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Are Your Grain Deals at Risk? Lessons from a $27 Million Ponzi Scheme

The last place a farmer wants to spend a summer day is in a court room. But that is exactly where more than a hundred Missouri farmers found themselves this past week, trying to be made whole on grain transactions that went horribly wrong and left them holding $27 million in lost grain sales.

The culprit of the scam was a small grain dealer and hauler named Cathy Gieseker. A rough-hewn, working class gal who tried to build up her grain hauling business after the death of her husband in 2007.  Around this time, she told farmers she had special deals with ADM Grain. These deals, which she claimed a farmer could only get by doing business with her, included well above market prices, exotic contract terms and multi-year contracts. And none of it in writing.

But it was all a lie. Gieseker was a fraud and had fabricated these deals to advance one of the biggest Ponzi schemes to ever hit the grain belt. Indeed, she was labeled the Madoff of the Midwest and subsequently sentenced to 9 years in prison in 2010. In her plea agreement with U.S. attorneys, she stated she acted alone in this fraud. But that didn’t help the farmers. Her assets paid out to farmers amounted to only about $1 million, so there was still a gaping hole in their wallet from this fiasco.

So, six years after Gieseker took up residence in a Kentucky correctional facility, these farmers found themselves in a class action lawsuit with ADM at a federal court in St Louis, Mo., this past week. The farmers contend that ADM knew about Geiseker’s fraud but did nothing to stop it. Gieseker sent millions of bushels of farmer grain to ADM facilities in Missouri, delivering it on the spot price, all the while paying farmers prices substantially higher through fictitious contracts.

But after the first day of the trial, the two sides came to a settlement. I had the misfortune of being an expert witness in this case, and while I am relieved it is settled, I firmly believe neither the farmers nor ADM “won” this 6-year battle. But, now that it is settled, I hope there are some teachable lessons for farmers and grain dealers that can be shared to prevent this misfortune in the future.

Get Grain Contracts in Writing, Always

Gieseker’s deals with farmers were never in writing. Farmers blindly accepted this as a good business practice, even though the arrangement involved selling crops 3 years in advance and rolling up prices with no cost and no downside risk.

Bona fide grain deals that involve some type of forward pricing will require a written contract between the dealer and the farmer. Each state regulates these differently (consult grain dealer laws in your own state for rules and regulations), but as a general rule of thumb, if you are making a grain deal for something other than spot delivery, you should have it in writing.  It’s just good protection for the farmer as well as the dealer. After all, contracts are not important when the deal goes smoothly, but instead the contracts are there to protect the parties if something goes wrong. And in this case, the deals went horribly wrong and as a result litigation was the only recourse.

Review Scale Tickets and Settlement Sheets

Because there were no written contracts in this case, a lot of attention focused on the scale tickets for the farmer grain delivered to ADM under the account of Gieseker. The farmers believed that when they pulled up to the scale house and told the scale house operator “contract” for Gieseker that they were acknowledging that Gieseker and ADM had a contract. But ADM employees contend they thought that meant the contract was between Gieseker and the farmers. Countless hours of depositions, expert testimony and forensic accounting went into examining these scale tickets and trying to determine what they truly meant.

But the lesson that comes out of this is that you should not rely on scale tickets for the terms of your deal with the buyer; that is what the settlement sheet is for. 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. 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 Party You Do Business With

Nearly all states have grain dealer laws that require licensing for those entities that buy grain directly from farmers. Each state is different, but grain dealers must post bonds, go through annual audits, and meet certain financial solvency requirements. Unfortunately these safeguards didn’t stop the Gieseker fraud. Furthermore, these requirements are generally inadequate for completely insuring farmers in the event of bankruptcy by the buyer. For example, Missouri requires a net worth of only 5% of the volume of grain purchased, that pales as a safety net for farmers.

In addition, many states have different classes of grain dealer licenses, where certain lower classes are not allowed to do transactions that involve forward or deferred pricing with farmers. This was true of Cathy Gieseker, who maintained the lowest class of grain dealer license and by law was not allowed to do any forward pricing contracts with farmers. You can find grain dealer licenses on the internet for your state, as state agencies strive to make this information publicly available to protect farmers.

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

Too Good to be True?

Gieseker’s deals were too good to be true.  For starters, she was able to offer prices that were in many cases a $1 or more a bushel over competitor prices. In grain markets, nearby buyers may have prices that differ by a few cents or a dime, but to be that dramatically above everyone else should cause you to wonder how that is possible.

Furthermore, Gieseker’s deals included a contract called a “rolling hedge”. This fictitious instrument allowed the farmer to perpetually ratchet up their price on a market rally, but never see their price fall if the market turned south. This contract was like hitting the lottery, giving the farmer the right to the highest price ever printed on the board without any downside risk or cost. Of course, the reality is no such contract exists but Gieseker’s keen spin meant that farmers believed it did and that it was backed by ADM. But the truth is no business would ever back such a one-sided contract. When farmers saw the prices they were getting versus the true market, they should have questioned how this is possible.

Grain Dealers: Are you the Watchdog for Fraud?

The Missouri Department of Ag, the FBI and the Justice Department all had a look at ADM’s role in the Gieseker scam but found no evidence that they were involved. Even so, ADM still had to open up their wallet to settle this case. They adamantly admit no wrong doing, but at the end of it the astronomical legal costs of defending were even too much for an industry giant like ADM to withstand.

Throughout the case, the farmers’ attorneys seized on ADMs knowledge that Cathy Gieseker was offering high prices, that her business model made no economic sense, and that ADM continued to buy grain from her at spot prices. ADM saw her business grow from delivering 160,000 bushels of soybeans a year to an ADM processing facility to over 1.6 million bushels in a few short years. So, the attorneys for the farmers made ADM culpable for Gieseker’s fraud. In late 2008, it was indeed an ADM employee that reported Gieseker’s suspicious activity to state grain regulators and ultimately her arrest. But in the eyes of the farmers it should have happened sooner.

I can’t help but think of the TSA traveler advisory that states, if you see something suspicious, report it. But in this case, the lesson seems more onerous on grain buyers. If you see suspicious activities by your customers whom you buy grain from, you better report them, otherwise you might find yourself with a massive legal bill.

(Source – http://www.agweb.com/article/are-your-grain-deals-at-risk-lessons-from-a-27-million-ponzi-scheme-naa-agweb-guest-editor/)

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