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2000
2000
ILLEGAL ACTIVITIES AT THE HUNTS POINT MARKETING TERMINAL

HEARING

BEFORE THE

SUBCOMMITTEE ON
LIVESTOCK AND HORTICULTURE
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JULY 27, 2000

Serial No. 106–58

Printed for the use of the Committee on Agriculture

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COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
BILL BARRETT, Nebraska,
    Vice Chairman
JOHN A. BOEHNER, Ohio
THOMAS W. EWING, Illinois
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
CHARLES T. CANADY, Florida
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH-HAGE, Idaho
JOHN N. HOSTETTLER, Indiana
SAXBY CHAMBLISS, Georgia
RAY LaHOOD, Illinois
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
KEN CALVERT, California
GIL GUTKNECHT, Minnesota
BOB RILEY, Alabama
GREG WALDEN, Oregon
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MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky

CHARLES W. STENHOLM, Texas,
    Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
DAVID MINGE, Minnesota
EARL F. HILLIARD, Alabama
EARL POMEROY, North Dakota
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
CHRISTOPHER JOHN, Louisiana
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
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KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
JOE BACA, California
——— ———
Professional Staff

WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director

Subcommittee on Livestock and Horticulture

RICHARD W. POMBO, California, Chairman
JOHN A. BOEHNER, Ohio,
    Vice Chairman
BOB GOODLATTE, Virginia
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
HELEN CHENOWETH-HAGE, Idaho
JOHN N. HOSTETTLER, Indiana
BOB SCHAFFER, Colorado
KEN CALVERT, California
GIL GUTKNECHT, Minnesota
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BOB RILEY, Alabama
COLLIN C. PETERSON, Minnesota,
     Ranking Minority Member
TIM HOLDEN, California
GARY A. CONDIT, Pennsylvania
CALVIN M. DOOLEY, California
MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
DEBBIE STABENOW, Michigan
BOB ETHERIDGE, North Carolina
LEONARD L. BOSWELL, Iowa
KEN LUCAS, Kentucky
(ii)

C O N T E N T S

    Peterson, Hon. Collin C., a Representative in Congress from the State of Minnesota, opening statement
    Pombo, Hon. Richard W., a Representative in Congress from the State of California, opening statement
    Stabenow, Hon. Debbie, a Representative in Congress from the State of Michigan, prepared statement
Witnesses
    Campbell, Ben, counsel, Rider, Bennett, Egan & Arundel, representing C.H. Robinson Co.
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Prepared statement
    D'Arrigo, Matthew, vice-president, D'Arrigo Brothers Co. of New York, Inc.
Prepared statement
    McClung, John, president, Texas Produce Association
Prepared statement
    McEvoy, Bruce, chief executive officer, Seald-Swett Growers, Inc.
Prepared statement
    McInerney, Matthew, senior vice-president, Western Growers Association
Prepared statement
    Merrigan, Kathleen A., Administrator, Agricultural Marketing Service, U.S. Department of Agriculture
Prepared statement
    Stenzel, Thomas, president and chief executive officer, United Fresh Fruit and Vegetable Association
Prepared statement
    Stuart, Michael, president, Florida Fruit and Vegetable Association
Prepared statement
    Viadero, Roger, Inspector General, U.S. Department of Agriculture
Prepared statement
Submitted Material
    ''Agricultural Marketing Service Evaluation of Inspection Activities at Terminal Markets'' August 2000, submitted by Mr. Viadero
    ''Good From Bad'' editorial from the Packer, June 26, 2000, submitted by Ms. Merrigan
    Andras, Matthew, KB&R Trading Corporation
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    Walden, Hon. Greg, a Representative in Congress from the State of Oregon, letter of August 7 to Mr. Pombo
ILLEGAL ACTIVITIES AT THE HUNTS POINT MARKETING TERMINAL

THURSDAY, JULY 27, 2000
House of Representatives,
Subcommittee on Livestock and Horticulture,
Committee on Agriculture,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:02 a.m. in room 1300, Longworth House Office Building, Hon. Richard W. Pombo (chairman of the subcommittee) presiding.
    Present: Representatives Gutknecht, Peterson, Condit, Dooley, Etheridge, Boswell, and Lucas of Kentucky.
    Staff present: Christopher D'Arcy, R. Bryan Daniel, Brent Gattis, Wanda Worsham, clerk; Callista Bisek, and Danelle Farmer.
OPENING STATEMENT OF HON. RICHARD W. POMBO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. POMBO. Good morning.
    As you have just heard, we have been called to a vote on the floor, but we are going to go ahead and start the hearing and then we will recess it before we introduce our first panel.
    Today, the Subcommittee on Livestock and Horticulture will exercise its oversight jurisdiction with regard to illegal activity occurring at the Hunts Point Terminal Market in New York.
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    On October 27, 1999, 21 people, including eight USDA inspectors, were arrested at the Hunts Point Terminal Market located in Bronx, New York, and were charged with bribery. These arrests were the result of a 3-year investigation by the USDA's Office of Inspector General, appropriately code named Operation Forbidden Fruit.
    Federal prosecutors were able to obtain the convictions for all eight of the USDA inspectors. Seven of the eight convicted inspectors received sentences ranging from 15 to 30 months in prison, as well as fines and forfeitures totaling $169,000 in May of this year.
    The investigation revealed how owners of 12 produce firms at the Hunts Point Market had routinely paid cash bribes to the USDA inspectors in exchange for lowering the grade of the produce being inspected. This saved the produce wholesalers a substantial amount of money per load, and at the same time defrauded farmers out of tens of millions of dollars.
    I consider this to be an extremely serious situation. Bribery and fraud in the USDA inspection program represent a dangerous threat to America's system for grading produce. Even more, when public officials fill their profits with bribes, effectively stealing from the very producers that they are supposed to serve, they undermine and erode every American's confidence and trust in their Government.
    This subcommittee, therefore, is determined to fulfill its responsibility by learning from the events that occurred Hunts Point, understanding how these activities proceeded without detection for so long, and determine what can be done to keep it from reoccurring—in short, what went wrong and how it is being fixed.
    I am glad to say that some initial steps to repair the integrity of our produce inspection system have already been taken. As a member of the Crop Insurance Conference Committee, I worked to include over $11.5 million in that legislation for infrastructure improvements and modernization at the USDA expressly to prevent fraud and corruption in the grading system. Additional language was included directing the USDA to address economic losses to the produce industry and to evaluate the suitability of restitution. The report was due on July 19.
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    Today we will hear about this issue from many sides. I expect that we will get a bit of an education as to how these types of businesses often operate, as well as some lessons in greed and how some people's greed knows no limit.
    I look forward to today's testimony and I welcome our witnesses, especially those who have traveled a long way to be here. Your efforts are appreciated.
    I would like to turn to the ranking member, Mr. Peterson, for his opening statement.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA

    Mr. PETERSON. Thank you, Mr. Chairman, and thank you for holding this hearing today on the illegal activities at the Hunts Point Marketing Terminal.
    First of all, I associate myself with your opening remarks and echo the seriousness of today's topic. The public and industry confidence in the inspection program has been, regrettably, shaken.
    I think that most of us agree that the overwhelming majority of inspectors are professional and do their jobs honestly and according to the law. It is unfortunate that the actions of a few can do such damage.
    Secretary Glickman made it clear when the arrests were announced in October 1999 that he has no tolerance for this kind of inappropriate and illegal behavior at USDA. I believe the Secretary has signaled the administration's firm intent to make changes necessary to restore full confidence in the program. I hope that we can work closely with them in this effort.
    Although there are several different questions to answer about Hunts Point, one of the more challenging is the question about damages to shippers and growers. I recognize the complex nature of the circumstances of illegal activity involving thousands of inspections over the course of many years; however, in order for the Congress and the administration to develop the most appropriate response to damages, we must work hard to measure the true cost. I hope that we can address this question today.
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    Again, Mr. Chairman, I welcome our witnesses today and look forward to receiving their testimony as we focus on what happened, how it happened, how to repair the damage, and, finally, how to prevent similar incidents. Thank you.
    Mr. POMBO. I thank the gentleman for his opening statement.
    Any other statements of Members will be in order at this time.
    [The prepared statement of Ms. Stabenow follows:]
PREPARED STATEMENT OF HON. DEBBIE STABENOW, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
    Chairman Pombo and Congressman Peterson, thank you for convening today's hearing on the illegal activities of the U.S. Department of Agriculture inspectors at the Hunts Point Terminal Market in the Bronx, NY. As members of the Agriculture Committee, we understand the important role that terminals play in finding buyers for surplus produce.
    As we are all aware, on May 22, 2000 seven U.S. Department of Agriculture inspectors were found guilty of taking bribes and downgrading loads of produce so that receivers could negotiate lower prices with shippers. The seven inspectors were sentenced to prison terms and levied fines and forfeitures totaling $169,000 against them. According to the Department of Agriculture, the losses as a result of these illegal activities range from $44 million to $100 million nationwide. That translates into possible losses for produce growers in my State.
    Today, our goal is to restore the integrity of the inspection system. The U.S. Department of Agriculture and the industry have been working with us here in Congress and I believe we are headed in the right direction. We must also consider if the restitution for those harmed by the conduct of the inspectors is in order. I look forward to the testimony of today's witnesses and I am hopeful that today's hearing will bring us closer to resolving these issues.
    Mr. POMBO.We are going to temporarily recess the hearing. We have a vote on the floor. We will be back as soon as possible. My apologies to the witnesses, but we will be back as soon as possible.
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    [Recess.]
    Mr. POMBO. I want to call this hearing back to order.
    We welcome our first panel. Mr. Roger Viadero is the Inspector General at USDA and Ms. Kathleen Merrigan is the Administrator of the Agricultural Marketing Service.
    I want to apologize to you and to the rest of our witnesses for the delay in the hearing. We had an unexpected series of events over on the floor, but hopefully we will be able to conclude this hearing without further interruptions.
    Mr. Viadero, we can start with you. I know you are familiar with the time system here. We are going to extend and be somewhat liberal with the timing because this is a very important issue and I want to give both you and Ms. Merrigan the opportunity to testify to the fullest extent.
    Mr. Viadero, if you are ready you may begin.
STATEMENT OF ROGER VIADERO, INSPECTOR GENERAL, U.S. DEPARTMENT OF AGRICULTURE; ACCOMPANIED BY GREGORY SEYBOLD, ASSISTANT INSPECTOR GENERAL FOR INVESTIGATION

