Sticky Fingers: Lessons From Grain Elevator Frauds

November 2, 2018 04:39 AM
 
Here are five lessons to learn from grain elevator frauds.

A former grain elevator manager is on the run after allegedly pocketing around $5 million from the Ashby Farmers Cooperative Elevator Co. in west-central Minnesota. Jerry Hennessey used the money for hunting trips, home construction projects, land purchases, taxidermy and paying his personal Cabela’s credit card.

Initial investigations show Hennessey siphoned off funds while inflating grain inventories from the single-location grain co-op for the past 15 years. But the issue came to head in early September and forced the co-op, which was established 110 years ago, to stop taking grain deliveries. It closed for a month until nearby Wheaton-Dumont Co-op Elevator leased the facility and reopened the co-op. 

Missing Grain. Hennessey took a two-week Australian safari hunting trip at the end of August. Following his return, the co-op’s loan to CoBank was due. When the payment didn’t arrive, and Hennessey couldn’t be reached, the bank got worried, says attorney Erik Ahlgren.

“Nobody had a good picture of what was going on,” says Ahlgren, who was hired by the co-op’s board.

Ahlgren and the co-op’s remaining staff of four, reviewed financial statements, which showed a large amount of grain in inventory. But, there was no grain in the bins.

“That’s not unusual for this time of year, since you want your elevators empty ahead of harvest,” Ahlgren says. “But there is no off-site storage. By Sept. 10, we knew there was a big problem. There was a substantial loan outstanding premised on the idea that we had extensive inventory; the loan was there but the grain was missing.”

The elevator can store 300,000 bu. of grain. So, if you do rough math and assume the bins were full of $10 beans that would be equal to about $3 million in inventory.

“But the financial statements showed more than $3 million in inventory,” says Ahlgren, who specializes bankruptcy law.

The board hired Eide Bailly, a forensic accounting firm, to conduct an investigation with Ahlgren. The firms gathered information, reviewed check images and expense reports and looked for suspicious activity.

Ahlgren uncovered several checks written to people or entities that the co-op’s bookkeeper didn’t recognize. Most were identified as hunting-related expenses, which the board had not authorized.

This is a classic case of asset misappropriation fraud, says Tiffany Couch, CEO and founder of forensic accounting firm, Acuity Forensics, in Vancouver, Wash. Employees stealing from their company for personal gain accounts for 89% of all fraud cases, she says. 

“It’s the most common type of fraud, and there is always a paper trail,” she says. “Those kinds of payments have to run through the bank account at some point. You just have to look at bank statements, canceled check images and credit card statements and these sorts of things are so easily uncovered. You’ll find the fraud in 15 minutes.”

The Red Flags. Fraud is prevalent because many businesses don’t do basic financial analysis, Couch says. This makes oversight by company leaders and boards vital. Farmers who sit on boards need to trust but verify financial information, she says.

“Understand how revenues come in and ensure those revenues are translated to actual real deposits in the bank account,” she says. “Is money being used for the purpose of the organization? You need someone who doesn’t have access to your cash to look through all the debits.”

Board seats for grain elevators or co-ops are not honorary positions, Ahlgren adds.

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

Because 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 be 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 the Ashby case.

Investigations are ongoing by the Grant County Sheriff’s department, USDA and the Minnesota Bureau of Criminal Apprehension. Around 200 to 300 co-op members were affected, and Ahlgren says his firm is preparing lawsuits against those who received unauthorized checks from the co-op. Hennessey has not been found since the case broke.  

Protect Yourself From Grain Elevator Fraud

The case of fraud at the Ashby Farmers Cooperative Elevator Co. 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 (to name a few).

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

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, explains 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 a witness in the Gieseker trial. A general rule of thumb, 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,” McNew 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. Each state is different, McNew points out, 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. “No laws, rules or regulations will completely protect you from bad business practices of those you trade with,” he says.

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,” McNew says. “It gives 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.”

Understand it can happen to you.   

In her 20 years of being a forensic accountant and fraud investigator, Tiffany Couch says victims are always shocked by who commits fraud. “Fraud is a human problem,” she says. “Fraudsters use their ability to be liked and trusted.” So, push the idea that “this can’t happen here” out of your mind.

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