A multimillion-dollar biofuel fraud began with a cowboy hat and a slew of seafood, Jacob Kingston testifies

When Lev Dermen’s private jet landed in Brigham City in January 2012, Jacob Kingston welcomed him with a basket of Armenian fruit and a cowboy hat.

After a tour of Washakie Renewable Energy’s plant in northern Utah, Dermen invited Kingston and his wife to dinner — in Seattle. The couple flew with him.

Before jetting the Kingstons back to Brigham City, Dermen took them to a seafood store.

“He asked if we liked crab and lobster,” Kingston testified Thursday, “and then he bought everything.”

“How much seafood?” federal prosecutor Richard Rolwing asked.

“About 15 boxes.”

Such was the beginning of a business relationship that prosecutors say escalated a fraud that eventually would try to steal $1.1 billion in biofuel tax credits. Kingston received $470 million fraudulently, prosecutors have said, and millions of that was diverted to Dermen.

Thursday was Kingston’s second day on the witness stand. In about 100 minutes of testimony Wednesday, Kingston explained his family history, including growing up in the polygamous Davis County Cooperative Society, and the roots of the fraud, which began two or three years before he met Dermen.

Kingston testified that he and Dermen met in Southern California in December 2011, a few weeks before Dermen visited Utah. Dermen, who then was named Levon Termendzhyan and immigrated from Armenia in 1980, had a chain of gas stations named NOIL Energy.

A few weeks after the Utah visit, Kingston told the jury, he returned to Dermen’s office in Commerce, Calif., and told him about a problem he had. A client in India had backed out of a deal to buy biodiesel from Washakie. The fuel was already in transit, and Kingston worried that the heat and cold of ocean tanker travel had degraded it.

Dermen agreed to purchase the fuel whatever its condition, Kingston said, but wanted to know if there was a way to submit the propellent again for the U.S. government biofuel tax credit program. That would be illegal, Kingston said, and would require that the fuel be shipped from a California rail station called Titan Terminal to Washakie and back to create the illusion of manufacturing new biofuel.

“Then we came up with an idea,” Kingston testified, “to create paperwork showing it went from Titan Terminal to Utah and back.”

Weeks later, Kingston testified, Dermen wanted to do the scam again. India was so far away, the two men decided they would send fuel to and from Panama this time. Ocean tankers took the biofuel to Panama. There, the fuel was relabeled as cooking grease or other biodiesel components, and trucked across Panama because that would generate more documentation than taking the product through that country’s shipping canal, Kingston said. Then the fuel was shipped back to California for the fraud to continue there.

Dermen was compensated for his end of the fraud by Washakie paying him about $1 million in storage and shipping fees for products that did not exist, Kingston testified. One $30,000 check went to Dermen’s son, George Termendzhyan, who was then about 20 years old. The son has not been charged with any crimes.

Kingston testified Dermen also had $600,000 in cash he needed to get rid of. So he sent Kingston and the cash home on the private plane. Washakie’s chief financial officer and Kingston’s brother, Isaiah Kingston, wrote two checks to Dermen covering the amount and delivered them to the pilot before the plane again left Brigham City, Kingston told the jury.

“It took us a long time to use it,” Jacob Kingston said of the currency. “We paid for things in cash.”

Kingston went on to describe more instances in which he and Dermen stole the tax credits. Rolwing placed a few dozen falsified records on projection screens for his witness to explain to the jury.

Jacob Kingston, who has pleaded guilty to 41 charges in the scheme, acknowledged Dermen never falsified applications to the government; Washakie employees did that.

The witness also described how he and Dermen had lunches and dinners with a variety of law enforcement, including a Glendale, Calif., police officer and an Immigration and Customs Enforcement agent, both of whom have since pleaded guilty to corruption charges.

When the IRS audited Washakie in 2012, Kingston testified, Dermen said he had government contacts who could help.

“He called them his boys or his umbrella,” Kingston said.

The audit found some of the fraud and wanted to impose $100 million in penalties against Washakie, he said. When the penalty was reduced to $5 million, Kingston believed Dermen’s umbrella had come through.

The trial is not in session Friday. Rolwing will resume questioning Kingston on Monday.

The defense wants to question Kingston, too.

Defense attorney Mark Geragos, in his opening argument last week, told jurors that Kingston and his family in the polygamous sect have defrauded the government for generations, and Kingston was looking for a way to send the proceeds of his scheme somewhere that sect leaders couldn’t find them.

To keep his mother and legal wife from going to prison, Kingston agreed to plead guilty, Geragos argued to the jury, and to “blame Levon.”

Those two women, Rachel and Sally Kingston, respectively, have pleaded guilty to crimes. So, too, has Isaiah Kingston. All four Kingstons are awaiting sentencing.

Dermen is charged with 10 counts: one count of conspiracy to commit mail fraud, one count of conspiracy to commit money laundering and eight counts of money laundering. He faces up to 180 years in prison.