On June 3rd a grand jury in Colorado handed down indictments against Jayson Penn, CEO of Pilgrim's Pride Corporation and Roger Austin, a former Pilgrim's Pride Vice President. Indictments were also filed against Mikell Fries, President of Claxton Poultry of Georgia and Scott Brady, Vice President of the company.
In announcing the indictments, Makan Delrahim, Head of the Department of Justice (DOJ) Antitrust Division stated, "executives who cheat American consumers, restauranteurs and grocers and compromise the integrity of our food supply will be held responsible for their actions".
The origin of the case lies in a civil lawsuit initiated in September 2016, alleging that seventeen chicken integrators colluded to "fix, raise, maintain and stabilize" prices for broiler products. Judge Thomas Durkin of the District Court for the Northern District of Illinois halted the process of discovery in the civil suit on June 25th 2019. Judge Durkin issued the stay in response to a petition from the Department of Justice. The Government maintained that obtaining depositions and gathering evidence would prejudice an ongoing criminal investigation. The stay was requested to protect an investigation by a grand jury.
As noted in the CHICK-NEWS report of July 2nd 2019, the civil lawsuit also alleged manipulation of the Georgia Dock benchmark price from 2015 through to its termination by the Georgia Department of Agriculture in mid-2017.
Central to the civil case was an allegation that the defendants colluded indirectly through data abstracted from the Agristats® benchmarking system. The Plaintiffs maintained that information published in reports circulated by Agristats containing production and marketing data allowed integrators to adjust production to the detriment of both the retail and food service sectors of the food industry. Agristats® is a co-defendant in the civil suit and represents a potential liability for the then owner Elanco Animal Health and parent company Eli Lilly before the spin-off of Elanco and the subsequent sale of Agristats® to unnamed acquirers.
Fieldale Farms settled the civil lawsuit in November 2018 paying $2.3 million and agreeing to provide substantial cooperation supporting plaintiffs' complaints.
Although the press reports concerning the indictments do not provide information beyond the names of the four indicted and their company affiliations, there are a number of inferences that can be derived from events preceding the release of the Federal Grand Jury findings: -
- It is considered significant that Bill Lovette was not indicted notwithstanding the fact that he was the president and CEO of Pilgrim’s Pride for eight years during which the alleged collusion took place. It is noted that Lovette "retired" from his executive position and the Board of Pilgrim's Pride Corporation on March 22, 2019. In commenting on the retirement, Gilberto Tomazoni, Chairman of the Board of Directors stated, "William W. Lovette will be retiring from his position as president and CEO and as a member of the Board of Directors effective March 22nd 2019 and not as a result of any disagreement with the company regarding its operations, policies or practices”. The sudden departure of Lovette generally recognized as a competent and experienced executive, popular in the industry and without a hint of ethical concerns, generated considerable speculation at the time. The question now arises as to his involvement as president and CEO of Pilgrim’s Pride in any possible collusion that occurred and his subsequent possible cooperation with the DOJ
- A second question relates to the selection of the companies allegedly involved in collusion. Obviously it takes more than one company to be involved in an alleged crime, but it is noted that Pilgrim's Pride with a weekly production of 30 million broilers is over ten times the size of Claxton Farms. It is difficult to see how these two companies, even if illegal activities occurred, could have collectively manipulated the broiler market. The DOJ has documentary evidence of collusion between indicted personnel at Pilgrim's Pride and Claxton Poultry concerning an attempt to "rig" a contract. It is also hypothesized that pressure will be brought to bear at both ends of the spectrum of defendants to elicit plea bargains that will be applied to future indictments.
- There is no question that if guilty pleas are extracted by the DOJ, the subsequent liability with regard to the civil case will devolve into negotiating the quantum of damages that will accrue to billions.
The disclosure of the indictments had an immediate effect on the share price of the three quoted companies producing chicken. On a day when the S&P rose 1.4 percent and the Dow by 2.0 percent, Tyson Foods closed at $60.10 down 3.8 percent; Sanderson Farms closed at $122.62 down 6.2 percent and Pilgrim's Pride Corporation closed at $18.29 falling 12.4 percent. Erosion of share value would have been greater but for a mid-afternoon recovery.
The involvement of Pilgrim's Pride plays out against a background of woes for JBS SA of Brazil the holder of 75 percent of the equity of PPC. Production units producing chicken, beef and pork in both the U.S. and Brazil have been impacted by COVID-19. Brothers Wesley and Joesley Batista scions of the founder and controlling shareholders of J&F SA that in turn controls JBS SA, recently had their civil and business rights restored. This was after a two-year suspension following a plea agreement involving payment of a $1.2 billion penalty. The Batista brothers acknowledged bribery and corruption of officials extending up to the President of Brazil, Michel Temer, in addition to flagrant insider trading.
It is hoped that the allegations advanced by the DOJ lack substance and that the criminal charges will be confined to the companies implicated and the action by the DOJ does not reflect activities in the chicken industry. It woild be best for all concerned for the issue to be resolved quickly with a minimal of negative publicity.
In the interest of completeness, relevant postings in CHICK-NEWS are re-posted in this special edition.