OMAHA (DTN) - The receiver investigating Eastern Livestock Company's accounts found invoices that weren't supported by cattle shipment records and that proceeds from some paid invoices were diverted to other entities, according to a report filed by the receiver in Hamilton County, OH, civil court.
The Dec. 20 report also states that Eastern Livestock Company "substantially overstated the value of its assets and its profitability" in information it provided to lenders, which bolsters Fifth Third Bank's accusations that Eastern Livestock inflated its sales figures to obtain a larger line of credit.
The receiver is cooperating with USDA and FBI investigations into Eastern Livestock. "The Receiver has developed a cooperative relationship with these agencies and has allowed them access to corporate headquarters and coordinated the turnover of key documents," the report stated.
Elizabeth Lynch, the receiver, was appointed by Hamilton County court to take over Eastern Livestock's books and business after Fifth Third Bank, the cattle brokerage's primary lender, detected an alleged check kiting scheme and froze Eastern Livestock's accounts.
In court documents, Fifth Third Bank alleged that Eastern Livestock inflated fiscal 2010 sales to $3.9 billion from $1.3 billion the year prior by creating $2.5 billion of transactions with affiliated companies in which no cattle traded hands. The object, the bank alleged, was to increase accounts receivable and thus the cattle brokerage's line of credit. Eastern Livestock defaulted on a $32 million loan with Fifth Third Bank, and the frozen account was $13 million overdrawn.
An issue Lynch found was that some invoices didn't have corresponding shipping records, which supports the bank's argument that the higher sales figures were fictitious. The report also noted Eastern had invoices that represented that cattle were sold when they were really shipped to a third party for feeding, another tactic used to inflate sales figures. She also found instances where customers paid their invoices, but the funds were diverted to other entities, which is the trademark feature of a Ponzi scheme.
The problems also extend into Eastern Livestock's accounting of inventory. "The Receiver has noted that a number of the cattle listed as inventory do not exist and that the realizable value of the inventory is only a fraction of the reported balance." Ownership of some of the existing cattle Eastern Livestock claims as inventory is disputed. The report said on many cases the underlying producer hasn't been paid for the cattle, so therefore Eastern Livestock doesn't own them. "In addition, the company principal and other related parties purportedly own cattle and there is some question as to the ownership of some of the identified cattle."
Eastern Livestock's owner, Thomas Gibson, declined to comment.
The receiver's investigation is ongoing, the report states, but the involuntary bankruptcy proceedings in the Southern District of Indiana federal court will take precedence over the Fifth Third case against Eastern Livestock in Hamilton County, OH, state court, a representative of the receiver's firm, Development Specialists Inc., told DTN. The Ohio proceedings will be delayed until the involuntary bankruptcy is resolved.
Bankruptcy court allowed Lynch to continue to act as a receiver and custodian until a trustee was appointed in the bankruptcy case. The court appointed James A. Knauer, an Indianapolis lawyer who specializes in reorganizations and receiverships, as the trustee on Dec. 27. According to the biography on his law firm's Web site, Knauer has worked on cases involving Ponzi schemes and was appointed receiver of a Cloverdale, IN, ethanol plant.
The Grain Inspection, Packers and Stockyards Administration estimates Eastern shorted more than 740 sellers in 30 states of $130 million, making it one of the largest cattle company failures in history.