2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE The gentleman’s agreement is obsolete jason thomas frost, PLLC 501.975.0238 jthomas@frostPLLC.com 2011 ABA NATIONAL AGRICULTURAL BANKERS CONFERENCE

INTRODUCTION JASON THOMAS – JTHOMAS@FROSTPLLC.COM 2

THE MORE NOTORIOUS NON-AGRI EXAMPLES JASON THOMAS – JTHOMAS@FROSTPLLC.COM 3

NOTORIOUS EXAMPLES BERNIE EBBERS, CEO, WORLDCOM JASON THOMAS – JTHOMAS@FROSTPLLC.COM 4

NOTORIOUS EXAMPLES KEN LAY, CEO, ENRON JASON THOMAS – JTHOMAS@FROSTPLLC.COM 5

NOTORIOUS EXAMPLES DENNIS KOZLOWSKI, CEO, TYCO JASON THOMAS – JTHOMAS@FROSTPLLC.COM 6

THE GOVT’S ANSWER JASON THOMAS – JTHOMAS@FROSTPLLC.COM 7

THE EASTERN LIVESTOCK DEBACLE JASON THOMAS – JTHOMAS@FROSTPLLC.COM 8

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 9

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 10

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 JASON THOMAS – JTHOMAS@FROSTPLLC.COM 11

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 JASON THOMAS – JTHOMAS@FROSTPLLC.COM 12

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 13

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 JASON THOMAS – JTHOMAS@FROSTPLLC.COM 14

ELC: SCOPE JASON THOMAS – JTHOMAS@FROSTPLLC.COM 15

POST-ELC QUESTIONS OF PRODUCERS JASON THOMAS – JTHOMAS@FROSTPLLC.COM 16

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 17

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 18

A PRODUCER’S CONFLICTING OBJECTIVES JASON THOMAS – JTHOMAS@FROSTPLLC.COM 19

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 JASON THOMAS – JTHOMAS@FROSTPLLC.COM 20

PREVENTION FOR PRODUCERS JASON THOMAS – JTHOMAS@FROSTPLLC.COM 21

SITUATIONAL ELEMENTS OF FRAUD MOTIVE/PRESSURE RATIONALIZATION OPPORTUNITY JASON THOMAS – JTHOMAS@FROSTPLLC.COM 22

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 JASON THOMAS – JTHOMAS@FROSTPLLC.COM 23

AUCTIONS: SOLUTIONS CATTLE PRODUCER STATE GOVT FEDERAL GOVT OKLAHOMA KENTUCKY FEDERAL GOVT USDA/GIPSA JASON THOMAS – JTHOMAS@FROSTPLLC.COM 24

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 25

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 26

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 27

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 28

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 29

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 30

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

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. JASON THOMAS – JTHOMAS@FROSTPLLC.COM 32

JASON THOMAS FROST, PLLC 501.975.0238 JTHOMAS@FROSTPLLC.COM JASON THOMAS – JTHOMAS@FROSTPLLC.COM 33