SF Special: Minnesota Cooperative Falls Prey to Its General Manager
By all accounts, Jerome “Jerry” Hennessey was an avid big-game hunter. The trophies he displayed, including a tiger, a zebra, and a Zimbabwe double kudu, were a testament to his exotic excursions. What the unsuspecting farmers who did business with the Ashby Farmers Cooperative Elevator didn’t realize is that they too had become prey for the former general manager.
Hennessey, who had managed the 307,000-bushel capacity grain facility since 1989, is accused of stealing more than $5 million from the elevator. As early as 2003, he began writing checks to himself coded as soybean, wheat, and corn purchases to disguise their true nature.
The deception escalated from there. Unauthorized checks signed by Hennessey included at least $1.4 million to his personal credit cards with the majority paid to his Cabela’s account, over $500,000 for taxidermy services, and more than $2 million toward hunting trips to Alaska, South Africa, New Zealand, and Australia.
“What Jerry did was really the simplest of all frauds,” says Erik Ahlgren, a Fergus Falls, Minnesota, attorney hired to represent the elevator and who now serves as the court-appointed representative for the creditors. “At first, he was just writing a few checks. As he became bolder, he was writing them more frequently and for larger amounts. He saw an opportunity that spiraled out of control.”
The elevator, which had about 200 members, has now been forced to liquidate its assets. In total, the elevator owes its members, CoBank, and various other creditors about $12 million.
Covering his tracks
Because no one was really watching what he was doing, Hennessey was able to take advantage of a broken system for at least 15 years. Here’s how he was able to cover his tracks.
1. Even though the elevator held a grain buyer’s license, which is renewed annually, it was not required to have a regular inspection by the Minnesota Department of Agriculture (MDA). However, an elevator can request a special exam. The most recent exam at the Ashby Farmers Cooperative Elevator was completed in January 2018.
These exams are voluntary, and the elevator is charged an hourly rate, according to Nick Milanowski, fruit, vegetable and grain section manager, Plant Protection division, Minnesota Department of Agriculture.
“Typically, they are limited in scope to the information the elevator requests. Our exams are often used as a component of the audit done by a CPA. These special exams are most often used in annual reporting for the board of directors or for working with banks,” he says.
Hennessey said there was grain being stored off-site, but the MDA was only asked to inventory the grain on-site. The report generated from the review included additional pages, which were supplied by Hennessey, outlining the off-site grain.
In reality, no grain was being stored off-site.
“This is a real glitch in the system because the bank was basically being given information on fictitious inventory,” Ahlgren says.
2. A financial audit or review was never done under Hennessey’s leadership. The requirement for all grain buying license holders to submit financial statements on a regular basis was removed from Minnesota statutes in 2012. However, the commissioner of the Minnesota Department of Agriculture can require a financial statement at any time.
“Typically, a financial statement is requested when there is some indication during exams or through reporting from clientele that there is a need or cause for concern,” Milanowski says.
3. The elevator failed to supply financial audits to CoBank, who’d been doing business with the elevator since 1985. During Hennessey’s time as general manager, it’s unclear how many audits were actually requested by and provided to CoBank.
What we do know is that in January 2017, CoBank requested a financial audit. Hennessey basically disregarded the request, and the bank did not take any additional action.
The following year (January 2018), the bank once again requested an audit. When Hennessey didn’t comply, CoBank notified the elevator in June 2018 that it would not be renewing the operating loan. It was also calling in the nearly $8 million it was owed, which was due in full on September 1, 2018.
“Apparently, Jerry was telling both the board and the bank he had this all worked out and that refinancing the loan wouldn’t be a problem,” Ahlgren says. “However, he had to have known that wasn’t true, and he could clearly see this was all coming to an end.”
While he may have realized it was all about to come crashing down around him, that didn’t stop Hennessey and his wife, Rebecca, from taking a trip to Australia in August 2018. This last excursion was – at least in part – paid for with funds from the elevator.
Editor’s Note: CoBank declined to comment for this article.
4. The elevator’s bank account only required one signature on checks.
5. The board of directors put too much trust in Hennessey. Because Hennessey had been employed by the elevator for more than three decades in this small community, the five-member board became comfortable in letting him control all aspects of the financials.
“What failed is the oversight of the process,” says Keri Jacobs, an associate professor at Iowa State University. “While it’s important to place your trust in the person hired to lead your business, there must also be checks and balances in place to verify what he or she is doing.”
“There’s no way around it,” Ahlgren says. “There were extremely poor internal controls.”
Editor’s Note: Attempts to reach the Ashby Farmers Cooperative Elevator’s former board president Russ Dewey were unsuccessful.
Where do we go from here?