    Mr. VIADERO. Thank you Mr. Chairman and members of the subcommittee.
    Before I begin today, I would like to introduce a member of my staff who is with me today, Gregory Seybold, Assistant Inspector General for Investigations.
    I would also ask, sir, that my comments be submitted in writing and for the record.
    Mr. POMBO. Your entire testimony will be included in the record. Thank you.
    Mr. VIADERO. Thank you, sir.
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    Thank you for asking me to discuss our investigations at the Hunts Point Market located in the Bronx, NY, which involved corrupt graders of the Agricultural Marketing Service Fruit and Vegetable Programs. These graders accepted bribes to help wholesalers cheat producers out of the true value of their goods.
    As you know, AMS graders are responsible for inspecting shipments of fresh fruits and vegetables received at wholesale locations throughout the country. The inspections, which are voluntary and requested at the discretion of the wholesalers, are intended to determine whether the delivered produce meets U.S. Department of Agriculture grading standards—for example, U.S. extra fancy, U.S. No. 1, U.S. utility, et cetera, as promised by the grower in the purchase contract with the wholesaler, USDA graders take into account various factors affecting the quality and condition of produce, such as bruising, decay, color, and shape. Slight variances in grade can dramatically impact the overall contract price, sometimes by several thousands of dollars, depending upon the size and value of the shipment.
    If a shipment of produce fails to meet the agreed-upon grade in the contract, generally the wholesaler is entitled to renegotiate the purchase price downward; thus, the integrity of the AMS graders is essential for fair prices to be paid to producers.
    Because of our concern about the potential for public corruption in the Federal inspection process at this market, for more than a decade we have been developing information relating to criminal activity at Hunts Point.
    We have conducted extensive electronic surveillance and undercover operations, reviewed business and inspection documents, and interviewed witnesses. These efforts led to our developing inside sources and cooperating witnesses.
    Only after developing these informants were we able to penetrate the bond of mutual trust and silence that shielded this crime from discovery. The sources informed us that produce wholesalers on a daily basis were paying AMS graders $50 to $100 per inspection in order to ensure that the graders would ''knock the loads'' so the wholesalers could negotiate the lower prices.
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    With our cooperating witnesses, we developed an extensive undercover operation. As our limited technical—that is, video surveillance and other electronic surveillance equipment inventory not sufficient to carry the operation out, we sought and obtained the resources from the Federal Bureau of Investigation.
    Our subsequent investigation documented the massive corruption at Hunts Point—corruption that was systematic and had been occurring for more than 20 years. In fact, evidence of bribery was obtained against most of the graders who worked at the market and the wholesaler firms that operated at the market.
    I have brought with me an enlargement of a photograph of Hunts Point, which is on display to your right, which gives you an idea of the size and amount of produce it handles daily.
    The bribes paid by wholesalers were paid in various ways and in various amounts. Sometimes wholesalers paid cash to the graders after the shipments were downgraded. Other times the wholesalers kept track of all shipments during a period of time, including those that were downgraded, and the names of the AMS graders who downgraded them. The wholesaler then provided one large payment to one of the corrupt graders, who shared the monies with the other corrupt graders, usually over lunch.
    If a corrupt wholesaler did not know a grader conducting the inspection, the wholesaler declined the inspection with an excuse and asked that the inspection be rescheduled, in hopes of having a corrupt grader conduct the rescheduled inspection.
    However, if the grader was on the take, he would oftentimes use the code phrase, ''I am one of the boys'' to signal that he accepts bribes, and the wholesaler would then tell the grader to go back and conduct the inspection.
    New graders were sized up for several months to determine whether they should be approached with an offer to join the scheme. A corrupt supervisory AMS official furthered the scheme by matching corrupt graders with corrupt wholesalers.
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    The investigation also found that total amounts of bribe monies received by the graders were substantial and were used for a variety of purposes. One grader netted between $40,000 and $100,000 per year over a 15-year period. He lived off his bribe monies without touching his Federal salary, which he deposited directly into a separate account. The grader purchased a new sports utility vehicle for cash and when arrested had approximately $3,600 in a shoe box in his closet.
    Another grader used his bribe money to solicit prostitutes, purchase jewelry for these prostitutes, and purchase weapons—specifically, a vintage 1861 Springfield rifle.
    Yet another grader used the money to purchase illegal drugs to support his habit.
    Thus far in the investigation, we have developed evidence of bribery against nine AMS graders, including an AMS supervisory official and 15 wholesalers at Hunts Point. The nine graders were indicted and charged with violating the Racketeering Influenced Corrupt Organization statute, and the 15 wholesalers were charged with bribery.
    Investigation of multiple firms at Hunts Point is continuing as we speak today.
    The public corruption by AMS employees and wholesalers at the Hunts Point market reduced producers' income for their goods, provided illicit gains for wholesalers and for corrupt graders, and adversely let them share in the illicit gains that they created, themselves, thereby adversely affecting the public's trust of Federal employees.
    Combatting this type of criminal activity is one of the Office of Inspector General's highest priorities. We are, therefore, conducting investigations of allegations relating to similar corruption in other markets around the Nation. I cannot discuss these investigations in detail, as they are ongoing.
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    To that end, I want to thank the Agriculture Committee for assisting OIG by providing a link from the committee's Internet website to the OIG home page. This link has facilitated the process by which producers have a means to report fraudulent activity by USDA graders and Hunts Point wholesalers.
    Before I close, I would be remiss if I did not inform you, as I have repeatedly informed Congress for the past 5 years, that our ability to combat crime and corruption, both internal and external to the Department, is in dire jeopardy due to steady erosion of our funding level. Today I have approximately 100 fewer Office of Inspector General criminal investigators than our authorized ceiling 5 years ago. This equates to a conservative estimate of 500 fewer investigations of crimes against USDA and corruption internal to the Department operations that is unaddressed each year. That's a yearly figure, sir.
    Before I sum up here, there is a quote that says, ''If it ain't broke, don't fix it.'' Well, I have a two-prong answer to that one, Mr. Chairman. The first one is, it is broke. I don't know if it is worth fixing. So I think what we have to discuss here and develop a dialog in the future as to whether or not we get rid of AMS fruit and vegetable graders and put it back on the industry to police itself.
    Or take money and do a total management review, restructure it, and train all of the employees and get some quality assurance out there.
    It is interesting to note that in less than a week after these indictments were made, the continuing criminal enterprise went on at Hunts Point.
    This concludes my statement, Mr. Chairman. I thank you again for the opportunity to address the subcommittee and appreciate your continued assistance and support.
    I will be pleased to answer any questions you or the other Members might have.
    I guess if we just want to put it into one simple phrase, what we have here is not only a crime of a breach of trust, but it is a moral hazard indicative throughout the entire industry.
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    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Viadero appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Ms. Merrigan.
STATEMENT OF KATHLEEN A. MERRIGAN, ADMINISTRATOR, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE
    Ms. MERRIGAN. Thank you very much for having me here this morning to discuss this extraordinary and terrible incident that has occurred at Hunts Point.
    It was about 4 months to the day that I was appointed administrator of the Agriculture Marketing Service that I got the early morning phone call with the OIG and FBI agents swarming Hunts Point arresting our employees, and since that date on October 27 it has been the highest priority of AMS to really our system, and overhaul it to ensure the public that this sort of activity never happens again.
    With me today are three of our inspectors, people who have worked at the field level in inspection. If you have technical questions you would like to ask them or questions you want to ask about what is going on in the terminal markets that we have across the country, you will be free to ask the questions to these exports.
    Kathy Staley behind me has been an inspector for 13 years, and from October to May we put her up as the acting officer in charge at Hunts Point.
    One of the things that we had to do immediately, since some of the supervisors were corrupt along with the inspectors, themselves, is we had to immediately put in some of our best staff from around the country to plug in there and keep that market operating.
    Tony Souza has been an inspector with AMS for 10 years. He is one of our managers out in California, and I know this has been a big issue there, and that is where some of the complaints came from to our hotline.
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    Finally, Leanne Skelton was an inspector in the field for 5 years and has been at headquarters for about 10 years helping to supervise our inspection service.
    We have about 170 Federal inspectors, and I guess I wanted to bring some of our inspectors here today to say that, for the most part, these people are honest and hard-working, and for them and for myself as administrator, this has been a really tough time as we have had to address these issues, and all of us having to deal with the barbs and taintedness that this kind of revelation puts on the whole system. So what we are trying to do is right what has gone on.
    Within 2 weeks of the announcement on the arrests on October 27, I sent a letter under my signature to 17,000 members of the produce industry informing them about what was going on and what we planned to do about it. We had meetings across the country with all our Federal inspectors to talk about Hunts Point, to talk about ethics, to encourage them to bring forward any information they may have about any other wrong-doing and, in fact, to tell them that was their responsibility and their job. I attended one of those sessions. They went on for several hours in every market location.
    We accelerated our installation of a database, a national database to collect all the information on inspections that go on around the country so we could, through this database at headquarters, determine if there were irregularities in the inspection service.
    We accelerated the installation of digital imaging. We use a digital camera, and you actually, at the site of the transaction, can photograph the fruits and vegetables, and then anyone in the world can download that through the Internet on their computer. This provided a reassurance to people in the produce industry about what was really going on in these inspections.
    We did some more rotation of inspectors, and revising our hiring guidelines—among other things that we did immediately, and we are not done. We are really looking at an overhaul of our system, and hopefully some good will come from this.
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    One of the things that this committee asked and Congress asked was for a report from the Secretary to assess how much harm was really caused to the industry from Hunts Point. I apologize for the delay of getting it up here. Maybe you have been in my shoes before. It is hard to find three economists who agree. But we do have a report, and I wanted to go quickly through the harm estimate that we came up with.
    Hunts Point is the largest of our Federal market terminals, with 22,000 of 180,000 of the inspections we do annually occurring there.
    We charge a $43 an hour fee, with a typical inspection costing about $86. This is a fee-for-service function that generally is requested when the buyer and the seller come together and there is a dispute over the quality of the produce. They call in the impartial AMS inspector to give it the USDA grade.
    There is indirect harm clearly that was suffered by everyone in the produce industry because some people were benefitting from getting goods at a reduced price, and that undercut the honest competition. It is really difficult for us to put a number on that other than to say that clearly there was significant indirect harm.
    In terms of the direct harm, we only can provide a range. Let me tell you why.
    First, we needed to put some parameters on our analysis. And this is what we decided: we would only look at those parties that were indicted, the nine AMS inspectors and 14 companies. We understand that the OIG investigation is ongoing and that there may be further people implicated, but we had to go with what we knew.
    Second, we looked at the 4-year investigation period from 1996 to 1999.
    Finally, we used the average PACA claim that had been filed as of July 14, which was $3,986.
    Then we had a couple of constraints we had to work with. When you do an inspection, you usually have a contract. There is a contract that is preexisting for a certain quality of good. Maybe it is a No. 1 or maybe it is a No. 2 potato. Without the contracts, it is hard for us to determine in all cases whether downgrading occurred.
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    The second constraint is that we also know that downgrading was irregular. It occurred, but not always. That was one of the things that we understand made the OIG investigation tough.
    And I should say, just right now, for all of us at AMS, we are very grateful for the Inspector General and his staff and all the hard work that they have put in on this, because this is an important revelation that we needed to respond to.
    So, given those parameters and those constraints, we developed two assumptions to predict a range of harm.
    First we decided what is the high ball here? What is the most it could be, given those parameters? Well, we will assume that the 14,000 inspections that were conducted by the indicted AMS inspectors were tainted in some way.
    What is the low ball? Well, we will assume that those 14,000 inspections that they did were legitimately requested, meaning that, like other market terminal formulas, this is essentially a formula where typically, when inspections are called, the product is already suspect. About 75 percent of the time there is a downgrading that occurs and 25 percent of the time when it is not, so we applied that 25 percent to the 14,000 and we assumed that that 25 percent was illegally downgraded.
    As unsatisfactory as that analysis might be, we come up with a range that gives us, at a high end, $55.8 million, and at a low end, $13.95 million.
    Let me just briefly tell you where we are in PACA claims to date. PACA, as you know—the Perishable Agricultural Commodities Act—is our USDA means of resolving disputes in the perishable agricultural market.
    As of yesterday, we had received and processed 199 PACA complaints involving 1,887 inspection certificates for a total of $5.1 million in claims.
    In addition, there are 152 complaints that we received in the last couple of days that we haven't processed, so that does not include that 152 complaints.
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    We also received 140 complaints related to Hunts Point, but that relate to other companies that weren't indicated or are outside of that 4-year period, and those claims total about $2 million.
    People ask, ''Why are you getting fewer complaints under PACA than you might have expected?'' It is a guessing game to know why. One of the issues has been our timeliness in getting these 14,000 certificates out to the industry to help them build the case that they were harmed, and we weren't able to get the last of those certificates out until June 23.
    The second reason is some shippers and growers may feel that it is just not worth all the time and effort to collect, and go through all this old paperwork to pursue a claim, especially when they are concerned that there is not money at the end of the rainbow, that it won't take much to collapse these firms and they will have spent the legal fees necessary to pursue the case and there will be nothing for them.
    Yet, a final reason perhaps is that there are current relationships, on going relationships between the buyers and sellers at Hunts Point that people don't want to disrupt.
    These are speculations on our part. We don't know. Those are the claims that we have to date.
    Let me just conclude by quoting The Packer. The Packer had an editorial recently in the June 26 issue that was called ''Good from Bad,'' and I would like to end a little bit on a high note in the midst of all of this to say we are taking this opportunity to scrutinize our system.
    One of the things that has nothing to do really with the corruption that happened at Hunts Point but what became apparent to me, as I went around the country meeting with growers' groups on this issue, is that there is a problem of consistency of grading between inspectors, and that is something we need to improve.
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    We are really grateful for the money that Congress recently appropriated to AMS in the crop insurance bill that the chairman mentioned. There was $29 million provided to AMS to offset inspection fee increases. That could last us for as long as another 5 years. There was $30.5 million to offset PACA fee increases. That could last us for another 10 years. And then $11.55 million in infrastructure improvements that we will be putting forward this year, including better training for inspectors, and we think that is going to make a world of difference in our operations.
    Finally, I would also like to take this opportunity to thank all of the industry leaders that have worked really closely and cooperatively with AMS as we have gone through this period of trying to figure out how to reform our system. The United Fresh Fruit and Vegetable Association put a task force together specifically to deal with Hunts Point. The next panel has a lot of members from that task force. We have been working with them closely.
    One of the things that we are contemplating now at AMS is trying to have a permanent Advisory Committee to the Secretary on fruit and vegetable industry issues broadly, a standing committee. We have a lot of committees in AMS. There is the Potato Committee, there is the Tomato Committee, it is the Cherry Committee, or what have you, but we really don't have one group that speaks for the entire fruit and vegetable industry, and I think, because of the size of the very small commodities, a collective voice might be good as we sort through a lot of things that we are going to need to do in the next few years.
    I would like, Mr. Chairman, to submit my formal statement for the record, as well as that editorial from The Packer, and I thank you for the opportunity to be here today.
    [The prepared statement of Ms. Merrigan appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Your entire testimony will be included in the record.
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     Ms. Merrigan, maybe you can explain this to me, and if any of the members of your staff or the folks that are with you want to answer this question—one of the things that we keep going back to is training and consistency within the inspectors, and I agree with you that that is important. Being someone who has worked in the industry my whole life, there are differences in inspectors. It is an opinion that they come up with, and having consistency I believe is important, and I have worked with you and the agency to help get money to increase training.
    But in the issue that we are talking about, I don't know how, if we had spent $200 million on training, it would have made any difference. And I am troubled by that, that the response—not just from you, but from others—that I have heard back is, ''Well, if we had more money for training it would be different,'' and that doesn't seem to be what the problem was here.
    What are you doing in terms of looking at the current work force or the future work force to ensure that this thing doesn't happen again because of the kind of people that you hired or what they became after you hired them and the culture that was created that allowed this to happen?
    Ms. MERRIGAN. I appreciate that question, because you are right. The infrastructure improvements that Congress provided us some money for recently only go so far, and it doesn't really hit the nail on the head in terms of the corruption problem.
    We are doing other things. We have really scrutinized how we manage our inspectors. One of the things that we found out sitting around the table for lots of hours with our various people from the field is that people who are supervising at these various markets are not necessarily walking the markets and following through an oversight responsibilities with the inspectors to a very large degree. So we are changing some of their responsibilities as managers. We are increasing the rotation of inspectors in markets where that is possible. And overall we are trying to accelerate and upgrade what we do on ethics training.
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    But at the end of the day there is probably only so much we can do to prevent this and, to some extent, we have to rely upon people in the industry to use that OIG hotline number and to call if they do know of abuses, because, from Washington, DC, there is only so much you can do, and then if people think they are harmed that is what that number is for, and that triggers Inspector Viadero's staff to go out and really look at the particulars of a situation.
    Mr. POMBO. Mr. Viadero, you and I had the opportunity to discuss this on a couple of different occasions, and I would like you to share with the committee what conclusion that you came to, that your staff came to, in terms of the culture that was created that allowed this to occur. And I know that you spent a great deal of time investigating this and were surprised, as I was, at how pervasive this problem was.
    Mr. VIADERO. Yes. Thanks, Mr. Chairman.
    I would like to start off by saying this problem has been systemic for decades, so it is well before the administrator arrived on the scene. She inherited this problem, so I don't want it to come down that we are coming out like a sack of bricks on the administrator. She just happened to be the unfortunate person there when this all came down, because these cases were well underway before she got the job.
    Mr. POMBO. I think we all realize that.
    Mr. VIADERO. This case began by several shippers calling our hotline. The shippers called us. They couldn't take any more, and they found it to be abusive.
    I was in the regional office we have in New York, and a assistant special agent in charge told me we had this hotline. Since I am a native of the Bronx, Hunts Point—although it is large—is difficult to find in the city.
    Myself and a fellow here on the next panel both come from that very neighborhood, so we are intimate with it, and we visited it, and there was no doubt that there were problems at the market.
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    This is my third enforcement job. I am here 6 years as the Inspector General, prior to that as a careerist with the Federal Bureau of Investigation, and at that market I worked extortionate and credit transactions, loansharking, and before that I was a member of the New York City police department for 10 years, and I worked there first in a strike, Teamsters strike, back in 1969, and then I graduated myself up to homicide—if that is, in fact, a graduation—and there were several homicides committed within the market, a melancholy situation. So the market has been prone to have some type of criminal activity, probably well before I got involved with it, and that was with the opening of the market when we had the strike up there.
    We went in and developed this. There was such a fear by shippers, that if they came forward they would be discriminated against. In other words, the graders would beat up on them, for lack of a better term.
    We reviewed the former case files, and there was a case opened about 1988–1990, if I recall—and members of the subcommittee—this is, again, before the Administrator got there. They had cajoled a shipper into letting his truck be graded right outside the market. He went inside, and what do you think happened? The load got knocked, the same thing that continued.
    As you so aptly put it, it is a matter of opinion that the grader has, so we are sort of in a problem and scratch our head. My problem now is every time I scratch my head more hair comes out. We were in a quandary. We didn't have the inside person. This is a crime of mutual trust. It is also a quite liquid crime. It is cash. Therefore, we get back to the moral hazard statement.
    So we had to develop this, and the assistant special agent in charge assigned the case and we developed it. We got to the point that we had a court ordered title 3, which is when a U.S. district judge authorizes electronic surveillance. We went in with the Bureau. They installed the cameras and the microphones for us.
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    We have several tapes. Unfortunately, the tapes we wanted to show, not everybody is through the judicial process, and to safeguard their Constitutional rights and just the right of the criminal justice system, we didn't want to bring them here with us today. They are most revealing, though, where we actually see people laughing about it—just taking it and putting the money in their pockets and walking away.
    We then went out and started contacting the growers. A lot of the growers came forward. In fact, something interesting, before I forget it. I have had chats in the last couple of months with different growers associations. One was just last week. One of the growers associations said, ''Well, we are having the same problem. We want you to look at it.'' So we sat down and we chatted with them. We were on a conference call.
    The only problem was this is going on through the large food chains also, the people that grade and purchase the goods coming in to the large food chains. That is why in my opening statement I said it is systemic throughout the industry, whether it be the private sector or the government sector. At present, I have got cases literally border-to-border, coast-to-coast, at the different markets.
    The beat goes on. I applaud the administrator's attempt at the training. But the problem is it didn't work. To that end, we would also like to ask that arrest checks, criminal background checks on all graders, and that mandatory drug testing be put in on graders.
    For instance, on the staff at Hunts Point two of the nine people arrested in this case already had previous arrest records, one for sexual abuse and one for drug charges. Of course, that is the fellow we arrested using his bribe money to buy more drugs.
    Mr. POMBO. Mr. Viadero, I don't want to cut you off, but I do want to give Mr. Peterson a chance to ask a question, and he is going to have to step out for a minute, so before he does I wanted to give him his opportunity.
    Mr. PETERSON. Thank you, Mr. Chairman.
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    Maybe this isn't the right panel, but what is curious to me is why the growers wouldn't have known about this. If their potatoes were downgraded from grade 1 to grade 2, why weren't they upset? Why weren't they complaining about this? I mean, were they some place else so they didn't know and they just had to take their word? It just doesn't seem to make any sense why they would allow this to go on if it was damaging them and not say anything or know about it. Were they clueless or what?
    Mr. VIADERO. No, they weren't clueless, sir. I think they were suffering in silence.
    Mr. PETERSON. They didn't mind that they were——
    Mr. VIADERO. Oh, they minded it, but it was in the course of doing business, and to that end let me go back. Even when——
    Mr. PETERSON. So you are saying to me that they knew about this, most of them?
    Mr. VIADERO. I think they did. Yes.
    Mr. PETERSON. But now there are bills, Mr. Chairman, around here that we are talking about giving a restitution, even though they knew about this?
    Ms. MERRIGAN. I think there were also two additional complications. It depends on how the contract is structured between the grower and the shipper in terms of what information actually comes back to the grower. They get the money, but they don't necessarily know all that went on in the transactions and why that is the bottom line that they received, and the contracts really can be structured in different ways.
    And the second thing is not that many people—and one of the things that is going to make it difficult for them to build their case under PACA—not many people are under the ideal situation where you have the same product leaving your place on the same day, and one is going to Philadelphia Terminal Market and one is going to Hunts Point and it is fine in Philadelphia and downgraded in New York because a lot of things can happen en route and it is hard to know why.
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    Mr. PETERSON. Yes. I understand that, and I used to raise potatoes and used to grade potatoes and I know how subjective it is. But it just seems to me—I don't know a lot about this, because we don't have a lot of folks in my area that deal with this stuff, but these folks—I mean, if this was happening consistently they ought to have known, and they ought to have been upset that they were getting downgraded.
    My question was why weren't they saying anything, but apparently——
    Mr. VIADERO. Mr. Peterson, the act, as I recall, is in approximately 45 years. I said this at the United Fruit and Vegetable Convention in Phoenix this February—if the act went in, let us say January 1, 1955, and it was effective at noon, the corruption started that afternoon. If it went into effect beginning on business at 4 in the morning, it started before noon.
    Again, it is cash, and what does $50 or $100 mean if you can make a difference of several thousand dollars a load?
    To that end, when we arrested some of the wholesalers, they honestly and truly believed that they were doing nothing wrong, because one fellow said—it is generational. He took it as a normal course of doing business to give the inspector a bribe. That is in the court record.
    Mr. PETERSON. Mr. Chairman, I have to leave. I will try to get back.
    So apparently what you are saying is that this was endemic throughout the whole system and everybody was kind of involved in this?
    Mr. VIADERO. Yes, sir, for several decades.
    Mr. PETERSON. And the only people that got arrested were the inspectors?
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    Mr. VIADERO. I am sorry, sir?
    Mr. PETERSON. The only people that got arrested were the ones that were actually taking the money? The rest of the people that were involved in this that knew about it, they are not—they didn't do anything wrong?
    Mr. VIADERO. No, sir. The nine USDA graders that were arrested were indicted and arrested on racketeering charges, RICO and bribery.
    Mr. PETERSON. What about all the people that knew about this that just kind of went along with it?
    Mr. VIADERO. Well, there were 15 wholesalers at that time that were arrested, and the best I can say to that, which was in the testimony, is that we have multiple other cases ongoing at that market right now.
    Mr. PETERSON. I will be back.
    Mr. POMBO. Ms. Merrigan, did you want an opportunity to respond?
    Ms. MERRIGAN. Well, I did. I did want to ask Kathy to say a few words, as someone who has been out in the field as an inspector for 10 years and someone that we entrusted taking over the Hunts Point situation after the scandal broke on the 27th, because the charges of widespread corruption is something that she may have a perspective on from the field.
    Mr. POMBO. If you may, identify yourself for the record, please.
    Ms. STALEY. OK. I am Kathleen Staley, a senior staff assistant in field operation, Fresh Products Branch.
    On October 28 I was put in the Hunts Point Market in the capacity of acting officer in charge. We have 38 Federal market offices across the country, and I have been to pretty much all of them. This has been my life has also been a lot of our employees livelihood and life.
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    Sir, their stomachs hit the floor when they found out about this, and they take personal offense that all of us are being painted with the same brush, because I guarantee you that the majority of our inspectors out there are honest, hard-working people who try to do the best job that they can.
    We have done an awful lot at Hunts Point, and I don't think anyone would have a problem having an inspection done there now.
    Mr. POMBO. Thank you.
    Mr. Dooley.
    Mr. DOOLEY. Thank you, both of you, for your testimony.
    I am interested, as we are moving forward, on how we improve the situation, and maybe even try to find ways even to limit some of the subjectivity that is involved in the grading process now. I am particularly interested in some of the investments that the Department is making in some of the digital imaging that might be a way to provide for greater confidence from the grower that there is at least a record that they can review.
    I understand your testimony, Ms. Merrigan, that you said that 12 of our terminals are currently using this. What does that involve?
    Ms. MERRIGAN. We are hoping by January of next year it will be in all of our market terminals, by the way.
    It involves a digital camera actually taking the picture, and there are a lot of different ways that the picture is taken so it is not easily constructed, the situation, if you will. And then the person who has concerns in California because they are hearing that the product is being downgraded can actually observe the product on the screen of their computer.
    That is just one of the infrastructure reforms, though, that will be funded out of the $11.5 million Congress provided.
    Another important investment, I think, is we are going to provide all of our inspectors with hand-held computers, and a lot of the standardized inspection information and pictorial representations will be available to them on the spot.
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    Simple things—I don't know if you have been to any of these terminal markets, but they are really not very fancy. They are sometimes very unpleasant places to work, very dilapidated. One of the things that we want to do is just buy lighted inspection tables to do better inspections. So some of the reforms seem very, very minimal in terms of the actual cost, but I think it is going to go a very long way in terms of improving the quality.
    I also think we need to spend more time at AMS going out to industry meetings. We went out to the California Tree Fruit League, and we heard a lot of news from the growers, those of us at headquarters, and I think we need to do more and more of those sort of meetings as we are in this period of scrutinizing our system and thinking about what else we can do.
    Mr. DOOLEY. Mr. Viadero, does this digital imaging and a record there, does that provide any real protection or does that impede some of the problems that we have seen, that took place at Hunts Point? Is that a technology and a process that could give us any hope in trying to at least minimize future problems of this nature?
    Mr. VIADERO. Well, Congressman, we applaud the administrator's efforts. It is a step forward. Is it honed to a fine edge yet? No. Is there a lot of room for error and construction of images you don't want to see? Yes, there are. But it is a step in the right direction.
    Again, when I mentioned in the statement I would like to get some of the money, myself, I didn't have enough money to run this investigation without having to go out and get technical equipment from the FBI, which is another story that is, I guess, best held for appropriations.
    The issue, though, is the training and the management restructure. Training is good. Training, according to another famous American by the name of William H. Webster, said that training is an investment in the future, and that is what training is. However, we find a very poor return so far on the training dollar.
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    We would like to either shepherd the contract, be funded for it, shepherd the contract through to have an outside firm totally independent of this come in, do a management review of AMS, offer up a restructure, work both with the Department and the Congress on what is amendable, institute that plan, and do quality assurance training.
    It is one thing to go out and give them the warm fuzzies and tell them, ''You guys are wonderful''—and they are wonderful for the most part. I take the supervisor's feeling very well. We don't want to condemn every inspector at AMS, but right now this is just a sunk hole we are putting money into.
    And before I forget, if I can—and you were here for Mr. Peterson's comments. This was a feedback comment we got last week. When asked by the growers why they don't complain about it, they said, ''Just fine and Jim Dandy for you guys to tell us to complain, but they will just boycott us. They will knock us right out. Nobody will buy our product.''
    These guys really put their lives on the line growing food for us. I mean, they are a very important commodity here. The problem is nobody has any money any more. We don't have the money to do the investigations or the audits. AMS is out of money for doing some training, as I understand, and taking remedial action there.
    Is it fixable? Yes. It is a matter of the commitment we have to fix it. And is it worth fixing?
    Mr. DOOLEY. Ms. Merrigan, what is the process that you employ now in terms of the industry/Department dialog that is looking to the future and how we put added—change maybe in the process?
    I am a little bit concerned with the consolidation we see in the retail sector and the imbalance of market power that we see there and the issue of grading. Is the Department looking at ways in which we maybe can take a broader and more-comprehensive look at how we reform our grading system here?
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    Ms. MERRIGAN. Certainly our efforts this year have been broader than just dealing with the corruption. I don't mean to downplay it, ''just dealing with the corruption,'' but, as I have said earlier, as we have gone across the country talking to industry groups and talking with our inspectors, we found out there are a lot of things that we can do to improve this system.
    We have actually at AMS been open to hearing from industry about whether they want this to continue to be an AMS service or whether they want it to be privatized, and what I hear from the industry is there is nothing inherently less corrupt about the private industry. It could also be susceptible. It is about putting in the management reforms necessary to prevent corruption.
    One of the things that I think we would really like to do is have an Advisory Committee that would be permanent at USDA to speak for the fruit and vegetable industry, as a whole. We are really grateful that United Fruit and Vegetable Association put together the task force, and we have been working closely with them, In addition, myself and other senior staff members from Washington have gone across the country to various key industry meetings to talk about Hunts Point and what we need to do to reform this service, but I think we really need an ongoing voice, a unified voice for fruit and vegetables in the Department right under the Secretary.
    Mr. DOOLEY. I have no other questions.
    When I talk about a wholesale revamping here, when we got equipment now in the processing sector that can kick out an individual pistachio that has a blemish on it, and we have color sorters on tomato harvesters that can kick out those, it almost seems like there ought to be a way that we can create a system here that you could actually have each individual box—it could be initially graded for color, size, a whole host of factors there—that you could change this some way so the preponderance of evidence would be such that when a product is downgraded that is where you have to provide the real demonstration and then have some process there.
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    Is there any consideration by AMS or the Department to invest in research that could lead us down a path that gives us better tools and maybe, what I am interested in, better protection for the producer? That is what we are really looking for.
    Ms. MERRIGAN. Well, we are on the same page there in terms of what our goal is, and if we identify research projects that would help us in that way, we would be more than willing to invest.
    Mr. DOOLEY. Is the Department actively soliciting those type of research projects?
    What I am a little bit concerned with is that it looks like we are putting a lot of band-aids on an old system here. I am not sure that we shouldn't be taking a longer-term approach to this and really going out and trying to solicit from the industry some ideas, and maybe even soliciting some research projects on how we take a fundamentally different approach to this.
    I am not sure that the role that the visual inspectors are playing now needs to be our focus here. Maybe there are technological approaches here that can get us to the same outcome that actually would be less reliant on a subjective evaluation by an individual.
    Ms. MERRIGAN. I take your point, sir. Let me assure you that, as we—it has been only since the end of October, last year—as we have struggled to figure out what to do. Let me work with the staff that we have in AMS, as well as our industry partners, and contemplate that question and get back to you.
    Mr. VIADERO. Congressman, if I can, why don't we privatize it and put it back on the industry to regulate itself, similar to what the chairman of the SEC has done, Securities Exchange Commission, by instituting NASD, the National Association of Security Dealers. SEC doesn't regulate that industry any more. It is regulated by the industry, itself. Maybe it is time for this.
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    If the Government can't handle the Government employees and the private sector can't handle the private sector employees, and every time we run into this are we going to appropriate tens of millions of dollars for these losses that we really have no control over—I think the industry should take a good part of the lead and take control of the problem, themselves, whether it be a user fee to the members or a fee at the market, however the associations decide to work this as an industry—but that is key, as an industry—all of the fruit and growers associations, all the nut growers, all of the grape growers, et cetera, et cetera, all get together and sit down.
    I think the dialog has to go back to them. It is their problem. What are they suggesting we do? They are just looking at the Government to solve their problems. They are all an integral part. They have been aware of it for decades.
    Mr. DOOLEY. I have nothing against privatization. I am a little bit concerned that if you went to a privatization approach, what the marketplace would dictate would be the appropriate level of the bribe, and I am not sure we would be any better off than we are now.
    Mr. VIADERO. It might be lower.
    Mr. DOOLEY. It might be, but it might be higher, too.
    Mr. VIADERO. We might only be able to get knocked one grade instead of two.
    The other issue is, as I understand the legislative history of the act, about 45 years ago USDA was asked, because of this very problem, and it solved it for about an instant and it just went on. It is sort of institutional throughout the industry.
    I have even spoken to my counterparts in other countries. The same thing. They want nothing to do with it because of—again, it is cash and you are dealing with highly-perishable items, and the farmer, the grower, the broker, the shipper is either going to take it or he is not going to get anything.
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    To that end, I am sure somebody will tell Mr. Peterson that we received a box that was misdirected to my office from a potato grower that filed a $400,000 claim on the PACA yesterday with us. We gave it over to the administrator's office.
    Thank you.
    Mr. POMBO. Mr. Viadero, can you comment on the just-released USDA report on Hunts Point? I have not had an opportunity to review it yet, but I was wondering if you have, and can you give the committee any comment on that report?
    Mr. VIADERO. I wish I could, but I was given the final copy as I walked in the door of this hearing room this morning, Mr. Chairman. Maybe you and I can sit down and review it together.
    Mr. POMBO. Well, we may as well.
    [Mr. Viadero submitted a copy of the report which appears at the conclusion of the hearing.]
    Mr. POMBO. Another question for you. Ms. Merrigan talked about an estimate of somewhere between—I believe it was $15 million and $55 million.
    Mr. VIADERO. Yes.
    Mr. POMBO. Can you, in your research or your dealings with this, can you confirm the accuracy of that? Do you have any idea whether or not it is in that ball park?
    Mr. VIADERO. We have different figures using a different methodology. From the audit standpoint, we find some odd methodologies—no pun intended—in comparing apples and oranges to determine the load. However, if you would like, Mr. Chairman, we will submit for the record our analysis of it.
    Mr. POMBO. I would appreciate that, because, as Mr. Peterson mentioned, there has been talk of some type of restitution on this, and I think before we go down that road we had better know what we are talking about.
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    Mr. VIADERO. Yes, sir.
    [The information appears at the conclusion of the hearing.]
    Ms. MERRIGAN. And I also would like to see that methodology, Mr. Chairman, because the report that I submitted to the committee was the report of the Secretary's office and was reviewed by our Office of the Chief Economist, our Office of Budget and Planning, and we have also shared several versions with the OIG, so if there is different methodology that might help us sort through these numbers and come up with something more definitive, we are very receptive to receiving that.
    Mr. VIADERO. Plainly, Mr. Chairman, we provided that. We made comments to it. It was vetted through the Department. Our comments were not included in—those comments in that particular issue were not incorporated by OBPA or Congressional Affairs or whoever had final clearance on that document, so that is why we take exception to that point.
    While the discussion of direct damages in USDA's report recognizes that there is an ongoing investigation, the report fails to explicitly recognize the potential for higher damage amounts, as a result of the ongoing investigation.
    Again, we will be happy to provide our comments for the record.
    Mr. POMBO. I appreciate that.
    I want to thank the panel for their testimony. I am sure there are going to be further questions that will be submitted to you in writing. I know I have a whole list of questions in front of me, but in the interest of time I will submit those in writing to you.
     Thank you for your testimony.
    Mr. VIADERO. Thank you, sir.
    Mr. POMBO. I would like to call up our second panel: Mr. Bruce McEvoy, Mr. Michael Stuart, Mr. Matthew McInerney, Mr. John McClung, Mr. Matthew D'Arrigo, Mr. Ben Campbell, and Mr. Thomas Stenzel, if you would join us at the witness table, please.
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    I thank you all for joining us. I again apologize to this panel for the delay in the hearing, but thank you very much. I know many of you have traveled a great distance to be here with us today.
    Mr. McEvoy, we will start with you.
    The lights that are in front of you, we limit your oral testimony to 5 minutes. Your entire written testimony will be included in the record.
    Mr. McEvoy, if you are prepared you may begin.
STATEMENT OF E. BRUCE McEVOY, CEO, SEALD-SWEET GROWERS, INC., VERO BEACH, FL

