The Polygamist Accused of Scamming the U.S. Out of $500 Million

"(Bloomberg Businessweek) -- On the afternoon of Aug. 23, 2018, federal agents fanned out across the Salt Lake City airport. They were looking for Jacob Kingston. He was 42, with short, dark hair and a salt-and-pepper beard. According to the IRS, Kingston had defrauded the U.S. government of more than a half-billion dollars, and now he was fleeing to Turkey. The agents feared that if he boarded KLM flight 6026, he’d never come back..Kingston is a member of the Order, the largest Mormon polygamist clan in the U.S. Authorities call it an organized crime group. Concentrated in Salt Lake City, its 10,000 members control more than 100 businesses in the West, including a casino in Southern California and a cattle ranch on the Nevada border. Closer to home, it runs a tactical arms company that specializes in semiautomatic weapons..The government had spent years investigating Kingston and a company he ran called Washakie Renewable Energy LLC, the most successful in the Order’s portfolio. At a plant along the Utah-Idaho border, Washakie made biodiesel that it shipped out on rail cars, but the bulk of its profits came from $1-per-gallon tax credits that the IRS administered. The credits—cash from the government, basically—had made Kingston wealthy. He sat in a suite at Utah Jazz basketball games, hobnobbed with state power brokers, and moved one of his wives, Sally, into a mansion in a leafy Salt Lake suburb..For more than a year, the government had also been probing Kingston’s ties to a man named Lev Dermen. An Armenian immigrant, Dermen sat atop a small oil and gas empire in Southern California with a string of gas stations and truck stops. The feds suspected that Kingston had been running a sophisticated scam for years with Dermen’s help. Evidence that the Environmental Protection Agency obtained suggested that Washakie’s plant didn’t produce the type of biodiesels eligible for tax credits. Yet the company had claimed more than $500 million in credits by allegedly falsifying records, sending diluted loads or tanks of water to co-conspirators, and recirculating the vegetable and animal fats and used cooking oil needed to make biodiesel on ships that shuttled from Panama to Houston. The government also accused Washakie of laundering $134 million to Turkey..At the airport, the agents grew anxious as they saw Sally and her family arrive, according to a source close to the investigation, court records, and an interview with a former Order member. The family split up, entering different security lines. But Kingston was nowhere in sight. Authorities had long feared that he had a mole; more than two years earlier, he’d been tipped off to a raid on his home and business..Now it seemed he’d slipped through their hands..Early Mormons lived the principle of plural marriage as part of their religion, but the practice has been illegal in the state since 1890, driving the fundamentalist sects that keep it alive underground..Many of these clans, such as the Fundamentalist Church of Jesus Christ of Latter-Day Saints (made famous in Jon Krakauer’s book Under the Banner of Heaven) have scattered to the red rock deserts of southern Utah, where they live in isolation in sprawling, dilapidated compounds. The Order is one of the few that stayed in the Salt Lake Valley. For this story, Bloomberg Businessweek talked to 10 former and current Order members, who asked for anonymity to avoid being cut off from family still in the group..Kingston’s great-uncle Elden founded the Order at the height of the Great Depression. With a strong jaw, broad shoulders, and a shock of white hair, Elden claimed to be the “one mighty and strong” predicted by Mormon founder Joseph Smith who, “holding the scepter of power in his hand,” would “set in order the House of God.”.Convinced the Mormon Church had lost its divine authority in renouncing polygamy, Elden persuaded three other families to join him in establishing a sect to restore the kingdom of God. They would live as early Mormons had, observing the law of consecration, signing over all property and future earnings to the Order. They sold their possessions, dressed in blue overalls, and lived out of canvas tents in a town north of Salt Lake. They called it the Home Place..When Elden died in 1948, his brother Ortell became prophet, and the clan grew in size and wealth. Ortell emphasized a doctrine called bleeding the beast. He taught the clan’s women to descend upon state welfare offices with their children and claim to be destitute single mothers, a scheme that would qualify them for welfare programs such as food stamps. (In 1983, Ortell paid the state $250,000 to settle welfare fraud allegations, though he never admitted guilt.).Authorities have alleged that Order members hired accountants to hide profits to avoid taxes; ignored environmental and safety regulations, including