Protect Yourself: Lessons from Grain Elevator Fraud

September 20, 2018 10:37 AM
 
Recent cases of embezzlement, fraud and Ponzi schemes occurring with grain buyers serve as reminders of why farmers should exercise due diligence when working with grain buyers.

Last week the Ashby Farmers Cooperative Elevator Co. abruptly shut down after its board discovered the elevator manager had allegedly siphoned $2 million from the grain elevator. The former manager, Jerry Hennessey, is now on the run and co-op leaders are evaluating the situation, seeking a new owner and exploring the legal ramifications.

Initial investigations show Hennessey had been pocketing funds while inflating grain inventories from the single-location grain co-op for at least a decade. He used the money for hunting trips, taxidermy and paying his personal Cabela’s credit card.

This case resurfaces memories of other similar incidents of embezzlement, fraud and Ponzi schemes occurring with grain buyers. Such as when Missouri grain dealer Cathy Gieseker cheated farmers out of more than $27 million in grain sales back in 2010. Or when Illinois farmer Robert James Printz and Timothy Boerma, a former manager of Towanda Grain Company, defrauded the central Illinois elevator in 2014.

Other examples can be found in Wisconsin, Nebraska and South Dakota (just to name a few).

These cases serve as reminders of why farmers should exercise due diligence when working with grain buyers, experts say.

Exercise the role of the board.

Board seats for grain elevators or co-ops are not honorary positions, says Erik Ahlgren, attorney with Ahlgren Law Office in Fergus Falls, Minn., who was hired by the Ashby Farmers Cooperative Elevator Co.

“You act as an overseer for the management,” he says. “The management doesn’t run the board; the board oversees the management.”

Since elevators tend to have small staffs, Ahlgren says, the board needs to ensure there are multiple internal controls in place to guard against embezzlement. This can as simple as one person reviewing invoices and a different person writing the checks.

“If I can write checks without anyone overseeing, then it is really easy to write a check to a taxidermist,” says Ahlgren, in reference to Ashby case.

Get grain contracts in writing, always.

Bona fide grain deals that involve some type of forward pricing will require a written contract between the dealer and the farmer, says Kevin McNew, Farmers Business Network's chief economist and former president of GeoGrain.

“Each state regulates these differently, but as a general rule, if you are making a grain deal for something other than spot delivery, you should have it in writing,” says McNew, who was slated to be an expert witness in the Gieseker trial. A general rule of thumb, he says, is if you are making a grain deal for something other than spot delivery, you should have it in writing.

Review scale tickets and settlement sheets. 

Don’t rely on scale tickets for the terms of your deal with the buyer; that’s the purpose of the settlement sheet, McNew explains.

“So, while the scale ticket is a document showing ownership transference and weight of the load, the settlement sheet is the key document that will show the payment on those bushels,” he says. “Whether you had a previous contract with an agreed upon price or whether you have no outstanding contract, so the load is given a spot price, this will all be transparent in the settlement sheet.”

Know the other party. 

Nearly all states have grain-dealer laws that require licensing for entities buying grain directly from farmers, McNew says. Each state is different, but grain dealers must post bonds, go through annual audits and meet certain financial solvency requirements.

But, these requirements are generally inadequate to completely insure farmers if the buyer goes bankrupt.

“Whenever you are doing deals with a third party, it is important to use good judgement in the deals you make,” he says. “No laws, rules or regulations will completely protect you from bad business practices of those you trade with.”

Beware the “rolling hedge.” 

“This fictitious instrument allows farmers to perpetually ratchet up their price on a market rally but never see their price fall if the market turns south,” McNews says. “It’s like hitting the lottery, giving the farmer the right to the highest price ever printed on the board without any downside risk or cost. The truth is no business would ever back such a one-sided contract.”

If you see something strange, speak up!

Remember the Transportation Security Administration traveler advisory: If you see something suspicious—report it.

McNew says in the case of grain fraud, it seems more onerous on grain buyers: If you see suspicious activities by your grain suppliers, you better report them, otherwise you might find yourself with a massive legal bill.

 

Read More: Sticky Fingers Fraud: $2M Missing at Grain Elevator

 

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Comments

 
Spell Check

Brian
McAllen , TX
9/20/2018 06:31 PM
 

  Technology will be able to prevent this type of fraud. www.grainchain.io

 
 
Mike Clemens
WIMBLEDON, ND
9/23/2018 10:00 AM
 

  I always read about grain elevator insolvencies. It will happen to the other guy. Not so fast. It happened to me in 2002. $148,000 GONE. $2MILLION lost in our community. Talk about a pain to an operation. If not the weather, high land costs, regulations, TARIFFS/Grain Enbargo, markets, etc. this shows up to ruin your day. The best way to midigate an elevator going broke is a State Grain Imdeminty Fund. Fund it with plenty of farmer money, everyone pays in that defers payment or credit sales contracts. Set a trigger that gets the money back to the farmer. You'll be glad the day you get stuck.

 
 

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