    Mr. MCEVOY. Thank you, Mr. Chairman and members of the committee. My name is Bruce McEvoy. I am currently the chief executive officer of Seald-Sweet Growers, Inc. Seald-Sweet is a citrus marketing cooperative based in Vero Beach, FL. But this afternoon I come before you as chairman of the Task Force on the Produce Industry Inspection Services.
    Whether you are a citrus grower in Florida, lettuce grower in Salinas, or an onion grower in Texas, the fruit and vegetable growers and, indeed, the entire produce industry depends on the inspection service to provide us with consistent and objective evaluations of our grade and condition upon arrival at destination.
    I can tell you that my growers, when they are challenged, the first question they ask us is, ''Did we get a Federal inspection?'' If it passes, they expect us to aggressively pursue a fair settlement. If it fails, they have learned over time that their value will be downgraded accordingly. But without the inspection service I would say that our members and shippers would be at the mercy of unscrupulous buyers who would use bogus conditions to downgrade their loads.
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    The recent bribery and racketeering scandal at the Hunts Point Produce Terminal Market in New York has severely damaged the trust and the creditworthiness of the inspection service, and I would add that it has caused substantial financial losses to the growers.
    In my case, we have pursued a number of the certificates provided by the Inspector General and have tried to track the losses to our members. We did, over a 4-year period, 40,000 cartons of fruit that were downgraded on average of $4.50 a carton, for a loss of $200,000-plus.
    I must tell you that this is detailed detective work and the burden of proof is on the grower.
    The Industry Task Force was formed as a result of the illegal activities at Hunts Point. It came together to provide a solid industry voice in dealing with this issue and in its interactions with U.S. Department of Agriculture after the arrest of the eight USDA inspectors of employees from 13 wholesale firms.
    On December 13, 1999, the United Fresh Fruit and Vegetable Association held an open meeting on this subject to discuss reform, which we felt was a priority, and a prevention from this happening again in the future. At that meeting, we formalized the organization of the Industry Task Force.
    The Task Force is an inclusive body. It includes all sectors of the produce industry—growers, shippers, receivers, and allied associations. It covers all varieties of fruits and vegetables, as well as all regions of the country.
    The task force has maintained an ongoing dialog with the U.S. Department of Agricultural, primarily on improving the inspection services. We have met privately with their staff to scrutinize the inspection service and agree that a major overhaul is necessary. We have also worked with Congress and your committees on the Agricultural Protection Act, which has secured funding for the inspection service reforms which were mentioned in the earlier testimony.
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    Currently, we are working with the Department to ensure that the reforms recommended by the Task Force on Produce Industry Inspection Services are, indeed, implemented. These include: extensive changes in training, which was discussed earlier; technological improvements, which we feel the addition of lap-top computers that can give us instant feedback on an inspection will help us build what is severely missing as a database to pick up anomalies in the inspection service by market or by region of the country.
    We also think that the expanded use of digital imaging will greatly help us in monitoring the success of a given inspection.
    We now use these internationally, and we feel that we can use them for departure, taking the pictures, and then matching those pictures with the inspection on site, so we feel that that technology can greatly assist us.
    Finally, there clearly are needs for renovations and upgrades of the equipment, which was also earlier discussed.
    I think at this point the clear challenge for all of us now is the importance of oversight that these much-reviewed and discussed reforms are actually implemented.
    I thank you very much for giving me this time to come before you, and I hope that we together can restore the integrity and confidence in our inspection service. I look forward also to answering any questions you have.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. McEvoy appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. Stuart.
STATEMENT OF MICHAEL J. STUART, PRESIDENT, FLORIDA FRUIT & VEGETABLE ASSOCIATION, ORLANDO, FL

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    Mr. STUART. Thank you, Mr. Chairman. My name is Mike Stuart. I am the president of Florida Fruit & Vegetable Association. We are a grower organization who represents producers of fresh vegetables, citrus, tropical fruits, and other agricultural commodities, obviously in Florida.
    One of the services that we provide to our members is called the ''marketing management service.'' It is a service that provides help to our producers who find themselves faced with problems in the marketing of their products, particularly through the Perishable Agricultural Commodities Act. It is a program that we basically stole from Western Growers Association a few years ago, based on my experience with that organization over the years.
    We do appreciate the committee's interest in this very important topic. I think, as Mr. Dooley said, it is extremely important that, as we move through this over the next several months and several years, that we focus on solutions to the problems and not continually rehash the problems that existed. We need to learn from the past, but, more importantly, we need to focus on the future.
    I particularly appreciate your leadership, Mr. Chairman, and not only on this issue but on a variety of other issues that you have been willing to carry the flag for the fruits and vegetable industry, whether it is the Food Quality Protection Act. You were down in Florida for a hearing dealing with exotic pests and some other things, and we greatly appreciate your help.
    One of the things that I think needs to be recognized—and I think everyone in this room does—is the fruits and vegetable industry in this country is unique. We have unique laws, like the Perishable Agricultural Commodity Act. We have unique services that are provided by the Federal Government to support the industry, such as the fruits and vegetable inspection system.
    Our entire marketing system in our industry is highly dependent on the Department providing a professional and credible inspection system to verify the conditions of our products. In fact, it is the foundation of our entire marketing system and particularly the administration of the Perishable Agricultural Commodities Act.
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    So on October 27, when we learned of the Hunts Point scandal, it shook that foundation to the core. What we basically found ourselves with was a Government agency, through its employees, that were being paid to provide a service yet were stealing basically from those that they served.
    Today's hearing again, I think, needs to focus on solutions. There are three areas that I would like to touch on briefly that are dealt with more in depth in our written statement. Number one is improvements of the system; secondarily, restitution from growers; and, thirdly stakeholder oversight.
    First on improvements to the system, first I want to congratulate Bruce McEvoy for taking on the leadership of the Industry Task Force. This is something that I think was extremely important in terms of building a bridge or a partnership with the Department in trying to identify issues that needed to be addressed within the system, and I think we have come a long way in a relatively short period of time in trying to identify some of those issues.
    Some of the things that have been discussed already here this morning I think will go a long way towards improving the system. Certainly, the training aspect that we discussed, the digital imaging I think is outstanding technology that will help in the system, as well as the proposed national inspection database, which will hopefully set some kind of benchmarks for what we are doing in the inspection area.
    But, as someone said earlier, it is just that—it is a good start, and implementation follow-up is going to be key to its success.
    The second element is restitution for growers and shippers who have been damaged as a result of this whole situation. I can't speak for the rest of the country, but producers in Florida have had a very difficult time over the past few years, whether it is in freezes, storms, tight labor supplies, terribly poor markets, particularly over the last 18 to 24 months, and now, as of the end of last year, this problem we have with our inspection service.
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    As of today, FFVA has filed on behalf of its members over $500,000 in PACA complaints tied in with the Hunts Point scandal, but we merely believe that is merely the tip of the proverbial iceberg. Many growers, as has been discussed already here this morning, simply will not file. Either the PACA process they feel is too cumbersome or they fear damaging longstanding customer relationships either with their brokers or with customers in New York or elsewhere. Restitution really is the only answer.
    But, in any event, whatever the reason, I think the bottom line is that millions of dollars, tens of millions of dollars, whatever the final number is, have been stolen from growers and shippers in this country and we need to find a solution to that.
    Finally, I was delighted to hear Administrator Merrigan point out the fact that they were looking very seriously at some type of stakeholder involvement in the process at USDA. I think for user fee programs this is absolutely imperative, particularly for the PACA and Inspection Programs, and we are delighted to hear that is moving in the right direction.
    To sum up, obviously a viable and credible inspection system is absolutely essential for the operation of this industry. I think improvements are being made, but the bottom line, again, is that it truly won't be fixed until those who are stolen from are repaid.
    Mr. Chairman, again, thank you very much.
    [The prepared statement of Mr. Stuart appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. McInerney.
STATEMENT OF MATTHEW W. McINERNEY, SENIOR VICE-PRESIDENT, WESTERN GROWERS ASSOCIATION, IRVINE, CA

    Mr. MCINERNEY. Thank you, Mr. Chairman. My name is Matt McInerney. I am senior vice-president of Western Growers Association, an agricultural trade association that represents growers and distributors of fresh fruits, vegetables, and nuts in California and Arizona. Thank you for the opportunity to speak before the committee today.
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    The Perishable Agricultural Commodities Act, which is administered by the USDA to regulate fair trading standards in fresh produce but which is fully funded by the produce industry, is critically important to our perishable industry. The PACA enables growers, shippers, and receivers to move perishable fruit and vegetable crops great distances, with assurances that all parties will be fairly compensated.
    In playing a critical role in assuring an abundant and affordable supply of healthy fruits and vegetables, the PACA provides many benefits to all sectors of the industry and to consumers who depend upon fresh produce for a healthy diet.
    Western Growers was greatly disturbed October 27 of last year to learn that USDA inspectors and certain wholesalers at the Hunts Point Terminal Market had been involved for almost two decades in a massive scheme to defraud growers and shippers by falsifying inspections of fresh produce. Trust and integrity of fresh products inspection are the cornerstone of our trading system and enhance the orderly marketing of our perishable crops. The massive criminal activity poses a very serious threat to both the industry and to consumers, as well.
    WGA continues to be concerned that growers and shippers who were unknowing victims of this criminal activity may very well be denied the opportunity to recover the massive financial losses which previously had been estimated at $44 million, but as we heard today may fluctuate between $13 million to $55 million.
    First, it has been virtually impossible for growers/shippers to obtain the documentation necessary to serve as evidence for the PACA claims from the Government. The Government began making this documentation available only recently, and the vast level of criminal activity in the 14,000 certificates involved is making the files extremely difficult and an extremely time-consuming process.
    It is unfortunate that today the statute of limitation for filing PACA claims expires July 27. As such, it is essential that Congress enact legislation to provide for an extension of the statute of limitation for cases related exactly to the Hunts Point scandal. It is our understanding that USDA has indicated it would support such legislation to provide growers/shippers with a reasonable amount of time to pursue their rights under the law.
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    While the PACA process permits defrauded growers and shippers to file grievance to recoup losses suffered as a result of the criminal activity, the burden of proof rests solely with the growers/shipper community. Some accommodation must be given to relieve this requirement in this unique situation, given the massive level of criminal activity. Without such relief, it will be virtually impossible for growers/shippers to recover the estimated losses caused by this criminal activity.
    It is Western Growers presumption that all of the inspections performed by the guilty inspectors who have now pled to their crimes are all part of the kickback scheme; therefore, immediate consideration should be taken on all of these inspections performed by the guilty inspectors at the implicated wholesalers, where the employees were also indicted, by having these suspect USDA inspections invalidated or voided. This would shift the burden of proof from the growers/shippers to the wholesale companies alleged to have been enriched by this scheme.
    WGA also urges Congress to require the USDA Inspector General to disclose all evidence related to Hunts Point cases to the growers/shipper community, including evidence relating to activities of wholesalers who were suspected of fraudulent activity but have not actually been indicted.
    As you can see, it is a very difficult task for growers/shippers to recoup the purported millions of dollars lost to the criminal activity of the Government inspectors and private wholesalers at Hunts Point. These massive financial losses essentially amount to a post-harvest disaster for our industry. Congress should consider providing a direct restitution package that would provide compensation to growers/shippers as a remedy for this matter.
    I would like to conclude by taking an opportunity to inform the subcommittee that WGA adamantly opposes the privatization of the USDA Fresh Products Branch Inspection Program. The inspection of the perishable produce cannot be relegated to private companies for a number of reasons, most of which are enumerated in my written statement.
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    With that, I will conclude my remarks and thank you for the opportunity to comment today.
    [The prepared statement of Mr. McInerney appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. McClung.
STATEMENT OF JOHN M. McCLUNG, PRESIDENT, TEXAS PRODUCE ASSOCIATION, MISSION, TX

    Mr. MCCLUNG. Thank you, Mr. Chairman. I am John McClung. I am president of the Texas Produce Association. On behalf of the Texas produce industry, I would like to thank you and the subcommittee for this hearing today and for giving us the opportunity to appear.
    I suspect you are going to hear a fair amount of repetition from my colleagues on the panel on the specifics, particularly technological fixes that are appropriate in this situation. I would like to skip over that—it is in the written testimony—and highlight some things that I think are important issues in this matter.
    Let me begin with the obvious. The PACA is an absolutely imperative act for the produce industry in the United States. You were intimately involved in the reauthorization process in 1995. You know how key that legislation is and the way the Government implements that legislation to the economic well-being of the industry.
    And I suppose that that falls squarely into the category of things that are patently apparent to everybody, but I would like to reinforce the notion that technology, in many respects, is the answer to the problems that we have had.
    There are things that can be done with imagery, with digital imagery, that are exceedingly useful to the process and ought to be incorporated by the PACA branch as rapidly as possible.
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    Training is also essential. It isn't just a matter of training inspectors. It is also a matter of making sure that those inspections are confident in their abilities, confident in their instructions, and take great pride in what they do.
    My office is about 4 miles from the Mexican border at the import point in Renosa, and I can tell you that I spend a lot of time down on that border and I do not want Federal inspectors—either AMS or any other Federal agency—who are there to do the bidding of industry. I want Federal Government people on that border who know what they are doing, who do it intelligently, who do it because they are well-trained, and who are proud of the jobs they do. That is what we need in the industry.
    Also let me point out that technology—we have long had a problem in the industry with consistency on inspections that has absolutely nothing to do with fraud or Hunts Point, and technology will help offset the inconsistency concerns. So that, it must be obvious, is extremely important.
    I do want to point out here that, in this regard, the Department of Agriculture has arrangements with various State inspection officers who do—USDA, by and large, does destination inspections. That is when the product gets to where it is going. But we also have origin inspections, shipment point inspections, that are often done by State inspectors.
    These are important because, when there is a dispute over the condition or quality of something, if you have two inspections which are credible it helps both determine the condition of the product and also it helps to eliminate fraud or corruption.
    I would like to encourage USDA to, through the use of technology, to put as much emphasis as possible on shipment point inspections.
    I also would like to emphasize that putting Hunts Point behind us as rapidly as possible is a goal I think we all share. I am not talking here about sweeping anything under the carpet. That solves nothing. I am talking about making sure we know exactly what happened, exactly how far it goes, and that we take the proper steps to solve those problems.
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    It worries me, however—I have heard Mr. Viadero on several occasions intimate that there are other shoes to drop here. If that is so, I wish he would get on with pinpointing those problems and enlightening us on them.
    To intimate that there are other publics—and, by the way, I have many members who secretly suspect or not secretly that they have been badly treated by the inspection process for years. They can't prove it. They can't prove, by and large, what, if anything, adverse happened to them at Hunts Point. But to constantly going on suggesting that there are ongoing problems but not exposing them, I simply would urge the Inspector General to continue that process as quickly as possible.
    As to the area of compensation or restitution, my suspicion is that most of the people that I represent will not be in line for compensation. For the most part, I represent smaller producers, smaller shippers, because that is the nature of the Texas industry. They don't have a paper trail that is going to make them eligible for compensation. Whether or not restitution is desirable and possible, clearly tens of millions of dollars have been forfeited here.
    I don't envy you the task of trying to figure out how that should be made right, but there are—it is going to be no mean feat to determine whether or not dollars should be made available, and, secondly, how that money should be distributed, if it were to come to that.
    I also am somewhat worried by the intimation that we might want to consider privatizing the system. I emphatically agree with Mr. McInerney. When the Hunts Point scandal first broke, there was considerable discussion in some quarters in the industry about privatizing it. I was delighted when that discussion evaporated. Privatizing the system, it seems to me, is no solution at all, in the first place. To say that the situation in Hunts Point reflects the industry or the inspection system in the Nation is an exaggeration or appears to be certainly, and privatization is not a workable solution.
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    Some of us on this panel have been involved for the last couple of years in trying to develop a dispute resolution function in the NAFTA countries between Mexico, the U.S., and Canada, and I will tell you that the notion that other countries are somehow put off by PACA comes as a revelation to me. I have heard both the Mexicans and the Canadians say that if their systems permitted it they would long ago have adopted it, so I would like to know why it is that there is a perception with Mr. Viadero or others that the system either ought to be privatized or that it is somehow considered an anomaly by foreign producers and shippers, who, by the way, do capitalize on PACA under our law.
    I think I will leave it at that, Mr. Chairman. Thank you very much for the opportunity.
    [The prepared statement of Mr. McClung appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. D'Arrigo.
STATEMENT OF MATTHEW D'ARRIGO, VICE-PRESIDENT, D'ARRIGO BROTHERS COMPANY OF NEW YORK, INC., BRONX, NY

