U.S. Attorney Announces Criminal Charges In Multi-Year Fraud Scheme In The Market For Carbon Credits

Damian Williams, the United States Attorney for the Southern District of New York, and James E. Dennehy, the Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of charges against KENNETH NEWCOMBE and TRIDIP GOSWAMI in connection with a scheme to commit fraud in the carbon markets, which resulted in their company, CQC Impact Investors LLC (“CQC”), fraudulently obtaining carbon credits worth tens of millions of dollars and fraudulently securing an investment of over $100 million.

Also announced today was the decision not to bring criminal charges against CQC, despite the alleged conduct of NEWCOMBE and GOSWAMI, in light of CQC’s voluntary and timely self-disclosure of misconduct, full and proactive cooperation, timely and appropriate remediation, and agreement to cancel or void certain VCUs.

Also unsealed today is the guilty plea of Jason Steele in connection with his participation in the conduct.  Steele pled guilty pursuant to an Information before U.S. District Judge Margaret M. Garnett.  Steele is cooperating with the Government.

U.S. Attorney Damian Williams said: “As alleged, Kenneth Newcombe and Tridip Goswami, among others, engaged in a multi-year scheme to fraudulently obtain carbon credits by using manipulated and misleading data. They then sold those credits to unsuspecting buyers in the multi-billion-dollar global market for carbon credits. The alleged actions of the defendants and their co-conspirators risked undermining the integrity of that market, which is an important part of the fight against climate change. Protecting the sanctity and integrity of the financial markets continues to be a cornerstone initiative for this Office, and we will continue to be vigilant in rooting out fraud in the market for carbon credits.”

According to the allegations contained in the Indictment:

The market for carbon credits emerged from an effort to reduce greenhouse gas emissions.  While most carbon credits are created through, and trade in compliance markets, there is also a voluntary carbon market. Voluntary markets revolve around companies and entities that voluntarily set goals to reduce or offset their carbon emissions, often to align with goals from employees or shareholders.  In voluntary markets, the credits are issued by non-governmental organizations, using standards for measuring emission reductions that they develop based on input from market participants, rather than on mandates from governments.  The non-governmental organizations issue voluntary carbon credits to project developers that run projects that reduce emissions or remove greenhouse gases from the atmosphere.

CQC was a for-profit company that ran projects to generate carbon credits—including a type of credit known as a voluntary carbon unit (“VCU”)—by reducing emissions of greenhouse gases. CQC profited by selling VCUs it obtained, often to companies seeking to offset the impact of greenhouse gases they emit in the course of operating their businesses.

One type of project that CQC ran to obtain VCUs involved installing cookstoves in rural Africa and Southeast Asia, among other places (collectively, the “Cookstove Projects”).  The cookstoves, if installed and used properly, were more efficient than the preexisting cooking methods many people in those regions used. To obtain VCUs from its Cookstove Projects, CQC collected data through surveys about, among other things, how much fuel people saved by using CQC’s cookstoves, as opposed to the preexisting cooking methods, and the number of CQC’s stoves that were installed and operational.  That data went into a formula that an issuer of VCUs (“Issuer-1”) used to calculate the emission reductions CQC had achieved and to determine how many VCUs to issue to CQC.

From at least in or about 2021, through 2023, NEWCOMBE, the CEO of CQC, and GOSWAMI, the Head of CQC’s Carbon & Sustainability Accounting Team (“CSAT”), along with others at CQC, including Jason Steele, the company’s Chief Operating Officer, submitted false and misleading data to Issuer-1, tricking Issuer-1 into giving CQC VCUs for emission reductions that, according to Issuer-1’s methodology for calculating such reductions, had not in fact been achieved.

Members of the conspiracy manipulated data to make it appear as if certain of the Cookstove Projects were far more successful in reducing carbon emissions than was actually the case.  For example, in or about August 2021, CQC received survey data for two projects in Malawi and two in Zambia. GOSWAMI reported to NEWCOMBE and Steele that the survey data reflected emission reductions that were only approximately half of what CQC had anticipated. NEWCOMBE responded by writing that “[t]his is a disaster for us.” NEWCOMBE, GOSWAMI, and Steele exchanged emails about possible solutions, and GOSWAMI ultimately informed them that the “[o]nly option left” was “to ‘revise’ the survey results.”  Ultimately, NEWCOMBE, GOSWAMI, and Steele agreed to manipulate the survey data for the Malawi and Zambia projects and enlist a person from outside CQC to fill out fraudulent survey forms to reflect the manipulated numbers. CQC sent the manipulated survey data to Issuer-1 when claiming VCUs for the Malawi and Zambia Projects.

