THE GENTLEMANS AGREEMENT IS OBSOLETE JASON THOMAS FROST, PLLC 501.975.0238 JTHOMAS@FROSTPLLC.COM...

THE GENTLEMAN’S AGREEMENT IS OBSOLETE

JASON THOMASFROST, PLLC501.975.0238JTHOMAS@FROSTPLLC.COM

2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE

2JASON THOMAS – JTHOMAS@FROSTPLLC.COM

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

DRAWS ON $32.5MM LOC BASED ON DAILY BALANCES

NON-FIFTH THIRD BANK ACCOUNT

$20.0MM IN DAILY TRANSFERS

NON-FIFTH THIRD BANK

ACCOUNT

CHECK KITING

JASON THOMAS – JTHOMAS@FROSTPLLC.COM

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

5th3rd FREEZES ELC ACCOUNTS AND

RETURNS CHECKS DRAWN

ACCOUNT

CATTLE PRODUCERS

$81MM CHECKS RETURNED FOR INSUFFICIENT

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

MANAGING RISK REQUIRES AN INTEGRATED APPROACH TO BALANCING CONFLICTING

OBJECTIVES

PERSONAL GOALS

RELATIONSHIPSTRUSTHISTORYINDEPENDENCE

BUSINESS GOALS

PROFITSECURITY

LONGEVITYINDEPENDE

PREVENTION FOR PRODUCERS

SITUATIONAL ELEMENTS OF FRAUD

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

501.975.0238JTHOMAS@FROSTPLLC.COM

THE GENTLEMANS AGREEMENT IS OBSOLETE JASON THOMAS FROST, PLLC 501.975.0238 JTHOMAS@FROSTPLLC.COM...

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