at their now-shuttered coal mine in central Utah; and armed themselves, swearing fealty to the prophet above any other man. “I strongly believe they are an organized crime family,” says former Utah Attorney General Mark Shurtleff. (The Kingston clan, which publicly calls itself the Davis County Cooperative Society Inc., has long denied breaking any laws. In response to the Washakie charges, it told CBS in May that it “condemns in the strongest terms fraudulent business practices and stresses that this behavior goes completely against our beliefs and principles.”).To protect the family, the Order abided by certain practices. Children were taught never to talk to outsiders beyond what was necessary. Members avoided banks, which they didn’t trust, and doctors, who could ask for birth certificates or other medical records that would expose the group’s lifestyle. They handled their affairs internally instead of going to the police..By the time Kingston was born in 1976, his uncle Paul was the prophet, and his father, Daniel, was the unofficial No. 2. Kingston’s early life was governed by Order rules known as ABC standards, with an edict for every letter in the alphabet. Two commandments took precedence. One was the rule for “I,” pertaining to “Incomings,” which was a modern interpretation of the law of consecration: Kingston would only work for an Order business, and any money he made would be turned over to the church to build the kingdom of God. This law applied to everyone. Girls and boys as young as 7 worked at the clan’s grocery store or answered phones at the Order’s law office, where Paul often worked. Everyone was paid in scrip, a form of credit that was only redeemable at Order stores. “If the Order doesn’t have it,” the clan taught, “we don’t need it.”.The other was the rule for “O,” corresponding to “Obedience,” which was otherwise known as the law of one above another. Everyone answered to someone—first a father, then up the line to the Numbered Men who ran the Order’s businesses. Paul had the final say in everything, from where you worked to whom you married to what house you lived in..Kingston’s second wife, Julianna Johnson, says that, as a boy, he was quiet and a bit aloof. In the clan’s unofficial caste system, Kingston is near the top; he’s a direct descendant of the group’s second prophet, which connects his bloodline directly to Jesus, she says. While he spent time as a kid doing manual labor at the Order’s ranch and coal mine, Kingston knew that good Order jobs awaited him, as did college..The two married when she was 15. The relationship lasted five years, but Johnson says she and Kingston rarely saw each other. For a time she lived at a coal yard that the Order owned in Salt Lake and, later, at a clan-run hotel. She remembers Kingston spending most of his time with Sally, only showing up now and then after midnight. “It was a strange relationship. It wasn’t even very physical. He was very immature, like joking and teasing,” Johnson says..By the late ’90s, the Order had transformed itself from a small group of families eking out an existence on a communal farm into a conglomerate worth about $150 million, according to a 1998 estimate by Mormon historian D. Michael Quinn. Trucks from its A-1 garbage disposal company were ubiquitous in the Salt Lake Valley, as were signs for its commercial real estate firm, Arrow. The clan opened pawnshops, burger joints, and trailer parks and bought more property in neighboring states..In 2006, not long after Johnson and Kingston split up, Kingston graduated from the University of Utah with a Ph.D. in mechanical engineering. Former Order members say it was about that time that he and his father started talking about building a biodiesel plant on a ranch near Plymouth, Utah, on the Idaho border. Just a year before, Congress had created the Renewable Fuel Standard, which was designed to reduce reliance on foreign oil and cut greenhouse gas emissions. The law mandated that refiners such as Valero Energy Corp. or Exxon Mobil Corp. blend into their products at least 4 billion gallons of renewable fuels, like ethanol and biodiesel, with the number jumping to 7.5 billion gallons by 2012..What was then known as Washakie Ranch was in a perfect spot. Situated at the base of a rugged mountain range, it sat next to a rail line, which would be ideal for shipping in the raw products needed to create biodiesel and shipping out tankers filled with it. “We felt like we were building something that would contribute to the kingdom of God,” says a former Order member who helped build the plant..By 2011, Washakie Renewable Energy billed itself as one of the largest producers of biodiesel in the western U.S. The Order had long operated in the shadows, but Kingston began breaking from tradition. Washakie became a main sponsor of the Jazz, and it paid for ads that ran before movies at an area theater chain. The company also started contributing to local politicians. “It made the prophet uncomfortable, because he didn’t like to draw attention to the Order, but it was seen as a necessary cost of business,” says another former member. “And Washakie was making a lot of money for the family.”