THE GENTLEMANS AGREEMENT IS OBSOLETE JASON THOMAS FROST, PLLC 501.975.0238 [email protected] 2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE.

THE GENTLEMAN’S AGREEMENT IS OBSOLETE

JASON THOMASFROST, [email protected]

2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE

2JASON THOMAS – [email protected]

INTRODUCTION


THE MORE NOTORIOUS NON-AGRI EXAMPLES

NOTORIOUS EXAMPLES


BERNIE EBBERS, CEO, WORLDCOM


KEN LAY, CEO, ENRON

NOTORIOUS EXAMPLES


DENNIS KOZLOWSKI, CEO, TYCO

NOTORIOUS EXAMPLES


THE GOVT’S ANSWER


THE EASTERN LIVESTOCK DEBACLE

ELC: GIPSA


THE GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION, OR “GIPSA” IS AN AGENCY OF THE UNITED STATES DEPARTMENT OF AGRICULTURE.

GIPSA’S MISSION IS TO:

“FACILITATE THE MARKETING OF LIVESTOCK, POULTRY, [AND] MEAT .. AND PROMOTE FAIR AND

COMPETITIVE TRADING PRACTICES FOR THE OVERALL BENEFIT OF CONSUMERS AND AMERICAN

AGRICULTURE.”

ELC: OPERATIONS


$875K BOND GIPSA

• GIPSA DIDN’T AUDIT EASTERN LIVESTOCK FOR FIVE YEARS

• EASTERN LIVESTOCK OPERATING AS A LIVESTOCK BROKER DEALER INSTEAD OF AS A STOCKYARD, A REGULATED ENTITY UNDER THE PAKCERS AND STOCKYARDS ACT

ELC: INFLATION OF A/R


$32.5MM LOC

AFFILIATED COS

FICTIOUS CATTLE SALES

• ACCOUNTS RECEIVABLE INCREASE FROM $1.3 BILLION IN 2009 TO $3.9 BILLION IN 2010

• IF IN 2009 ELC CONTROLLED 30 TO 40% OF THE DEALING BUSINESS, A TRIPLING OF ITS SALES WOULD MEAN THAT IT TOOK OVER 100% OF THE MARKET

• NEITHER FACTOR RESULTED IN FIFTH THIRD AUDITING EASTERN LIVESTOCK

ELC: CHECK KITING

12

DRAWS ON $32.5MM LOC BASED ON DAILY BALANCES

NON-FIFTH THIRD BANK ACCOUNT

$20.0MM IN DAILY TRANSFERS

NON-FIFTH THIRD BANK

ACCOUNT


ACCOUNT


ACCOUNT

CHECK KITING

JASON THOMAS – [email protected]

ELC: INCREASED BOND/DEFAULT


$1.15MM BOND GIPSA

• ELC FAILES TO FILE A REQUIRED COMPLIANCE REPORT FOR FISCAL YEAR 2009

• AFTER ELC FILES THE COMPLIANCE REPORT TWO MONTHS LATE GIPSA RAISES BOND REQUIREMEN TO $1.15MM BASED ON AT LEAST TWO DAYS TRADING

• GIPSA RECEIVES FIRST NOTICE OF SLOW PAYMENT IN JANUARY 2010 TRIGGERING AN AUDIT

ELC: FIFTH THIRD’S FREEZE

14

5th3rd FREEZES ELC ACCOUNTS AND

RETURNS CHECKS DRAWN


ACCOUNT


ACCOUNT


ACCOUNT

CATTLE PRODUCERS

$81MM CHECKS RETURNED FOR INSUFFICIENT

FUNDS


ELC: SCOPE



POST-ELC QUESTIONS OF PRODUCERS

QUESTIONS POST-ELC


• HOW DID GIPSA MISS A $129MM BONDING ISSUE?

• WHY DIDN’T THE FIRM CLAIMING TO BE “ONE OF THE LARGEST CATTLE BROKERAGE COMPANIES IN THE UNITED STATES” NOT GARNER MORE ATTENTION FROM GIPSA?

• WHY DID FIFTH THIRD BANK WAIT UNTIL THE MOST OPPORTUNE TIME TO FREEZE THE MONEY, I.E., IN NOVEMBER SUBSEQUENT TO WHEN MOST CATTLE ARE MOVED IN SEPTEMBER, OCTOBER AND NOVEMBER?


• WHY DIDN’T A THREE-FOLD INCREASE IN VOLUME OVER ONE YEAR TRIGGER THE NEED FOR AN AUDIT BY FIFTH THIRD?

• HOW WAS EASTERN LIVESTOCK ABLE TO OPERATE AS A DEALER WHICH RESULTS IN NO TRUST PROVISIONS AND PUTS SECURED CREDITORS AHEAD OF PRODUCERS?

• WHERE DID THE MONEY GO?

• WHERE WILL THE MONEY COME FROM TO COMPENSATE PRODUCERS?

