Bankruptcy Trustee Gives Update
On Eastern Livestock Debacle
By Colleen Schreiber
KISSIMMEE, Fla. — One of the cattle industry's worst debacles — at least in recent times — the Eastern Livestock Chapter 11 bankruptcy case is now about 10 months in, and far from being sorted out.
James Knauer, who was appointed as the trustee over the debtor's assets in December 2010, told those attending the National Cattlemen's Beef Association's Live Cattle Marketing Committee meeting that he now predicts creditors might possibly get back as much as 20 to 30 cents on the dollar, four or five cents of which would come from claims filed against Eastern's bond. That's far better than his original prediction, but he was quick to qualify that the estimate is dependent upon the amount of money available to distribute and the amount of claims allowed.
"People file claims in bankruptcy cases for all kinds of bizarre reasons and all kinds of amounts that are way too much," Knauer told listeners. "If you look on the docket and see the total dollar amount of all the claims filed, it's a ridiculous amount by probably 50 percent."
The 20 to 30-cent figure that he offered is based on the estimated recoverable amounts from the following "pots" of money: Eastern's USDA bond totaling $875,000, $15 million in claims against assigned contracts, $8 million in interpleader actions, $2.5 million from Eastern's assets, $15 million in collections from accounts receivable, and $4.7 million in funds seized by the FBI.
It is important to understand, however, that this is simply the trustee's opinion and not the opinion of the bankruptcy court. The bankruptcy court itself may or may not reflect Knauer's position. How the court might rule is completely independent of Knauer's position on the issue.
Regardless, the "pots" that Knauer referred to does not sound like much money given that Eastern reportedly sent up to $130 million of bad checks to 700 or so producers across the country beginning in late 2010. The first checks began bouncing on October 29. Things came to a head on November 9 when Fifth Third Bank, Eastern's primary bank, froze the company's accounts after uncovering an alleged check-kiting scheme.
Eastern's last reported audit, conducted in September 2009, recorded sales of $1.7 billion. By October 2010 their sales had virtually doubled. Most of those 2010 sales are now thought to be fraudulent transactions.
"I now believe those audits were inherently flawed," stated Knauer. "I believe the things Eastern was doing go clear back to 2008."
Since being appointed trustee, Knauer has met with USDA, the FBI, and the office of the Inspector General of the U.S. Postal Service. The FBI, for obvious reasons, is limited in terms of information they can provide to those involved in the civil case.
Knauer said he's talked to well over a hundred people who owe Eastern money, and he's found most of them to be "very fine people." Still, as in every bankruptcy case, the trustee faces challenges when it comes to collecting money. One hurdle, which Knauer noted is not uncommon in these kinds of cases, is that just before the key principles left the company, much of the information was destroyed, particularly the more damaging information stored on computers. Some of the hard drives have been successfully restored, but such success has been relatively limited.
Another hurdle is that the company had an antiquated accounting and recordkeeping system. Many of the transactions were handwritten and thus are now open to various interpretations as to exactly what those entries referred to.
A lot of records are also missing, and others were altered. Every desk in the building, Knauer said, had two or three rolls of white eraser tape.
"I don't know why anyone in the world would need that … It seemed to be a way of life."
Knauer said they've attempted to contact all the people they've uncovered records on who owe Eastern money. There are some, however, who have not been contacted because there is no record of them owing money.
Thus far, $10 to $11 million has been collected. He offered a few of what he referred to as his "David Lettermen Top 10 list" of reasons why there isn't more money in the bank's coffers with respect to the accounts receivable portion of the bankruptcy case. There's the "that wasn't the deal," and the "those weren't the cattle I purchased," and "those were the sickest cattle I ever bought; half of them died and I incurred all these extraordinary expenses."
"Some of these are perfectly legitimate claims," Knauer pointed out.
