CHS to Restate Earnings Because of Fraud

Cenex Harvest States (CHS) will be restating their earnings for the last number of years as well as net assets because an employee intentionally messed with the cooperatives financials.  Seems a bit strange that a singular person could tamper with financials to this extent (overstatement of earnings by $100-$190 million for years 2014-2018) without it being caught in an audit.

This was announced via a SEC filing today.  As a cooperative they have no common stock trading, but as almost all of us know they have 5 issues of preferred stock trading which you can see on the Master List.

We post this information because there is a slight chance of a over reaction by investors come Monday and for those with an interest there may be a quick ‘sale’ held.  Personally we believe this is a somewhat non-event, but the cooperative has been rather poorly managed in the last couple of years.

The SEC filing can be read here.

The article from the Minneapolis paper can be seen here.

24 thoughts on “CHS to Restate Earnings Because of Fraud”

  1. First let me state that there are many of these “indiscretions” in SEC filings that are sadly never caught. I have very close friends that were CFO’s of some enormous publically traded companies (JOE, United Rental, Oppenheimer, Blockbuster etc) that have told me that they rely on their large accounting firm(s) greatly to find any “inefficiencies” or deliberate problems that should arise each quarter; there are just too many moving parts to many of these companies to track everything exactly. I am long (BL) Blackline since their IPO (recommended by one of these CFO’s) because they find “anomalies” in companies daily accounting and electronically alert the company to these issues.
    I am long both CHSCO (for many years) and recently picked up a bit of CHSCM when it dipped under $25.10 (I only got a partial fill). I have zero interest in selling (unless there was proven massive fraud) and would definitely accumulate a bit more as I see the private farming cooperative as unusual but very preferred friendly and hopefully this is a one time incident.
    Wishing everyone profitable investing, Nomad

    1. Fraud is hard to detect. CFOs are under pressure to report “good” earnings. Auditing firms and corporate finance and accounting departments are full of CPAs who should have similar ethical character but many times don’t. Financial statements are the responsibility of management. As a retired CPA,
      sadly I wouldn’t count on the outside auditors to find a lot but sometimes they do and it becomes public. Nomad I would hold the CFO and chief accounting officer of an entity along with higher corporate management responsible for the integrity of corporate financials. Outside auditors purport
      to look for material misstatements. Many organizations have high ethics, sadly many don’t. There are a considerable number of restatements.


      1. Speaking of fraud. Something interesting happened with my wife’s 401k from a company she left about 5 yrs ago. We should have rolled it over awhile ago, but just left it sit there.

        A certified planner for the 401k plan tracked her down 5 yrs later and called her at work. She has since worked at 2 other companies since leaving. Essentially he was saying that the company has reached a certain size, and has an upcoming audit, and is working with people that have left and getting them to roll the 401k plan into a separate rollover account just for her, and getting it out of the companies 401k plan. He mentioned all the good things that will happen if you do so, like they help with the tax forms, you have more control over the account, no more ties with the company, etc. He told her to call him back when she has free time. 7 days a week any time day or night.

        I called him back, and he sounded a little nervous. But was trying to get us to move the 401k into a rollover account outside of the 401k. He said an audit was coming. He felt that we would be charged more fees if we stayed in the 401k. He highly recommended them creating a special ira rollover account and put the money there.

        I then said, “i have rolled over some IRA’s before, and you can cut me a check, or i can send you a form and you can then send to my brokerage, and this is all done.” He then said, you have to deal with all the tax forms, etc., and it would be better if they handled all the rollover info. I then said, “thank you for all your help… but simply cut me a check to me or to TD Ameritrade, and this is all done, and i can handle any tax situation.” He then tried several more times to twist my arm, including not sure about the check options, etc. I then said, “find out what how you can get me the check, or if you can cut a check to a brokerage firm. Then let me know and I can then put you in touch with TD Ameritrade phone # that handles rollovers.”

        That was the weirdest conversation i have had. I had him tell me our email, people at the company, etc, and he knew all of that info. He also said he is contacting hundreds of people over the last several years to do this. We ended the call with him figuring out how to cut us a check.

        I am not sure what to think… but I will pull up past statements, make some phone calls on Monday to make sure this is all legit. If this is the latest scam… they went into a lot of detail.

        1. Yeah, that sounds pretty shady. But companies are hard to deal with now. If you ask them anything outside the script it’s like you are speaking a foreign language to them.

          I am currently trying to move my daughter’s trust from Merrill Edge to another company. But they sent the check in my name instead of the trust name so I can’t deposit it in the new account. I would put it in my account and then write a new check for the trust but I am not sure what the tax consequences would be (not good I assume).

