$166 million cattle fraud tied to Ohio

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SALEM, Ohio – Two Florida ranchers will receive $4.2 million as a settlement in a phantom cattle scheme the FBI is calling the largest cattle fraud in U.S. history.
A federal jury awarded Arky and Debbie Rogers the settlement after the couple sued Ohio-based Producers Credit Corp., a division of United Producers, for damages.
The Rogerses borrowed money from Producers Credit to buy and pay for the custom feeding of cattle that never existed.
The connection. Missouri cattle buyer George Young partnered with Producers Credit to form United Livestock Service in 1997.
In that position, Young bought cattle for Producers’ clients for at least three years and promised high returns on investments, according to Dick Rhyne, attorney for the Rogerses.
Young was supposed to buy and feed the cattle in late 1999 and early 2000 for the Rogerses and several other Midwestern ranchers, Rhyne said.
Swindlers. It was later discovered during bankruptcy proceedings for all of Young’s entities that he and business partner Kathleen McConnell had bilked ranchers out of more than $160 million in investments since 1995.
McConnell provided bookkeeping and accounting services for Young’s businesses.
At the time Young and McConnell were discovered in August 2001, falsified records indicate they had 344,000 head of cattle under their control. Instead, fewer than 17,000 head of cattle actually existed.
The partners had created a Ponzi scheme, paying off early investors with money from later investors and buying few cattle in between.
According to a federal indictment, the defendants used their clients’ funds to cover cash shortfalls, business expenses and to pay other clients whose cattle had supposedly matured and had been sold.
In prison now. In May 2004, Young and McConnell were sentenced to nine years and seven years, respectively, in federal prison without parole.
The court also ordered the partners to repay more than $25 million in restitution to investors, but Rhyne says that repayment is unlikely since both parties are bankrupt and in prison.
Still owed. The settlement isn’t all payback for the Rogerses, who owe Producers Credit for their loans, according to their attorney.
Their initial loan was $2.8 million, but interest accruing for three years during the lawsuit has pushed their responsibility to $3.6 million, he said.
The $4.2 million settlement is the calculate value of the 4,992 cattle the Rogerses supposedly owned at the time of the bankruptcy. United Producers calculated that amount, Rhyne said.
The couple will receive another $1 million in interest in the judgment.
Rhyne said his clients are pleased with the results.
“When you’re faced with a bank note like that, it’s pretty intensive. Once the interest [settlement] is added, they feel they’re be made whole again. They feel vindicated,” he said.
How it happened. “We’re talking about 250,000 or 300,000 head of cattle not being there. It’s hard to understand what happened. On paper, everyone was making money and thought it was all OK,” Rhyne said.
But investors and lenders were misled by Young and McConnell’s falsified records and inspections.
In depositions, Kathleen McConnell admitted she kept two sets of books, one recording live cattle and another tracking “everything that was owned by clients.” She said she spent “probably 20 hours a week” creating false documents to cover the indiscretions.
Inspections. Rhyne said when lenders went to inspect the cattle herd at different points in feedlot, they were shown a group of “show cattle” – maybe the only cattle the buyers owned – over and over again.
Rhyne, admittedly a city boy, said “it’s not hard for anyone to see if a cow weighs 600 pounds, it doesn’t weigh 1,200 pounds” and lenders should have known something wasn’t right when they were supposed to be inspecting feeders or fats, and seeing the differences between the two.
United Producers’ senior vice president Steve Buckalew sees things differently.
He said it was standard for Producers to inspect cattle used as collateral on loans for their own benefit. Inspectors would “go count them, make sure the numbers were there, check condition and see they were in the right location,” Buckalew said.
But Buckalew’s theory is that Young and McConnell had enough cattle among all their contracts and ranches to show their biggest investor the correct number of cattle and not raise suspicions.
“They obviously had enough to show to many banks and investors. Inspectors were satisfied when they were there,” he said.
“Right, wrong or different, they were able to show the proper number of cattle at each weight and no one was aware of what was going on,” he said.
Buckalew also noted the fraud was exposed when banks and other lenders thought it would be a good idea to inspect and count heads all at once. Young and McConnell were not able to produce enough cattle at that time, he said.
Young and McConnell admitted they deliberately misled clients and lenders who attempted to inspect the cattle.
Going on and on. In depositions, McConnell also said she kept finely detailed documents with false information, yet no one every asked her to see them. That move, defendants believe, let the duo keep up their facade and scheme.
Rhyne also said McConnell admitted to writing checks without invoices from third parties and had no checks and balances to keep the business honest.
Rhyne said he “doesn’t know where Producers was” during the scheme and can’t understand how they didn’t know something wasn’t right.
“There was a complete lack of supervision [of Young],” Rhyne said.
Producers’ side. Meanwhile, Producers maintains it was as much a victim of the scheme as individual investors.
Producers’ Steve Buckalew says the company lost about $8 million in the scheme and couldn’t have known anything was wrong until the end inspection.
“We were involved in one little company with [Young and McConnell]. We got financial statements every month that showed a successful business,” he said.
Buckalew also said the merged United Livestock Services underwent audits in December 1999 and 2000 and showed no reason for concern.
In depositions, McConnell testified only she and Young knew the company was having financial difficulty until they closed doors in August 2001.
“We were trying to save our business and we were robbing from Peter to pay Paul and covering our — and making false documents,” McConnell said in depositions.
Checked out. Buckalew says Producers conducted the “normal background checks” on George Young but had no reason to check McConnell when United Livestock Services was formed in 1997.
They wouldn’t have turned up any red flags then, though, since the scheme started after the merger, Buckalew said.
“This has been very detrimental to our business,” Buckalew said, noting the company hopes for some recovery in bankruptcy proceedings.
“Young and McConnell were obviously masters. They defrauded a lot of investors. United Producers had no idea, no involvement in this. We’re victims as many people are,” Buckalew said.
“The fact is, we didn’t commit a crime here. If we did, we’d be in prison today with Young and McConnell,” he said.
More to come. United Producers has filed post-trial motions with the courts asking the judge to overturn the jury’s decision to award the Rogerses the money.
The Rogerses have also filed a federal securities suit in Ohio against Producers’ board of directors.

Related coverage:

Cattle buyers sentenced to jail time in Missouri ‘phantom cattle scheme’ (6/3/2004)

$160 million phantom cattle scheme involves Midwest victims (10/30/2003)

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