.Kingston broke from Order tradition in another way. For decades the family had done business with only blood relatives, even avoiding working with other polygamists. But he partnered with outsiders, and in early 2011 he met Dermen at a conference in Las Vegas, says a source familiar with the investigation..Dermen ran a biodiesel producer called Noil Energy Group Inc. The two became close, according to the government. At a court hearing, IRS special agent Tyler Hatcher said that Kingston “couldn’t make a decision without checking in with Mr. Dermen first.”.They were an odd couple. While Kingston grew up in rural Utah and Nevada, 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 10th grade to work at the family gas station, saving up until he could lease his own pump. He soon owned three stations..Dermen drove in armored vehicles and traveled with security. His lawyer, Mark Geragos, said in court filings that his client had reason to fear for his safety: In July 2016 a gunman ambushed a car that Dermen’s son was in, thinking Derman was the passenger; Dermen’s son wasn’t hit, but the driver was shot five times (he survived). A biodiesel trader who met Dermen the year before says he carried himself with a slightly menacing air. He wore blue alligator shoes, a blue alligator belt, and designer jeans. The clothing “didn’t look like it fit on the guy. It looked like he was playing the part of the big shot,” says the trader, who spoke on condition of anonymity..Dermen told the trader to call him the Lion (lev in Russian). It was a request he made frequently. Then he suggested that they walk to lunch. “It was like straight out of The Godfather,” the trader says. “The table was waiting, everybody had to kiss his alligator shoes.”.In August 2017, a joint Los Angeles Police Department-Homeland Security task force investigating Dermen for alleged biodiesel fraud of his own raided his homes and businesses and seized potential evidence, including his $1.7 million Bugatti Veyron. He eventually got his property back, and the case was closed, says the source close to the investigation..The Renewable Fuel Standard initiative put billions of gallons of biodiesel into the marketplace, but it was also a magnet for cons. Around the time of Dermen’s meeting with the biodiesel trader, the EPA had begun investigating whether Washakie was running an illegal operation..Part of the problem with the program was enforcement. In its early years, registering with the EPA to claim tax credits didn’t even require an inspection. One fraudster in Ohio signed up with pictures of a biodiesel plant that he found online. The EPA also did little to ensure that plants were producing as many gallons as they claimed or testing the quality of the product. “It was a ‘buyer beware’ program,” says Doug Parker, the former head of the agency’s criminal investigations unit. “It was up to the fuel producers to make sure the biofuels they were buying were up to standards.”.Prosecutors allege that Washakie joined other biodiesel producers in a complex fraud. It worked like this: EPA rules dictate that companies such as Washakie can make a pure biodiesel (B100) or buy it and cut it with petroleum (B99). For every gallon of pure product that Washakie made, it could earn at least an additional $2: $1 via a credit and $1 or more for the RIN, or renewable identification number that correlates to that batch. Refiners who fall short of blending the minimum biodiesel into their products can buy RINs as an alternative way to comply with the standard. (Ethanol RINs generally remain affixed to their respective gallons, but the EPA allows biodiesel makers to strip RINs off their product and sell them as tradable credits.).The question is whether Washakie ever produced or bought B100. The government says it often didn’t, instead buying millions of gallons of B99 and falsifying paperwork to make it appear that it was producing the purer variety. Prosecutors say the company hired barges to move B99 from Houston to Panama and back to Houston; it was then transported and sold to Washakie as B100. A former worker says Washakie was fudging paperwork to make it look like it was producing biodiesel. Kingston’s lawyer, Marc Agnifilo, says, “We took credits appropriately on the type and amount of biodiesel that was created.”