There are those who did, in fact, pay for the cattle and have a cancelled check as proof. There are also those who, rather than pay Eastern, paid the person who sold the cattle to Eastern because Eastern hadn't paid them. Still others, when they heard about Eastern's troubles, stopped payment on a check for cattle that had already been delivered, and because they weren't sure who to pay, put that money in a separate escrow account. Some of those transactions have been tracked down, but because records are lacking, authorities are still in the process of tracking some of the money.
There also were lots of "air" cattle, cattle that Eastern's customers claim they never bought — ultimately fraudulent transactions on Eastern's part.
"The ultimate irony is early in the case we started calling these fictional cattle 'air' cattle," Knauer told listeners. "Two months ago we actually found a file called 'air' cattle."
"We're talking about millions of dollars worth of checks that were sent to Eastern that never hit the books. Toward the end, in some cases, those proceeds were diverted to pay money that was owed."
Some creditors filed their own case against Eastern. In fact, shortly after Knauer was appointed as trustee there were debtor interpleader cases pending in five states. An interpleader, he explained, is someone who is concerned that if they paid Eastern, for example, someone else connected with the transaction would sue them for the same money.
"What they did was they tendered money with the court, and in some cases seemed to enjoin everyone who was on their rolodex as a defendant because they might have a claim against the money."
Those interpleader actions have now been transferred into one court — the bankruptcy court where the Eastern bankruptcy is being handled. Those claims, Knauer said, amount to about $10 million, and he opined that perhaps as much as $8 million of that could be owed Eastern.
Another piece of the puzzle that has made recovering money owed Eastern more difficult is that days before things imploded, Eastern assigned hundreds of its contracts to various auction markets and other customers in an effort to cover some of the losses. The largest of these assigned contracts, some 500, went to Superior Livestock Auction.
Superior was apparently trying to do the right thing to make their customers whole. They made certain that every customer whose cattle sold on the video to Eastern during late October and early November was paid. According to court documents, that left Superior on the hook for $19.2 million in unpaid sales.
Many of those cattle were for future delivery. When Superior took over these contracts they gave the people who had originally bought the cattle through Eastern the opportunity to take delivery on the cattle. Some 28,000 head that Eastern contracted for future delivery, however, were not delivered. In this case Superior stepped in and made the sellers whole by paying them what the cattle had originally been contracted for, and then on a specified date those cattle were resold on the video.
Knauer, however, contends that Eastern's assignment of these contracts gave preferential treatment to certain customers.
"Several hundred of these contracts were hardly contracts at all because the cattle had already been delivered," Knauer insisted. "In fact, about $9 million of these assigned contracts involved cattle that had already been delivered but money was still owed Eastern. The people who got these assignments," he continued, "were faced with having to pay a lot of money because Eastern gave them bad checks … they came in and got whatever they could. That's what people do."
The other aspect that makes this difficult to sort out is that the industry standard is that when cattle are contracted for future delivery, the seller is paid a good-faith down payment, perhaps $40 per head. In this case, because Eastern was the order buyer, Eastern paid the seller the $40 per head deposit. On the buy side, those who bought cattle through Eastern on the video also typically paid a good-faith deposit.
If it all works properly, the $40 per head fee is simply a pass-through transaction. Not so in this case, according to Knauer. He contends that when Superior took over those contracts, Superior not only in some cases benefitted by selling them in an up market, but they also benefitted from the $40 per head good faith deposit, because rather than pay that fee to Eastern, the feedyard, for example, paid that fee to Superior.
The trustee and Superior obviously have conflicting views. Superior contends that the cattle contract terms clearly permitted assignment. This differing view will have to be decided by the bankruptcy court. Total claims against all of these assigned contracts now amounts to $15 million.
To reflect the assignment of these contracts, USDA did reduce Superior's $19 million claim against Eastern's bond to $1.4 million. This does not, however, have any affect on the amount or the validity of Superior's claim against Eastern in the bankruptcy.
Early in the case the FBI seized $4.7 million from Tommy Gibson's personal bank account, the account that "anchored" the kited check writing scheme. When things came crashing down, it was that bank account that was ahead, he explained.
