Coal Fraud: Undermining a Vi~Al Resource '
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If you have issues viewing or accessing this file, please contact..-._- us at NCJRS.gov. ---_ - - ----- . ---- \ r . ',-. ~ .... -i 0# • D '. • Pennsylvania Crime Commission oalFraud: Undermining a VitolResource ~ ~ I • VlSg February 1985 COMMONWEALTH OF PENNSYLVANIA /1 v ~ 7 3 PeJl1l1l1syl~~llrnia Crime Commission Coal Fraud: Undermining a Vi~al Resource '-- 110973 u.s. Department of Justice National Institute of Justice This document has been reproduced exactly as received from the person or organization originating it. Points of view or opinions stated in this document are those of the authors and do not necessarily represent the official position or policies of the National Institute of Justice. Permission to reproduce this copyrighted material has been granted by Pennsylvania Crime Commission \ to the National Criminal Justice Reference Service (NCJRS). Further reproduction outside of the NCJRS system requires permis sion of the copyright owner. ISBN 0-8182-0000-6 Printed in the Commonwealth of Pennsylvania 1100 E. Hector Street Conshohocken, Fa., 19428 215-834-1164 Introduction. .. 5 Coal For Korea: Anything Goes. .. 9 Coal Tax Shelters: Mining Investors, Not Coal .. 33 Corporate Looting: Pocketing the Profits ...... 51 Heavy Equipment Theft .................... 69 Bank Theft .............................. 69 2 Pennsylvania Crime Commission Charles F. Scarlata, Esq., Chairman Alvin B. Lewis Jr., Esq., Commissioner Thomas F. Lamb, Esq., Commissioner Dean Wm Roach, Commissioner Trevor Edwards, Esq., Commissioner Wallace P. Hay, Executive Director Frank R. Booth, Assistant Director for Investigations Willie C. Byrd, Special Agent-In Charge, Conshohocken Christopher J. DeCree, Special Agent-In-Charge, Pittsburgh William J. Fry, III, Special Agent-In Charge, Harrisburg George R. Van Durick, Special Agent-In-Charge, Scranton Carl P. Brown, Director of Intelli gence Gino L. Lazzari, Inspector of Field Operations Wasyl PoIischuk, Assistant Director for Administration Christopher M. Roberts, Special Assistant for Communications Legal: John J. Contino, Esq. Richard L. Schultz Joan Weiner, Esq. Gregory C. Smith Paul J. Spear Special Agents: Donna J. Vogel Thomas J. Connor Victor N. DiCicco Intelligence~ John P. Ditmore Carl P. Brown ~~.J~~ Joseph P. Dougherty Nancy B. Checket Daniel S. Fedeanis Sharon A. Rockey Deborah A. Feurer fda~ ~ 19138 William F. Foran Non-Investigative: Stephen B. Hohenwarter Sharon L. Beerman Paul S. James Eileen Commons ~~@tJ@1Vg~NS James F. Kanavy Regina M. McBride Steven R. Keller Margaret A. Millhouse Anthony T. McDonald Nancy S. Monzi Dwight L. McKee Lois Ryals Russell· J. Millhouse Diane L. Schwandt Edward,J. Mokos Deborah J. Smith Gerald D. Rockey Richard W. Williamson 3 Bunco Artists Take to the Coal FieldsoQ Investor Confidence Eroded !' 5 There were two other incentives theft of heavy equipment, loan that spawned investor interest in sharking, narcotics trafficking and coal. They also undoubtedly price fixing. helped open the coal industry's door to the organized criminal. By December of 1977, the problem had become so immense Coal once was king in Pennsyl The first was Ruk 146, adopted that the SEC issued a rare warn vania, a mighty economic force by the U. S. Securities and ing to the American public to be honeycombed in hills and Exchange Commission (SEC) in aware of coal swindles. hollows, providing jobs, 1974 to make qualified private producing prosperity. In its investment offerings easier and Two years later, in a grant heyday, the state's anthracite cheaper by exempting them from application to the federal govern industry alone turned out 100 SEC regIstration. While it accom ment, the founding agencies of a million tons of coal a year and plished its goal, Rule 146 also multi-state strike force to be employed 150,000 men. tended to insulate these offerings known as the Leviticus Project Association noted: But the day came when cheap from scrutiny by the SEC's enforcement arm, much to the and convenient oil and gas took I!lm Criminal elements are delight of coal-country swindlers. its place, and Pennsylvania's coal acquiring substantial interests in industry withered and towns died The second incentive was a series and control of th'~ American coal as the mines shut down. It would of favorable Internal Revenue industry including coal resources, take an event thousands of miles Service (IRS) rulings that enabled mining, and support industries. away to spark coal's comeback. investors to deduct the entire cash IiEJ Througl1 the use of foreign In 1972, the Arab nations and note amount of an investment in a coal mining venture for the coal purchase contracts, these imposed their now famous oil criminal elements are defrauding embargo and a year later America tax year in which the investment was made. foreign purchasers of American had her "energy crisis." Govern coal and bankrupting American ment and industry alike sought This high degree of "leveraging" coal producers. alternative domestic sources of made coal deals attractive tax energy to reduce the