Where’s the beef? Ghost Cattle Fraud

The TV show Yellowstone is all the rage and it’s all about protecting the ranch and the cattle. But what if the cattle doesn’t exist?

In Washington State a cattle rancher has been sentenced to 11 years in prison for scamming Tyson Foods out of almost $250 million with cattle that didn’t exist. You read that number right, almost a quarter of a billion dollars.

I keep saying that fraud at the top is the most expensive fraud. This might be the exception…sort of.

In 2016, Cody Easterday of Mesa, WA entered into an arrangement with Tyson Foods. Easterday ran a family farm and feedlot in Washington. Tyson would front the money for cattle and feed, Easterday would maintain the cattle for Tyson and pay 4% interest on the fronted money when the cattle went to slaughter.

This looks like a typical outsourcing arrangement. Tyson wanted beef, where presumably it has some control over the conditions of the cows, so it outsources. Given Tyson’s size in the marketplace, it fronts the cash to avoid overwhelming the smaller partner. It charges the partner 4% for fronting the cash. Seems reasonable.

The contract totaled more than $2 billion over 4 years. Easterday is accused of padding the number of cattle by more than 10% and billing Tyson for cattle that didn’t exist, to the tune of $233 million. He pulled a similar stunt with another producer and bilked them out of $11 million for a total of $244 million. Easterday was at the top of his organization, so this is still fraud at the top, he’s just defrauding another organization.

Why did he do it? Easterday was trading futures contracts on cattle. We talked about future contracts last time with FTX and I believe I called it really, really, one more really, risky, certainly leveraged future trading is. Easterday managed to lose $200 million trading cattle future contracts. He reportedly started trading cattle futures as a hedge against market fluctuations, perfectly reasonable, but as he took riskier bets it turned into a straight up gambling addiction.

Easterday confessed when Tyson became suspicious and asked for a full inventory of cattle purchases.

The core lesson here is trust but verify. We don’t have information on how Easterday reported cattle to Tyson, but it’s pretty clear that weren’t conducting any type of audit. I have a friend who did audits of agriculture and it can be tough to audit something like a newly planted field, but you can show a up few months later and confirm.

I have another friend who owns a small cattle ranch and cows these days are all tagged , many of them have RFID chips. While cows do move around, they can be counted. If partners are showing red flag like regular invoice corrections, delivery mistakes, etc., it may be time for an audit. If there is already some type of audit in place, review it.

That’s what SOC reports do for online providers. They document the controls in place and whether those controls are being performed appropriately. Company can and should review SOC reports where available to get comfortable with a partner’s controls. On a related note, back to last week, I’ve not found any evidence that FTX had a SOC report in any form.