Did Firm Pay Espy For Favors? Crop Growers Corp. Indicted On Charges It Tried To Buy Access To Former Secretary Of Agriculture

On a sticky day in July 1994, New Orleans attorney Alvarez Ferrouillet Jr. walked into a grocery store and cashed a $20,000 check from Crop Growers Corp. and its Post Falls president, John J. Hemmingson.

The money, dished out by the store owner in $100 bills, ostensibly was payment to retain Ferrouillet’s legal services for Crop Growers, a fast-growing insurance underwriter that until recently kept its executive offices in downtown Coeur d’Alene.

But a federal grand jury, in new indictments issued last Thursday, charges that the Crop Growers’ payment was a thinly veiled cover for the true purpose of the $20,000 - to buy favors from Mike Espy, the embattled former secretary of agriculture.

The money, a grand jury concluded in U.S. District Court in Washington, D.C., was part of a conspiracy by Crop Growers and its officers to defraud the U.S. Federal Elections Commission, the Securities & Exchange Commission and the public by making illegal campaign contributions, falsifying records and deceiving investors.

A jury is expected to decide on the claims when a trial begins in January.

The 18-count indictment, which replaced earlier charges against Hemmingson, associate Gary A. Black and Crop Growers, alleges the company tried to buy access to Espy by paying up to $46,000 in illegal contributions to his brother, Henry Espy, the current mayor of tiny Clarksdale, Miss.

The payments, moreover, were allegedly hidden from the SEC at a time when the regulatory agency was giving final approval for Crop Growers to raise $36 million by selling stock to investors across the nation.

Hemmingson also is a defendant in a separate 16-count indictment handed up by a federal grand jury in eastern Louisiana. That case charges Henry Espy, Ferrouillet and Hemmingson of conspiring to use Crop Growers’ “contributions” to defraud certain banks and the Federal Elections Commission to repay Henry Espy’s campaign debt.

“The conspiracy was undertaken,” the first indictment says, “for the purpose of gaining access to Secretary Espy in order to favorably influence his decision concerning matters affecting Crop Growers.”

All the defendants, including Crop Growers, have pleaded not guilty.

Crop Growers is the nation’s second-largest provider of federal multi-peril crop insurance, which it sells and services on behalf of larger companies such as Fireman’s Fund Insurance Co.

Crop Growers, with nearly $400 million in assets, recently moved its headquarters from Great Falls, Mont., to Overland Park, a Kansas City suburb. It employs 450 people, including 20 at its downtown Coeur d’Alene regional office, where Hemmingson used to work.

Hemmingson, who was president, chief executive officer, chairman of the board and the largest shareholder of Crop Growers, resigned in March. Black, the company’s executive vice president and a Great Falls resident, left the company at the same time.

Hemmingson, who still keeps a home in Post Falls, and Black face up to 10 years in prison and a $250,000 fine on each count of the indictments.

Neither Hemmingson nor his Minneapolis attorney returned several telephone calls seeking comment. Henry Espy also could not be reached.

Former Secretary Mike Espy resigned on Dec. 31, 1994, amid allegations that he took gifts from other companies regulated by the USDA. Espy denies the claims.

Donald Smaltz, an independent counsel, is overseeing the investigation of Mike and Henry Espy, Hemmingson, Black and Crop Growers. All total, indictments have been filed against 14 individuals or companies tied to the Mike and Henry Espy investigations, Smaltz’s office says.

Thus far, Smaltz has succeeded in convicting Washington, D.C., lobbyist James H. Lake of arranging $5,000 in illegal corporate contributions to Henry Espy. He also has indicted Richard Douglass, a friend of Mike Espy and former Sun-Diamond Growers of California lobbyist, on a charge of arranging an illegal $5,000 contribution to Henry Espy.

Why Hemmingson would gamble his company on a chance to get an audience with Mike Espy is still unknown.

But the following allegations detailed in 78 pages of grand jury indictments provide a glimpse into how he may have been tempted: When Mike Espy, a Mississippi congressman, was appointed to President Clinton’s cabinet, the USDA was considering a major reform of the nation’s expensive federal crop insurance program. Espy agreed that crop insurance funding should be cut. That threatened to reduce the amount of business for Crop Growers and others selling the insurance.

At the same time, Henry Espy was launching his bid to fill his brother’s congressional seat during a special election in early 1993.

Cabinet members cannot receive campaign contributions. But relatives running for public office can.

So Hemmingson hatched a plan to give money to Henry Espy’s campaign on the belief that he could get him in to see his powerful brother, the indictments say.

Hemmingson enlisted contributions to Henry Espy from 19 employees, their spouses, parents and others linked to Crop Growers. Each contributed the federal limit of $1,000 so as not to tip off the Federal Elections Commission.

