Livestock Securities Case Proves Agribusiness Isn’t Forgotten

The Securities and Exchange Commission announced on Dec. 14 that it brought charges against Agridime LLC, a Texas company specializing in meat sales, distribution, and animal supply chain management.

The SEC alleged the company and its owners conducted unregistered securities offerings and used investor funds to make Ponzi payments and pay undisclosed sales commissions to themselves and others.

It also obtained a temporary restraining order against Agridime, which appointed a receiver and halted key aspects of Agridime’s cattle investment program that the SEC argues violates US securities laws.

While much of the attention on the SEC’s enforcement activity centers on new technologies and programs in digital assets, this case is a reminder that, like several foundational securities law cases, the economic realities of an investment program remain equally applicable to agribusiness and that the SEC remains active in this industry.

According to the SEC’s complaint, since 2021, Agridime has raised over $191 million from more than 2,100 investors located in 15 states through the sale of investment contracts related to the purchase and sale of cattle. Through its website and social media sites, defendants promised retail investors returns ranging from 15% to 32% on passive investment “without having to do all the work.”

As described in the complaint, Agridime agreed to sell cattle to investors for $2,000 per calf and buy back the same calf after a year at a higher price to provide a certain guaranteed profit. Agridime promised to use the funds to purchase, feed, process, and sell specific cattle.

An important feature of Agridime’s program is that investors never took possession of the cows and, therefore, never purchased specific cows. Instead, they invested into a program, the success of which fully depended on the efforts of Agridime and its principals.

Of the $191 million raised, the defendants used $58 million to pay back the existing investors and $11 million to pay commissions (per cow sold) to themselves and other salespeople. Neither type of payment was disclosed to the new investors, and the SEC characterized these as Ponzi payments.

In the end, the company was unable to purchase the necessary quantity of cattle and, therefore, failed to fulfill the contracts.

The Securities Act of 1933, as amended, requires that the offer or sale of securities to the public be registered with the SEC unless made in compliance with one of the available exemptions.

The definition of security under federal law includes many financial instruments. Among them is an investment contract, and the hallmark US Supreme Court case establishing the test still used today—SEC v. W.J. Howey Co.—was based on an investment scheme for orange groves.

Under the namesake Howey test, an investment contract is an investment of money, in a common enterprise, with a reasonable expectation of profits, derived from the entrepreneurial or managerial efforts of others.

Closer to this case, the sale and management of livestock has previously given rise to securities laws issues. In 1971, in Miller v. Central Chinchilla Group, Inc., an Iowa District court addressed whether a contract for the purchase of a pair of breeding chinchillas was an investment contract and, therefore, a security.

The plaintiffs in that case agreed to raise and breed chinchillas in accordance with instructions provided by the defendant corporation. The corporation agreed to repurchase the offspring of the chinchillas for $100 per pair. The plaintiffs argued that they were misled into believing that it was easy to raise chinchillas and that the venture would be highly profitable.

Chinchillas turned out to be difficult to raise and had a high mortality rate. Also, this could be profitable only if the defendants repurchased the offspring and then resold them to other prospective chinchilla raisers at a higher price.

The investors’ profits depended on the promoters’ ability to find new investors willing to raise the chinchillas. This scheme satisfied the Howey investment contract test and, therefore, was held to be a security.

Similarly, in Continental Mktg. Corp. v. SEC, the US Court of Appeals for the 10th Circuit affirmed an earlier decision that an investment contract existed when investors were offered contracts for the “sale, care, management, replacement or resale of live beaver for breeding purposes.”

In that case, the Weavers’ Beaver Association, one of the original defendants, sold pairs of beavers for up to $1,200 each (while initially buying them for $20 to $75 each), representing to the public that there was a ready market for the resale of the beavers. Beavers are challenging to take care of in private residences.

Pursuant to a separate contract, the defendants were to keep the beavers on their ranches, assuming complete control of their care and feeding while also assuming control over their resale. Defendants guaranteed 100% return on this investment within one year.

The association charged investors annual fees until the beavers could be resold. However, since the association also sold their own beavers, there wasn’t enough demand to sell the beavers purchased by investors, who ended up paying yearly maintenance costs on top of an expensive initial investment.

Although the Agridime case is still to be decided, there is a strong resemblance between the facts in the SEC’s complaint and securities precedent related to livestock cases, which may have contributed to the court’s prompt temporary restraining order and appointment of a receiver to manage Agridime’s assets during the lawsuit.

Neither the chinchillas, beavers, nor cows are securities in themselves. However, in each case, they were subject of an investment scheme, under which investors invested their own money with the expectation that they would derive a profit based on the promises of the promoters.

In the Miller and the Continental Mktg. Corp. matters, the courts held that the promoters offered and sold these investment contracts, which were unregistered securities, to unaccredited investors in violation of the federal securities laws.

Agridime hasn’t yet had an opportunity to present its opposition to the SEC’s complaint, if any, and the court has scheduled a preliminary injunction hearing on Jan. 5, with the recognition that “both parties have an enormous amount of preparatory work to perform in this case’s nascency[.]”

We shall wait and see whether the court in the Agridime case agrees with the SEC’s allegations, but this enforcement action serves as a reminder that the SEC’s recent emphasis on crypto and digital assets enforcement doesn’t mean that it is neglecting traditional industries in the meantime.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Arina Shulga is partner at Nelson Mullins’ New York office, representing startups and emerging growth companies.

Jeff Kelly is partner at Nelson Mullins’ Raleigh, N.C., office, with focus on emerging technology, including data analytics, digital assets, and fintech.

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