Knauer also noted that government seizure laws are such that when assets or cash used in the commission of the crime are seized, the government can keep the money.
"We've had a number of meetings with the FBI and they have told us that they are not going to keep the money, that they want the money distributed to the victims," Knauer said.
The FBI, however, doesn't necessarily agree with the bankruptcy ordinance law for distribution of such money, and according to Knauer, they are in the process of working out a plan for how they would like to see the money distributed.
"It's going to be distributed by me, but outside the bankruptcy," he told listeners. "Because we have all the claims, I think they feel we're already set up to distribute the money, but I have yet to see exactly what their thoughts are."
Tommy Gibson and his wife have filed a separate bankruptcy, thus as trustee, Knauer has filed an enormous claim on behalf of creditors in the Gibsons' bankruptcy case as well.
Fifth Third Bank, however, has a lien on most of Eastern's assets, as they are owed about $32 million. Knauer said he's asked frequently why he hasn't sued the bank. He assured listeners they are looking into it. An independent law firm he hired is investigating this in two phases. The firm's first charge was to determine if Fifth Third's lien was properly documented and properly filed. The law firm confirmed that the lien had, in fact, been properly documented.
Their second charge was to determine if Fifth Third engaged in any illegal conduct that would allow the bankruptcy court to assert a claim against them that would offset or eliminate some of their rights. That part of the investigation, Knauer said, has not been completed.
"When the law firm completes its investigation, we'll make a decision," he stressed. "We are having negotiations with Fifth Third to release some of their liens," he added. "I suspect if we aren't successful, then the FBI will probably just exclude the bank … I don't know that for sure, but that's part of the leverage that's moving around in the case."
Knauer told listeners that 387 claims totaling about $37 million were filed against Eastern's USDA bond. However, after USDA reviewed the claims, the amount was reduced to around $18.7 million. He explained that part of the reason the claims have been reduced by almost half is because there was a lot of redundancy. Because he was concerned that some of the people impacted might not know they needed to file a claim in the bankruptcy case as well as a claim on the bond, as trustee he filed a $30 million claim on the bond on behalf of every unpaid seller. As it turns out, many of them did file a claim on the bond as well, so all of that had to be sorted out.
Knauer told listeners he now expects the bond portion of the settlement to pay impacted parties four to five cents on the dollar rather than the one or two cents on the dollar that he originally had predicted. Those who filed a claim on the bond should have already received a letter stating an amount they are entitled to receive. To minimize unnecessary expenses on the part of the claimants, only those who do not agree with the amount stated will need to appear in court. He said his goal is to get the bond money distributed before year's end.
Following the formal presentation Knauer took questions from the crowd.
One producer asked how many other banks in addition to Fifth Third were involved.
"Fifth third was the principle lender to Eastern," Knauer responded. "Another lender, who is making claims that cattle he owned were sold by Eastern and they had a lien on those cattle, is owed about $8 million. These are just more of the kinds of problems we're dealing with."
There was still another question about why this Ponzi scheme was not identified earlier, given all of today's modern technology; the same producer wanted to know why the FBI wasn't investigating possible fraud by Fifth Third.
"Well, first, I didn't say the bank was involved in any kind of fraud," Knauer responded. "I said that the principles of this company clearly committed fraud and at least pulled the wool over the bank's eyes, but I have not seen anything that indicated the bank knowingly did anything other than make a lot of bad decisions in lending."
He added that the assumption is that the FBI is pursuing every possibility in the criminal case, but as trustee he is not privy to those details.
"Any time we uncover anything juicy, we image it and send it to them. However, while we give them a lot of information, we don't get a lot of information back," he reiterated.
Someone else wanted to know if the auditor was being investigated to see if they were liable.
"You can bet we looked at that," Knauer responded. "Those audits were done by a small CPA firm in Louisville, Kentucky.