And each contributor got the money back from Crop Growers, which used false vouchers and fictitious recordkeeping that outside auditors would not catch. Under the Federal Election Campaign Act, it is illegal for a company to make a campaign contribution or reimburse an individual for a contribution.

None of the contributors personally knew Henry Espy, according to Bob Rousey, Crop Growers’ spokesman.

The FEC recorded a flurry of Crop Growers-related contributions to Henry Espy’s campaign between Jan. 29 and Feb. 3, 1993.

In the subsequent weeks, Crop Growers’ records showed that all 19 of the original contributors were reimbursed. Among those reimbursements were a $1,000 payment to Hemmingson’s mother as a “travel advance” and a $1,000 payment to a full-time employee for “consulting fees.”

Henry Espy lost the election, but Crop Grower’s support did not go unrewarded, the indictments allege. During the next year, Hemmingson met three times with Mike Espy in Washington, D.C., to discuss crop insurance. At each meeting, a third person was present: Henry Espy.

Whether Crop Growers directly benefited from its contacts with Mike Espy is unknown. But one thing is clear: Mike Espy’s brief, two-year stint as secretary of agriculture coincided with Crop Growers best years to that point.

By the end of 1994, when Espy left office, Crop Growers’ annual revenues had jumped 166 percent and the number of its agents had doubled. Company assets quadrupled and an annual loss reported at the end of 1992 had blossomed into a $5.3 million profit.

Henry Espy acted as the political broker between his brother and Hemmingson because he needed Crop Growers’ money, the indictments allege. Henry Espy had rung up a $125,000 debt during the campaign, including a $75,000 bank loan that needed to be repaid.

Henry Espy appointed attorney Ferrouillet to help retire the debt. On March 31, 1994, Ferrouillet threw a fund-raiser at the 116 Club in Washington, D.C. Hemmingson, and several others who do business with the USDA, attended the event, the indictments say. Ferrouillet encouraged each guest to raise $10,000 for the failed candidate.

Meanwhile, the SEC was approving Crop Growers’ plan to sell stock to the public. A month after the stock hit Wall Street, Hemmingson signed the $20,000 check to Ferrouillet. It was recorded in Crop Growers’ books as “legal fees.”

Crop Growers’ Rousey says he does not know what legal work Ferrouillet did for the company.

Cashing the check, Ferrouillet began depositing $100 bills at three different branches of the Omni Bank in New Orleans which held the “Henry Espy for Congress” account. The deposits far exceeded the FEC’s $1,000 limit on individual contributions.

A few days later, the indictments say, Ferrouillet transferred $21,000 to a separate bank that had lent $75,000 to Henry Espy.

And somewhere near New Orleans, a grocer held a check written by a stranger from Coeur d’Alene and a company called Crop Growers.

, DataTimes ILLUSTRATION: Photo

MEMO: This sidebar appeared with the story: Company accused of withholding financial information from SEC While the charges against former Crop Growers chairman John Hemmingson are serious, allegations against the company he left behind may have more dire consequences. Prosecutors accuse Crop Growers of withholding important financial information from shareholders and the U.S. Securities & Exchange Commission at a time when the company was preparing to sell stock on Wall Street. The SEC considers that a breach of trust because individuals and money managers rely heavily on audited financial data to determine whether to invest in a company. “If there’s anyone who deserved to be sued by shareholders, this is probably it,” said Orin Kramer, manager of a New Jersey investment group that owns nearly 10 percent of Crop Growers. Crop Growers’ spokesman Bob Rousey said there are no shareholder suits against the company concerning the Espy-Hemmingson investigation and indictments. Kramer says he hasn’t sued because he believes the company will rebound and that an expensive lawsuit would be counterproductive. But defending itself against the criminal charges is costing Crop Growers a bundle. From April through June of this year, the company spent nearly $1 million on the case. It also paid $1.3 million to Hemmingson and associate Gary A. Black to buy back a portion of their Crop Growers stock. The stock purchases, legal fees, and costs of moving company headquarters from Great Falls, Mont., to Kansas resulted in a $4.6 million loss for Crop Growers’ second quarter ending June 30. Crop Growers stock, which in 1995 peaked at $33 per share, closed Friday at $6-5/8. Despite the problems, some investors are displaying renewed confidence in the company. In July, Fireman’s Fund Insurance Co. invested $10 million in preferred convertible Crop Growers shares in exchange for the company’s commitment to sell more Fireman’s Fund policies. Investor Kramer also has announced intentions to increase his stake in Crop Growers to 25 percent because of the company’s strong network of insurance agents. “While this is a difficult period, we believe there is a valuable franchise there,” Kramer said. Grayden Jones