SALEM, Ohio — Court documents filed in U.S. Bankruptcy Court may show why the U.S. Justice Department is involved in an investigation with Eastern Livestock.
Eastern Livestock Company is considered one of the largest cattle brokerage companies in the United States, with operations in 11 states across the mid-South, Midwest and West.
A Grain Inspection and Packers and Stockyards Act investigation estimates Eastern Livestock owes more than $130 million to 743 sellers in 30 states.
Eastern Livestock filed bankruptcy Dec. 6 in Indiana.
Three creditors are included in the initial filing: Southeast Livestock Exchange LLC in North Carolina, asking for $774,513 for cattle sold; Moseley Cattle Auction LLC, Georgia, is owed $670,949; and a third creditor, David L. Rings, from Russell Springs, Ky., $7,100 for cattle sold.
The bankruptcy filing comes after Fifth Third Bank, of Cincinnati, filed a lawsuit Nov. 10 against Eastern Livestock.
According to court documents, Eastern Livestock Company issued between $81 million and $130 million in bad checks.
According to court documents filed in Hamilton County Court of Common Pleas, Fifth Third Bank alleges a complicated bank fraud and check-kiting scheme.
According to the court documents, Eastern Livestock has engaged in a “sophisticated check-kiting scheme involving the deposit and withdrawal of thousands of checks into and out of its Fifth Third account and accounts at various other banks, even though there were insufficient funds to cover the checks that Eastern Livestock was purporting to deposit and withdraw.”
Taking advantage of the “float,” the delay in one bank’s returning an item for insufficient funds to another, creating a provisionally credited balance in the account to which the “deposit” was made, “Eastern Livestock cycled checks between its various bank accounts to create an artificially high balance among those accounts and then withdrew million of dollars in provisionally credited funds.”
When Fifth Third discovered Eastern Livestock’s scheme, the bank froze the account.
Since Eastern Livestock has been prevented from cycling checks in and out of its main Fifth Third checking account, the account has been determined to be overdrawn in the amount of at least $13 million and possibly even more as items continue to be returned for insufficient funds.
Fifth Third Bank also alleges in the court filing that Eastern Livestock overstated its assets and accounts receivable, which resulted in the bank lending millions of dollars to Eastern Livestock through a line of credit.
The court documents are also asking that Eastern Livestock be forced to return the funds that it reportedly stole from Fifth Third Bank. However, the documents allege that Eastern Livestock refuses to identify the accounts where it has transferred the bank funds and refuses to return them.
According to court documents, an audit concluded Nov. 1 by the bank showed that Eastern Livestock had a pattern of entering into numerous transactions with affiliated entities and that these transactions existed on paper only.
These transactions are believed to have been designed to create the impression of higher accounts receivable, to induce Fifth Third Bank to extend additional credit.
“Fifth Third discovered that Eastern Livestock’s reported sales for the fiscal year ending Sept. 30, 2010, had increased to $3.9 billion after reported sales of $1.3 billion just one year earlier. Further, $2.5 billion of the $2.6 billion reported sales increase was the result of transactions with affiliated companies. In other words, Eastern Livestock was buying and selling its own goods.”
Fifth Third Bank is asking for a judgment in excess of $32.5 million plus $13 million for the alleged theft.
According to the court documents, Fifth Third Bank confronted Eastern Livestock’s principal Thomas P. Gibson Nov. 5 about the apparent scheme and to determine whether there were any legitimate funds in the accounts or any legitimate business reasons for check transactions between operation accounts, and an account that Gibson held at Your Community Bank in New Albany, Ind., where the headquarters for Eastern Livestock is based.
The documents state Eastern Livestock initially agreed to allow Fifth Third representatives to visit the office Nov. 8 to review documents, and discuss the matter with Eastern Livestock personnel. However, the bank representatives were turned away and directed to speak only with attorneys obtained by Eastern Livestock.
Attorneys told the bank that the personnel would not be answering any of their questions.
Elizabeth M. Lynch, of Development Specialists Inc., of Cleveland, has been appointed receiver by the Hamilton County Common Pleas Court, with custodial responsibilities for Eastern’s assets.
GIPSA is onsite at Eastern’s headquarters in New Albany, Ind., investigating the violations of the Packers and Stockyards Act, and is working with the Department of Justice in the matter.
Producers who have not received payment due from Eastern are encouraged to contact the GIPSA Midwestern Regional Office, in Des Moines, Iowa, at 515-323-2579, for complete information on available financial protections, and for forms necessary for filing a bond claim on payments due from Eastern.
Bond claims must be filed within 60 days from the date of the transaction on which the claim is based.