"Back in 2008, at the end of the year, the related party's receivables would go way up because he had a kite going on, and he'd have to get those off the books or the bank would not have renewed their credit line," Knauer explained. "So what they did was they got other people — friends of theirs — to engage in fictitious transfers of cattle to reduce the related party receivables and increase the unrelated party receivables which they'd been counting against their borrowing. The total receivables, however, didn't change. He'd just sweep them off the books."
The producer asked again, "So if you were an auditor, what would you assume if you saw that pattern?"
"I would have sensed something was going on," Knauer responded. "The problem that a bankruptcy trustee has going after accountants for gross neglect is even if they participate, they stand in the shoes of the company; the company is committing the fraud. They were pulling the wool over their accountants' eyes."
Given this, as trustee Knauer has instead encouraged Fifth Third to follow through because they were the ones who ordered the audit.
"The audit was done for Fifth Third's benefit, so we think they should be the one who decides whether to file a claim against the accountant. They relied on the audit in extending credit to Eastern. The bank didn't create the fraud; Eastern did," he reiterated.
"They're in the best position to make a claim over an audit that was at least negligible — perhaps more so," Knauer continued. "If there is a claim and they're successful, then that would allow the bank to reduce the money they owe."
Fifth Third, he said, has yet to do anything on the matter.
Someone else asked if Superior violated any laws by accepting private contracts from Eastern just prior to Eastern filing for bankruptcy.
"We contend they violated some bankruptcy laws, but nothing criminal," Knauer responded. "They were doing what they could to try to recover their losses, and we just claim that they didn't have a right to do that."
Responding to a question about the numbers of trade cattle versus the number of cattle that Eastern had on feed, Knauer acknowledged that a significant number of cattle owned by Eastern were on feed at the time of the bankruptcy, but he couldn't verify actual numbers.
There was a question about the interpleader portion of the bankruptcy and who might or might not be paid.
"I think we've identified more than a million and less than $2 million of claims that we think are likely to be paid," Knauer said.
"What kind of claim would that be?" the producer asked.
"Of all the facets of the bankruptcy, because these interpleader cases are being so heavily litigated, that is the one I am least familiar with," he responded. "There are some statutory trust claims in one or two states that may have to be recognized. I believe there are some feed claims; there may be some states that have some trucking liens …
"The interpleaders operate in three different ways," he continued. "They bought and sold, they acted as a marketing agency, and/or they acted as a clearing agency … so the creditors in our case want to put the hat on Eastern which is most favorable to them, and in many cases that is the view we share.
"Eastern recorded virtually all those transactions as sales and cattle in the inventory. That would indicate they were buyers and sellers, and so how those transactions end up being characterized may have a huge impact on how those cases are decided."
He was also asked about the amount of fees already paid out in the bankruptcy case. Development Specialists Inc., the firm hired to do the accounting investigative work, has thus far been paid $700,000 to $800,000. The attorneys have been paid another $760,000. As the receiver, Knauer's total fees paid to date amount to about $121,000.
Another questioner asked, "Where did all the money go in an up market? I just don't understand where all the money went."
"I think the money had been disappearing for a long time and the kite just got bigger and bigger," Knauer responded. "I don't think it happened in some short marketing period."
Knauer was asked to offer suggestions on what buyers and sellers could do in the future to protect themselves against fraudulent transactions. He opined that while wire transfers may not be the most practical and they may not be the answer in every situation, in the case of the seller it might be the most sensible solution. The buyer of the cattle, however, would not likely agree to wire money in advance because he wants to see the cattle before paying for them.
Given that, Knauer suggested that perhaps a seller set up some kind of provisional escrow account whereby they wire the money to a bank to put in a special escrow account and that money is not released until after the cattle are unloaded.
Finally, Knauer had this to say:
"I've seen every kind of contract written; some of them are long and complicated, and some I've seen are only two or three sentences," Knauer told listeners. "As long as you're dealing with honorable people, it doesn't matter what the contract says. However, since not everyone is honorable, when doing transactions of this magnitude, I'm not sure in this day of commercial banking and wire transfers and cell phones why something can't be worked out to overcome such problems."
http://www.livestockweekly.com/papers/11/09/01/index.html
On Eastern Livestock Debacle
By Colleen Schreiber
KISSIMMEE, Fla. — One of the cattle industry's worst debacles — at least in recent times — the Eastern Livestock Chapter 11 bankruptcy case is now about 10 months in, and far from being sorted out.
