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A California Town Reels in Wake of Bankruptcy and a Leader's Exit
by Richard C. Paddock
Posted: 11/18/09
Farmers in the Eel River Valley dairy lands of Northern California looked up to Rich Ghilarducci. He ran the Humboldt Creamery, a thriving cooperative that increasingly pushed organic products. The former mayor of the town of Rio Dell made major contributions to local charities and headed the annual Easter Seals campaign.
He was a hometown boy who made good.
But that was before the 80-year-old creamery, which buys milk from local dairy farmers, went broke this year. The company's collapse cost 150 jobs, wiped out the farmers' stake in the cooperative and drove local businesses into debt. Tens of millions of dollars remain unaccounted for, a huge sum in this region of about 25,000 people.
Ghilarducci is suspected of bank and securities fraud, company officials say, and the FBI is investigating. A federal grand jury in San Francisco also is looking into the matter, said Len Mayer, the company's general manager. Three creamery officials reportedly have been subpoenaed to testify.
"There is a seething undercurrent of anger as a result of what happened," said Mayer, who has temporarily taken over day-to-day administration of the creamery. "People here say it's a miniature version of Bernard Madoff. People are wounded, and that's not going to go away any time soon."
The resignation of the 49-year-old Humboldt CEO in February stunned the community. His attorney – a San Francisco criminal lawyer – informed the company he was quitting. The attorney also advised the creamery that there could be inaccuracies in its financial statements.
Ghilarducci left for Arizona, where he had purchased a home last year. He has given no public explanation for his departure or for the mess he left behind. During a deposition in San Francisco, he refused to answer questions, citing his Fifth Amendment right against self-incrimination, said Caroline Titus, editor and publisher of the weekly Ferndale Enterprise.
Elliot Peters, Ghilarducci's lawyer, said his client worked tirelessly to protect the creamery. "One of his last acts as CEO was to use most of his own net worth to put his cash into the company so that it could make payroll," Peters said in a statement.
The creamery went into bankruptcy and was purchased in August by Foster Farms for less than $20 million – far less than the $80 million to $100 million that members of the cooperative had thought it was worth. The farmers' $6 million share of the company evaporated.
Before the sale, farmers didn't get paid for their milk for many weeks, causing a ripple effect throughout the community as they fell behind on their feed, vet and other bills. They now receive less for their milk, making it hard to regain lost ground.
"We know we lost a ton of money, but no one can confirm where it went," said Dennis Leonardi, a dairy farmer who served on the board of directors.
Ghilarducci may have been overstating the company's inventory and its receivables for years, creating the impression that the company was in a much stronger financial position than it actually was, said Mayer, whose job will end in February.
The exaggeration helped the company get bigger bank loans and lure more investors, including some of the dairy farmers themselves.
Then the economy collapsed and the prices for milk products tumbled.
Some find it difficult to get past the sense of personal betrayal.
"We were friends," Leonardi said. "We traveled together. We went to NASCAR races. He came over for parties. I liked him. ... He was part of the fabric of the community."
The creamery is on the outskirts of Ferndale, a town of 1,400 known for its century-old Victorian buildings. The entire town is a state historic landmark and has been featured in several movies, including "The Majestic" and "Outbreak."
The mild weather and fertile soil of the Eel River Valley make it ideal for dairy farming. Most of the 60 dairy farmers in the region belonged to the cooperative and relied on it to purchase their milk.
The logging and fishing industries that once dominated the region have declined along with the resources they harvested. But the creamery under Ghilarducci seemed to flourish, especially as it shifted to organic milk products.
"Lots of businesses were struggling," said Leonardi, who at one point served as chairman of Humboldt's board. "We weren't."
Former associates say that Ghilarducci may have started fudging the books in a misguided attempt to make the company look better. With each passing year, they suggest, the gap between fact and fiction grew.
His critics acknowledge that he does not appear to be living extravagantly in his self-imposed exile in Arizona. Yet they wonder what has happened to the vast sum that vanished.
Ghilarducci appeared to be scrambling to stave off collapse in the weeks leading up to his resignation even as he maintained the image that the creamery was prospering.
In January, the company issued a press release saying it had record sales, which turned out to be false. With the actual inventory running low, workers stacked the remaining pallets of ice cream and powdered milk at the front of the freezer and warehouse, creating the illusion that the storage facilities were full, former board members said.
The ruse was discovered in January when an inspector insisted on looking behind a wall of powdered milk and found that the space behind it was empty, they said.
