Federal Charges Filed in CoBank Co-Op Blunder

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Ashby Farmers Cooperative Elevator (AFCE) is a cooperative in Minnesota with a financial relationship with CoBank, one of the Farm Credit System’s (FCS) banks, and the only FCS institution permitted to lend to cooperatives. But AFCE has fallen on hard times because its former general manager, Jerry Hennessey, allegedly embezzled money from the co-op “to bankroll big-game hunting trips and other personal expenses.”

Things just got much worse for Mr. Hennessey.

The Grand Forks Herald reports that the U.S. attorney for Minnesota has charged Mr. Hennessey with federal income tax evasion as well as two counts of mail fraud. Federal involvement in this matter indicates that its impacts are broad and far-reaching, and that it merits investigation by a higher authority. Of course, there’s already a higher federal authority – the Farm Credit Administration (FCA). As Farm Credit’s regulator, the FCA has a mandate to keep Farm Credit in check. The FCA should have been one of the first lines of defense.

Federal prosecutors should not stop their investigation at Mr. Hennessey – CoBank’s role in this should also be under scrutiny. How could CoBank, a large financial entity with more than a thousand employees – including many auditors – and immense resources, miss that the AFCE was in trouble? According to John Kokkinen, assistant U.S. attorney prosecuting the case, Hennessey had “made numerous misrepresentations to the lender (CoBank) regarding the Co-op’s assets that were to serve as collateral for the line of credit, including the amount of grain the Co-op had in storage.”

Why hadn’t CoBank verified that the co-op had the amount of grain it claimed? Why didn’t CoBank verify Hennessey’s statements to determine whether they were true or misrepresentations? This was fully within CoBank’s power – Erik Ahlgren, an attorney retained by AFCE to piece together what went wrong, noted that while a co-op is not required to do an annual audit, CoBank, as the co-op’s lender, could have required one.Why hadn’t CoBank conducted an audit? Are there other co-ops that it has lending relationships with which haven’t been audited? Has the FCA investigated whether CoBank is conducting enough thorough audits? If it hasn’t, then why hasn’t it?

CoBank is putting farmers and members of these co-ops at risk by not conducting reasonable, regular audits. If it is going to extend loans and enter into financial relationships, it should be thorough and measured, for the sake of the farmers and member-owners of the co-ops it is entitled to serve.

CoBank isn’t going to just do this on its own accord – that would cost it money that would be better spent on loans for telecoms and real estate investment trusts (REITS). It will need a nudge from the FCA. And if the FCA won’t take on the job, Congress should.