NEWCOMBE, GOSWAMI, and Steele also fraudulently obtained VCUs from Issuer-1 by providing false and misleading information about the number of operational stoves in CQC’s projects. Issuer-1’s methodology for calculating emission reductions was designed to ensure that project developers, such as CQC, would receive VCUs only for stoves that were operational and in use.

Beginning in or around 2020, NEWCOMBE set a new direction for CQC and decided to rapidly and aggressively increase the size of CQC’s Cookstove Projects. CQC’s rapid growth caused significant problems for the quality of its Cookstove Projects.  To meet the targets set by NEWCOMBE, CQC had to rely on partners that did poor work installing stoves; installed stoves in locations that were outside of a project’s scope (e.g., installing stoves in a suburban area, instead of a rural area, because it was easier to meet targets in more populated areas); and sometime claimed to install stoves that they never installed. These logistical issues posed a meaningful problem for the number of VCUs that the company’s projects might generate—if stoves were not installed properly, or at all, it was likely that surveys would show low levels of stoves in operation, which could reduce the number of stoves for which CQC could claim VCUs.

Rather than writing off and not claiming credits for stoves that were missing, broken, or not installed in correct locations, NEWCOMBE, GOSWAMI, and Steele conspired to conceal from Issuer-1 the true extent of problems with CQC’s Cookstove Projects.  One way in which the members of the conspiracy concealed these issues and manipulated survey data about the number of stoves in use was by instituting a practice of having CQC employees rebuild or fix stoves in samples that were missing or broken, then reporting those stoves as operational.

Through this fraud scheme, CQC received millions more VCUs than it otherwise would have, which were worth tens of millions of dollars at then-prevailing prices for VCUs. CQC sold VCUs it had fraudulently obtained to unsuspecting purchasers, who thought they were purchasing VCUs that reflected emission reductions calculated in accordance with Issuer-1’s methodology.

Relying on data about those fraudulently obtained VCUs, NEWCOMBE and others at CQC also deceived an investor (“Investor-1”) into agreeing to invest up to $250 million in CQC. The agreement included Investor-1 purchasing some of NEWCOMBE’s shares in CQC for more than $16 million.

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NEWCOMBE, 77, of Santa Barbara, California, and GOSWAMI, who resides in India, are charged with wire fraud conspiracy, which carries a maximum sentence of 20 years in prison; wire fraud, which carries a maximum sentence of 20 years in prison; commodities fraud conspiracy, which carries a maximum sentence of five years in prison; and commodities fraud, which carries a maximum sentence of 10 years in prison.  NEWCOMBE is also charged with securities fraud conspiracy, which carries a maximum sentence of five years in prison, and securities fraud, which carries a maximum sentence of 20 years in prison.

The maximum potential sentences are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by a judge.

Steele, 47, of Arlington, Virginia, pled guilty earlier today to a three-count Information, which charged him with wire fraud conspiracy, commodities fraud conspiracy, and securities fraud conspiracy for his participation in the fraud scheme.  A sentencing date has not yet been scheduled.

The Office of the United States Attorney for the Southern District of New York has declined prosecution of CQC in connection with the scheme to fraudulently inflate the number of VCUs issued to CQC projects. This decision reflects a careful weighing of factors set forth in the United States Attorneys’ Offices Voluntary Self-Disclosure Policy, https://www.justice.gov/usao-sdny/press-release/file/1569411/dl, and the Principles of Federal Prosecution of Business Organizations, Justice Manual (“J.M.”) § 9-28.300. Those factors include, among others: the voluntary and timely self-disclosure of the misconduct by CQC—specifically, CQC truthfully and completely disclosed all criminal conduct in which officers, employees, and agents of CQC had been engaged promptly after becoming aware of it, which misconduct had not previously been made public and was not already known to the Office or to any component of the Department of Justice; CQC’s full and proactive cooperation in this matter (including its provision of all known relevant facts about the misconduct and information about all of the individuals involved in the misconduct) and agreement to continue to cooperate with the Office’s ongoing investigation and any prosecution that might result in the future from the investigation; CQC’s timely and appropriate remediation, including terminating employees involved in the misconduct and instituting appropriate compliance measures to deter and detect similar misconduct in the future; and CQC’s agreement to cancel or void a number of VCUs equal to the number of VCUs that CQC improperly obtained through the fraudulent scheme.

Mr. Williams praised the outstanding work of the FBI. Mr. Williams further thanked the Commodity Futures Trading Commission and the Securities and Exchange Commission, each of which today filed parallel civil actions.

The case is being prosecuted by the Office’s Securities and Commodities Fraud Task Force and Complex Frauds and Cybercrime Unit. Assistant U.S. Attorneys Thomas Burnett, Nicholas W. Chiuchiolo, and Kevin Mead are in charge of the prosecution.

The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.

A link to the declination letter is here.