Whether the employees who stacked the products knew the reason for the subterfuge is unclear, said Jim O'Neil, a dairy farmer and former board member. "Certainly they knew it was not the right way to run a business," he said.
Many residents are counting on the federal investigation to determine who was responsible and to begin restoring trust among members of what was once a close-knit community. But some worry that Ghilarducci could be allowed to strike a deal with prosecutors and avoid a public trial, leaving many questions unanswered.
"Until this is resolved through the legal system, there is a shadow of doubt and mistrust in the community," said Titus, whose newspaper has doggedly pursued the story of the company's meltdown. "People are looking around and wondering who knew. Could it just be one person?"
Spokesmen for the FBI and the U.S. attorney's office in San Francisco would not comment on the case or on whether a grand jury is looking into the matter. "We are investigating," FBI spokesman Joseph Schadler said.
One potential witness who has not been questioned by the FBI is Lisa Carnahan, who left the company last year.
She was hired in 2005 to set up a computer system that would combine three separate financial systems and modernize the company's tracking of its inventory and receivables. She said Ghilarducci repeatedly created obstacles for the new system and, when it was nearing completion, forced her out of the company.
She now believes an innocent remark prompted her ouster.
Each month, Ghilarducci would prepare the company's financial statement himself at the last minute and present it to the board without input from any of the staff, not even the chief financial officer, Carnahan said.
The new computer system would have changed that practice, she said. At one point, she joked to a colleague that it would keep Ghilarducci from fiddling with the numbers.
After her comment got back to Ghilarducci, she said, he continually criticized her work. She eventually was given the choice of quitting or being fired. She quit. Installation of the computer system was never completed, she said.
"Rich's greatest gift was his mastery of manipulating people," she said. "The company was run with the attitude that you're lucky to have a job."
But what she finds most egregious, she said, is that Ghilarducci maintained his silence after his resignation rather than help the farmers hang on to their cooperative. By not providing them with financial information, she said, he prevented the farmers from moving quickly to find investors and buy the company back themselves.
"I honestly do not know how Rich, who grew up in this area and was friends with a lot of these people, could have done what he did," Carnahan said. "These are people he knew all his life. By skulking away in the middle of the night, he deprived them of the opportunity to save it."
by Richard C. Paddock
Posted: 11/18/09
Farmers in the Eel River Valley dairy lands of Northern California looked up to Rich Ghilarducci. He ran the Humboldt Creamery, a thriving cooperative that increasingly pushed organic products. The former mayor of the town of Rio Dell made major contributions to local charities and headed the annual Easter Seals campaign.
He was a hometown boy who made good.
But that was before the 80-year-old creamery, which buys milk from local dairy farmers, went broke this year. The company's collapse cost 150 jobs, wiped out the farmers' stake in the cooperative and drove local businesses into debt. Tens of millions of dollars remain unaccounted for, a huge sum in this region of about 25,000 people.
Ghilarducci is suspected of bank and securities fraud, company officials say, and the FBI is investigating. A federal grand jury in San Francisco also is looking into the matter, said Len Mayer, the company's general manager. Three creamery officials reportedly have been subpoenaed to testify.
"There is a seething undercurrent of anger as a result of what happened," said Mayer, who has temporarily taken over day-to-day administration of the creamery. "People here say it's a miniature version of Bernard Madoff. People are wounded, and that's not going to go away any time soon."
The resignation of the 49-year-old Humboldt CEO in February stunned the community. His attorney – a San Francisco criminal lawyer – informed the company he was quitting. The attorney also advised the creamery that there could be inaccuracies in its financial statements.
Ghilarducci left for Arizona, where he had purchased a home last year. He has given no public explanation for his departure or for the mess he left behind. During a deposition in San Francisco, he refused to answer questions, citing his Fifth Amendment right against self-incrimination, said Caroline Titus, editor and publisher of the weekly Ferndale Enterprise.
Elliot Peters, Ghilarducci's lawyer, said his client worked tirelessly to protect the creamery. "One of his last acts as CEO was to use most of his own net worth to put his cash into the company so that it could make payroll," Peters said in a statement.
The creamery went into bankruptcy and was purchased in August by Foster Farms for less than $20 million – far less than the $80 million to $100 million that members of the cooperative had thought it was worth. The farmers' $6 million share of the company evaporated.