Hennessey disappeared in early September 2018, but he turned himself in to federal authorities on December 4, 2018. He pleaded guilty to federal mail fraud and income tax evasion.
During the plea hearing in St. Paul, Minnesota, on February 14, Hennessey admitted to writing personal checks and disguising them as co-op expenses. He also confessed to misrepresenting the amount of grain in storage in order to obtain an approximate $8 million line of credit for the co-op. Federal prosecutors believe the checks written from the co-op’s account added up to approximately $5.3 million, which Hennessey did not dispute.
His sentencing is scheduled for June 21, 2019, at the federal courthouse in Fergus Falls, Minnesota. Hennessey could serve 6½ to 8 years in federal prison, according to court documents. In addition, he would have to pay up to $250,000 in fines and restitution of $6.5 million to victims and the IRS.
As part of his guilty plea, Hennessey agreed to pay a little over $5.3 million in restitution to the victims of his crime. The plea agreement asked that the court order this restitution be paid before the $1.2 million that is owed to the IRS for income taxes. However, what he agreed to pay and what he has the ability to pay are two different things.
“The general rule of thumb is that if it’s easy to get a judgement, it’s hard to collect because the other side knows it has little to no assets to fulfill the debt,” Ahlgren says. “If it’s hard to get a judgement, it’s because the other side has assets you can easily collect, and they are going to fight to keep those assets.”
Monies to help cover what is owed will come from the sale of any real or personal property owned by the Hennesseys that was purchased with elevator funds. This consists of four properties including their primary residence located in Dalton, Minnesota, and a 2011 Bobcat S185 skid steer.
Proceeds from the sale of the Ashby Farmers Cooperative Elevator including the land, the Brock grain bin and handling equipment, buildings, fixtures, and equipment will also go toward the debt. Ashby Grain LLC, which is an entity wholly owned by Wheaton-Dumont Co-Op Elevator, is purchasing the property for $500,000.
The elevator he once managed is also pursuing a civil case against Hennessey and Rebecca (his now estranged wife) for approximately $4.9 million in damages. In addition, Ahlgren is going after $831,500 from the six big-game hunting firms who received checks from the elevator.
Jason Lina, a Morris, Minnesota, attorney is representing Ahlgren as the assignee to pursue funds from a $1 million directors and officers liability insurance policy. The suit is being brought on behalf of the elevator against its board.
Once all is said and done, Ahlgren believes around $3 to $4 million will be recovered.
As litigation moves through the court system, there is no escaping the negative effect on the entire community – most of all, farmers.
“For these farmers, grain is cash,” says Senator Torrey Westrom, chairman of the Minnesota Senate Committee on Agriculture, Rural Development, and Housing Finance. “Just like you or I would depend on a bank to keep our money safe, farmers must be assured their grain is stored safely at the elevator.”
Farmers who fell prey to the deception are considered unsecured creditors, which means they are last on the list to receive compensation for their losses. They could, however, file a claim by March 23, 2019, against a bond the elevator held through MDA. The amount of a bond can range from $10,000 to $150,000 and is based on how much grain the elevator purchases annually. The Ashby elevator reportedly had $1.9 million in annual revenue. It held a $125,000 bond, which is $55,000 more than it was required to have, according to Whitney Place, assistant commissioner, Minnesota Department of Agriculture.
Because this is an open investigation, Milanowski says they are still evaluating the validity of claims. However, he did share that the total filed to date exceeds $2 million. Some speculate that figure could be closer to $4 million. Actual numbers are expected to be available in early June 2019.
Clearly, the $125,000 bond won’t come close to covering what farmers lost. As the Minnesota bond claim history below shows, the total payout rarely covers what is actually owed. In fact, from 2011 to 2015, the bonds only covered 18% of what was actually owed on the valid claims.
|Year||License Type||Company||Total Valid Claims||Total Paid|
|2011||Buy & Store||Minnesota Grain||$691,034.77||$50,000|
|2011||Buyer||Bock Co-op Creamery||$17,360.69||$17,360.69|
|2011||Buy & Store||Green Meadow Bean||$69,043||$50,000|
|2011||Buyer||Winsted Farm Elevator||$57,462.09||$57,462.09|
|2012||Buy & Store||Green Meadow Bean||$152,352.89||$150,000|
|2012||Buy & Store||Anderson Seed||$450,545.45||$125,000|
|2015||Buyer||North County Seed||$1,473,375.27||$125,000|
|2018||Buyer||Ashby Farmers Cooperative Elevator||To be determined||To be determined|
Better protection for farmers
While there is plenty of blame to go around, what’s important is ensuring something like this doesn’t happen again. After the collapse of the Porter Elevator in 2015, the Minnesota legislature had been addressing the topic. However, it really wasn’t gaining any traction.