James Knauer, who was appointed as the trustee over the debtor's assets in December 2010, told those attending the National Cattlemen's Beef Association's Live Cattle Marketing Committee meeting that he now predicts creditors might possibly get back as much as 20 to 30 cents on the dollar, four or five cents of which would come from claims filed against Eastern's bond. That's far better than his original prediction, but he was quick to qualify that the estimate is dependent upon the amount of money available to distribute and the amount of claims allowed.
"People file claims in bankruptcy cases for all kinds of bizarre reasons and all kinds of amounts that are way too much," Knauer told listeners. "If you look on the docket and see the total dollar amount of all the claims filed, it's a ridiculous amount by probably 50 percent."
The 20 to 30-cent figure that he offered is based on the estimated recoverable amounts from the following "pots" of money: Eastern's USDA bond totaling $875,000, $15 million in claims against assigned contracts, $8 million in interpleader actions, $2.5 million from Eastern's assets, $15 million in collections from accounts receivable, and $4.7 million in funds seized by the FBI.
It is important to understand, however, that this is simply the trustee's opinion and not the opinion of the bankruptcy court. The bankruptcy court itself may or may not reflect Knauer's position. How the court might rule is completely independent of Knauer's position on the issue.
Regardless, the "pots" that Knauer referred to does not sound like much money given that Eastern reportedly sent up to $130 million of bad checks to 700 or so producers across the country beginning in late 2010. The first checks began bouncing on October 29. Things came to a head on November 9 when Fifth Third Bank, Eastern's primary bank, froze the company's accounts after uncovering an alleged check-kiting scheme.
Eastern's last reported audit, conducted in September 2009, recorded sales of $1.7 billion. By October 2010 their sales had virtually doubled. Most of those 2010 sales are now thought to be fraudulent transactions.
"I now believe those audits were inherently flawed," stated Knauer. "I believe the things Eastern was doing go clear back to 2008."
Since being appointed trustee, Knauer has met with USDA, the FBI, and the office of the Inspector General of the U.S. Postal Service. The FBI, for obvious reasons, is limited in terms of information they can provide to those involved in the civil case.
Knauer said he's talked to well over a hundred people who owe Eastern money, and he's found most of them to be "very fine people." Still, as in every bankruptcy case, the trustee faces challenges when it comes to collecting money. One hurdle, which Knauer noted is not uncommon in these kinds of cases, is that just before the key principles left the company, much of the information was destroyed, particularly the more damaging information stored on computers. Some of the hard drives have been successfully restored, but such success has been relatively limited.
Another hurdle is that the company had an antiquated accounting and recordkeeping system. Many of the transactions were handwritten and thus are now open to various interpretations as to exactly what those entries referred to.
A lot of records are also missing, and others were altered. Every desk in the building, Knauer said, had two or three rolls of white eraser tape.
"I don't know why anyone in the world would need that … It seemed to be a way of life."
Knauer said they've attempted to contact all the people they've uncovered records on who owe Eastern money. There are some, however, who have not been contacted because there is no record of them owing money.
Thus far, $10 to $11 million has been collected. He offered a few of what he referred to as his "David Lettermen Top 10 list" of reasons why there isn't more money in the bank's coffers with respect to the accounts receivable portion of the bankruptcy case. There's the "that wasn't the deal," and the "those weren't the cattle I purchased," and "those were the sickest cattle I ever bought; half of them died and I incurred all these extraordinary expenses."
"Some of these are perfectly legitimate claims," Knauer pointed out.