    Mr. D'ARRIGO. Thank you, Mr. Chairman and members of the subcommittee. I am Matthew D'Arrigo. I am vice-president of D'Arrigo Brothers Company of New York. We are wholesalers in the Hunts Point Market. I have affiliations with affiliated companies. It is a family operation, our business is. We have another wholesale firm in Boston. And we are also growers in California in the Salinas Valley.
    I was asked to join the Task Force, I think probably because of the multi-leveled experience that our family businesses have and the various perspectives that we may have concerning this whole scandal that developed at Hunts Point.
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    I think I will just try to give an overview a little bit of how this market works at Hunts Point. It is the largest market in our country. It is probably the largest single collection of fruits and vegetables in our country every day, given what is, I am sure, close to a million boxes there, or something like that. I know that our place can hold over 100,000, and we are not 10 percent of the business there. It probably generates more sales dollars than any other place in the country in fresh fruits and vegetables, as well.
    It is very volatile and dynamic. It works on supply and demand. On any given day, a wholesaler like ourselves can be urged to take much more product into their business than they would normally take if they were just being a straight buyer of produce. There is a lot of pushing and pulling in our market of supply, depending on the needs of shipping point. It is one of the few marketplaces that is a sponge, a place that can be over-shipped by shipping point, which protects their markets at shipping point—a hedge against their markets, so to speak.
    That is how our business works and that is how many of the larger businesses in the market work.
    It also is a collection point for all of the problem children of the industry, all of the refugees, the claim loads, the refrigeration problems, the rejections from supermarkets due to various qualities and condition problems that develop.
    I know that we have received rejected loads from North Carolina, from Texas, from places that you wouldn't think would get to New York, but they bring it there to sell.
    We have the clientele that can take all different kinds of product, and we do because we receive all different kinds of product. We don't buy on spec. We are not a retailer. We get what comes.
    Historically, our business operated as a consignment business. I am dating myself. This is really my father telling me these things. You used to get almost everything in on consignment. The consignment system was one of being a commission agent. You acted on behalf of your shipper. You basically were a selling agent and you remitted back an account of sale and a charge to commission and pertinent expenses and sent the check of the balance. That is the historical background of our market.
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    The buying and selling of produce has evolved quite a bit. You now have terms of price after sale, or straight, firm price buying being thrown around the industry, and they are not thrown around, they are the reality.
    The change in the buying practices was not really accompanied by the way we sell in our market. It is still behaving like a consignment market. It is still a market that is full of overflow and full of markets that go up and down crazily, depending on not just supply but our local demand. Today in New York they are finishing up a 5-day rain storm, and that makes all the markets plunge.
    I think what really happened here is wholesalers that maybe could not procure their product as effectively as others that were forced to buy firmly and technically trade within the rules of the industry were not doing very well because our marketplace is just a little too risky for that, and if you have a large percentage of your business that has firm money in it and you have to try to make a profit in the New York market, you are not going to work it out very well.
    I think that created their need or maybe their interest in trying to circumvent the safeguards that were in the system.
    The other side, I believe the inspectors, the crooked inspectors, not all of the inspectors, because I know and I believe that many of them are completely honest and I know and believe that many of the wholesalers are completely honest, and I have felt, like the honest inspectors, a lot of anger and embarrassment about this entire incident in a personal sense.
    But I think the inspectors maybe were not supervised in a consistent manner or a manner that was thought out properly. I think they were a little bit on their own up there, and I am almost certain that many of them felt that way.
    I also feel that they are a little bit underpaid for the New York market area.
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    So I think the two halves of the puzzle basically is that, and that is what occurred in New York.
    As far as the other issues here on how to fix it, privatization, I have distinct opinions on all those things and would be happy to talk about it if questioned.
    Thank you very much for allowing me to appear.
    [The prepared statement of Mr. D'Arrigo appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. Campbell.
STATEMENT OF BEN G. CAMPBELL, COUNSEL, RIDER, BENNETT, EGAN & ARUNDEL, REPRESENTING C.H. ROBINSON COMPANY, MINNEAPOLIS, MN

    Mr. CAMPBELL. Thank you, Mr. Chairman, members of the subcommittee. My name is Ben Campbell and I am a partner with the Minneapolis-based law firm of Rider, Bennett, Egan & Arundel. For the last 5 years, I have represented C.H. Robinson Company in its dealings before the USDA, specifically in the area of PACA reparation proceedings.
    I believe that C.H. Robinson Company brings a very different perspective to the issues of Hunts Point that the committee is currently considering, and I believe that is why I have been asked to appear here today.
    C.H. Robinson Company is not a grower or a shipper of fresh fruits and vegetables, and they are not a wholesaler on the Hunts Point Market, but they are intimately tied up into the events that took place there.
    C.H. Robinson Company is an intermediary. They buy and sell fresh fruits and vegetables. Several of the groups that are represented here represent some of C.H. Robinson's best partners and vendors from whom they make purchases. They actually take title to the product and sell it across the country, including at Hunts Point.
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    That is an important issue because the fact of the matter is that nearly 50 percent of the claims that have been filed as a result of Hunts Point have been filed not against the wholesale markets on Hunts Point but against intermediaries just like C.H. Robinson Company. The fact of the matter is that when Robinson buys the product it takes title to it. It then sells it on Hunts Point or other places.
    When the inspection was taken and was fraudulently downgraded, C.H. Robinson was the intended victim of that. They were the person selling it to the wholesale market on Hunts Point. They were the ones that received the inspection. They would then forward the inspection to the party they had purchased the product from and they would sit down together and say, ''OK, based on the results of this, we need some sort of an accommodation.'' There would be a pass-through of that accommodation. C.H. Robinson Company and other intermediaries may take a $2 per carton hit from the wholesaler. They would pass that on to the shipper.
    The thing I would like the committee to remember is this: C.H. Robinson Company has in no way been implicated in the unlawful activities that took place at Hunts Point. They were the intended victims of the fraud that was committed by the USDA inspectors in conjunction with the wholesale markets. And, third, they made no economic benefit from the activities that took place there. To the extent that they had a margin, the margin stayed the same and the deduction that was claimed was passed through. They were a mere conduit for the fraud that was being conducted at the wholesale markets by a small handful of houses and by a small number of inspectors.
    Their role is very important because of this. As I noted at the outset of my testimony, 50 percent of the claims, nearly 50 percent of the claims that have been filed to date have been against intermediaries. The fact of the matter is that the growers/shippers have filed claims against intermediaries like C.H. Robinson Company and they seek full payment on those invoices. The inequity and the injustice that is being created by that should be apparent. The fact of the matter is, C.H. Robinson Company had no role in this, yet they are being asked to pay in full on these invoices.
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    The problem with that situation is that C.H. Robinson Company has now been granted the right to file cross-claims against the wholesale markets, but I think it is important for the committee to understand that the damages that have been created by these inspectors and these wholesale markets at Hunts Point far strips any financial wherewithal that those wholesale markets have to repay that.
    As Ms. Merrigan testified, these are not fancy places. These are not high-dollar operations in most instances. You have wholesale marketers now that are under indictment or have been criminally prosecuted, and they are not going to be able to repay this.
    What we run the risk of here is that C.H. Robinson Company and other intermediaries are going to be the ones that end up holding the bag on this. They are going to end up being found liable under the reparation process to pay the shipper/growers, but when they turn around and get reparation awards against the wholesale markets they will be worthless. That is inappropriate. Again, Robinson had no wrongdoing, it didn't benefit, and it was merely a conduit for fraud. It was a tool for fraud by the wholesalers, and I think the committee needs to take that into account when it is fashioning remedies.
    In conclusion, there are just a couple of points that I would like to make in addition to the situation that Robinson is in about the process that is being handled.
    We need to understand that these were USDA employees that were involved in the collusion and the fraud, USDA inspectors. We are now asking another branch of the USDA to mete out the punishment and to allocate the financial aftermath of that activity. It is very difficult—and I think Ms. Merrigan and her staff reported a very difficult situation to try and look back and put the pieces back together, and there are some inherent injustices in that where you now have one side of the agency policing the other.
    Second, the process that is being used is wholly inappropriate. The PACA reparation process is an excellent tool for what it does, and that is resolve disputes between shippers, growers, and intermediaries with regard to grade and price and other terms. It is not a tool to be used to mete out criminal restitution.
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    There is criminal, intentional, tortious actions that were taken place by USDA inspectors and by the wholesale markets that participated in that fraud, and to use a civil administrative proceeding to try and allocate the financial burden of that is inappropriate.
    In closing, what I would like to say is that, in order to fix the process for everyone involved, I believe there also needs to be a restitution fund established. I think that fund needs to be established with a separate claims process.
    I am here and I am maybe also unique because I don't think that my client would be entitled to any of the restitution, but I do think that, for the good of the inspection service, the industry, the USDA, and especially the shippers and growers that are represented here today, there needs to be some sort of a restitution fund. It should not be the innocent third parties that were ensnared in this that should end up bearing the financial burdens.
    I thank you for the opportunity to be here and present what I think is a unique position with regard to these events, and I would be more than willing to answer any questions the committee may have.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Campbell appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. Stenzel.
STATEMENT OF THOMAS E. STENZEL, PRESIDENT & CEO, UNITED FRESH FRUIT AND VEGETABLE ASSOCIATION