          At any rate, I will be making my third call next week to get this issue sorted out. Twice before they assured me it was being handled, but when I called to check I found that no action had been taken. I went for years with no trouble from Merrill Edge and now they are nothing but problems.

  2. I’m hoping N and M will drop like a stone on Monday. I will be there with my big basket. This is no Enron.

    1. This appears to have been public info while market was open yesterday. I would be eager like you Bob, but I doubt we get served up a ball on a tee to hit. After adjusting tax payments for faux profits, they could easily be looking at a loss under a $100 million total. They had net income of $229 million last year. This is a big nothing burger for the preferreds. Now if they found a systemic pattern of accounting fraud, well that is an entire different matter!

  3. Since they didn’t have a common stock, I didn’t know how to evaluate them. I use the common stock to link to the financials. I am curious of the outcome. Because of this, I have never invested in them. A part of me thought their stock price was too good to be true. But another part of me said, well if the prices are high, someone smarter than I knows better. And there are smarter people than I.

    1. Mr. Lucky let me tell you this. This is a co-op and largely the patrons of their “common stock” are owners of their preferreds too. They will not screw you over and serve the people who own them. Example…CHSCP…This was the original preferred issued in 2003 at 8% par when 10 year was over 4%. It necame callable 2013 when 10 year was under 2%. So did they redeem and reissue at lower rate? No, there was such an outcry from existing preferred holders that not only did they not redeem, they renewed it to be noncallable for 10 more years! If you notice CHSCP trades higher than any because of its limited supply. People generally have held it and continue to do so.
      If you believe the company is viable, then its just personal price point as they do their preferred shareholders right.

      1. Exactly why I like owning the preferreds of CHS. How many other companies would do that ? I don’t think I’ve ever heard of another. There is no common stock on the exchange so the shareholders are those that own the preferred and they do treat you right. Mr. Lucky should take another look. It’s a unique company.

        1. Retired, the only reason why I have not been in long term, was I would flip out on new issues as they would run up fast…I mean $2 bucks quick! Of course I would think I could reenter, and then it wouldnt drop. They did a few times over the years, I would buy and flip, and would get locked out again!
          Im going to try to show some restraint and hold my CHSCN. Frankly I should have stayed awake and bought recently CHSCM when it briefly went before par, but was asleep at the wheel. I am watching a little closer now!

  4. I read the article linked to. With revenue of 32 billion last year the company surpassed Minnesota based 3M in size so this is a huge company. The $190 million overstatement is on reported pretax income of $1.6 Billion. I own the L preferred and if it drops on Monday due to this, I’ll be selling something else to add to my position. I don’t see this as an issue for Preferred stock holders. Any reaction will be an opportunity IMHO.

    1. I have owned off and on various CHS preferreds. Recently got back in CHSCN at $25.48. A collective yawn on this. After tax deduction it is way less than one quarters earnings. Not looking for any dip. But if there is I will pounce. Most people do not realize this is a powerhouse Fortune 100 company.

      1. It is more like a Fortune 370 ish company. It is in the top 500 though. It would need to more than double its earnings to get that title.

        1. Mr. Lucky, the 64th annual Fortune 500 list released this year has them at #96, down 3 spots from previous. Fortune will have several lists, but the main one referred to is this one which is based on revenue, not profits. Yes it would be nice if CHS was top 100 there, also.

          1. BTW, last year was a poor year for them, with earnings down 69% from previous year. Earnings will be higher this year. Last year they only made about $129 million and they are at $576 million through three quaters. Of course the accounting fraud will adjust these numbers for various undetermined years though. Ag earnings can be highly cyclical, but they also are in other cyclical ag related and energy segments.

          2. Very nice Grid. I should not write emails late at night. I think i saw a very old list. Yeah, lots of revenue, but profit is slim. Must be light on margin. A few hundred million in profit with 30 billion in revenue is slim. Thx for keeping me honest

            1. You kept me honest too, Mr. Lucky. I got lazy and remembered they were Fortune 100 like more around 70 a few years ago…I was barely right at 96, lol… They got into fertilzer business and some mistakes there. They are in ethanol also, which is a total scam business. They are not an “ag” company in traditional since, having tentacles in a lot of stuff. Outside of utilities and some banks, they generally I would personally consider to be one of the more “safer” QDI issued preferreds to own. Unless the of course the books are a total mess!

  5. Grid owns some of this one, I believe.

    Good catch Tim. I had a lowball order in for this one. Better go lower it A LOT.

    1. This is a tough one – I am heavy in CHSCP and CHSCO. Just have to wait and see what the damage is come Monday.

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