There are those who did, in fact, pay for the cattle and have a cancelled check as proof. There are also those who, rather than pay Eastern, paid the person who sold the cattle to Eastern because Eastern hadn't paid them. Still others, when they heard about Eastern's troubles, stopped payment on a check for cattle that had already been delivered, and because they weren't sure who to pay, put that money in a separate escrow account. Some of those transactions have been tracked down, but because records are lacking, authorities are still in the process of tracking some of the money.
There also were lots of "air" cattle, cattle that Eastern's customers claim they never bought — ultimately fraudulent transactions on Eastern's part.
"The ultimate irony is early in the case we started calling these fictional cattle 'air' cattle," Knauer told listeners. "Two months ago we actually found a file called 'air' cattle."
"We're talking about millions of dollars worth of checks that were sent to Eastern that never hit the books. Toward the end, in some cases, those proceeds were diverted to pay money that was owed."
Some creditors filed their own case against Eastern. In fact, shortly after Knauer was appointed as trustee there were debtor interpleader cases pending in five states. An interpleader, he explained, is someone who is concerned that if they paid Eastern, for example, someone else connected with the transaction would sue them for the same money.
"What they did was they tendered money with the court, and in some cases seemed to enjoin everyone who was on their rolodex as a defendant because they might have a claim against the money."
Those interpleader actions have now been transferred into one court — the bankruptcy court where the Eastern bankruptcy is being handled. Those claims, Knauer said, amount to about $10 million, and he opined that perhaps as much as $8 million of that could be owed Eastern.
Another piece of the puzzle that has made recovering money owed Eastern more difficult is that days before things imploded, Eastern assigned hundreds of its contracts to various auction markets and other customers in an effort to cover some of the losses. The largest of these assigned contracts, some 500, went to Superior Livestock Auction.
Superior was apparently trying to do the right thing to make their customers whole. They made certain that every customer whose cattle sold on the video to Eastern during late October and early November was paid. According to court documents, that left Superior on the hook for $19.2 million in unpaid sales.
Many of those cattle were for future delivery. When Superior took over these contracts they gave the people who had originally bought the cattle through Eastern the opportunity to take delivery on the cattle. Some 28,000 head that Eastern contracted for future delivery, however, were not delivered. In this case Superior stepped in and made the sellers whole by paying them what the cattle had originally been contracted for, and then on a specified date those cattle were resold on the video.
Knauer, however, contends that Eastern's assignment of these contracts gave preferential treatment to certain customers.
"Several hundred of these contracts were hardly contracts at all because the cattle had already been delivered," Knauer insisted. "In fact, about $9 million of these assigned contracts involved cattle that had already been delivered but money was still owed Eastern. The people who got these assignments," he continued, "were faced with having to pay a lot of money because Eastern gave them bad checks … they came in and got whatever they could. That's what people do."
The other aspect that makes this difficult to sort out is that the industry standard is that when cattle are contracted for future delivery, the seller is paid a good-faith down payment, perhaps $40 per head. In this case, because Eastern was the order buyer, Eastern paid the seller the $40 per head deposit. On the buy side, those who bought cattle through Eastern on the video also typically paid a good-faith deposit.
If it all works properly, the $40 per head fee is simply a pass-through transaction. Not so in this case, according to Knauer. He contends that when Superior took over those contracts, Superior not only in some cases benefitted by selling them in an up market, but they also benefitted from the $40 per head good faith deposit, because rather than pay that fee to Eastern, the feedyard, for example, paid that fee to Superior.
The trustee and Superior obviously have conflicting views. Superior contends that the cattle contract terms clearly permitted assignment. This differing view will have to be decided by the bankruptcy court. Total claims against all of these assigned contracts now amounts to $15 million.
To reflect the assignment of these contracts, USDA did reduce Superior's $19 million claim against Eastern's bond to $1.4 million. This does not, however, have any affect on the amount or the validity of Superior's claim against Eastern in the bankruptcy.
Early in the case the FBI seized $4.7 million from Tommy Gibson's personal bank account, the account that "anchored" the kited check writing scheme. When things came crashing down, it was that bank account that was ahead, he explained.