Before the sale, farmers didn't get paid for their milk for many weeks, causing a ripple effect throughout the community as they fell behind on their feed, vet and other bills. They now receive less for their milk, making it hard to regain lost ground.
"We know we lost a ton of money, but no one can confirm where it went," said Dennis Leonardi, a dairy farmer who served on the board of directors.
Ghilarducci may have been overstating the company's inventory and its receivables for years, creating the impression that the company was in a much stronger financial position than it actually was, said Mayer, whose job will end in February.
The exaggeration helped the company get bigger bank loans and lure more investors, including some of the dairy farmers themselves.
Then the economy collapsed and the prices for milk products tumbled.
Some find it difficult to get past the sense of personal betrayal.
"We were friends," Leonardi said. "We traveled together. We went to NASCAR races. He came over for parties. I liked him. ... He was part of the fabric of the community."
The creamery is on the outskirts of Ferndale, a town of 1,400 known for its century-old Victorian buildings. The entire town is a state historic landmark and has been featured in several movies, including "The Majestic" and "Outbreak."
The mild weather and fertile soil of the Eel River Valley make it ideal for dairy farming. Most of the 60 dairy farmers in the region belonged to the cooperative and relied on it to purchase their milk.
The logging and fishing industries that once dominated the region have declined along with the resources they harvested. But the creamery under Ghilarducci seemed to flourish, especially as it shifted to organic milk products.
"Lots of businesses were struggling," said Leonardi, who at one point served as chairman of Humboldt's board. "We weren't."
Former associates say that Ghilarducci may have started fudging the books in a misguided attempt to make the company look better. With each passing year, they suggest, the gap between fact and fiction grew.
His critics acknowledge that he does not appear to be living extravagantly in his self-imposed exile in Arizona. Yet they wonder what has happened to the vast sum that vanished.
Ghilarducci appeared to be scrambling to stave off collapse in the weeks leading up to his resignation even as he maintained the image that the creamery was prospering.
In January, the company issued a press release saying it had record sales, which turned out to be false. With the actual inventory running low, workers stacked the remaining pallets of ice cream and powdered milk at the front of the freezer and warehouse, creating the illusion that the storage facilities were full, former board members said.
The ruse was discovered in January when an inspector insisted on looking behind a wall of powdered milk and found that the space behind it was empty, they said.
Whether the employees who stacked the products knew the reason for the subterfuge is unclear, said Jim O'Neil, a dairy farmer and former board member. "Certainly they knew it was not the right way to run a business," he said.
Many residents are counting on the federal investigation to determine who was responsible and to begin restoring trust among members of what was once a close-knit community. But some worry that Ghilarducci could be allowed to strike a deal with prosecutors and avoid a public trial, leaving many questions unanswered.
"Until this is resolved through the legal system, there is a shadow of doubt and mistrust in the community," said Titus, whose newspaper has doggedly pursued the story of the company's meltdown. "People are looking around and wondering who knew. Could it just be one person?"
Spokesmen for the FBI and the U.S. attorney's office in San Francisco would not comment on the case or on whether a grand jury is looking into the matter. "We are investigating," FBI spokesman Joseph Schadler said.
One potential witness who has not been questioned by the FBI is Lisa Carnahan, who left the company last year.
She was hired in 2005 to set up a computer system that would combine three separate financial systems and modernize the company's tracking of its inventory and receivables. She said Ghilarducci repeatedly created obstacles for the new system and, when it was nearing completion, forced her out of the company.
She now believes an innocent remark prompted her ouster.
Each month, Ghilarducci would prepare the company's financial statement himself at the last minute and present it to the board without input from any of the staff, not even the chief financial officer, Carnahan said.
The new computer system would have changed that practice, she said. At one point, she joked to a colleague that it would keep Ghilarducci from fiddling with the numbers.
After her comment got back to Ghilarducci, she said, he continually criticized her work. She eventually was given the choice of quitting or being fired. She quit. Installation of the computer system was never completed, she said.
"Rich's greatest gift was his mastery of manipulating people," she said. "The company was run with the attitude that you're lucky to have a job."
But what she finds most egregious, she said, is that Ghilarducci maintained his silence after his resignation rather than help the farmers hang on to their cooperative. By not providing them with financial information, she said, he prevented the farmers from moving quickly to find investors and buy the company back themselves.
"I honestly do not know how Rich, who grew up in this area and was friends with a lot of these people, could have done what he did," Carnahan said. "These are people he knew all his life. By skulking away in the middle of the night, he deprived them of the opportunity to save it."