In August 2018, the MDA developed the Grain Advisory Group. Made up of organizations like the Feed and Grain Association, CHS, the Co-Op Network, as well as bond companies, its goal is to identify ways to mitigate the negative impacts on farmers when grain buyers go out of business.
“When we went to the legislature, we wanted to be able to say we had talked to all of the stakeholders, and this is our proposal,” Place says.
Based on the Grain Advisory Group’s efforts as well as recommendations made by a previous Senate Agriculture Committee hearing focused on the topic, Westrom recently chief-authored legislation in an attempt to strengthen the financial protections for grain elevator cooperatives.
Seven highlights of Senate bill S2226 include:
- All grain buyers will be required to have at least one yearly inspection. Currently, the law requires that facilities with grain storage licenses be inspected annually.
- Additional inspections can be required at the discretion of the Minnesota Department of Agriculture commissioner.
- Inspections must measure all grain owned and maintained by the grain buyer, which includes off-site storage.
- Grain buyers are required to have their financial statements examined, at the very least, by a certified public accountant (CPA).
- If a grain buyer purchases $5 million or more annually, a full financial audit by a CPA is required.
- All grain cooperative board members must sign off on the financial statements.
- The Minnesota Department of Agriculture must provide cooperative board members with documents that explain their legal fiduciary obligations as board members annually.
“These proposed protections will help strengthen farmers’ confidence in the financial security of a grain buyer, while also bringing more stability for farmers and consumers,” Westrom says.
The fraud protection proposals were included within the agriculture omnibus budget bill passed by the Senate Agriculture, Rural Development, and Housing Finance Committee on Wednesday, April 3, 2019. The bill was heard and passed out of the Senate Finance Committee on April 11, 2019. It passed off the Senate floor on April 23, 2019.
A similar bill, HF2200, was also introduced to the Minnesota House of Representatives.
Both bills are currently being negotiated in conference committee between the House and Senate. The session is set to end on May 20, 2019. If passed, it will then be sent on to the governor.
While the Minnesota legislature works to implement ways to better protect its farmers, the Grain Advisory Group continues to look at other ways to help farmers. Educating them on topics like ensuring they get a signed contract from an elevator is at the top of the list.
At any given point in a farmer’s career, he or she will likely serve on a board. Whether you have agreed to accept a term on a school, a church, or a cooperative board, you generally have two primary responsibilities:
- Hire competent management.
- Guide the direction of the business by providing policy and oversight to its operation. Members place the fiscal health of the cooperative in the hands of directors.
“Being a member of a board is an extremely important function in a cooperative and that role must be taken seriously,” Jacobs says. “To effectively carry out his or her duties, a board member has to be well versed in many critical areas, be able to provide sufficient time and energy to those duties, and hire outside experts on legal and financial matters to ensure proper fiduciary oversight.”
Yet, because these positions are often voluntary, they do not require any formal training.
Through the director of certification program, or DCP, Jacobs has worked for nearly seven years to help board members who are thrust into these seats to understand and carry out their duties.
“These are farmers who are very successful, and they understand everything about their own operation,” she says. “However, they need to be brought up to speed on what it means to run what are sometimes multimillion-dollar companies. What they need expertise in is overseeing management and the financial health of the company and successfully engaging in the strategic planning process of a cooperative.”
Offered jointly among Iowa State University, the University of Nebraska – Lincoln, the Iowa Institute for Cooperatives, the Nebraska Cooperative Council, and CoBank, DCP provides participants education about their responsibilities as board members and training to improve skills used in fulfilling their roles as cooperative directors. The four phases cover cooperative principles and practices, roles and responsibilities of directors, directors’ legal obligations, long-range strategic planning, understanding and using financial statements, and management evaluation and compensation.
Conducted annually to help new directors deal with the challenges they face as decision makers, DCP is designed to accelerate how directors become active, effective members.
“As a new board member, training is very important because it helps establish an understanding of the responsibilities of the position,” Jacobs says.
While this program has been replicated across a number of states, a cooperative is not mandated to send its members.
“The reality is there aren’t enough guidelines for what are essentially volunteer boards of what can be pretty significant entities,” Lina says, noting that lawmakers should provide additional education for directors who sit on the state’s grain elevator boards.
“It’s a huge responsibility and most people don’t really understand what they are taking on,” Ahlgren says.
While the topic of board training did come up during a Grain Advisory Group discussion, the members felt it was best to leave that mandate to individual cooperatives and did not make a recommendation to the legislature.
“However, we would encourage a farmer who is on any board to seek out training,” Place says.