    Mr. STENZEL. Thank you, Mr. Chairman. My name is Tom Stenzel. I am president and CEO of United Fresh Fruit and Vegetable Association. We represent growers, shippers, producers, wholesalers in almost every State across the country, and also include in our membership a number of the regional and commodity membership organizations, as well, many of which you have heard from today, and also served on the Produce Industry Task Force.
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    I will submit my written comments for the record, Mr. Chairman, but try to sum up briefly here today several reactions I have had as I have listened to other testimony.
    The first thing I would like to point out is the absolutely critical role of the USDA inspection service for fresh produce. Several witnesses have testified to the unique nature of our industry, the perishability of our products. This system has been in place since the 1950's and it has worked well. This is a system that we have analyzed since October 27 with all of our industry partners. We do not believe privatization in any way would help prevent the problems that occurred.
    Quite the contrary, we believe that USDA is in a position to reinvest, take a strong look at management reforms, and do all of the things that we have talked about earlier such that we can once again depend upon a fair and impartial inspection service.
    In responding perhaps to Mr. Peterson's question earlier and the impression left by Mr. Viadero, I would submit that not a single grower, shipper, or wholesaler knew that we were being defrauded by USDA inspectors at the Hunts Point Market. Now, you may hear broad comments that we suspected, or perhaps there were assertions, or growers/shippers think they are getting harmed, and that may true, but we have asked the AMS, we have asked the Department time after time to do investigations. The Office of the Inspector General did an investigation at Hunts Point more than a decade ago and found no evidence, no indictable offenses for fraud occurring in that market. I would just like to put that on the record.
    Mr. Viadero deserves a hero's praise because he has found the first evidence that our industry has ever learned of with regard to fraud. Without that evidence, we wouldn't be here today. We do have the opportunity to bring good out of what has been a very tragic situation, and he deserves credit for that.
    However, I would say with my colleague, Mr. McClung, that it is time to move on from the broad assertions. I would directly challenge the assertion that this system was corrupt the moment it was formed in 1955. I would directly counter the assertion that inspectors are on the take in markets around the country or that wholesalers are crooked around the country. There may be bad apples anywhere. Let us root them out, get them the heck out of our industry, and get them off the Government payroll, but then let us move on with this system of reforms that are going to serve all of us in the produce industry well.
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    The reforms that Ms. Merrigan spoke about have been the direct result of negotiation and input from the industry. We fully intend to continue a very aggressive response with the Department and look forward to putting in many of the new technologies and bold new ideas that Mr. Dooley spoke about earlier.
    I agree with my colleague, Mr. Campbell, and others. The PACA claims process is simply unacceptable in terms of a forum for handling restitution to those parties who were defrauded by this action. The PACA system is meant to provide for dispute resolution on issues of price and quality and terms between two business partners. That is fine and it works extremely well. What it is not designed to do is handle intentional illegal activity by U.S. Government employees who defrauded our industry.
    And when I talk about U.S. Government employees, I don't just mean one character who happened to be free-wheeling. A system that was perpetrated, including supervisory authority, in that market in New York which was allowed to take place by management flaws of the U.S. Department of Agriculture. It is that simple.
    I am very receptive to the comment that training, alone, is not going to fix it. We need management controls, we need better supervision. We need a system in place from Washington, DC, from the top ranks of AMS that ensures that this never happens again.
    Finally, Mr. Chairman, the last element of this tragedy that can result in reforms that really do make a difference for our industry is just and fair restitution to those parties who were defrauded. It is absolutely beyond the realm of the guilty wholesalers to pay back those funds. We can sue every single one of them and put every single one of them out of business and there are not going to be funds to pay the growers in your district or in Florida or Texas across this country. These were people who were stolen from and defrauded by U.S. Government employees in an organized and systematic way. The first time we found out about it was on October 27, and there simply must be some form of restitution that has a strong paper trail, that is tied specifically to those individuals who can show damages, but we do ask seriously for your support in continuing the effort to develop restitution for those growers.
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    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Stenzel appears at the conclusion of the hearing.]
    Mr. POMBO. Thank you. Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman.
    I am still having a hard time understanding how you could be there every day and be involved in this and not know this was going on until October 27. Now, maybe—I don't know who exactly to ask, but C.H. Robinson Company, you guys aren't even there? Is that the deal? You are some other place and you just handle the paperwork? Is that what you do? Or what?
    Mr. CAMPBELL. C.H. Robinson's role is that they have offices across the country. They have an office in New York City that sells product to a lot of customers in New York City, including people at Hunts Point.
    In response, Mr. Peterson, to your question earlier this morning, I heard that. I think it is interesting. I don't believe that every inspection that was done over a 3- or a 4-year period was bad. I think the more sinister intent here was when product came in that was a little bit bad, let us say 5 percent creates a breach of contract that might have some accommodation financially. If something was 3 percent out of grade, $50 or $100 might have got that 6 or 7 percent out of grade.
    I think it was probably rare that a perfectly good load of product would come in with absolutely no blemishes that would be downloaded. Other people might disagree with mitigation, but I think that is kind of how the mentality got going, and it was difficult to prove whether or not that product was perfect so that it was taken care of.
    Mr. PETERSON. Do you have people there at the market?
    Mr. CAMPBELL. C.H. Robinson doesn't have people right at Hunts Point Market. They are in an office actually in Paulsboro, NJ, with a bunch of computers, and they handle the logistics and things, but they are not right there.
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    On certain instances, if there was something totally egregious, they may go to Hunts Point Market, but it would be on a very limited basis. There would need to be something out of the ordinary.
    Mr. PETERSON. So you wouldn't know whether this stuff was degraded or not?
    Mr. CAMPBELL. What they would——
    Mr. PETERSON. What I am trying to get at is somebody had to be there. Somebody is in this market. Mr. D'Arrigo, you are there.
    Mr. D'ARRIGO. I am there.
    Mr. PETERSON. So how could this have gone on for all this time without people knowing about it? That is what I don't get.
    Mr. D'ARRIGO. Well, I can speak only for myself. Since the day I started working there when I was 14—well, maybe full time when I was 23—there has been the whispered rumor of maybe something going on. I, personally, have been party to suspicion over the telephone with my suppliers on honest inspections knocking something out of grade, forcing a substantial reduction in price. When that happens to a supplier on the other end of the phone, there is just a couple of different ways you can react. One is you take it and you think it is honest, and one is you think that something is wrong.
    Now, I have had hundreds of times felt that, coming over the phone line, the doubt about what is going on. There is always that doubt because you are helpless when it goes on.
    So everybody suspected, and I am sure if you talk to—if you pick a thousand shippers, you pick any one of them, they will pick out a couple of loads where they know, but they don't know, they just really think they know.
    So your point about how could everybody not know, everybody suspected because the system is very—there is a lot of things going up in the air and there is a lot of money being juggled around, and you have this certificate that is the referee to everything. So there is a lot of suspicion behind it because it is a natural reaction.
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    Mr. PETERSON. But wouldn't there be a situation where somebody actually knew what that load was and it got graded, downgraded, or whatever, and they should have known at that point that what was going on was not right? I mean, how does——
    Mr. D'ARRIGO. I don't think there is any real spot where someone can absolutely be positive that there is fraud going on or that there is bribery.
    Mr. PETERSON. It is that subjective?
    Mr. D'ARRIGO. It is a very subjective deal, and the product flies around through the system, and our market retrieves a lot of product that really has no contract to it any more, and that makes markets go crazy. So it is really a part of our business that I don't believe any system is going to change how our market operates. It is just you have to have the inspectors be the one defining principled group of people that everybody knows is doing what they are supposed to be doing, and a code of conduct, for example, something that is hammered away at the inspection group is, to me, the cleanest and most effective thing that is going to come out of this, whether they have to go back every year to, like, an academy where they retrain and re-energize what their original thinking was, I am not sure what it is, but that is really what it has got to be.
    Mr. MCCLUNG. Mr. Peterson, I think perhaps the real answer to your question lies in the ratio between sellers and buyers. There are many, many more sellers than there are buyers; therefore, the buyers are very dear to the sellers. Very often, if you are packing potatoes in Mule Shoe, TX, or onions in the valley or grapefruit in the valley, even if you strongly suspect that there is a buyer that is downgrading your product improperly or having it downgraded improperly and therefore paying you less than that product is worth, you are extremely reluctant even to call for an inspection, knowing that that buyer simply—you may win the point, but that buyer is never going to talk to you again.
    Therefore, you really don't even want to have an inspection if you can avoid it, and if you do get an inspection you are unlikely to challenge it.
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    What you may do over time, if you think there is a house that is cheating you long-term, you will drop that house. You may not sell to them in the future. But it is not in your long-term economic interest to try and prove that you were defrauded on individual transactions.
    Mr. MCEVOY. I would make one comment on your question about do we ever check them. Yes, we do. We frequently send our own inspectors to the market. The problem is we have never been able to catch them. What we have been able to do is negotiate a settlement where there may be some—something is arbitrary about how they read the specifications. But catching them at systematic fraud is the real challenge to us.
    We even asked for appeals, and sometimes the appeals that we understand were part of this process were upheld and they were fraudulent.
    So I think what you have is built up over time at the growers/shipper level, at the grower level, enormous trust in the system that it would work, and that all we can do is challenge it and try to do the best we can working within it.
    Mr. PETERSON. Thank you. Thank you, Mr. Chairman.
    Mr. POMBO. Mr. D'Arrigo, I understood from your testimony that you are also a grower in California?
    Mr. D'ARRIGO. Well, not me. My cousins are. We are affiliated businesses. I am a third-generation produce person.
    Mr. POMBO. Can you walk the committee through what a typical grower would do, say, that was shipping from the Salinas Valley into Hunts Point? What would happen during that process in terms of the inspection and determining the value of the load that is going from, say, the Salinas Valley to Hunts Point?
    Mr. D'ARRIGO. We have many suppliers out of Salinas Valley, not just our cousins, so I will use a non-family member to make my point, because they are a lot tougher, my family, than the other people.
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    Mr. POMBO. I am in a family business, too, so I know what you mean.
    Mr. D'ARRIGO. I am going to speak like I am a technical buyer of produce, which in reality I am not. I buy almost everything without prices on it, even if I get priced invoices. I am an agent for growers or packers or shippers or whatever. But if I were to buy a load through a broker or from a shipper that I don't know very well, then your technical part of this business would come into play.
    Incidentally, the retail world really doesn't play a major role in this technical part of this business, as you can see by their representation throughout all this event.
    You agree on a price and your shipper sends you the load. The load——
    Mr. POMBO. At what point do you agree on the price?
    Mr. D'ARRIGO. Before it is shipped. There are other ways, but I am talking about where something has to have an inspection to really knock it out of grade.
    You agree on a price. You load the product. You also would agree on a spec, what you are buying—size, whatever. Upon arrival, you would unload that truck, you would find a problem, you would call for an inspection. The inspection usually—before this scandal broke, the inspection would, most of the time, happen—I shouldn't even say most of the time. About half the time it would happen the day of arrival, but I would say at least half the time it would happen a day later. So you have got some interesting dynamics there. You don't have enough room in your warehouse to unload this truck. You are not even really supposed to unload this truck any more because you have a firm price contract and you should leave it on the truck.
    So now you are asking trucks to lie around for 24 hours while this happened—certain things that aren't very realistic. More often than not, you would have this product unloaded. It would be deemed out of grade. Your grower or shipper has a few options. None of them are very good if the inspection is out of grade.
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    In the rare event that you called an inspection on a real hot market it might not mean anything. It might mean that the supply is so short that your customers have lost their eyesight and they are just taking whatever they can find. But more than likely you have a competitive market where there are a lot of items of all different varieties of condition and what not.
    You and your supplier would have a telephone conversation where you would agree to something that would happen. One, your shipper can pull the load away and send it to some other place for sale. That is not a very successful method of doing business. I know that. I see it happen. Whenever we receive a load from someone else in the market, it is usually—you don't need extra loads. It is not like, ''Oh, great. I have a load of bell peppers I didn't have to sell.'' You usually have your own, and therefore you are weakening your own sales position by receiving it. So it is a matter of finding a home for this thing. Or the shipper can make an adjustment on the spot, which personally I do not do. I usually wait for a consignment counting and sell the product to the shipper's account and send him an accounting of it, or sometimes you can just say, ''I averaged 998, bill me 850.'' Or you are talking freight involved. You have to deduct a few things. You would arrive at an adjustment.
    Your shipper doesn't have a lot of recourse there because everything is tied to that inspection knocking it out of grade.
    It is not a business that is done one battle at a time, though. It is a business of relationships. And that is a rare example in our own business.
    But what I think is occurring more and more is that there is a lot of this technical trading going on, and you cannot buy technically at firm prices and throw it onto this market that just goes up and down so much as it does, and everyone on this panel understands how that market behaves. It is an extremely volatile place.
    So where this problem occurs is where the buyer and the seller are not that familiar with each other or where there is an intermediary, a broker, or some kind of buffering in the whole communication system, and quite often in the case of C.H. Robinson I would think they were totally innocent of everything. But I do think there probably are some brokers around that aren't stupid, and they are just trying to push product around and get in the middle of the business and make a little bit of money.
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    I could talk forever about this, but a technical trade is basically that: you buy it, you load it, you bring it, you unload it. It is either out of grade or in grade. And you make a deal based on what is going on with that inspection.
    Mr. POMBO. I wanted you to explain for the committee and to the record the process that we go through in terms of shipping. I am familiar with going from California. There are others here that go from other parts of the country. But I know that when we are shipping something to New York and it is—once it gets there, if they tell you it doesn't grade, you are out of luck because you are 3,000 miles away and you don't have anything else to do with it and you usually take what you can get for it.
    That problem that the growers have, I think that they need to depend upon the inspectors to be honest when it is going there because you can't afford to get on a plane and fly back and look at it yourself once it gets there, and there is someone else that is supposed to be the arbiter of that transaction and make sure that it is honest.
    So I do understand the problem that the growers have, particularly coming from far away and shipping something by truck or rail. Once it gets over there, you are in trouble.
    Mr. D'ARRIGO. That problem does cut both ways though, I must say.
    Mr. POMBO. As a grower, I think it only cuts one way, but I am sure you——
    Mr. D'ARRIGO. I would think they only know about the one that cuts one way, but, on the other side, there is definitely—and I can remember plenty of different times where the system has forced our company to lose money on product that we really thought wasn't worth money. So we are talking about——
    Mr. POMBO. I didn't think you guys ever lost money. [Laughter.]
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    Mr. D'ARRIGO. That is where you get back to training and the—not the objectivity, but the expertise of inspection. That is a very important part of the whole thing, too, because everybody can be honest but it would be nice for them to be accurate, as well.
    Mr. POMBO. Well, I do believe that is important.
    I would like to get onto the subject of restitution and ask whether or not anybody has pursued a legal path in terms of a lawsuit to gain restitution up to this point. Has anybody done that yet? If not, why not? Whether it is a lawsuit against the wholesalers that were involved with this—Mr. Stenzel?
    Mr. STENZEL. Mr. Chairman, let me start kind of on a broad industry front and then ask the individual companies perhaps to speak to their evaluation.
    As an industry, we have looked at a number of options for restitution. The first was we asked the U.S. district court to consider restitution in terms of sentencing of the individuals who are found guilty. Unfortunately, that has not been forthcoming, and, to be quite frank, we don't see that as much of an option at this point.
    We have looked at individual lawsuits against the wholesale companies involved, but, again, that does not appear to be a very forthcoming pool of money. Quite the opposite, we anticipate that many of those firms who are eventually found guilty, their officers are found guilty in the criminal cases, may face severe PACE penalties, enforcement action there, and would have likely bankruptcy action forth.
    Probably the most likely thing on an industry-wide basis that we are seriously considering is action against the USDA. We firmly believe that the Department of Agriculture is the responsible party here in failing in its fiduciary responsibility to provide management reforms and protections for our industry.
    The user fee program, we paid for these services. We paid for the impartiality. And yet, over time, systematic errors and systematic mismanagement by the Department have led to this.
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    Now, you know as well as I that course of legal action is a long and costly endeavor, which brings us back to the question of restitution through congressional means.
    Mr. POMBO. Mr. McEvoy.
    Mr. MCEVOY. We certainly looked into it, but I think the same conclusion that Mr. Stenzel has just given was our conclusion, that the two companies where most of our filings were concerned, we felt that financially in a major lawsuit they couldn't withstand it, so we haven't taken that action yet and we have pursued it through the PACA filings which we have done over the last month.
    Mr. POMBO. I have to point out, in all fairness, to go down the path of congressional action on restitution is a very, very difficult path to go down. Not only from a policy standpoint do we have some real questions about doing this to begin with; we also have very deep questions about the cost, about how you would fairly distribute any type of restitution that exists.
    Mr. Viadero pointed out in his testimony that this has been something that has been ongoing for a long time. How do you determine who gets restitution, or is it just the guys that are still in business? I have had a number of growers that have gone bankrupt in the past couple of years in my district who I am sure, at some point over the last several years, shipped to Hunts Point.
    I have had growers that have died, and their families have sold out their business. What happens with their fair share of all of this?
    I have more questions about restitution than I think any of you could possibly answer. I know and I understand quite a bit about the industry and how it works, and I know there are a number of Members who have very little knowledge of the industry and how it works, and to try to piece together something that would be fair and equitable I think would be very, very difficult to do in any short period of time.
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    I don't want to suggest or make any suggestions, but I think you ought to keep all your options open and on the table in terms of this.
    Mr. D'Arrigo, do you have a comment?
    Mr. D'ARRIGO. Yes. As a way of thinking about who was hurt, in the market if the lettuce market is $14 and fraudulent inspection knocks a contract out of grade on a load of lettuce in a house and they go from $14 and sell the lettuce for $10, all of the lettuce is hurt. The lettuce market just went to $10, or maybe $12 to $10.
    So, as an idea of who gets restitution and how do you decide that, to me everybody gets the little piece of this hit because everybody has shipped to Hunts Point and I am sure everybody had their market fall unjustly and fraudulently because of it.
    Mr. POMBO. Yes. I think that is a very valid point, and that is one of the difficulties that we have, and I think it is also one of the difficulties that the Department has had in determining what the dollar amount is of any damage that was on this.
    I seem to think that the estimates that they have come up with are probably considerably on the low side, but I am not an economist and I am not digging through the figures like they are, either.
    Mr. Stenzel.
    Mr. STENZEL. Mr. Chairman, we are extremely sympathetic to the problem that you raise from a policy perspective and appreciate all of your efforts to this point in terms of trying to help your fellow Members trying to understand a little bit about our business.
    We do think that this is a critical issue. It is something that we would like to work with you to really develop the clear and very buttoned-down type of restitution plan, to get those amounts much more clearly defined, to establish the paper trail, to provide a mechanism for restitution that you and other members of the committee and of the Congress would feel comfortable with.
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    We are disappointed in the Department's efforts with that to date, frankly. The estimates on the amount of damages we had hoped would be much more specific than the $14 million to $55 million range. They can be more specific.
    There are several ways that can happen. Mr. McInerney raised one specific option—invalidating the 14,000 inspection certificates that were performed by guilty inspectors. That one step would provide a clear paper trail so anyone who had direct damages in downgrading due to one of those inspection certificates, that would be the pool of potential damages.
    Now, we can talk about perhaps it has been going on for 10 years or 20 years, but from an industry standpoint we do feel that some form of restitution is essential to putting this issue behind us.
    If we are going to go back to our growers and say, ''OK, let us have faith again in the inspection system,'' that is not just going to be because of future reforms, it is going to be for making good on past fraud.
    We aren't looking for damages that are nebulous. The indirect damages that we were just talking about we do feel that Congress has taken care of in the Risk Protection Act and in funding reforms for the program. But for those direct damages that can be shown with a paper trail and tied to guilty inspectors at those indicted wholesale firms at Hunts Point, we do believe a system of restitution can be put in place that would be effective and could be supported by fellow Members of Congress.
    Mr. POMBO. Well, we have got a long road, but I do appreciate your comments and I know that we have had an opportunity to talk about this and it is difficult to come to a policy point that I think I could get 218 votes for because we are talking about a sizeable amount of money and what solution we come up to would be very difficult to do that.
    I want to thank the panel for your testimony. There will be additional questions that may be presented to you in writing, and if you could answer those in writing for the committee in a timely manner, I would appreciate it.
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     I would also like to say I thank everyone who testified here today. I know many of you have come a great distance to be here. I appreciate that. Again, I apologize for the delay in the hearing at the beginning.
    I want to particularly I want to thank Mr. Viadero for the work that he has done on behalf of the industry in this particular case. I know at times he may say things that you and I may not want to hear or may not agree with, but this is the first time that we have had a report like this that has come out that someone has actually gone through and done the work on this issue, and I think many of us have suspected that this was going on for a long period of time, but we finally got to the point where someone came forward with the proof on it, and it is something that none of us wants and that we do have a lot of work to restore the faith and trust in the inspectors. I am committed to doing that. I am sure all of you are committed to doing that. We need to move on and restore that trust so that the system again works, but we do have a lot of work to do to get there, and I pledge to work with all of you to make that happen.
    I appreciate all of you coming in today. Thank you very much.
    The hearing is adjourned.
    [Whereupon, at 1:36 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
    [Material submitted for inclusion in the record follows:]
Testimony of Roger C. Viadero
    Thank you, Mr. Chairman and members of the subcommittee. Before we begin today, I would like to introduce a member of my staff who is here with me today: Gregory S. Seybold, Assistant Inspector General for Investigations.
    Thank you for asking me to discuss our investigations of Hunts Point Market, located in the Bronx, NY, which involve corrupt graders of the Agricultural Marketing Service's Fruit and Vegetable Programs. These graders accepted bribes to help wholesalers cheat producers out of the true value of their goods.
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    As you know, AMS graders are responsible for inspecting shipments of fresh fruits and vegetables received at wholesale locations throughout the country. The inspections, which are voluntary and requested at the discretion of the wholesalers, are intended to determine whether the delivered produce meets the U.S. Department of Agriculture grading standards—for example, ''U.S. Extra Fancy, U.S. No. 1, or U.S. Utility'' as promised by the grower in the purchase contract with the wholesaler. USDA grades take into account various factors affecting the quality and condition of produce, such as bruising, decay, color, and shape. Slight variances in grade can dramatically impact the overall contract price, sometimes by several thousands of dollars, depending on the size and value of the shipment. If a shipment of produce fails to meet the agreed-upon grade in the contract, generally the wholesaler is entitled to renegotiate the purchase price downward. Thus, the integrity of the AMS graders is essential for fair prices to be paid to producers.
    Because of our concern about the potential for public corruption in the Federal inspection process at this market, for more than a decade we have been developing information relating to criminal activity at Hunts Point. We have conducted extensive electronic surveillance and undercover operations, reviewed business and inspection documents, and interviewed witnesses. These efforts led to our developing inside sources and cooperating witnesses. Only after developing these informants, were we able to penetrate the bond of mutual trust and silence that shielded this crime from discovery. These sources informed us that produce wholesalers on a daily basis were paying AMS graders $50 to $100 per inspection in order to ensure that the graders would ''knock'' loads, so that the wholesalers could then negotiate lower prices.
    With our cooperating witnesses, we developed an extensive undercover operation. Our limited technical (i.e., video surveillance) resources were not sufficient, however, to carry out the operation, so we sought and obtained these resources from the Federal Bureau of Investigation.
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    Our subsequent investigation documented the massive corruption at Hunts Point, corruption that was systematic and had been occurring for more than 20 years. In fact, evidence of bribery was obtained against most of the graders who worked at the market and wholesaler firms that operated at the market. I have brought with me an enlargement of a photograph of Hunts Point, which gives you an idea of its size and the amount of produce it handles.
    The bribes paid by wholesalers were paid in various ways and in various amounts. Sometimes wholesalers paid the cash to the graders after the shipments were downgraded. Other times, the wholesalers kept track of all shipments during a given period of time, including those that were downgraded and the names of the AMS grader who downgraded them. The wholesaler then provided one large payment to one of the corrupt graders, who shared the monies with the other corrupt graders, usually at lunch.
    If a corrupt wholesaler did not know a grader conducting an inspection, the wholesaler declined the inspection with an excuse, and asked that it be rescheduled in hopes of having a corrupt grader conduct the rescheduled inspection. However, if the grader was ''on the take,'' he would use the code phrase, I am ''one of the boys,'' to signal that he accepts bribes. This was generally sufficient, and the wholesaler would then tell the grader to go back and conduct the inspection. New graders were sized up for several months to determine whether they should be approached with an offer to join this scheme. A corrupt supervisory AMS official furthered the scheme by matching corrupt graders with corrupt wholesalers.
    The investigation also found that the total amounts of bribe monies received by the graders were substantial and were used for a variety of purposes. One grader netted between $40,000 and $100,000 per year over a 15-year period. He lived off his bribe monies without touching his Federal salary, which he deposited directly into an account. The grader purchased a new sport utility vehicle with cash and when arrested had approximately $3,600 in a shoebox in his closet. Another grader used his bribe monies to solicit prostitutes, purchase jewelry for these prostitutes, and purchase weapons (e.g., an 1861 Springfield rifle). Another grader used the monies to purchase illegal drugs to support his habit.
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    Thus far in the investigation, we have developed evidence of bribery against nine AMS graders, including an AMS supervisory official, and 15 wholesalers at Hunts Point. The nine graders were charged with violating the Racketeering Influenced Corrupt Organization statute (RICO) and the 15 wholesalers were charged with bribery. Investigation of multiple firms at Hunts Point is ongoing.
    The public corruption by AMS employees and wholesalers at the Hunts Point Market reduced producers' income for their goods, provided illicit gains for wholesalers and for corrupt graders, and adversely affected the public's trust of Federal employees. Combating this type of criminal activity is one of the Office of Inspector General's (OIG) highest priorities. We are, therefore, conducting investigations of allegations relating to similar corruption in other markets around the Nation. I cannot discuss these investigations in detail as they are ongoing. To that end, I want to thank the committee for assisting OIG by providing a link from the committee's Internet Web site to the OIG homepage. This link has facilitated the process by which producers have a means to report fraudulent activity by USDA graders and Hunts Point produce wholesalers.
    Before I close, I would be remiss if I did not inform you, as I have repeatedly informed Congress for the past 5 years, that our ability to combat crime and corruption, both internal and external to USDA, is in dire jeopardy due to steady erosion of our funding level. Today, I have approximately 100 less OIG special agents than our authorized ceiling 5 years ago. This equates to a ''conservative'' estimate of 500 fewer investigations of crimes against USDA and corruption internal to USDA operations that is unaddressed each year.
    This concludes my statement, Mr. Chairman. I thank you again for the opportunity to address the subcommittee and appreciate your continued assistance and support. I would be pleased to answer any questions you or other members of the subcommittee might have.
     