.In 2015 the EPA claimed that Washakie generated 7 million false RINs for biodiesel it purportedly produced five years earlier. The company paid $3 million to settle the civil case without admitting wrongdoing. The next year, Washakie applied for $644 million in false credits that it never received, prosecutors charge..Still, as more than $500 million in credits rolled in, Kingston began distancing himself from Order leadership, former members say. He told business partners that he wasn’t a polygamist, even though he’d recently taken another wife. Ortell, the second prophet, had prided himself on his frugality, living in a dilapidated shack and bragging that he’d worn the same black shirt every day for a year. Paul wore secondhand suits and kept his office on a grimy downtown side street. But Kingston liked nice cars—a former member recalls him showing up to a family barbecue in a yellow sports car—and didn’t mind spending money on frivolous things, such as gambling in Las Vegas..Kingston’s justification was that if Washakie wanted to play in the big leagues, he had to look the part. He was no longer turning over all of his profits to the church. Washakie was ordering tens of millions of dollars’ worth of biodiesel in a single shipment, and it needed more control over its cash than typical Order businesses, which pooled their money for general use. He bought a $4.5 million mansion in Sandy, Utah, and a $1 million home in Salt Lake, around which he promptly built a wall..Kingston was becoming an international man of business. Now worth hundreds of millions of dollars, he diversified his portfolio, becoming a partner in a chemical company in Turkey and buying a palm oil plant in Kuala Lumpur. Prosecutors allege he used an office at a villa on the Bosporus in Istanbul, where he kept a Mercedes-Benz S-Class in a garage he shared with Dermen. Back home, Kingston bragged that he was friendly with Turkish President Recep Tayyip Erdogan; a former Order member told prosecutors that Kingston had a cellphone video showing a police escort from the airport. Kingston felt so at home in Turkey, he married off one of his sons there, flying in an entourage of family members. The former Order member says there were rumors that he was thinking of buying an island near Turkey where the clan could move if necessary..Early on the morning of Feb. 10, 2016, IRS, EPA, and Homeland Security agents raided Kingston’s Sandy mansion, rustling him and Sally out of bed. Kingston would later describe the raid in a court hearing as a “full tactical seizure” during which he and his family were awoken and held at gunpoint..Across town, agents raided Kingston’s offices, searching for tax and accounting records, bank statements, and other Washakie-related documentation. What they found instead were empty bookshelves and scrubbed hard drives. The clan had been tipped off before the raid by someone inside the government, former members say. One says that children had been sent to the offices to destroy records and that boxes of documents were hidden in members’ homes..In California, Dermen was running into his own problems. Prosecutors were looking at a series of suspicious wire transfers that Kingston and Dermen made to Turkey. Kingston once wired $9 million to a company he owned there—and within about a week, that $9 million was wired to a U.S. company that Dermen ran..The botched raid on Order businesses did little to slow the government’s investigation of Washakie. Kingston knew the government was talking to cooperating witnesses and gathering evidence. The penalty for tax fraud could be severe. By 2017 more than 30 people had been accused of defrauding the IRS in biodiesel tax credit scams. Most had been sentenced to prison, including one person who got 20 years..In January 2017, the government began closing in. It had flipped a Kingston and Dermen associate named Santiago Garcia-Gutierrez. Dermen had introduced Garcia to Kingston, and for a time he worked for Washakie, until he was fired for embezzlement, according to court filings. He would later tell law enforcement that part of his job at Washakie was to give money and favors to Utah politicians..Kingston agreed to meet with Garcia, who promised him he could make the case disappear. They met at the Grand America Hotel, the largest and most opulent in Salt Lake. Garcia, who was working as a government informant to avoid charges connected to reentering the country illegally, told Kingston he could pay off the judges and prosecutors investigating Washakie. Going forward, they agreed to speak in code via text, referring to a Department of Justice official that Garcia said he could bribe as Commissioner Gordon. Kingston would be Batman..A few weeks later, according to texts that the IRS retrieved from Garcia’s phone, Kingston told him about a witness in Miami who was cooperating with the government. He asked Garcia if he could get an enforcer to scare the witness. “Ring the bell of the bird in Miami,” Kingston texted, according to court filings. (Garcia’s lawyer, Victor Sherman, says, “If called as a witness in this case, he will tell the truth and lay out all the facts.”).Growing concerned, prosecutors sent IRS agents