On October 2, 2024, the Commodities Futures Trading Commission (“CFTC”), the Securities and Exchange Commission (“SEC”), and the United States Attorney’s Office for the Southern District of New York announced parallel enforcement actions relating to alleged fraud by a carbon credit project developer---CQC Impact Investors LLC (“CQC”)---and several former executives. These actions, which are the first enforcement cases involving fraud in the markets for voluntary carbon credits (“VCCs”), allege that CQC and its former executives delivered false, misleading, or inaccurate reports concerning project performance and compliance with emissions methodologies to validation and verification bodies (“VVBs”) and a carbon credit registry.
These enforcement actions confirm the agencies’ continuing focus on environmental fraud and manipulation in the voluntary carbon markets and demonstrate the broad regulatory and criminal exposures faced by those operating in the evolving voluntary carbon credit markets, even when that activity is solely in the cash markets and does not involve derivatives. These matters also highlight the potential benefits of substantial cooperation with the government.
CFTC Settled Actions Against CQC and Its COO - Allegations of Fraud Concerning Project Emissions Reductions
In two settled CFTC actions involving CQC and its COO, Jason Steele, the CFTC found that CQC fraudulently obtained VCCs in connection with CQC’s cookstove and lightbulb replacement projects that CQC claimed reduced greenhouse gas emissions compared to baseline emissions. Specifically, the CFTC alleged that CQC intentionally and repeatedly submitted false and misleading information to VVBs and at least one carbon credit registry regarding the emissions reductions achieved by the cookstove and lightbulb replacement projects to fraudulently increase the number of VCCs generated by the projects. As a result of CQC’s fraudulent representations, the carbon credit registry issued millions more VCCs to CQC than CQC was entitled to receive. CQC then sold a number of these VCCs.
With respect to Steele, the CFTC found that he intentionally participated in the efforts to provide false and misleading information to at least one carbon credit registry and third-party reviewers in order to present a misleading impression of the quality of the cookstove projects and to increase the number of carbon credits a project would produce.
Based on these facts, the CFTC found CQC and Steele in violation of the CEA and regulatory requirements under 17 C.F.R. Part 180. Specifically, CFTC determined:
- CQC and Steele violated CEA Section 6(c)(1) and 17 C.F.R. § 180.1(a)(1)–(3) by intentionally and recklessly engaging in fraud in connection with the contracts of sale of VCCs.
- CQC and Steele violated CEA Sections 9(a)(2) and 6(c)(1)(A) as well as 17 C.F.R. § 180.1(a)(4) by knowingly, and intentionally or recklessly, delivering false, misleading, or inaccurate reports concerning the projects’ performance and compliance with emissions methodologies and verification to third-party VVBs and the carbon credit registry. Such information—which CQC and Steele knew to be false, misleading, or inaccurate—affected the price of the VCCs.
CQC agreed to resolve the matter with the payment of a $1 million civil monetary penalty and a cease and desist order, along with certain undertakings. Specifically, these undertakings include an agreement to: (i) cancel the carbon credits that resulted from the violative conduct; (ii) review training conducted to ensure personnel are complying with relevant methodologies and data reporting; (iii) implement a comprehensive system of testing to ensure all data submitted to carbon registries and VVBs are complete and accurate; and (iv) submit a written report to Commission staff detailing its remediation efforts. The Commission recognized CQC’s substantial cooperation in the investigation, which was reflected in a reduced civil monetary penalty.
Steele in his individual capacity entered into a formal cooperation agreement with the CFTC, admitted the facts set forth in the order, and agreed to resolve the matter with only a cease and desist order and compliance with certain undertakings. No civil monetary penalty was ordered. The agreed undertakings require Steele to provide extensive ongoing cooperation with the CFTC in connection with this matter. As noted below, it was later revealed that Steele had pled guilty to related criminal charges in the SDNY and was cooperating with the government.