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Statement of Kathleen A. Merrigan
    Good morning, and thank you, Mr. Chairman, for the invitation to appear before your Subcommittee to discuss the illegal activities at the Hunts Point Terminal Market.
    First, let me say that the Department of Agriculture (USDA) shares your concern and takes this incident very seriously. On behalf of USDA, I want to express our deep disappointment about these events. The produce industry as well as the American public has every right to expect honesty and accuracy in the grading service that USDA provides. When this expectation is not met, we all pay a price. At the same time, I must emphasize that the conduct of these inspectors is not indicative of our overall organization, just as the actions of the implicated produce receivers do not represent the entire industry. For more than 80 years, USDA has prided itself on maintaining positive, but impartial, working relationships with producers, shippers, brokers and wholesalers. Integrity is the foundation of our daily efforts to provide the quality service expected of us.
    I would also like to take this opportunity to thank the Members of the Agriculture Committee for your support in providing $71 million in the Agricultural Risk Production Act of 2000 (P.L.106–224) for the infrastructure and system improvements of the fresh fruit and vegetable inspection program and to build up the reserve funds of the inspection program and Perishable Agricultural Commodities Act (PACA) program. I will outline how this money will be spent later in my testimony.
    You already know about what happened, but I want you to know what steps the Agricultural Marketing Service took when we first found out about the bribery, and the long-range steps we are taking to ensure the inspection program is improved. I also want to share with you a summary of the report on the Hunts Point bribery incident.
    Immediate Response. As you know, on October 27, 1999, eight USDA fruit and vegetable inspectors and representatives of 13 wholesale fruit and vegetable establishments at the Hunts Point Terminal Market in the Bronx, New York, were arrested. In addition, one USDA inspector and two wholesale receivers were arrested prior to October 27, 1999, and assisted the investigators during the investigation. The representatives of the wholesale receivers at the Hunts Point Terminal Market were paying cash bribes to the USDA graders in exchange for their downgrading of the quality or condition of produce shipments. The wholesalers would then use the results of the USDA inspection to demand reductions in the original sales prices for the products. As soon as we learned of the arrests, we took immediate steps to restore control over the Hunts Point Terminal Market.
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    We immediately placed the indicted inspectors on administrative leave until they could be formally suspended. They later resigned their positions with USDA. On February 9, seven of the eight USDA inspectors arrested on October 27, 1999, pleaded guilty to bribery charges. Their sentencing hearing was held May 22, and the graders received prison sentences ranging from 15 to 30 months, probation from 2 to 3 years, and fines ranging from $4,000 to $70,000. The remaining two inspectors have been cooperating with the government and have not yet been sentenced.
    We began on October 28, 1999, denying inspection requests from the 13 Hunts Point firms indicted on October 27, 1999. To date, seven employees of these companies and the two arrested prior to October 27, 1999, have pleaded guilty to the bribery charges. The remaining six indicted wholesalers have either entered ''not guilty'' pleas or entered no plea. To date, one wholesaler employee has been found not guilty by a jury and three individuals who pleaded guilty received sentences ranging from 6 months home detention to 15 months in prison plus fines and in some cases restitution to the shipper.
    We relieved the Officer-in-Charge (OIC) and Assistant OIC of their supervisory responsibilities and established a temporary management and inspection team. We brought in senior program officials and highly skilled and experienced inspectors to maintain service.
    We continue to rotate into Hunts Point experienced inspection personnel from across the Nation to provide continuity in inspection operations and to restore confidence. To date, we have hired and are training 5 new inspectors to replace the convicted Hunts Point inspectors.
    We immediately began putting all our market inspectors through a refresher course in ethics, stressing that a conviction for bribery could mean a prison term, a fine, the loss of their job, a tax liability and the confiscation of property bought with bribe money. The training was immediately followed by unannounced audit inspections in four of our largest markets.
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    Long-Range Steps. In addition to these immediate steps, we have taken measures to strengthen and reshape oversight and administrative procedures to improve the inspection program and restore industry confidence, and to ensure that nothing like this happens again. I want to assure you that to this end we have been working very closely with the fresh fruit and vegetable industry. To date we have:
     Implemented a new National Inspection Database that allows us to generate reports showing inspection results and trends, and to identify inconsistencies and irregularities in inspections.
     Intensified pre-employment background investigations of inspectors.
     Stepped up unannounced, random follow-up inspections of product graded by AMS inspectors.
     Placed increased emphasis on our digital imaging services that are currently available at 12 terminal market locations. Digital imaging allows visual confirmation over the Internet of the quality and condition of a product at the time of inspection by shippers located anywhere in the country.
     Increased the rotation of assignments among inspectors within each market to prevent, to the extent practical, inspectors from frequenting the same applicants in an effort to reduce the likelihood of bribery attempts.
     Reassigned a new management team at the Hunts Point Terminal Market.
     Sent senior management officials to industry meetings to answer industry questions about the Hunts Point incident and to explain what steps were being taken to restore integrity to the inspection program.
INFRASTRUCTURE IMPROVEMENTS
    USDA has identified several corrective actions and infrastructure improvements that it believes are needed at this time. USDA believes that its single greatest area of need is an improved Inspector Training Program. Accordingly, during FY 2001, USDA will establish an Inspector Training Center near one of its terminal market offices so that practical, on-the-job style training can be effectively blended with rigorous classroom teaching of inspection procedures, including the application of U.S. grade standards, defect identification and scoring, and note sheet and certificate preparation. Additional training will be provided in the areas of communication, customer service, and ethics and integrity. USDA believes that its inspectors need 6–12 months of training before being allowed to perform inspections independently. Currently, new inspectors receive one year of on-the-job training and three weeks of formalized classroom instruction.
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    USDA has begun working to provide its terminal market inspectors with laptop computers and computer-based training modules for use in the inspection and inspector training processes. These computers and training modules will automate USDA's business processes and significantly improve USDA's efficiency. More specifically, they will reduce the time required to perform inspections by electronically generating and printing the official inspection certificates based on the data entered by the inspectors. These computers will lead to significantly more accurate inspection certificates, as all of the counts and percentages will be calculated by the computer rather than through manual means. All of the training modules, U.S. grade standards, and USDA's inspection instructions and visual aids will be stored on the computers for quick reference during inspections, greatly improving inspection uniformity and consistency, as well as USDA's training efforts. Finally, these laptop computers will result in greater operational efficiency and strengthened management capability as the data entered into the computers will be electronically transmitted to USDA's database system, allowing quicker access to data.
    USDA is working to fully implement digital imaging technology in its offices (USDA currently offers these services at 12 of its 38 terminal market offices). Digital imaging technology involves using a digital camera which digitizes images (takes computerized photographs) and saves them to a flashcard (similar to a computer diskette) which can be inserted into a computer so that the images can be downloaded. Once the images are in the digital format, they can be viewed, printed or transmitted, via the Internet, to anyone in the world with Internet access. USDA uses the digital imaging technology to: (1) provide additional inspection services to the fresh fruit and vegetable industry; (2) evaluate inspection program uniformity and ensure program integrity; (3) enhance its Inspector Training Program; and (4) improve communications between headquarters and the field and among and between industry participants with regard to defect identification. USDA believes that, during the next few years, digital imaging will become increasingly utilized because it provides a means for buyers and sellers, even those that are separated by great distances, to actually see, in essentially real-time, exactly what they are buying and to show what they are selling.
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    USDA will also renovate and modernize approximately 20 of its 38 Federal terminal market offices during FY 2001. These offices are in need of significant improvements to make them more efficient, ergonomically sound and compliant with Federal Occupational Safety and Health Act requirements. USDA believes that an improved quality of work life will make it easier for USDA to recruit and retain highly qualified employees.
    USDA is working to purchase approximately 700 lighted grading tables and place them on-site at its major terminal market applicants' facilities. These tables will make it far easier for USDA's inspectors to make accurate grading determinations.
    We believe these initiatives will be of considerable benefit to both USDA and the fresh fruit and vegetable industry. The $71 million provided in the Agricultural Risk Production Act of 2000 (P.L. 106–224), will support these infrastructure improvements and will build up the fresh fruit and vegetable inspection program's reserve funds so that no fee increases will be needed in the foreseeable future, as well as offset the need for a Perishable Agricultural Commodities Act (PACA) fee increase.
STATUS OF HUNTS POINT CLAIMS
    We know that many shippers may have unfairly suffered financial losses as a result of the corrupt actions at the Hunts Point Terminal Market. To help identify the improper transactions, we worked closely with USDA's Office of Inspector General to obtain copies of the relevant official inspection certificates and note sheets. It took some time to obtain release of these documents, but eventually by June 23, we mailed approximately 14,000 certificates to 911 shippers.
    If a produce company believed that it suffered damages as a result of a fraudulent inspection, it could have filed a claim under PACA. Under PACA, companies must file their claim within 9 months from the time the cause of action accrues. Since news of the Hunts Point scandal was made public on October 27, 1999, the 9-month statute of limitation expires today, July 27 unless the complaining company can supply a justification why its cause of action did not vest on October 27. As of July 14, 131 PACA claims had been filed against 14 companies implicated in the allegation of fraudulent inspections and the damages alleged in these complaints total $2.16 million. Thirteen of these claims have been settled or withdrawn, with restitution totaling $104,000.
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    Another 90 claims totaling $1.44 million also were filed under PACA involving allegation of fraudulent inspection certificates at Hunts Point. These claims involved inspection certificates issued prior to the period of investigation and/or were filed against entities other than the 14 implicated firms.
DIRECT ECONOMIC DAMAGES
    During the 4-year period (1996–99) of the investigation, some 14,000 inspections were performed by the implicated AMS inspectors at the implicated produce firms. Of concern is the unwarranted downgrading of produce that took place with respect to these inspections.
    Ideally, to develop an estimate of direct economic damages, the certificates for each of these 14,000 inspections would be reviewed, as would the related contracts that describe the terms and conditions under which each transaction took place. Contract documentation would be necessary because notations of quality defects on inspection certificates do not, necessarily, represent a breach of contract or an unwarranted downgrading through inspection.
Based on inspection experience at terminal markets throughout the United States, inspections are usually requested when receivers have reason to believe that contract terms are not being met. Inspections are somewhat costly, so frivolous requests are unusual. Typically, inspections are requested on approximately 25-percent of shipments received at terminal markets, with some three-quarters of those inspections resulting in a downgrading of product.
    Some similar pattern seems likely for the Hunts Point market. However, as already noted, a complete review of inspection certificates and contract documentation would be necessary to determine whether inspections were legitimately requested, and whether downgrading had occurred. Unfortunately, given the time available to develop an estimate of damages, it was not possible to review the several tens of thousands of inspection certificates written for produce firms operating at the Hunts Points market. Even if these inspection certificates could have been reviewed, the absence of accompanying contractual documentation would have rendered such an effort largely futile.
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    Thus, two broad assumptions have been made in an effort to develop a range of possible damages associated with the unwarranted downgrading of product at Hunts Point. First, although not likely based on testimony of at least one convicted inspector, it could be assumed that all 14,000 inspections were in some way tainted. If so, using the average Hunts Point PACA claim of $3,986 filed to date, estimated damages would amount to $55.8 million.
    A second assumption would be that all 14,000 inspections were requested for legitimate business reasons, but the 25-percent of these inspections typically expected to meet contract requirements were inappropriately downgraded. This would have resulted in 3,500 inspections being tainted, with estimated damages amounting to $13.95 million.
    Thus, given the information available, we estimate that damages incurred by shippers doing business with the 13 implicated produce firms could range from $13.95 to $55.8 million.
INDIRECT ECONOMIC DAMAGES
    Although the amount of money saved by Hunts Point receivers participating in the scheme varied from load to load, a downgraded inspection likely saved a receiver several thousand dollars per shipment. These savings allowed the receiver to offer produce for a slightly lower cost, causing harm to competitors not participating in the scheme as well as their suppliers.
    Given the high volume of produce that is sold at the Hunts Point market, coupled with the fact that the bribery scheme went on for at least the 4 years of the investigation, means that many honest produce companies and their suppliers could have suffered substantial indirect damages.
ACTIONS TO BENEFIT GROWERS AND SHIPPERS
    As already mentioned, AMS has provided assistance to growers and shippers who choose to file claims with PACA. Copies of the 14,000 inspection certificates relating to the implicated inspectors and produce firms during the period of the investigation have been mailed to the shippers of record. AMS has also participated in industry meetings and addressed directly questions that shippers have had about the PACA claims process. As of July 14, 131 PACA claims have been filed against the companies implicated in the allegation of fraudulent inspections. Thirteen of these claims have been settled or withdrawn, with restitution totaling $104,000.
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    A number of management and program improvements have been identified in consultation with the produce industry. These have already been described and should serve to reduce the possibility of wrongdoing by AMS inspectors in the future. Finally, industry-wide fee increases for inspection and PACA will be deferred for several years. Congress has provided $29 million to offset inspection fee increases and $30.5 million to offset PACA license fees increases.
    The investigation at Hunts Point began with a complaint made to the USDA Hotline by several shippers. Without their cooperation, this investigation might not have developed. If anyone observes violations of the law or regulations, please call the USDA Hotline at (800) 424–9121, (TTD) (202) 690–1202. Complainants to the Hotline may request that their identities be kept confidential.
    Let me close, Mr. Chairman, by saying, that there is no excuse for what happened at Hunts Point. At the same time, it is important to note that at terminal markets all across the United States, honest, hard-working USDA and federally licensed graders are working to provide the produce industry with high-quality, expert service.
    We have about 175 Federal inspectors working at 38 markets nationwide and about 500 State inspectors who are licensed to carry out Federal inspections at about 100 additional markets. These men and women conduct more than 200,000 inspections a year, 80 percent of which are performed by the 175 Federal inspectors. They are deeply concerned about their reputations, and the reputation of USDA. I assure you that we and they are doing everything possible to implement corrective actions needed to restore industry and public confidence in the program.
    This concludes my statement, Mr. Chairman. I would be pleased to respond to questions from Members of the Subcommittee.
     
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Statement of Matthew D'Arrigo
    Thank you Mr. Chairman and Members of the Subcommittee. My name is Matthew D'Arrigo and I am vice-president of D'Arrigo Brothers Company of New York. I have been asked to testify today as a member of the United Fresh Fruit and Vegetable Association's (United) Task Force on Produce Industry Inspection Services for two basic reasons. One, D'Arrigo Bros. Co. of New York is a large, well established and respected cornerstone company in the market and known for its reputation of integrity and honesty. Two, our corporate affiliate, D'Arrigo Bros. Co. of California, is one of the oldest grower, packer, shipper operations in the country and has been packing the Andy Boy label of fresh vegetables for over 75 years. We have been marketing their products in New York since 1948, and have participated in countless decisions concerning grower related issues. Based on these reasons, we have a very good understanding of the grower, FOB/shipping point supplier, and receiver perspective concerning this incident, and our testimony today will allow us to share with you our perspective of the illegal activities that took place at Hunts Point.
    To clearly understand the impact this activity has on the industry, one must first understand the marketplace in which it occurred. Hunts Point has the largest collection of fresh fruits and vegetables of any market in the country. More sales dollars are generated yearly at Hunts Point than any other produce selling entity in the United States, including any of the shipping point areas. It is a volatile and dynamic market, often behaving in ways unforeseen by the concerned party whether a shipper or a wholesaler. On any given day, a wholesaler may have to receive or load more than they would normally take in due to the supplier's insistence. Our market is one of the few shipping points that can over ship produce while still protecting their FOB market. All kinds of conditions and qualities are received at this market, including all rejected/claimed shipments from all over the eastern United States. Historically, Hunts Point is a consignment market where wholesalers act as agents for the supplier. These wholesalers charge a commission for their services based on an account sale and a net proceeds payment. That way of doing business has changed over the last three decades to what is now called firm price buying and price after sale. When firm price buying or technical trading is done by parties, who are not well acquainted, perhaps with a broker or a third party, transactions can become very cut and dry. While the manner in which business was conducted had changed, the basic nature of Hunts Point and the volatility of market price of the products sold has not changed in the slightest.
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    Some firms in our market are competitively more effective at procuring product than others. These firms buy their product at a lower percentage of their total package volume at firm prices than the average wholesale house in the market they are competing against.     When markets under-perform, these wholesalers are not asked to sustain large losses. Other firms do buy a large percentage of their goods at firm prices and this can be very risky because if they guess wrong or under-estimate the value of the goods, they can lose money. Also, if a wholesaler or an individual buyer is faced with the possibility of a substantial loss, they might be motivated or encouraged to somehow rig the system in order to protect themselves rather than fundamentally attempt to change their way of doing business or decide to go out of business altogether.
    On the other side of this issue are the Government inspectors who are entrusted with the duty of conducting USDA Inspections which are used to ensure that all of these technical transactions are appropriately assessed. The most important part of any inspector's job is objectivity, integrity and honesty in the execution of his duties. Without that, the system will operate adversely against one of the parties involved. I believe that the inspectors at Hunts Point were not properly supervised or managed effectively. I also believe that some of the inspectors felt under-appreciated, and perhaps underpaid by USDA. This kind of personal discontent could in my mind be enough to make an inspector susceptible to the kind of illegal practices as uncovered in this scandal.
    So, there are two sides of this whole event. On one side, the wholesalers are motivated and tempted to circumvent the safeguards built into the system, and on the other side the inspectors who are discontent and distracted enough to forget what their primary function is, namely to uphold the system by conducting their inspections in an honest and objective manner. Both sides become too comfortable that they believe deep down that nobody would care enough to pay any attention to them.
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    Since the scandal broke, I have noticed along with others at Hunts Point the renewed efficiency and professionalism exhibited by the USDA inspectors. This scandal was a cold slap in the face and a wake-up call, not only to the wholesalers and inspectors indicted at Hunts Point, but also to every wholesaler and every inspector around the country. This incident has forced our industry to form and implement some changes necessary to our industry and the Inspection Service, and bring the inspection services up-to-date in order for it perform to a higher standard. I have little doubt that if the changes outlined by the Task Force are implemented, then we can avoid a repeat of the Hunts Point scandal.
    This scandal was a terrible thing for all of us in the produce industry. This is not to say that all the inspectors were corrupt. I know that the honest inspectors that I have spoken with feel much the same as I do when they think about this whole mess. Namely, feelings of anger and embarrassment for having to speak to ones honesty, because all of a sudden you are now looked at differently due to your close proximity to those that broke the law.
    I would like to thank the Chairman and Members of the Committee for allowing me the opportunity to testify today and look forward to your questions.
     
Testimony of John M. McClung
    Mr. Chairman, members of the Subcommittee, my name is John McClung and I am president of the Texas Produce Association headquartered in Mission, TX, in the Lower Rio Grande Valley. On behalf of our member companies, including growers, domestic and import shippers, specialty shippers, distributors, and material and service providers, I thank you for the opportunity to appear before this panel today to discuss the past and future of the Perishable Agricultural Commodities Act, and the Federal agency that administers it.
    I first came to the produce industry some 15 years ago following nearly 7 years in the U.S. Department of Agriculture during the Reagan administration, most recently as director of information for the department. During those 7 years, in keeping with the philosophy and policies of the administration, a significant part of my time was devoted to identifying and, when possible, eliminating unnecessary and burdensome Federal regulations. I believed in that mission.
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    It was, therefore, a profound shock for me to discover that the fresh fruit and vegetable industry operated, happily and contentedly, under Federal regulations that dictated strict conditions of sale and payment. Not only do we suppliers of produce comply with these regulations or forfeit our ability to buy and sell commercial quantities of fresh fruits and vegetables, but we gladly pay several hundred dollars a year in licensing fees to come under the provisions—and protections—of the regulations. And, we are willing to quickly rise up in vigorous opposition to any effort to undermine or weaken those regulations, as those of you who participated in the 1995 battle over PACA reauthorization will well remember.
    Of course, there is good reason for the industry's commitment to the PACA. It is a law that, for the most part, works extremely well. It assures the seller of produce that he or she will be fairly compensated for a given quantity of produce, and that when inevitable disputes arise, they will be settled promptly and fairly based on the judgment of an independent and unaffiliated third party—the U.S. government. Obviously, for the whole system to work it must have great credibility, and equally obviously, the Hunts Point Scandal shook that credibility to the core. It is the reestablishment of that credibility that we are seeking here today.
    In response to the October 27, 1999 FBI announcement regard the indictments of eight USDA fruit and vegetable inspectors at Hunts Point, the Industry developed the Task force on Produce Industry Inspection Services. That Task Force consists of representatives from all sectors of the industry and has had an ongoing dialogue with members of Congress, and USDA officials from Marketing and Regulatory Programs, Agricultural Marketing Service and the Office of the Inspector General to improve USDA's produce inspection system. The Task Force has identified a series of reforms we believe will result in a stronger inspection service that is less susceptible to corruption and fraud in the future. We know this is a goal we share with both the Congress and the administration.
    To enable the revitalization process, Congress approved $11.5 million for infrastructure and modernization efforts as part of an emergency Economic Assistance Package, which was attached to H.R. 2559, the Agricultural Risk Protection Act of 2000, and signed by President Clinton on June 22. We greatly appreciate the strong support from this committee in approving this critical funding and enthusiastically recommend prompt implementation of essential reforms as developed by the Task Force in consultation with the Department. Specific improvements, as recommended by the industry, address deficiencies in the areas of training, technology and office modernization and equipment upgrades. Let me add here that equipment advancements also have been repeatedly recommended by the Association of Fruit and Vegetable Standardization Agencies, which is the organization that represents state inspectors who work in partnership with the PACA Branch at USDA. Such technological adaptations would lend authority to ''shipping point'' inspections, which is a goal long advocated by produce shippers.
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INSPECTION TRAINING CENTER
    One of the most pressing needs is to ensure that qualified inspectors are hired and receive ongoing training. If the Federal Government does not hire qualified inspectors, ensure that they are trained appropriately, and then reinforce and support continued professional development, we will continue to have a suboptimal inspection system that will be vulnerable to abuse and corruption. To address this need, the industry has recommended that a dedicated training office be created near a terminal market so that practical, on-the-job training could be effectively blended with rigorous classroom teaching on inspection procedures, including the application of U.S. grade standards, defect identification and scoring, and note sheet and certificate preparation. Such a training office could and should be responsible for proper instruction in the areas of communication, customer service, and ethics and integrity. We would estimate some 6 to 12 months of instruction might be required before any inspector could perform professionally and independently.
TECHNOLOGICAL IMPROVEMENTS FOR INSPECTION PERSONNEL
    In addition to appropriate on-the-job training, the Task Force Recommended that USDA's Fresh Produce Branch provide its terminal market inspectors with laptop computers and computer-based training modules for use in the inspection and inspector training process. These computers and training modules are needed to automate FPB's business processes and significantly improve its efficiency. Through the implementation of such technology, efficiency and accuracy can be greatly enhanced by electronically generating and printing the official inspection certificates based on the data entered by the inspectors. This would significantly improve inspection uniformity, consistency and transparency.
EXPANDING DIGITAL IMAGING
    Also in the area of new technology, we have recommended that digital imaging technology be fully implemented in every terminal market as a vital inspection tool and component of the inspection training process. Presently, FPB has implemented digital imaging technology at only 12 of the 38 Federal terminal market offices, in addition to the headquarters office in Washington, D.C.
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    Full incorporation of this technology in every office would help ensure that any load of downgraded produce would be digitally photographed and downloaded on a computer disk so that the photograph could be printed or electronically transmitted, via the Internet, to anyone in the world. As the produce industry increasingly operates in a global marketplace, digital imaging is becoming more and more important in providing an efficient and accurate means for buyers and sellers to see, in real time, exactly what they are buying and selling.
    Moreover, full implementation of digital imaging at every terminal market could greatly enhance services by: (1) providing upgraded technological services to the fresh fruit and vegetable industry, (2)evaluating inspection program uniformity and ensuring program integrity; (3) enhancing the inspector training program; and (4) improving communications between headquarters and the field—including state inspectors—and among and between industry participants with regard to defect identification.
RENOVATION/IMPROVEMENTS TO OFFICE SPACE AND GRADING TABLES
    Finally, in the area of infrastructure improvements, the Task Force recommended funding for improvements at several Federal terminal market offices that are in need of significant renovation and quality enhancements. For example, we understand that office equipment and construction upgrades are needed in many offices to fully comply with Federal Occupational Safety and Health Act requirements. Additionally, we understand that up to 750 lighted grading tables are needed to ensure that FPB's inspectors can make accurate grading determinations. Such workplace enhancements would greatly reduce inspectors' predisposition to becoming involved in improper activity and should make it easier for FPB to recruit and retain highly qualified employees. Based on these findings, we recommend that a full inspection of such renovations and workplace improvements be adopted as soon as possible.
    While full implementation of these improvements does not automatically preclude corruption by Department of Agriculture officials, it will be a vital step to restoring industry and intraservice confidence in Federal produce inspection services.
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    The next step is to ensure that those growers and shippers who have been defrauded by the lack of Federal Government oversight, combined with unscrupulous inspectors and produce wholesalers at Hunts Point, are able to recoup some of their economic losses. Continued oversight by the Congress regarding consideration of how appropriate restitution can be provided to parties that are found to have been unduly harmed by government/private industry malfeasance is an important element of the healing process. It will be challenging, however, as in Texas—and I suspect around the Nation—clear and compelling paper trails proving fraud many years in the past will be difficult, often impossible, to provide. We look forward, nonetheless, to working with the Congress and administration toward this end whenever possible.
    Thank you very much for attention and consideration to this important issue.
     