United shelters for high tax bracket The Leviticus Project was formed State's dependence on foreign oil. investors. And it made the specifically to investigate and It wasn't long until America had investors reluctant to cooperate prosecute criminals operating in turned to coal, which soon was in with investigators for fear that the Appalachian coal region. It great demand. fraudulent schemes would borrowed its name from the jeopardize past tax deductions and Bible: "Ye shall not steal; neither Domestic electric utility result in major assessments for shall ye deal falsely, nor lie one to companies converted from oil to back taxes. As it turned out, the another." Leviticus 19.11. coal-fired generators and rapidly lion's share of these investors hoarded coal reserves in antici were more interested in tax It received its first federal pation of a miners' strike. Coal savings than they ever were in funding in February of 1980. A mine operators were suddenly coal. month later a New York grand selling coal that had been stock jury returned the first of many piled as unsalable only a few By the spring of 1977, law indictments that would stem from months earlier. Foreign orders for enforcement and regulatory project investigations. U. S. coal also rose sharply. agencies in Alabama, Georgia, and Kentucky had begun investi As of September 30, 1984, In an effort to deal with this gating fraudulent coal investment criminal charges stemming from increasing demand, a variety of schemes and other related crimes. Leviticus-sponsored probes have investment incentives were They soon discovered that most of been brought against 233 developed to hike domestic coal the major criminal activity was defendants. Civil charges have output. They included the interstate in nature. Pennsylvania been brought against 179 individ exemption of long-term coal and other states soon joined in. uals and businesses. production contracts from wage and price controls, the exemption In a short time these state In addition, Leviticus Project of the coal industry from the agencies, induding the Pennsyl members have, as of that date, windfall profits tax, and the vania Crime Commission, were referred approximately $168 government authorization of $750 documenting cases of grand million in suspect investments to million in loan guarantees to coal larceny, securities fraud, tax the Internal Revenue Service. mine operators who opened new fraud, bank fraud, insurance Additional referrals to the IRS mines. fraud, political and business involving between $20 million and corruption, murder, extortion, $40 million have either been made 6 since September 30, 1984, or are appropriate, six coal-producing too often are vented on the expected to be made in the near states and New York formed their worker himself and on his family. future. own strike force. " And while the workers watch their wages and dreams fall apart, the Today, the Leviticus Project, America's "energy crisis," of real perpetrators of the scam-the which still is federally funded, course, is behind us now. And fly-by-night coal operators-count consists of 16 law enforcement coal may not be booming like it their undeserved and illegal and regulatory agencies from was a decade ago. But there is profits. " seven states: Pennsylvania, reason to be cautiously optimistic Alabama, Georgia, Indiana, about the industry's future. Oil Noted James Hooton, executive Kentucky, New York and and natural gas no longer are the director of the state Senate Virginia. The Pennsylvania Crime cheap alternatives they once were. Environmental Resources and Commission is a charter member. Nuclear energy, once so prom Energy Committee, at another ising, has been bogged down by Commission hearing: Other members: heavy fallout from environmental The Alabama Securities activists and corporate decision "If the fraud your (Crime Commission, the Alabama makers who aren't sure which Commission) investigations have Department of Public Safety, the energy path to follow. uncovered goes unchecked, the Birmingham, Ala., Police reputation of the industry as a Department, the Georgia But if coal's future is to be whole could suffer, and our hopes Organized Crime Prevention bright, investor confidence will for future expansion could be Council, the Georgia Bureau of have to be restored. For, unfortu undermined. The industry simply Investigation, the Georgia nately, the criniinals who robbed cannot afford a reputation for Secretary of State's Office, the the coal industry of its money, dishonesty. " Indiana Securities Commission, also soiled its reputation. the Indiana State Police, the Kentucky Division of Securities, There are lending institutions the Kentucky Attorney General's today that consider investments in This anthology was compiled as Office, the Kentucky State Police, coal ventures too risky. And part of the Crime Commission's the New York County District that's understandable considering mandate to report to the Pennsyl Attorney's Office, the Pennsyl that between 1979 and 1984 there vania General Assembly on its vania Securities Commission, the were 116 Pennsylvania coal investigative findings.