Many producers, truckers and livestock markets have been seriously financially affected, by Eastern's failure, but who is to blame?

Eastern Livestock Company, based in Indiana, bought and sold cattle in 30 US states. Around the beginning of November 2010, it started issuing unfunded cheques to cattle producers and livestock market operators.

It is estimated that Eastern may owe 743 cattle sellers up to $130 million, in addition to disrupting the movement of cattle across the country.

"Looking into the details, there are a number of irregularities concerning Eastern's records," says James Knauer, one of the trustees. "In particular, we are finding that Eastern was purchasing cattle using all sorts of fictitious names, not in the records."

Allie Devine, Vice President and General Counsel, for the Kansas Livestock Association, said that a theme throughout bankruptcies is the selling of bought cattle to "related entities".

Mr Knauer said on his Trustee Blog, http://www.easternlivestockbkinfo.com/trustees-blog.html, that there were cheques for large amounts of money made to Eastern Livestock, signed by someone who had been dead for some time on the date the cheque was issued.

"I think this typifies the type of problem we are up against in investigating this massive fraud," said Mr Knauer.

The investigation began in November, when a livestock seller complained to GIPSA that a payment check received for livestock sold to Eastern had been returned due to insufficient funds.

The National Cattlemen's Beef Association (NCBA) is seeking financial assistance from the US Department of Agriculture (USDA) and the US Small Business Administration (SBA), to aid cattle producers affected by the bankruptcy.

“Hundreds of cattle producers and marketers, through no fault of their own, have been financially harmed by Eastern’s bankruptcy,” NCBA Past President Steve Foglesong said. “We know Eastern may owe more than $130 million to producers and without some short-term financial assistance, in the means of low-interest or government-backed loans, many operations may be forced to shut down or sell off assets to cover costs.”

GIPSA - What Is It? The Grain Inspection, Packers and Stockyards Administration (GIPSA) facilitates the marketing of livestock, poultry, meat, cereals, oilseeds, and related agricultural products, and promotes fair and competitive trading practices for the overall benefit of consumers and American agriculture.

Lack of auditing

Addressing the NCBA Live Cattle Marketing Committee, John Queen, from the South Eastern Livestock Exchange in North Carolina said that the industry had been failed by two entities involved with Eastern Livestock.

The first, he said were the regulators. He said that the Packers and Stockyard Act (PSA/ GIPSA) had committed an oversight.

"Eastern was the largest trader in the country," said Mr Queen. "Yet there is no evidence that they were audited at all in the last five years."

In 2010, Eastern traded $3.9 billion worth of cattle, which is three times the amount traded in 2009. Why, Mr Queen questioned, was an audit not carried out?

He said that as a much smaller business, South Eastern Livestock Exchange, in which Mr Queen is co-owner, has been audited three times in the last two years.

"Is our regulatory authority afraid of challenging the big guys?" he asked. He said that had an audit been carried out, problems would have been recognised a lot earlier on, and this information would have protected a large number of producers.

"If the PSA does not have the ability or competence to carry out frequent audits with large dealers and yards, then independent auditors should be brought in."

Fraud Undetected By Bank

The second entity, which Mr Queen said failed livestock producers, was the Eastern's main lender - Fifth Third Bank.

The bank is seeking to cover its own debt, which will leave little to no options for the 743 sellers who have lost out.

Mr Queen asked why the bank had waited until the last opportune moment to freeze the assets. October to November is one of the busiest times of the year for selling cattle.

"Did the bank wait until they could get the most out of the situation, before they froze assets," Mr Queen asked. "In doing this, the bank did not shed one thought for how Eastern's situation would affect others caught up in the scandal."

Jim Odle, from Superior Livestock Auction said that whilst the fraud that Eastern committed was atrocious, the bank was more or as much in the wrong.

"Banks have software in place to recognise fraud, and a query was raised in 2009, however no investigation or audit was carried out.

"I hope every person out there gets their money from the bank," he said. "As the Fifth Third was as wrong as Eastern."

Bonds

Another issue raised at the meeting, was the value of bonds.

Bonds According to GIPSA, market agencies and dealers must maintain a bond as a measure of protection for livestock sellers against non-payment. The size of the bond is based on the volume of business, generally an average 2 days' business with a minimum of $10,000 bond. Packers whose annual livestock purchases exceed $500,000 are also required to be bonded.

Eastern had a bond amount of $875,000, but with the company owing over $130 million, it is apparent that the bond in place was inadequate to cover Eastern's obligations.

Mr Queen demanded an immediate review of bonding regulations.

Van Dewey, a Managing Director with Rabobank said that Eastern's bond only covered 12 per cent of one days purchases.

Gary Coady from Cline Wood Agency said that dealers who wish to file a claim against a bond, must do so in writing within 60-days from the date of the transaction on which the claim is based.

What can we learn from Eastern?

Whilst the NCBA and other relevant industry bodies are continuing to fight on behalf of those who have lost through Eastern's failure, Ms Devine said that it is imperative for producers and dealers to get a paper contract in place.

The majority of failed transactions have no paperwork to back up sales, which leaves sellers in a horrible predicament.

Mr Dewey said that too much caution can never be taken. "Guys can be solvent today and bankrupt tomorrow."

He recommended that sellers get a letter of credit from buyers as soon as cattle are put onto the truck.

Changing payment methods

Many of the committee agreed that payment methods should be changed to protect sellers.

Sending cheques through the post adds a significant time lag and so intensifies the damage, said Steve Owens, owner of the Joplin Livestock Market.

Jonathan Fox, from Oldfield, Fox and Sarna legal service said that immediate wire transactions were the safest method of payments, as it is highly unlikely they can ever be retracted. However these didn't prove popular amongst traders due to the $50 charge.

Mr Dewey recommended paying through an automatic clearing house (ACH), which is an electronic network for financial transactions.

Conclusion

"Eastern's failure has tested the industry deeper than one could ever imagine," Mr Queen concluded.

The NCBA has said that it is working aggressively with Congress and federal agencies to make relief available to those affected and to ask for a congressional hearing into federal auditing and bonding procedures.

The process is a long one, there is a lot of paperwork to go through and a lot of claims to verify. The bankruptcy claim is no further on that it was three days after the bankruptcy, said Mr Odle.

However, for those who have accrued losses through Eastern or other similar cases, rest assured that the industry is working on your side. And for those continuing to trade cattle, caution is urged.

How cattle traders and other parties can protect themselves against bankruptcy and fraud, will be discussed in more detail at the NCBA summer meeting

 

February 2011