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THE GENTLEMANS AGREEMENT IS OBSOLETE JASON THOMAS FROST, PLLC 501.975.0238 2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE.

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Presentation on theme: "THE GENTLEMANS AGREEMENT IS OBSOLETE JASON THOMAS FROST, PLLC 501.975.0238 2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE."— Presentation transcript:

1 THE GENTLEMANS AGREEMENT IS OBSOLETE JASON THOMAS FROST, PLLC ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE

2 2JASON THOMAS – INTRODUCTION

3 3JASON THOMAS – THE MORE NOTORIOUS NON-AGRI EXAMPLES

4 NOTORIOUS EXAMPLES 4JASON THOMAS – BERNIE EBBERS, CEO, WORLDCOM

5 5JASON THOMAS – KEN LAY, CEO, ENRON NOTORIOUS EXAMPLES

6 6JASON THOMAS – DENNIS KOZLOWSKI, CEO, TYCO NOTORIOUS EXAMPLES

7 7JASON THOMAS – THE GOVTS ANSWER

8 8JASON THOMAS – THE EASTERN LIVESTOCK DEBACLE

9 ELC: GIPSA 9JASON THOMAS – THE GRAIN INSPECTION, PACKERS AND STOCKYARDS ADMINISTRATION, OR GIPSA IS AN AGENCY OF THE UNITED STATES DEPARTMENT OF AGRICULTURE. GIPSAS 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.

10 ELC: OPERATIONS 10JASON THOMAS – $875K BOND GIPSA GIPSA DIDNT 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

11 ELC: INFLATION OF A/R 11JASON THOMAS – $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

12 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 CHECK KITING JASON THOMAS –

13 ELC: INCREASED BOND/DEFAULT 13JASON THOMAS – $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

14 ELC: FIFTH THIRDS FREEZE 14 5 th 3 rd FREEZES ELC ACCOUNTS AND RETURNS CHECKS DRAWN NON-FIFTH THIRD BANK ACCOUNT CATTLE PRODUCERS $81MM CHECKS RETURNED FOR INSUFFICIENT FUNDS JASON THOMAS –

15 ELC: SCOPE 15JASON THOMAS –

16 16JASON THOMAS – POST-ELC QUESTIONS OF PRODUCERS

17 QUESTIONS POST-ELC 17JASON THOMAS – HOW DID GIPSA MISS A $129MM BONDING ISSUE? WHY DIDNT 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?

18 18JASON THOMAS – WHY DIDNT 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

19 19JASON THOMAS – A PRODUCERS CONFLICTING OBJECTIVES

20 AN INTEGRATED APPROACH 20 PERSONAL OBJECTIVES BUSINESS OBJECTIVES MANAGING RISK REQUIRES AN INTEGRATED APPROACH TO BALANCING CONFLICTING OBJECTIVES PERSONAL GOALS RELATIONSHIPS TRUST HISTORY INDEPENDENCE BUSINESS GOALS PROFIT SECURITY LONGEVITY INDEPENDENCE JASON THOMAS –

21 21 PREVENTION FOR PRODUCERS JASON THOMAS –

22 SITUATIONAL ELEMENTS OF FRAUD 22 MOTIVE/PRESSURE RATIONALIZATIONOPPORTUNITY JASON THOMAS –

23 CATEGORIES OF BUSINESS 23JASON THOMAS – 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

24 AUCTIONS: SOLUTIONS 24JASON THOMAS – CATTLE PRODUCER STATE GOVT OKLAHOMA KENTUCKY FEDERAL GOVT USDA/GIPSA

25 AUCTIONS: ACCEPTED SOLUTIONS 25JASON THOMAS – THE STATES OF OKLAHOMA AND KENTUCKY WERE THE EARLIEST TO RESPOND THE PURPOSE OF BOTH STATES LEGISLATION IS TO PROTECT THE RIGHTS OF LIVESTOCK OWNERS WHILE NOT INTERRUPTING THE AUCTION PROCESS

26 26JASON THOMAS – 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 OWNERS SECURED LENDER AUCTIONS: ACCEPTED SOLUTIONS

27 27JASON THOMAS – 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. AUCTIONS: ACCEPTED SOLUTIONS

28 28JASON THOMAS – 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. AUCTIONS: ACCEPTED SOLUTIONS

29 29JASON THOMAS – GIPSA ISSUED NEW REGULATION THAT TERMINATES A LIVESTOCK TRADER/DEALERS REGISTRATION IF THE ANNUAL REPORT IS NOT FILED ON A TIMELY BASIS. REVIEW AND REVISION OF CURRENT BONDING FORMULAS AUCTIONS: ACCEPTED SOLUTIONS

30 30JASON THOMAS – 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

31 DAY-TO-DAY: PROACTIVE SOLUTIONS 31JASON THOMAS – LETTER OF CREDIT IN WRITING PARTNER INFO RECORD RETENTION BINDING CONTRACTS CATTLE PRODUCER

32 32JASON THOMAS – FOCUS: REDUCING COUNTERPARTY RISK 1.BINDING CONTRACTS 2.LETTER OF CREDIT 3.RECORD RETENTION 4.IN WRITING 5.COUNTERPARTY FINANCIAL INFORMATION PROACTIVE STEPS

33 33JASON THOMAS – JASON THOMAS FROST, PLLC


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