Testimony of E. Bruce McEvoy
    Good Morning members of the committee. My name is Bruce McEvoy and I currently serve as CEO of Seald Sweet Growers, Inc., a grower-owned citrus marketing cooperative based in Vero Beach, Florida. However, I come before you today as Chairman of the Task Force on Produce Industry Inspection Services.
    Fruit and vegetable growers, and indeed the entire produce industry, depend heavily on the USDA's inspection system to provide a credible and consistent third party analysis of product grade and condition at both shipping point and upon arrival. Without a sound inspection system in place, growers are at the mercy of unscrupulous buyers who would use bogus condition or grade problems to leverage a reduction in the price of a load.
    The recent bribery and racketeering scandal at the Hunts Point Terminal Produce Market in New York has severely damaged the fruit and vegetable industry's confidence in the USDA inspection system. Additionally, growers have suffered substantial losses from the fraudulent inspections. In the case of my growers, we have evaluated inspections performed by the convicted USDA inspectors at the request of the indicted Hunts Point receivers. In many cases, we are using documents provided by the Office of the Inspector General. Over 42,000 cartons of citrus are involved, with the average loss or downgrade per carton of $4.45, or a total $203,901.
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    This industry task force was initiated and established as a direct result of the illegal activities at Hunts Point, and it has served as the industry's voice in dealing with the incident. Following the disclosures of October 27, 1999, it was important for all sectors of the produce industry to come together to help identify solutions that address the problems that led to the arrest of eight USDA inspectors and employees of 13 wholesale firms at the Hunts Point Market.
    On December 13, 1999, United Fresh Fruit and Vegetable Association hosted an open meeting of produce industry leaders to discuss the Hunts Point Terminal Market Investigation, and to begin exploring the potential for reforms in the inspection system that would prevent this from occurring again. One of the key recommendations out of that meeting was the organization of the Industry Task Force to address the many issues associated with this event.
    The Task Force consists of representatives from all sectors of the produce industry: growers, shippers, receivers and allied associations. The primary objective is to provide an ongoing dialogue and interaction with the USDA and to solicit the industry's input and recommendations for improving inspection services. Since its formation, the Task Force has met privately with USDA officials to scrutinize the industry's inspection service system. We believe it is critical that the entire USDA inspection system be overhauled to ensure that this kind of corruption of the system is eliminated. Through the Task Force's examination, the industry has identified a series of reforms that will result in a stronger inspection service and one much less susceptible to this type of corruption.
    We are pleased that we had the opportunity to work with Congress and Members of this Committee during their deliberations on the Agricultural Risk Protection Act to secure funding for inspection program reforms. As you are aware, Congress approved $71 million to modernize the inspection system across the country, while keeping both inspection costs and PACA license fees to all industry members at current levels for at least the next 5 years. Now that Congress has approved the $71 million in funding, we believe a tremendous opportunity exists for the industry and the Department to continue their cooperative alliance to ensure that we maximize our efforts to restore the integrity and confidence of the inspection service program.
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    Currently, the Task Force has begun working with the Department to ensure that reforms, as recommended by the Task Force on Produce Industry Inspection Services, are implemented as part of this funding for modernization. These recommendations include the establishment of an inspection-training center, technological improvements, inspector training modules, expanded use of digital imaging, and needed renovations and equipment upgrades. Expeditious implementation of these recommendations is urgently needed so that confidence in the system can be restored. Congress should also provide oversight as this process moves forward to ensure a seamless, transparent and efficient system is in place as soon as possible.
    We are pleased we had the opportunity to be here today to discuss the issue of the produce inspection service program, and we look forward to working with you over the next months to help restore integrity and confidence in the inspection service. I look forward to your questions.
     
Testimony of Tom Stenzel
    Good Morning Mr. Chairman and Members of the Subcommittee. My name is Tom Stenzel and I am president and CEO of United Fresh Fruit & Vegetable Association (United). I greatly appreciate the opportunity to testify this morning regarding the unacceptable behavior at the Hunts Point Terminal Market and discuss with you the produce industry's perspectives on the challenges and key public policy issues facing the fresh fruit and vegetable industry regarding this issue. As the national trade organization representing the views of producers, wholesalers, distributors, brokers and processors of fresh fruits and vegetables, United has provided a forum for the produce industry to advance common interests since 1904.
    The current crisis with the USDA inspection system is a serious threat to the entire produce industry. Public officials' acceptance of money under the table erodes the very foundation of the produce industry inspection system. It undermines the assumption of honesty and trust that is a prerequisite for both the government and the produce industry. My comments today will focus on these three general areas: (1) overview of the issues surrounding Hunts Point; (2) industry recommendations; and (3) the restitution debate.
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    Overview. On October 27, 1999, eight U.S. Department of Agriculture fruit and vegetable inspectors stationed at the Hunts Point Terminal Market in the Bronx, New York, were arrested and charged with taking bribes for downgrading loads of produce so that receivers could negotiate lower prices with shippers. Federal prosecutors in New York have now obtained convictions for all eight of the indicted USDA inspectors and each has been sentenced to a prison term ranging from 15 to 30 months.
    The investigation, which was codenamed ''Operation Forbidden Fruit,'' was the result of a 2 1/2-year effort, and followed on previous investigations of similar allegations at Hunts Point. The investigation revealed that the now convicted individuals at Hunts Point were routinely paying cash bribes in exchange for a reduction in grading produce. According to USDA, direct economic losses as a result of this scandal could exceed $100 million for the produce industry nationwide.
    Growers and marketers of perishable agricultural commodities sell produce with the promise to deliver a particular grade, or standard, of quality. Sometimes, disputes arise when a buyer claims that a shipment of produce is not the agreed upon grade. The USDA graders act as impartial referees in resolving disputes between sellers and buyers regarding the condition of the delivered produce. When the produce does not meet the grade promised by the seller, the contract price is renegotiated downward under this system. Following the scandal last fall, United organized an Task Force on Produce Inspection Services to evaluate the inspection system and make recommendations for needed reforms.
    The Task Force, chaired by Past United Chairman Bruce McEvoy, CEO, Seald-Sweet Growers Inc., met at United's annual convention in February 2000, and with USDA's Agricultural Marketing Service (AMS) staff this spring to develop a series of recommendations to advance through Congress. Its efforts to promote this reform package were culminated with a meeting May 22 with USDA Secretary Dan Glickman, Deputy Secretary Richard Rominger, and a host of other USDA staff. Following that meeting, Task Force members met with staff from the Senate and House Agriculture Committees to urge passage of the reform package. On May 25 Congress passed the reform package and sent the bill to the President who then signed the legislation into law June 20.
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    Industry Recommendations. Now that Congress and the President have taken major steps to modernizing the inspection system, we believe a tremendous opportunity exists to ensure that we maximize our efforts to restore the integrity and confidence of the inspection service program. Because of this opportunity, United and the produce industry would like to work with USDA and Congress to focus on several overall issues that we feel must be addressed.
    Perishable Agricultural Commodities Act (PACA) and Inspection Fee Increases: With the adoption by Congress of the $71 million in funding, $59.45 million was allocated to both the PACA and Inspection Service reserve funds. Because of this effort, we have requested that USDA withdraw its current proposed fee increase for both programs. We believe that this funding is adequate in eliminating any need for fee increases for the program. It will also allow licensing fees for PACA and the inspection service fees to be maintained at their current levels. It is important to recognize that everybody in the produce industry incurred damages caused by the scandal and these funds fairly compensate the broad produce industry for the past failure of the inspection system.
    Strategic Planning: As a result of this legislative achievement, we also request that USDA work closely with the industry to prepare a strategy of utilizing the $71 million allocated by Congress to modernize the system and restore trust in the inspection service program to administer fair and impartial inspections. As the Committee is aware, the industry has presented USDA a package of key recommendations. We propose that USDA establish an implementation plan for these recommendations as soon as possible. The industry believes these recommendations will go a long way in infrastructure improvements and modernization of the inspection system and the prevention of fraud and corruption of the system.
    In addition, the industry is also committed to working with USDA on other funding preferences. While maintaining the current inspection and licensing fees is one of our top priorities, the industry believes that USDA should have a full and open discussion with the industry on any plans for the further expenditure of these important funds. In turn, we believe the industry should also have the ability to provide recommendations on the priorities and implementation of the user-fee funding for this important program.
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    Task Force Involvement: Finally, because of the success and cooperation between the Task Force and USDA, we will continue to maintain the Task Force and would recommend that USDA utilize the Task Force when considering these important issues. The primary objective for the Task Force is to provide ongoing dialogue and interaction with USDA and solicit the industry's input and recommendations for improving inspection services. We strongly believe that the Task Force has achieved its objectives and is well-established to continue its cooperation with USDA.
    Restitution Debate. We are pleased with the major steps taken by Congress and the President to modernize the inspection service, but our industry will never have total confidence in the system until USDA makes good on its past failures to those companies defrauded. Since October of last year, the industry has been working together to evaluate ways to restore confidence and integrity into the inspection system that serves our industry. The industry firmly believes that restitution must be part of any plan to fully bring closure to the Hunts Point scandal and regain the total confidence in the USDA inspection system. Unfortunately, there currently exists no structure by which USDA could compensate produce industry members for the fraudulent activities of USDA inspectors at the Hunts Point Terminal Market. However, the industry believes that to achieve this goal there must be cooperative effort between the industry, Congress, and USDA to put an action plan in place and the opportunity to do this is now.
    In addition, there has also been a tremendous amount of debate over the issue of whether Congress should intervene into the matter regarding the fraudulent activities at Hunts Point, specifically, what legal remedies the industry has considered.
    Since October of last year, the produce industry has been examining their legal options for industry members who believe that they have been defrauded by corrupt USDA inspectors using their official authority at Hunts Point. These options include: (1) restitution as part of sentencing; (2) a civil suit outside of PACA; and (3) proceedings under the PACA framework.
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    (1) Restitution as Part of Sentencing: The sentencing laws of the United States provide that an order of restitution may be imposed as part of any sentencing, including a sentence of probation. The statements given by the convicted inspectors, as well as the terms of their plea agreements, may have particularly described a limited set of offenses, and may affect any sentence to be imposed. Under ordinary circumstances, defendants pleading guilty admit to only a limited number of charges and remaining charges would be dropped at sentencing.
    The U.S. Attorney's Office has not sought restitution against any of the corrupt USDA inspectors or wholesaler employees and, in fact, has sought civil forfeiture against one with substantial assets. Under civil forfeiture proceedings, any recovered funds would go to the U.S. Treasury as general receipts and be unavailable to compensate any defrauded party including the produce industry.
    (2) Civil Suit Consideration: A civil suit against corrupt USDA inspectors, if in their official capacity, would be barred by the Federal Tort Claims Act, 28 U.S.C. —2680(a). If a suit were brought against the corrupt USDA inspectors in their personal capacity, it is highly likely that they would not be in a financial position to make defrauded parties whole. In addition to criminal defense costs, the defendants may be answerable to Federal and state tax authorities if they did not properly report income derived from the scheme. The industry has made a conscience decision to forgo a run on the United States Treasury and has decided to responsibly pursue restitution where government employees were fraudulent.
    (3) Proceedings Under PACA: There have been numerous references made regarding the statute of limitations that the industry is currently under. The statute of limitations is under PACA and not any legal statute as with the minority farmer case. USDA officials have stated that if any reparation claims under to the PACA are to be filed based upon persons or incidents related to the indictment in this matter, those claims should be filed on or before July 27, nine months after the indictment. The reparation claim procedure, however, would run against only the indicted produce wholesalers and the burden of proof would be on the grower/shipper to show that particular transactions were affected by the fraud. In addition, the reparation system does not contemplate the existence of corrupt USDA inspectors and makes no provision for involving them as a defending party to permit recovery against them.
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    Because of the inadequacy of each of these options, and because none of them would effectively address restitution for the actions of USDA inspectors, Congressional action is needed to remedy the wrongs perpetrated by those using their Federal office for private gain.
    While a restitution package was not adopted by Congress in May, Members of this Committee understood the need for direct restitution and called for USDA to prepare a report on the extent of the losses and recommendations on a means to repay damages caused to the produce industry. While we are disappointed that the report was not filed on the July 19 Congressional deadline, the industry looks forward to working with Congress and the administration to resolve this important matter and restore our attention to promoting the wonderful health benefits for fruits and vegetables to the American public and our trading partners around the world. For those growers and shippers who took direct losses through fraudulent inspections at Hunts Point, our work is not yet done and the industry will work tirelessly to get fair and just restitution for those companies, and insist that Congress and USDA do the right thing.
    Looking Forward. Since the revelation of this defrauding scheme, the industry has been working to evaluate ways to restore confidence and integrity into the inspection system. United believes that one of the fundamental safeguards of our industry is the Federal produce inspection program. If buyers and sellers cannot have confidence in the objectivity and independence of the inspection system, the framework for dispute resolution is in serious trouble.
    As you have heard today, it is important to recognize that everybody in the produce industry was damaged by this scandal, including honest wholesalers who had to compete with fraudulently downgraded produce and growers and shippers who sold products during the artificially depressed markets. We want to underscore to you that the produce industry has absolutely no room for unscrupulous operators.
    What started out as a potentially divisive and bitter struggle for our industry has turned into a tremendous opportunity to put in place reforms and modernize the system that will serve shippers, wholesalers and retailers with a more fair and professional inspection program. We look forward to working with both USDA and Congress to ensure that full restitution for damages are secured. We need this final action to close the books on Hunts Point, and get on with the business of selling more produce to consumers.
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    Thank you for your time and I look forward to your questions today.
     
Testimony of C.H. Robinson Company
    C.H. Robinson Company is the largest third-party logistics company in North America. Robinson's corporate headquarters are located in Eden Prairie, Minnesota, and Robinson maintains offices and a significant corporate presence in 39 states through its operation of 103 branch offices. Robinson also maintains offices throughout Canada, Europe and South America with foreign agents located in over 50 additional countries. Robinson currently has 3,051 employees in its offices across the United States.
    In addition to providing full service logistical support to its customers, including shippers of fresh fruits and vegetables throughout the United States, Robinson also utilizes its extensive knowledge of the produce industry to directly facilitate the purchase and sale of a wide variety of produce. Robinson's business presence in virtually every major market across the country enables it to identify and serve local, regional, and national produce customers. By purchasing produce directly from shippers/growers in numerous states, and assuring its timely delivery and sale to markets across the country, Robinson plays an integral role in this country's fresh fruit and vegetable distribution system.
    2. An Overview of How the Illegal Activity at the Hunts Point Terminal Market, as Exposed by Operation Forbidden Fruit, has Impacted Robinson and Other Similarly Situated Entities
    One of the markets in which Robinson is active is New York City. One of the areas which Robinson services in New York are the produce houses which comprise the Hunts Point Terminal Market. In order to understand Robinson's interest in the illegal activities which have been documented at Hunts Point, it is important to understand its commercial role in the produce industry.
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    Robinson routinely purchases large quantities of fresh fruits and vegetables from shippers/growers throughout the United States. In turn, and pursuant to the terms of a separate purchase and sale contract, Robinson sells that produce to customers throughout the country, including customers at Hunts Point. As a general rule, Robinson purchases the produce from the shippers/growers at a set price and sells it to its customers at a set price as well. Robinson's logistical support services and its large volume of business enable it to operate at a minimum per transaction margin of profit. Occasionally, product arrives at Robinson's customer's place of business in a distressed condition. At that point the issue arises of whether Robinson has breached its contract with its customer and whether the shipper/grower has breached its contract with Robinson by shipping distressed product. In order to resolve the foregoing issues, the parties have to date uniformly relied upon the results of Federal inspections conducted by the Inspection Services Branch of the U.S. Department of Agriculture.
    As this committee is well aware, it has now been revealed that Federal inspections conducted by representatives of the USDA at Hunts Point were routinely down-graded by inspectors in exchange for cash payments. The purpose of down-grading the inspections was, in most instances, to establish a breach of contract by the seller. In many cases, the seller of the product at issue was Robinson.
    Based on the results of fraudulent inspections the various Hunts Point houses would invariably seek price accommodations from Robinson. Robinson, in reliance upon the tainted inspections procured by its customer, would in turn request a corresponding accommodation from the shipper/grower who had sold the product to Robinson. Based upon the belief that the Federal inspections were true and accurate, Robinson often granted the requested financial accommodations and was authorized by the shipper/grower to take a corresponding deduction against its payment obligation.
    Robinson was unaware of the Federal inspections' inaccuracies and was in no way involved in or aware of the unlawful activity taking place at Hunts Point. The truth of the matter is that Robinson, like all other parties that sold produce on Hunts Point, was the party that the purveyors of the tainted inspection intended to mislead and defraud. In reliance upon the fraudulent inspections, Robinson innocently requested corresponding adjustments from its suppliers. Robinson, therefore, did not receive any economic benefit from the tainted inspections. In the vast majority of transactions touched by a tainted inspection the damages suffered by Robinson were, by consent, passed through to the innocent shipper who, in turn, was relying upon the veracity of the underlying Federal inspection.
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    It cannot reasonably be disputed that unlawful conduct was undertaken by the participating Federal inspectors and Hunts Point produce houses. In turn, the economic damages caused by the fraudulent inspections was most often incurred by the shippers/growers.
    3. Adverse Consequences of Current Handling of Reparation Claims Filed Under the Perishable Agricultural Commodities Act