Knauer also noted that government seizure laws are such that when assets or cash used in the commission of the crime are seized, the government can keep the money.
"We've had a number of meetings with the FBI and they have told us that they are not going to keep the money, that they want the money distributed to the victims," Knauer said.
The FBI, however, doesn't necessarily agree with the bankruptcy ordinance law for distribution of such money, and according to Knauer, they are in the process of working out a plan for how they would like to see the money distributed.
"It's going to be distributed by me, but outside the bankruptcy," he told listeners. "Because we have all the claims, I think they feel we're already set up to distribute the money, but I have yet to see exactly what their thoughts are."
Tommy Gibson and his wife have filed a separate bankruptcy, thus as trustee, Knauer has filed an enormous claim on behalf of creditors in the Gibsons' bankruptcy case as well.
Fifth Third Bank, however, has a lien on most of Eastern's assets, as they are owed about $32 million. Knauer said he's asked frequently why he hasn't sued the bank. He assured listeners they are looking into it. An independent law firm he hired is investigating this in two phases. The firm's first charge was to determine if Fifth Third's lien was properly documented and properly filed. The law firm confirmed that the lien had, in fact, been properly documented.
Their second charge was to determine if Fifth Third engaged in any illegal conduct that would allow the bankruptcy court to assert a claim against them that would offset or eliminate some of their rights. That part of the investigation, Knauer said, has not been completed.
"When the law firm completes its investigation, we'll make a decision," he stressed. "We are having negotiations with Fifth Third to release some of their liens," he added. "I suspect if we aren't successful, then the FBI will probably just exclude the bank … I don't know that for sure, but that's part of the leverage that's moving around in the case."
Knauer told listeners that 387 claims totaling about $37 million were filed against Eastern's USDA bond. However, after USDA reviewed the claims, the amount was reduced to around $18.7 million. He explained that part of the reason the claims have been reduced by almost half is because there was a lot of redundancy. Because he was concerned that some of the people impacted might not know they needed to file a claim in the bankruptcy case as well as a claim on the bond, as trustee he filed a $30 million claim on the bond on behalf of every unpaid seller. As it turns out, many of them did file a claim on the bond as well, so all of that had to be sorted out.
Knauer told listeners he now expects the bond portion of the settlement to pay impacted parties four to five cents on the dollar rather than the one or two cents on the dollar that he originally had predicted. Those who filed a claim on the bond should have already received a letter stating an amount they are entitled to receive. To minimize unnecessary expenses on the part of the claimants, only those who do not agree with the amount stated will need to appear in court. He said his goal is to get the bond money distributed before year's end.
Following the formal presentation Knauer took questions from the crowd.
One producer asked how many other banks in addition to Fifth Third were involved.
"Fifth third was the principle lender to Eastern," Knauer responded. "Another lender, who is making claims that cattle he owned were sold by Eastern and they had a lien on those cattle, is owed about $8 million. These are just more of the kinds of problems we're dealing with."
There was still another question about why this Ponzi scheme was not identified earlier, given all of today's modern technology; the same producer wanted to know why the FBI wasn't investigating possible fraud by Fifth Third.
"Well, first, I didn't say the bank was involved in any kind of fraud," Knauer responded. "I said that the principles of this company clearly committed fraud and at least pulled the wool over the bank's eyes, but I have not seen anything that indicated the bank knowingly did anything other than make a lot of bad decisions in lending."
He added that the assumption is that the FBI is pursuing every possibility in the criminal case, but as trustee he is not privy to those details.
"Any time we uncover anything juicy, we image it and send it to them. However, while we give them a lot of information, we don't get a lot of information back," he reiterated.
Someone else wanted to know if the auditor was being investigated to see if they were liable.
"You can bet we looked at that," Knauer responded. "Those audits were done by a small CPA firm in Louisville, Kentucky.
"Back in 2008, at the end of the year, the related party's receivables would go way up because he had a kite going on, and he'd have to get those off the books or the bank would not have renewed their credit line," Knauer explained. "So what they did was they got other people — friends of theirs — to engage in fictitious transfers of cattle to reduce the related party receivables and increase the unrelated party receivables which they'd been counting against their borrowing. The total receivables, however, didn't change. He'd just sweep them off the books."
