and his brother “cycled” fraud proceeds through at least 10 Order-related businesses and then returned the money to Washakie’s bank accounts by falsely calling them loans or profits.

The 10,000 members of the Order control more than 100 businesses in the West, including a casino in Southern California, a cattle ranch on the Nevada border and a tactical-arms company that specializes in semiautomatic weapons. Prosecutors said the Order had engaged in many crimes through the years, and Bloomberg Businessweek spoke to 10 current and former members in detailing its practices.

“The Order also promotes a practice of ‘bleeding the beast,’ wherein Order members are encouraged to obtain as much money as possible from local, state and federal government agencies for the benefit of the Order, because of the fear that the government will seek to punish them for their way of life,” prosecutors said last month in court papers.

On June 17, Jacob’s lawyers asked the judge to bar any reference at trial to the Order or the practice of polygamy, arguing that it could inflame the jury.

“Even assuming the polygamy evidence was relevant (which it is not), the risk of prejudice is even greater in this case considering how emotionally and politically charged the issue of polygamy is and has been in Utah,” according to the filing.