One of the founders of defunct cattle broker Eastern Livestock was sentenced Tuesday to almost six years in federal prison and the former chief financial officer was sentenced to nearly five for their roles in a $32 million check kiting scheme.
U.S. District Judge Thomas B. Russell also ordered company founder Thomas "Tommy" Gibson and CFO Michael Steven McDonald to two years of probation. Gibson and McDonald pleaded guilty to mail fraud in January.
Both men were charged with running a scheme to deposit billions of dollars worth of checks issued from various bank accounts, even though there wasn't enough cash on hand to cover the checks. In doing so, the company got Fifth Third Bank to release more funds from Eastern Livestock's $32 million line of credit.
"Gibson and McDonald caused widespread damage to the livestock industry and devastating harm to numerous individual cattle farmers in Kentucky and elsewhere," U.S. Attorney David J. Hale said in a statement. "Many other businesses associated with the livestock industry were also damaged by the Eastern Livestock fraud. These lengthy prison sentences hold Gibson and McDonald accountable for their federal crimes."
Former employees and business associates of Eastern Livestock in Glasgow, Ky., and New Albany, Ind., flooded Russell with hundreds of pages of letters from around the country in support of Gibson. Many of the letters ask Russell for leniency, citing Gibson's honesty as a businessman in dealing with them.
One person, L.E. "Jim" Byrd, owner of Oak Lake Cattle Company in Okeechobee, Fla., described himself as a victim of Eastern Livestock's collapse. But, Byrd asked Russell to be lenient with Gibson and described business dealings with him as fair. Byrd blamed Fifth Third Bank, which handled the company's line of credit, for honoring checks that weren't backed by deposits.
"It does not serve my interests or anyone else's for Mr. Gibson to serve a lengthy sentence," Byrd wrote.
Another business colleague, Linus A. Thornton of Savannah, Tenn., described Gibson as being well-known and thought of "from coast to coast" with a reputation for honesty in business dealings.
"The only way you accomplish this and continue to be in business this long is basically your word, honesty and character," Thornton wrote.
Eastern Livestock, which had stockyards in 11 states, did business with ranchers in 30 states. The company mainly bought calves throughout the South and sold them to feed lots in big cattle states including Texas and Oklahoma where they are fattened for slaughter.
The indictment states that by inflating the amount of money in the company's cash collateral account, the company could get Fifth Third Bank to release more funds from Eastern Livestock's $32 million line of credit.
The line of credit with the bank ended on Oct. 15, 2010, though the men are charged with continuing to kite checks against the account. Prosecutors said the scheme resulted in millions of dollars in worthless checks being issued.
Federal agriculture officials filed an administrative complaint against Indiana-based Eastern Livestock, accusing it of bouncing checks for livestock purchases and failing to maintain an adequate bond to cover its debts. The company owes money to about 740 ranchers in 30 states, according to the U.S. Department of Agriculture. Three of those owed money sued and forced Eastern into involuntary bankruptcy.
The bankruptcy is still pending in the southern district of Indiana.
"Our seizure of $4.7 million from the defendants has preserved a significant portion of the crime proceeds, which will ultimately be distributed to victims of the fraud," Hale said. "Equitable disbursement of these funds to victims will be accomplished through a coordinated process involving two Eastern Livestock bankruptcy cases pending in the Southern District of Indiana, and the forfeiture action brought by my office in federal court in the Western District of Kentucky."
The company's accounts were frozen by a judge in Ohio, and USDA records show the company is bonded for only $875,000.
McDonald and Gibson were also sentenced to 10 years in state prison after pleading guilty to charges of fraud. Two other men, Grant Gibson and Darren Brangers, received five-year sentences that were probated pending the payment of more than $900,000 in restitution to victims.
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