to provide 24-hour security to the Miami witness. They also worried that Kingston and Dermen were about to go on the run: The pair had conspired to wire more than $134 million to Turkey, where Kingston’s investments included a company that assumed nonperforming mortgage loans. It also appeared that the pair owned businesses and property together, according to prosecutors. If they made it to Turkey, extradition was unlikely. On Aug. 20, 2018, Kingston bought airline tickets for himself, Sally, and four other family members on Travelocity..When his family showed up at the airport three days later without him, agents watched them at the gate. One former member says Sally and several family members, including Kingston’s son and his son’s wife, boarded the flight. But Kingston was nowhere in sight, and a frantic search ensued. Then a voice came over the plane’s intercom. Kingston had been taken into custody. Any family members on board needed to disembark. The source close to the investigation says that Kingston was apprehended on a sky bridge, getting off a flight from Houston and on his way to the KLM gate..Later that day, agents took Dermen into custody in L.A..Last April, Kingston and Dermen appeared in a courtroom in downtown Salt Lake with Kingston’s brother Isaiah, who’s also been indicted, for a pretrial hearing. They wore prison jumpsuits. Kingston nodded to Sally and his mother, Rachel..Isaiah’s wife, who recently gave birth to the couple’s eighth child, had dressed their kids in their Sunday best—white dress shirts and black pants for the boys, dresses for the girls. Isaiah made eye contact with his kids, smiling warmly whenever they looked at him..Earlier this year prosecutors offered to resolve the case against Kingston by offering a deal that required him to plead guilty and testify against the family, say two people knowledgeable about the matter. He declined and intends to go to trial, they say..The proceedings are scheduled to begin on July 29 and last 10 weeks. Kingston and Isaiah face charges related to filing false claims for fuel tax credits, conspiring to obstruct justice, and witness tampering. Those two, as well as Sally, Rachel, and Dermen, are charged with conspiracy to commit mail fraud and money laundering. All five have pleaded not guilty. Dermen has asked to be tried separately from the Kingstons; Geragos has argued that his client had nothing to do with the Order and wasn’t in on the alleged biodiesel scam..Prosecutors say the case is by far the biggest biodiesel fraud in U.S. history and that Washakie’s tentacles ran throughout the country. They plan to show that the Kingstons were in cahoots with biodiesel producers from Florida to Ohio. Kingston attorney Agnifilo says, “The charges are misguided and stem from cooperators who themselves engaged in illegal conduct and are now implicating Jacob Kingston to secure their own freedom.” Sally’s lawyer declined to comment, and Isaiah’s and Rachel’s lawyers didn’t return calls for comment..On June 17, Kingston’s lawyers asked the judge to bar mention of the Davis County Cooperative Society, the Order, or polygamy. They wrote in a court filing that these references could inflame jurors, “considering how emotionally and politically charged the issue of polygamy is and has been in Utah.”.Meanwhile, the government is worried about witness safety. At an August hearing, prosecutor Leslie Goemaat said bricks had been thrown at the house of one. At the April hearing, prosecutor Rich Rolwing said some witnesses still expressed concern for their well-being. Others said they feared that Dermen will retaliate..Order members who’ve agreed to testify are afraid that doing so will result in excommunication. The clan has “more leverage on their members than the typical person,” says the source familiar with the investigation. “They’re not just holding the person’s life in their hands. They’re holding their salvation and eternal life in their hands.”.One Order member says that the group is praying for Kingston and Isaiah; it’s long been persecuted for its way of life by the mainstream Mormon power structure that runs the state, and this trial is no different. Regardless of what happens with the case, the clan believes, the work of God won’t be slowed, and his kingdom on Earth will be restored..To contact the editor responsible for this story: Bret Begun at bbegun@bloomberg.net.©2019 Bloomberg L.P."

The Polygamist Accused of Scamming the U.S. Out of $500 Million

Last year, federal agents were looking for Jacob Kingston. Kingston had defrauded the U.S. of more than a half-billion dollars.

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The Polygamist Accused of Scamming the U.S. Out of $500 Million

Last year, federal agents were looking for Jacob Kingston. Kingston had defrauded the U.S. of more than a half-billion dollars.

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