QUESTIONS POST-ELC


A PRODUCER’S CONFLICTING OBJECTIVES

AN INTEGRATED APPROACH

20

MANAGING RISK REQUIRES AN INTEGRATED APPROACH TO BALANCING CONFLICTING

OBJECTIVES

PERSONAL GOALS

RELATIONSHIPSTRUSTHISTORYINDEPENDENCE

BUSINESS GOALS

PROFITSECURITY

LONGEVITYINDEPENDE

NCE


21

PREVENTION FOR PRODUCERS


SITUATIONAL ELEMENTS OF FRAUD

22

MOTIVE/PRESSURE

RATIONALIZATIONOPPORTUNITY


CATEGORIES OF BUSINESS


THE CATTLE PRODUCER VIEWS ITS BUSINESS IN TWO PRIMARY CATEGORIES WHEN REVIEWING WHAT HAPPENED IN THE EASTERN LIVESTOCK DEBACLE. THESE CATEGORIES ARE:

1. DAY-TO-DAY OPERATIONS AND

2. LIVESTOCK AUCTIONS

AUCTIONS: SOLUTIONS


CATTLE PRODUCER

STATE GOVT

• OKLAHOMA• KENTUCKY

FEDERAL GOVT

• USDA/GIPSA

AUCTIONS: ACCEPTED SOLUTIONS


• THE STATES OF OKLAHOMA AND KENTUCKY WERE THE EARLIEST TO RESPOND

• THE PURPOSE OF BOTH STATE’S LEGISLATION IS TO PROTECT THE RIGHTS OF LIVESTOCK OWNERS WHILE NOT INTERRUPTING THE AUCTION PROCESS


• THE STATE LEGISLATION GRANTS A STATUTORY LIEN TO SECURE PAYMENT OF THE SALES PRICE NEGOTIATED BY THE LIVESTOCK OWNER FOR HIS STOCK

• THE SECURED CLAIM ATTACHES TO EITHER (1) THE LIVESTOCK SOLD OR (2) THE PROCEEDS HELD FROM THE RESALE OF LIVESTOCK

• THE STATUTORY LIEN EXISTS ONLY UNTIL THE OWNER OR HIS SALES AGENT (I.E. SALE BARN OR AUCTION) RECEIVES PAYMENT OF THE SALES PRICE; LIEN ACCRUES TO BENEFIT OF OWNER’S SECURED LENDER



CRITICAL COMPONENT OF STATE REGULATION:

STATUTORY LIEN DOES NOT INTERRUPT COMMERCE OR DISCOURAGE THE RESALE OR

SECONDARY PURCHASE OF LIVESTOCK.

IF A BUYER (SUCH AS A BROKER LIKE EASTERN) IMMEDIATELY RESELLS THE LIVESTOCK IN GOOD FAITH, THE LIEN “JUMPS” FROM THE LIVESTOCK AND ATTACHES TO THE PROCEEDS RECEIVED ON THE RESALE OF THE LIVESTOCK.



• REQUIRE LIVESTOCK AUCTIONS TO OPERATE AS REGULATED STOCKYARDS UNDER PACKERS & STOCKYARDS ACT WHICH PUTS PRODUCERS AT FRONT OF LINE IN BANKRUPTCIES.

• SUPPORT THE 2008 FARM BILL REQUIRING GIPSA TO INCREASE PROTECTIONS FOR FARMERS AND RANCHERS UNDER THE PACKERS & STOCKYARDS ACT. AS THE FEDERAL AGENCY CHARGED WITH IMPLEMENTING THE ACT, GIPSA HAS RESPONSIBILITY TO ISSUE REGULATIONS THAT CLARIFY INTENT OF THE ACT FOR THE COURTS.



• GIPSA ISSUED NEW REGULATION THAT TERMINATES A LIVESTOCK TRADER/DEALER’S REGISTRATION IF THE ANNUAL REPORT IS NOT FILED ON A TIMELY BASIS.

• REVIEW AND REVISION OF CURRENT BONDING FORMULAS



• CHANGES TO BONDING FORMULAS RESULTING IN BONDING LEVELS THAT WOULD BE PROHIBITATIVELY EXPENSIVE FOR SMALL LIVESTOCK MARKETS AND DEALERS

• INCREASED REGULATORY OVERSIGHT HINDERING THE AUCTION PROCESS

• PROVING FINANCIAL STATEMENTS TO DEALERS

AUCTIONS: REJECTED SOLUTIONS

DAY-TO-DAY: PROACTIVE SOLUTIONS


CATTLE PRODUCER


• FOCUS: REDUCING COUNTERPARTY RISK

1. BINDING CONTRACTS2. LETTER OF CREDIT3. RECORD RETENTION4. IN WRITING5. COUNTERPARTY FINANCIAL INFORMATION

PROACTIVE STEPS


JASON THOMASFROST, PLLC

[email protected]

THE GENTLEMANS AGREEMENT IS OBSOLETE JASON THOMAS FROST, PLLC 501.975.0238 [email protected] 2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE.

Documents

producers jason thomas

audit slide

obsolete jason thomas

worldcom slide

introduction slide

questions postelc slide

stockyards act slide

auction process slide