CFTC Litigated Action Against CQC’s Former CEO (CFTC v. Newcombe)
In connection with the same underlying facts concerning the VCCs CQC generated for the cookstove project, the CFTC also filed a complaint in the U.S. District Court for the Southern District of New York against former CQC CEO Kenneth Newcombe alleging he participated in and directed the alleged fraud. Among other things, the CFTC alleges that in generating VCCs for CQC’s cookstove projects, Newcombe altered and reported false data regarding how many stoves had been installed, cookstove usage and efficiency, and associated greenhouse gas emissions reductions, and signed various representations that this information was true when it was in fact false. The CFTC seeks civil monetary penalties, disgorgement of ill-gotten gains, restitution, permanent trading and registrations bans, and a permanent injunction against further CEA violations as charged.
SEC Settlement with CQC
In a parallel proceeding related to the same conduct, on October 2, 2024, the SEC also brought a settled action against CQC for a fraudulent securities offering. Specifically, the SEC’s order states that CQC violated Sections 17(a) of the Securities Act, 10(b) of the Exchange Act, and Rule 10b-5, which prohibit fraudulent conduct in the offer, sale, or purchase of securities. In 2022 and 2023 CQC raised $250 million in an equity offering by marketing and disseminating misleading offering materials, financial projections, and due diligence questionnaires that reflected false and manipulated data related to its generation of carbon credits. The order states that CQC deceived investors with respect to its ability to profitably and sustainability generate VCCs. CQC admitted the facts and violations set forth in the order and agreed to resolve the matter with a cease and desist order. The SEC did not impose a penalty in this matter in consideration of CQC’s cooperation with the SEC and the remedial acts CQC promptly undertook.
SDNY Criminal Charges Against CQC and Certain Former Executives
On October 2, 2024, the United States Attorney for the Southern District of New York announced the unsealing of securities fraud, wire fraud, commodities fraud, and conspiracy charges against Newcombe and Tridip Goswami, the former head of CQC’s carbon and sustainability accounting team. The SDNY USAO also announced that Steele had previously, secretly pled guilty to wire fraud conspiracy, commodities fraud conspiracy, and securities fraud conspiracy, and is cooperating with the government in its case against Newcombe and Goswami.
The criminal allegations arise out of the same underlying facts as outlined above. The SDNY’s charges noted that, in August 2021, Goswami reported to Newcombe and Steele that survey data for certain cookstove projects in Malawi and Zambia reflected emission reductions that were only about half of what CQC had anticipated. In response to this disappointing report, Newcombe, Goswami, and Steele decided to “revise” the survey results, ultimately enlisting a person from outside CQC to fill out fraudulent survey forms to reflect the manipulated numbers. CQC then sent the manipulated data to a VCC issuer.
The U.S. Attorney also announced the SDNY’s decision to not bring criminal charges against CQC in light of CQC’s cooperation. Specifically, the U.S. Attorney cited:
- “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 [VCCs] equal to the number of [VCCs] that CQC improperly obtained through the fraudulent scheme.”
Key Takeaways
These groundbreaking enforcement actions come in the wake of the CFTC’s adoption of final guidance on VCC derivative listings. The CFTC’s VCC Derivatives Guidance together with these carbon credit fraud enforcement actions clearly demonstrate the CFTC’s increased focus on oversight of the environmental commodity “spot” markets.
Carbon credit project developers and others active in the broader VCC markets should carefully review these CFTC regulatory and enforcement actions with a focus on the market guidance principles and the required undertakings concerning carbon market calculation methodologies, verification, and data reporting, as well as related employee training. Market participants should consider implementing and/or improving compliance policies, internal monitoring, reporting, and verification procedures for VCCs and related operations. Developers and other market participants should also consider requiring CFTC regulatory training for relevant personnel to ensure compliance with applicable environmental market fraud and manipulation prohibitions.
The SEC action highlights that, despite the recent disbanding of the SEC’s Climate and ESG Task Force, that the SEC remains focused on ESG-related enforcement actions. The U.S. Attorney’s action in SDNY illustrates the potential for regulatory enforcement matters to become criminal under certain circumstances as well as the potential benefits to a company (avoiding prosecution) of timely, voluntary disclosure to the government.
