1. 2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE
The gentleman’s agreement is obsolete jason thomas frost, PLLC
2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE

2. INTRODUCTION
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3. THE MORE NOTORIOUS NON-AGRI EXAMPLES
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4. NOTORIOUS EXAMPLES BERNIE EBBERS, CEO, WORLDCOM
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5. NOTORIOUS EXAMPLES KEN LAY, CEO, ENRON
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6. NOTORIOUS EXAMPLES DENNIS KOZLOWSKI, CEO, TYCO
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7. THE GOVT’S ANSWER
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8. THE EASTERN LIVESTOCK DEBACLE
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9. 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.”
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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10. ELC: OPERATIONS GIPSA DIDN’T AUDIT EASTERN LIVESTOCK FOR FIVE YEARS
$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
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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11. ELC: INFLATION OF A/R $32.5MM LOC AFFILIATED COS
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
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
FICTIOUS CATTLE SALES
AFFILIATED COS
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12. ELC: CHECK KITING NON-FIFTH THIRD BANK ACCOUNT
DRAWS ON $32.5MM LOC BASED ON DAILY BALANCES
$20.0MM IN
DAILY TRANSFERS
EASTERN HAD A SIGNIFICANT AMOUNT OF UNCOLLECTED FUNDS FROM AND OUTSTANDING CHECKS DUE TO RELATED ENTITIES; THE TYPICAL AMOUNT WAS $14.5 MILLION. BASED ON THESE TRANSACTIONS, EASTERN HAD BEEN MOVING FUNDS BETWEEN VARIOUS ACCOUNTS TO CREATE THE ILLUSION OF BALANCES THAT DID NOT EXIST.
EASTERN ALSO SENT APPROXIMATELY $20.0MM BACK AND FORTH BETWEEN ITS OPERATIONS ACCOUNT AT 5TH 3RD AND ANOTHER ACCOUNT ON A DAILY BASIS. CREATED ARTIFICIAL BALANCES FROM WHICH EASTERN COULD W/DRAW FUNDS.
CHECK KITING
NON-FIFTH THIRD BANK ACCOUNT
NON-FIFTH THIRD BANK ACCOUNT
NON-FIFTH THIRD BANK ACCOUNT
NON-FIFTH THIRD BANK ACCOUNT
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13. 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
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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14. ELC: FIFTH THIRD’S FREEZE
5th3rd FREEZES ELC ACCOUNTS AND RETURNS CHECKS DRAWN
$81MM CHECKS RETURNED FOR INSUFFICIENT FUNDS
NON-FIFTH THIRD BANK ACCOUNT
NON-FIFTH THIRD BANK ACCOUNT
NON-FIFTH THIRD BANK ACCOUNT
CATTLE PRODUCERS
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15. ELC: SCOPE
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16. POST-ELC QUESTIONS OF PRODUCERS
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17. 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?
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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18. QUESTIONS POST-ELC
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?
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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19. A PRODUCER’S CONFLICTING OBJECTIVES
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20. AN INTEGRATED APPROACH
MANAGING RISK REQUIRES AN INTEGRATED APPROACH TO BALANCING CONFLICTING OBJECTIVES
PERSONAL OBJECTIVES
BUSINESS OBJECTIVES
PERSONAL GOALS
RELATIONSHIPS
TRUST
HISTORY
INDEPENDENCE
BUSINESS GOALS
PROFIT
SECURITY
LONGEVITY
INDEPENDENCE
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21. PREVENTION FOR PRODUCERS
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22. SITUATIONAL ELEMENTS OF FRAUD
MOTIVE/PRESSURE
RATIONALIZATION
OPPORTUNITY
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23. 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:
DAY-TO-DAY OPERATIONS AND
LIVESTOCK AUCTIONS
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24. AUCTIONS: SOLUTIONS CATTLE PRODUCER STATE GOVT FEDERAL GOVT
OKLAHOMA
KENTUCKY
FEDERAL GOVT
USDA/GIPSA
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25. 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
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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26. AUCTIONS: ACCEPTED SOLUTIONS
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
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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27. AUCTIONS: ACCEPTED SOLUTIONS
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.
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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28. AUCTIONS: ACCEPTED SOLUTIONS
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.
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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29. AUCTIONS: ACCEPTED SOLUTIONS
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
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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30. AUCTIONS: REJECTED SOLUTIONS
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
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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31. DAY-TO-DAY: PROACTIVE SOLUTIONS
LETTER OF CREDIT
WRITING IN
PARTNER
INFO
RETENTION
RECORD
CONTRACTS
BINDING
CATTLE
PRODUCER
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32. PROACTIVE STEPS FOCUS: REDUCING COUNTERPARTY RISK BINDING CONTRACTS
LETTER OF CREDIT
RECORD RETENTION
IN WRITING
COUNTERPARTY FINANCIAL INFORMATION
EASTERN LIVESTOCK REPORTS SALES TO 5TH 3RD OF $3.9 BILLION COMPARED TO $1.3 BILLION IN THE PRIOR YEAR. $2.5 BILLION OF THE $2.6 BILLION WAS THE RESULT OF TRANSACTIONS WITH AFFILIATED COMPANIES.
WHEN 5TH 3RD CONDUCTED A “SHIP TEST” IN WHICH IT SAMPLED 26 INVOICES, NO SHIPPING DOCUMENTS EXISTED.
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33. JASON THOMAS FROST, PLLC 501.975.0238 JTHOMAS@FROSTPLLC.COM
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