Eastern Livestock Owes Over $130 Million

How does $130 million disappear?

That seems to be the question looming over the tragic case of Eastern Livestock of New Albany, Indiana, charged by the United States Department of Agriculture with: failure to pay for livestock purchases; failure to pay timely for livestock purchases; and failure to maintain an adequate bond. Investigators and auditors with the Grain, Inspection, Packers, and Stockyards Administration at USDA estimate that Eastern owes more than $130 million to 743 sellers in 30 states, documenting at least $81 million in returned checks already. GIPSA officials are onsite at Eastern assessing the extent of the firm’s malfeasance.

Eastern began issuing unfunded checks to producers for livestock purchased by Eastern in different markets on or around November 3, 2010. Producers affected by the massive dearth of funds available to pay Eastern’s obligations are encouraged to contact the GIPSA Midwestern Regional Office in Des Moines, Iowa for information on available financial protections. Concerns mount, however, as to exactly how producers will be indemnified in a scandal this large.

At issue is the colossal disparity between the size of Eastern’s surety bond and its outstanding obligations. Bonded for a mere $875,000, the debacle at Eastern Livestock comes at a precarious time for GIPSA, already embroiled in a dogfight over an excessively ambitious remake of the agency’s role in regulating livestock markets. Tasked by Congress in the 2008 Farm Bill with examining certain issues in the poultry markets, GIPSA and former trial-lawyer turned agency Administrator J. Dudley Butler instead released a simultaneously vague and insidious proposed rule considered by most mainstream livestock organizations and at least 115 members of Congress to be well beyond the legislation’s intent.

How GIPSA missed a $129 million bonding issue is a question being asked on ranches and in policy circles across the country. While most organizations are waiting for further details before tackling GIPSA’s handling of the issue head-on, private sources tell me high-level policy experts question exactly how the agency allowed Eastern to operate without proper bonding for so long.

The Agency, for its part, started digging into the Eastern muck as early as last January when the firm failed to file a required compliance report for fiscal year 2009. The report, filed nearly two months late, led GIPSA to demand a bond of at least $1.15 million based on the need to bond at least two days worth of transactions. The firm, claiming to be “one of the largest cattle brokerage companies in the United States,” has branch facilities in 11 states and does business across at least half the country, based on USDA information.

GIPSA requested the additional bonding in May of this year, and by mid-June notified the firm that it was in default of that obligation. The agency, as part of its investigation at that time, also noted instances of slow payment for transactions in the first five months of 2010.

According to GIPSA’s Deputy Administrator of the Packers and Stockyards Program Alan Christian at a stakeholder meeting in Washington this week, the failure of Eastern to pay for livestock purchases is one of the largest in the history of GIPSA and the livestock industry. Christian said Eastern, which is 65 percent owned by Tommy Gibson, operates across an extremely large territory, and the situation is further complicated by both the number of buyers and sellers involved and the fact that there are cash and forward contract transactions involved.

In a message sent to its producers members, the National Cattlemen’s Beef Association noted that allegations included in a Temporary Restraining Order filed by Ohio’s Fifth Third Bank included fraud, check kiting, and a possible Ponzi Scheme. In Christian’s stakeholder conference, GIPSA officials noted that USDA notified 754 sellers to-date of their right to file a bond claim. 161 sellers have already filed claims, valued at $3.374 million.

Relative to Eastern’s outstanding obligations, there are no trust provisions for livestock dealers, meaning secured creditors are the first in line. This is compared to Packers & Stockyards Act requirements that put producers at the front of the line in case of default by regulated entities. Accordingly, Deputy Administrator Christian indicated that there are “15 or so” individuals with custodial accounts who would appear to be in severe financial distress or may not have an ability to stay in business as a result of Eastern’s actions.

When asked about GIPSA’s role in insuring Dealer compliance with GIPSA regulations and statutory requirements under the Packers and Stockyards Act, Christian indicated that historically the Agency estimates less than 70 percent compliance with the Compliance regulation triggering the initial inquiry into Eastern’s dealings last January. Additionally, in the spring of this year, GIPSA issued a new regulation that terminates a livestock trader/dealer’s registration if the annual report is not filed on a timely basis, as was the case with Eastern. As such, 100 dealer’s registrations were terminated in 2010, though GIPSA noted that most had left the business. In one notable case, GIPSA worked with the Department of Justice to issue a $30,000 fine to a livestock dealer who did not comply with this annual report requirement as a result of the new regulation.

Just weeks into the Eastern Livestock scandal, the questions outnumber the answers. Where did the money go? Where will the money to compensate effected producers come from? Did GIPSA drop the ball in this situation? And perhaps most importantly, can GIPSA be trusted with the carte blanche regulatory authority it proposed in its controversial proposed rule? With the comment period closing this week, the Agency is under intense scrutiny already. Its handling of the biggest livestock scandal in recent history could be a flashpoint for an already beleaguered regulatory agency.

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About Andy Vance

Grains and Biofuels Editor at Feedstuffs, the weekly newspaper for agribusiness, and resident blogger at BeefProducer.com. If the pen is truly mightier than the sword, I may be the most dangerous man I know...

2 Responses to “Eastern Livestock Owes Over $130 Million”

  1. Good Story Andy! The cattle business seems to have these people pop up who have been playing both sides until they get caught. GIPSA should show its good side on this and put the producers who sold livestock at the top of the list but bankruptcy court, if that’s the way it goes, has it’s own set of rules.

    • It’s a bad situation… Amazing to think how it ever got this out of hand. And you’re right – GIPSA/USDA have a really interesting road ahead of them in how they handle this situation. What’s right/wrong versus a bad budgetary situation for the department could put them into a tight spot.