The producer asked again, "So if you were an auditor, what would you assume if you saw that pattern?"
"I would have sensed something was going on," Knauer responded. "The problem that a bankruptcy trustee has going after accountants for gross neglect is even if they participate, they stand in the shoes of the company; the company is committing the fraud. They were pulling the wool over their accountants' eyes."
Given this, as trustee Knauer has instead encouraged Fifth Third to follow through because they were the ones who ordered the audit.
"The audit was done for Fifth Third's benefit, so we think they should be the one who decides whether to file a claim against the accountant. They relied on the audit in extending credit to Eastern. The bank didn't create the fraud; Eastern did," he reiterated.
"They're in the best position to make a claim over an audit that was at least negligible — perhaps more so," Knauer continued. "If there is a claim and they're successful, then that would allow the bank to reduce the money they owe."
Fifth Third, he said, has yet to do anything on the matter.
Someone else asked if Superior violated any laws by accepting private contracts from Eastern just prior to Eastern filing for bankruptcy.
"We contend they violated some bankruptcy laws, but nothing criminal," Knauer responded. "They were doing what they could to try to recover their losses, and we just claim that they didn't have a right to do that."
Responding to a question about the numbers of trade cattle versus the number of cattle that Eastern had on feed, Knauer acknowledged that a significant number of cattle owned by Eastern were on feed at the time of the bankruptcy, but he couldn't verify actual numbers.
There was a question about the interpleader portion of the bankruptcy and who might or might not be paid.
"I think we've identified more than a million and less than $2 million of claims that we think are likely to be paid," Knauer said.
"What kind of claim would that be?" the producer asked.
"Of all the facets of the bankruptcy, because these interpleader cases are being so heavily litigated, that is the one I am least familiar with," he responded. "There are some statutory trust claims in one or two states that may have to be recognized. I believe there are some feed claims; there may be some states that have some trucking liens …
"The interpleaders operate in three different ways," he continued. "They bought and sold, they acted as a marketing agency, and/or they acted as a clearing agency … so the creditors in our case want to put the hat on Eastern which is most favorable to them, and in many cases that is the view we share.
"Eastern recorded virtually all those transactions as sales and cattle in the inventory. That would indicate they were buyers and sellers, and so how those transactions end up being characterized may have a huge impact on how those cases are decided."
He was also asked about the amount of fees already paid out in the bankruptcy case. Development Specialists Inc., the firm hired to do the accounting investigative work, has thus far been paid $700,000 to $800,000. The attorneys have been paid another $760,000. As the receiver, Knauer's total fees paid to date amount to about $121,000.
Another questioner asked, "Where did all the money go in an up market? I just don't understand where all the money went."
"I think the money had been disappearing for a long time and the kite just got bigger and bigger," Knauer responded. "I don't think it happened in some short marketing period."
Knauer was asked to offer suggestions on what buyers and sellers could do in the future to protect themselves against fraudulent transactions. He opined that while wire transfers may not be the most practical and they may not be the answer in every situation, in the case of the seller it might be the most sensible solution. The buyer of the cattle, however, would not likely agree to wire money in advance because he wants to see the cattle before paying for them.
Given that, Knauer suggested that perhaps a seller set up some kind of provisional escrow account whereby they wire the money to a bank to put in a special escrow account and that money is not released until after the cattle are unloaded.
Finally, Knauer had this to say:
"I've seen every kind of contract written; some of them are long and complicated, and some I've seen are only two or three sentences," Knauer told listeners. "As long as you're dealing with honorable people, it doesn't matter what the contract says. However, since not everyone is honorable, when doing transactions of this magnitude, I'm not sure in this day of commercial banking and wire transfers and cell phones why something can't be worked out to overcome such problems."
http://www.livestockweekly.com/papers/11/09/01/index.html