     As the committee is undoubtedly aware, in response to the recent events at Hunts Point the PACA Office of the USDA extended the deadline for the filing of reparation complaints based on allegedly tainted inspections through July 27, 2000. As a result, shippers/growers that suffered provable damages have been granted until that date to record their informal complaints with the PACA office.
    Although well intentioned, the PACA's reaction has had unintended adverse consequences for intermediaries and other parties such as Robinson. It must be remembered that in transactions such as the one outlined above, the shipper/grower did not contract with a Hunts Point house. Rather, the shipper/grower contracted with Robinson, who in turn sold the product on Hunts Point pursuant to the terms of a separate and distinct contract. As a result, the shippers/growers have in many instances asserted claims for full payment directly against Robinson, despite the fact that Robinson had no knowledge that the subject inspection it passed on to the shipper/grower may have been tainted, and did not benefit financially in any way from the alleged fraud. Robinson therefore finds itself in the unenviable position of being forced to defend itself against reparation claims which are based upon improper and unlawful conduct by third parties.
    The PACA has attempted to rectify the inequity which has been created by authorizing the shipper/grower to file and/or complaints naming both Robinson and the involved Hunts Point produce house as respondents. In the alternative, the PACA has authorized Robinson to file crossclaims against its customers on Hunts Point in those cases in which claims have been filed directly against Robinson.
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    Although the foregoing accommodations may appear at first blush to rectify the glaring inequities created by the procedures currently in place, they actually heighten the risk of an inequitable outcome. For example, assume that 1,000 claims are filed against Robinson by shippers/growers and that the claims each seek an average recovery of $1,000. Robinson, in turn, could file cross-claims against the Hunts Point produce houses seeking to recover an equal amount of damages. Following the PACA's handling of the hypothetical 1,000 files, Robinson could face the entry of reparation awards against it in an amount in excess of $1.0 million. Robinson's only recourse, under the procedures currently in place, is to seek to obtain corresponding awards against the involved Hunts Point houses.
    At this juncture it is important to note that the involved Hunts Point houses face significant claims in an amount which has yet to be determined. Individual representatives of the involved produce houses face criminal prosecution. There is a very real possibility that most, if not all, of the Hunts Point houses implicated in Operation Forbidden Fruit may not survive the financial aftermath of that investigation. If that is the case, and Robinson's cross-claims become worthless, Robinson, and other similarly situated parties, will be placed in the unsavory position of facing significant liability for unlawful acts it did not commit or condone, with no prospects for recovery. Such an outcome is patently unjust and all steps necessary to avoid such a miscarriage of justice should be taken.
    What can be done? Two options appear viable. First, the PACA's current procedures could be modified to assure that innocent third-parties are not held financially responsible for the illegal and unconscionable conduct of the indicted USDA inspectors and the involved Hunts Point produce houses. Failing to take such action could result in the entry of awards which run afoul of controlling legal theories and authority. Secondly, and perhaps more appropriately, Congress could provide for the establishment of an appropriate restitution fund to compensate those parties that have suffered an actual economic loss as a result of the fraudulent inspections identified during the course of Operation Forbidden Fruit.
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    4. The Rules Governing Reparation Proceedings Should Be Revised to Provide Shippers/Growers the Right to Recover Actual Damages From the Party Responsible for Causing Those Damages
    The rules under which reparation claims are currently administered clearly run the risk of causing innocent third parties to bear the financial brunt of the unlawful conduct which took place at Hunts Point. In addition to offending most notions of justice, forcing innocent parties to defend themselves against claims created by third parties runs afoul of the legal doctrines governing breach of contract claims.
    Most, if not all, of the claims filed by shippers/growers against Robinson and other intermediaries will allege a failure to pay in full for fresh fruit and vegetables in violation of section 2 of the Perishable Agricultural Commodities Act. In essence, the shippers/growers will allege that Robinson breached the parties' contract by failing to pay the originally agreed upon invoice price. Although reparation proceedings are administrative in nature, reparation awards are made in accordance with controlling statutory and common law theories, including article 2 of the Uniform Commercial Code. A brief review of some controlling legal principles highlights the inappropriate outcomes which may result from application of the rules currently being observed by the PACA.
    As noted above, most of the shippers/growers' claims are based upon an alleged breach of contract which occurred when Robinson failed to pay the contractually agreed price for the product at issue as demonstrated by the original invoice price. Such a claim has no basis in fact or in law. You will recall that in the typical transaction Robinson would receive the tainted inspection from the Hunts Point house and relay it to the shipper/grower. Upon mutual receipt and review of the tainted inspection by Robinson and the shipper/grower, the parties would agree to revise the terms of their then-existing contract. A new contract, reflecting the new payment term, would then be formed.
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    At the time of the formation of the new contract, both parties had access to and relied upon the fraudulent inspection. Neither Robinson nor the shipper/grower knew or had reason to know that the inspection was in fact fraudulent. The accuracy of the inspection was a fact which both parties to the contract relied upon in forming the new contract. A mutual mistake of material fact which was relied upon by both parties does not, in and of itself, give rise to a claim for breach of that contract. The PACA's current rules and procedures implicitly authorize a breach of contract claim by ignoring the fact that the parties entered into a valid revised contract which was entered into in reliance upon a mutual mistake of fact.
    The current procedures being followed by the PACA also make it possible for Robinson and other intermediaries to be held liable for a breach of contract they did not cause and which they were unable to prevent. It cannot reasonably be disputed that the conduct creating and giving rise to the alleged breach of contract claim was undertaken by the indicted USDA inspectors and the Hunts Point houses identified during the course of Operation Forbidden Fruit. As a general rule, courts of various jurisdictions have refused to award damages for an alleged breach of contract when the damages are caused by an intervening act of a third party.See Stedman v. Hoodendor, et al., 843 F. Supp. 1572 (N.D. Ill. 1994).
In so holding, the courts have recognized that it is essential to a breach of contract claim that the complaining party prove a causal connection between the alleged breach of contract and the damages claimed to have been suffered. An award of damages is only appropriate if the defendant's breach was the proximate cause of the damages sought to be recovered.See generally Transpen Wax Corp. v. McCandless, 50 F.3d 217 (3rd Cir. 1995); Bausch & Lomb Inc. v. Sonomed Technology, Inc. 780 F. Supp. 943 (E.D.N.Y. 1992).

    As set forth above, it is abundantly clear that the act which precipitated the alleged breach of contract claims currently being asserted was the procurement and performance of fraudulent inspections. Holding Robinson responsible for the financial consequences of those acts, as the procedure that is currently being followed threatens to do, runs afoul of controlling principles of contract law.
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    The procedures currently being followed by the PACA also ignore several fundamental rules and principles regarding the admissibility and weight of various items of evidence. During the course of its handling of Hunts Point's claims, the PACA has routinely distributed and disseminated copies of the plea agreements entered into between the indicted inspectors and the U.S. Attorney's Office. The PACA has also encouraged claimants to gather additional evidence by contacting the United States District Court for the Southern District of New York and requesting documentation produced during the criminal prosecutions of the indicted inspectors.
It is apparent from the PACA's handling of claims to date that it believes that the criminal convictions and plea agreements may be relied upon by claimants in attempting to establish their right to recover damages. That belief is unfounded. It is well established that a criminal conviction or criminal plea agreement may not be relied upon to establish a breach of contract in a subsequent civil proceeding.See generally Shimman v. Frank, 625 F.2d 80 (6th Cir. 1980); New England Mutual Life Ins. Co. v. Null, 534 F.2d 896 (8th Cir. 1977).
Although claimants may produce evidence similar to that relied upon by the prosecution in the criminal cases, it will be no more persuasive or credible simply because it previously supported a criminal conviction. Use of evidence in a criminal prosecution does not mark it with a badge of authenticity.
    As the foregoing analysis demonstrates, the current procedures in place for handling reparation claims arising from the illegal activities at Hunts Point may produce results which are inequitable and which are subject to reversal on appeal.Reparation awards may be appealed to the United States District Court for review on a de novo basis.
In order to maintain the integrity of any reparation awards which may be entered, it is necessary to revise the PACA's current rules and procedures. The proper result may be reached most effectively by revising the PACA's current procedures to allow, and in fact require, that parties who suffered provable economic damages as a result of a fraudulent inspection assert and prosecute their reparation claims directly against the Hunts Point house responsible for procuring and disseminating the tainted inspection.
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    Allowing injured shippers/growers to file third-party claims against the Hunts Point houses whose conduct caused them to suffer damages is specifically authorized by UCC 2–722. That provision acknowledges that a seller may maintain an action against a third party whose conduct causes an actionable injury. Having suffered a direct loss as a result of the Hunts Point houses' intentional conduct, shippers/growers may clearly maintain a direct action against them. In any event, Robinson and other similarly situated intermediaries could clearly consent to the maintenance of third-party claims by shippers/growers.Third-party claims for fraud and misrepresentation are also recognized by many states and would be appropriate in this instance. Viske v. Flaby, 316 N.W.2d 276, 284 (Minn. 1982); Kronebusch v. MVBA Harvestore System, 488 N.W.2d 490, 496 (Minn. Ct. App. 1992).
Allowing shippers/growers to pursue their claims for economic damages directly against the parties most directly responsible for their loss would have the effect of assuring that innocent parties like Robinson are not wrongly required to bear financial responsibility for the illegal activity which took place at Hunts Point. Awards made directly in favor of the shippers/growers and against the Hunts Point houses would also be much more likely to survive legal scrutiny on appeal.
    5. Victims of the Illegal Activity Which Took Place at Hunts Point are Entitled to the Establishment of a Restitution Fund and Claims Process
    Allowing the maintenance of third-party claims by shippers/growers does not alter the fact that the illegal activity engaged in by a handful of USDA inspectors and Hunts Point houses caused damages well in access of what the Hunts Point houses themselves will likely be able to repay. As a result it is critical for the entire produce industry that a restitution fund be established by Congress to compensate the shippers/growers that suffered actual damages as a result of the illegal activity uncovered by Operation Forbidden Fruit. The establishment of such a fund would assure that the Hunts Point scandal does not threaten the long-term financial well-being of innocent shippers/growers who were unwitting victims of the fraud being perpetrated at Hunts Point.
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    The establishment of a proper restitution fund would also allow compensation to be dispensed in accordance with an orderly claims process which could be administered independent of the reparation procedures which are currently being employed. Although the reparation process serves a useful purpose, it is ill-suited for resolving claims which have arisen due to the intentional, tortious and illegal conduct of members of the USDA inspection service. Attempting to compensate criminal victims by allowing them to pursue an administrative claim for breach of contract raises the prospect that an inequitable and ultimately unfair outcome will be reached.
    Restoring integrity and trust to the USDA inspection service and financial stability to the produce industry requires the establishment of an appropriate restitution fund. Compensating the victims of the Hunts Point scandal and ensuring the integrity of the inspection service is the best way to assure that the conduct documented by Operation Forbidden Fruit is not repeated.
     
Statement of Matt McInerney
    Good morning, Mr. Chairman. On behalf of Western Growers Association (WGA), I want to commend you for holding this hearing and thank you for the opportunity to relate WGA's views to the members of the subcommittee. The Hunts Point Terminal Market scandal and its impact on growers and shippers of fresh fruits and vegetables are of great importance to our industry.
    WGA was established in 1926, and represents over 3,300 members who grow, pack and ship more than half of the nation's fresh fruits, vegetables and nuts. The Association represents over 90 percent of the fresh vegetables and about 60 percent of the fresh fruits and nuts grown in Arizona and California.
PERISHABLE AGRICULTURAL COMMODITIES ACT
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    The Perishable Agricultural Commodities Act (PACA), which is administered by the USDA to regulate fair trading standards in fresh produce, but which is fully funded by the industry, is critically important to growers and shippers of fresh fruits and vegetables. The PACA enables growers, shippers, and receivers to move perishable fruit and vegetable crops great distances with assurances that all parties are fairly compensated. In playing a critical role in ensuring an abundant and affordable supply of healthy fruits and vegetables, the PACA provides many benefits to all sectors of the industry and consumers who depend upon fresh produce to maintain a healthy diet. Without the PACA, the supply and quality of fresh produce in the U.S. market would be severely diminished.
HUNTS POINT TERMINAL MARKET CRIMINAL ACTIVITY
    Our industry was greatly disturbed last year to learn that USDA inspectors and wholesalers at the Hunts Point Terminal Market in New York City had been involved for almost two decades in a massive kick-back scheme to defraud growers and shippers by falsifying inspections of fresh produce. Trust and integrity of fresh products inspection are the cornerstones of our system of impartial trading of perishable commodities. The massive criminal activity at Hunts Point poses a very serious threat to growers and shippers for fresh fruits and vegetables, as well as the consumers who depend on them to supply fresh produce necessary to a healthy diet.
    All of the indicted inspectors involved in the scheme and many of the wholesalers' employees have agreed to plead guilty in criminal proceedings. While WGA is pleased to see that this criminal activity has been uncovered and prosecuted, we are concerned that growers and shippers may be denied the opportunity to recover the massive financial losses, which have been estimated at $44 million, suffered due to the Hunts Point criminal activity, for a number of reasons. While the PACA permits defrauded growers/shippers to file grievances against the Hunts Point wholesalers in order to recoup these losses, there are a number of procedural obstacles which need to be overcome.
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DISCLOSURE OF EVIDENCE/STATUTE OF LIMITATIONS
    First, it has been virtually impossible for growers/shippers to obtain the documentation necessary to serve as evidence for such grievances from the government. The government began making this documentation available only very recently, and the vast level of criminal activity and voluminous records (some 14,000 inspection certificates) involved make filing the relevant grievances an extremely time-consuming process.
    Moreover, it is unclear just how much evidence has been obtained from the inspectors and wholesalers who have plead guilty to defrauding growers/shippers in fruit and vegetable inspections. WGA wrote to the prosecuting U.S. Attorney, Mary Jo White, on February 15, 2000, urging that complete cooperation of the prosecuted individuals and corporations in providing for the disclosure of evidence to defrauded parties be obtained as part of their plea bargains.
    To date, WGA has not received any response to this request from the U.S. government, nor any indication that such evidence has been forthcoming from the guilty parties. (I would like to submit WGA's letter for the hearing record.) Frankly, WGA is very disappointed with the level of cooperation by the government with respect to disclosure of the necessary documentation to file PACA claims related to the Hunts Point matter.
    It is ironic, and unfortunate, that the nine month statute of limitations for filing PACA complaints expires today, July 27, 2000. As such, it is essential that Congress enact legislation to provide for an extension of the statute of limitations for cases related to the Hunts Point scandal. As far as WGA understands, such legislation would be completely non-controversial. It is our understanding that USDA has indicated it would support such legislation, which would only apply to the Hunts Point cases. There appears to be broad agreement that this is a terribly unfortunate incident and that it makes sense to extend the statute of limitations so that growers/shippers adversely impacted by this pervasive criminal activity have a reasonable amount of time in which to pursue their rights under the law. WGA is not aware of any substantive or procedural opposition to such an extension.
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    WGA urges Congress to enact, as soon as possible, a 1-year extension of the statute of limitations for cases which apply to criminal activity at Hunts Point Terminal Market. WGA would appreciate the opportunity to work with Congress toward this goal.
    Burden of Proof. As I mentioned earlier, the PACA process permits defrauded growers and shippers to file grievances against wholesalers to recoup losses suffered as a result of criminal activity. However, the burden of proof rests solely with the growers/shippers. Some accommodation must be made to relieve the shippers' burden of proof requirement in this situation given the overwhelmingly complex and voluminous nature of the criminal activity. Without such relief, it will be virtually impossible for growers/shippers to recover any of the losses caused by this criminal activity.
    It is WGA's presumption that all of the inspections performed by the inspectors who have pleaded guilty are part of the same kick-back scheme. Therefore, immediate action should be taken on all of the inspections performed by the guilty inspectors at the wholesalers where employees were indicted by having the USDA inspection certificates voided. This would shift the burden of proof from the growers/shippers to the wholesale companies alleged to have participated in the scheme.
    WGA also urges Congress to require the USDA Inspector General to disclose all evidence related to the Hunts Point case to growers/shippers, including evidence relating to activities of the wholesalers who were suspected of fraudulent activities, but were not actually indicted.
FEDERAL STING OPERATION.
     Another issue is the impact on growers/shippers of the Government's law enforcement sting operation at Hunts Point. The shippers were unknowingly involved in, and paid a heavy price for, Federal efforts to document criminal activity. WGA believes that shippers who unknowingly were victims of this government surveillance should be compensated for the fair market value of the produce involved in the sting operation. It is well within the power of Congress to reimburse shippers for such losses caused by Federal law enforcement efforts. Moreover, certificates verified by wholesalers who are found to be involved in fraudulent activities under the sting operation should categorically be declared to be invalid.
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RESTITUTION PACKAGE
    As you can see, it will be very difficult for growers/shippers to recoup a substantial portion of the millions of dollars lost to the criminal activities of government inspectors and private wholesalers at Hunts Point. These massive financial losses essentially amount to a post-harvest disaster for members of our industry. As such, Congress should consider providing a direct restitution package that would provide compensation to growers/shippers as a remedy for this unfortunate matter.
    USDA was been mandated by Congress to prepare a report which estimates the losses of growers/shippers caused by Hunts Point and recommend a process to compensate those who suffered financially because of this scheme. WGA requests expedited consideration of such a restitution package by Congress.
PRIVATIZATION OF THE U.S. INSPECTION SERVICE
    I would like to take this opportunity to inform the subcommittee that WGA adamantly opposes the privatization of the USDA Fresh Products Branch inspection program. The inspection of perishable produce cannot be relegated to one or more private companies. While we recognize that some regulatory activities can be performed better by private entities, WGA does not believe that the grade inspection of our Nation's supply of fresh produce is one of them. Our first concern in this regard is uniformity. It would be extremely difficult to prevent numerous entities from participating in any privatization of inspection services, and therefore uniformity of inspections would be jeopardized. Second, we believe that the cost of inspection would escalate to a level that neither the shipper nor the receiver would find it feasible to protect their investment in the shipment, and there would also be inconsistencies in inspection costs around the country. Third, private companies would not have the necessary expertise to assume control of the 170 Federal inspectors nationwide. Fourth, international trade would be adversely impacted because of the lack of agreement between foreign governments and the new privatization program.
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    WGA believes that the current inspection system serves both the industry and consumers well in providing a nutritious and affordable supply of healthy, fresh produce, and we believe that privatization would increase costs and limit access to inspections without any significant benefits for growers or consumers.
FRUIT AND VEGETABLE DISPUTE RESOLUTION CORPORATION
    On a related topic, I would like to take a moment to discuss a program of great importance to the U.S. fruit and vegetable industry. One result of the passage of NAFTA was the formation of the Advisory Committee on Commercial Dispute Resolution. One of this advisory committee's recommendations was to create a program similar to PACA for dealings between NAFTA member nations.
    As a result, representatives from the three NAFTA countries created the Fruit and Vegetable Dispute Resolution Corporation (DRC) to address concerns about perishable commodities in international markets. The DRC was patterned after the PACA program and a similar program in Canada. However, unlike PACA, the DRC is privately run and completely voluntary.
    The success of the DRC is particularly important to the U.S. fresh fruit and vegetable industry because we have not seen the increase in trade many expected as a result of the passage of NAFTA. Rather, our industry continues to have a negative fruit and vegetable trade balance with Mexico.
    Seed Funding Operational for only 6 months, the DRC will be completely funded through membership fees. However, in order for the DRC to operate effectively and boost U.S. fruit and vegetable exports to Mexico, this private/public process needs initial support from the government.
    The estimated annual budget for the DRC is $800,000. The Canadian government has already contributed $1 million to the DRC. These funds were used to set up the corporation and draft the trade rules and mediation and arbitration guidelines. WGA supports a one-time appropriation of $500,000 to allow the DRC to go out and sign up members. While there is strong support for the DRC among industry members who are aware of the program, funding is needed to educate more individuals and encourage them to become members of the DRC.
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    Arbitration Fees. Finally, I would urge the Subcommittee to support legislation that would allow USDA's Agricultural Marketing Service (AMS) to accept fees to mediate and arbitrate disputes arising between members of the DRC. As discussed above, AMS currently provides similar mediation and arbitration services for the domestic fruit and vegetable industry through PACA. This legislation would make it possible for AMS to provide these services and assist in the development of increased trade in perishable agricultural commodities between Canada, Mexico and the United States.
    I understand that this legislation has already been approved by the Senate Agriculture Committee as an amendment to grain inspection legislation. The legislation is supported by the Clinton administration, and there is no cost to the Federal Government because the fees would be paid by DRC's members.
    Mr. Chairman, that concludes my testimony on behalf of Western Growers Association. Again, thank you for the opportunity to express our views.
     
Statement of Michael J. Stuart
    Florida Fruit & Vegetable Association (FFVA) appreciates the opportunity to appear before the Subcommittee to discuss solutions to the issues surrounding the Hunts Point bribery and racketeering scandal. USDA's Fruit & Vegetable Inspection Service is extremely important to our members and the fresh produce industry as a whole. The current USDA inspection system, when it is operating properly, allows for orderly sales of highly perishable commodities. Prior to the development of our current system, growers and shippers of fresh produce hundreds of miles away from delivery points were taken advantage of routinely. Therefore, it is of utmost importance that we retain a reliable and credible inspection system.
    FFVA is an organization comprised of growers of vegetables, citrus, tropical fruit, sugarcane and other agricultural crops. The state's growers lead the Nation in the production of some 19 major agricultural commodities, including oranges, fresh tomatoes, grapefruit, bell peppers, and cucumbers. Florida's unique geographical location in the United States affords growers an opportunity to provide American consumers and export markets with fruit, vegetables, and other seasonal crops during the months of the year when other domestic producers cannot grow and harvest these commodities.
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    Our comments are grouped into four general areas: (1) factors that led to the Hunts Point scandal; (2) our strong support of the Industry Reform Package; (3) restitution; and (4) stakeholder oversight.
    Factors that Led to the Hunts Point Scandal. There is no one clear reason that can be singled out as the root cause of the Hunts Point scandal. Instead, a combination of several factors probably contributed to the breakdown of the inspection system. For years, growers and shippers have made numerous complaints to USDA regarding suspected improprieties at Hunts Point. It was only until recently, when a telephone call to USDA's hotline touched off the ''Operation Forbidden Fruit'' investigation, that USDA took significant action to address the problems in the inspection system. An earlier, more prompt investigation of industry complaints by USDA undoubtedly would have lessened the ultimate economic impact of Hunts Point. Other factors such as employee supervision, oversight, and/or safeguards in the inspection system also may have contributed to the scandal. If appropriate safeguards had been in place, USDA would have been promptly alerted to situations where inspectors and/or companies had higher than average amounts of produce declared out of grade.
The Inspection Service is a data and report driven service that should have a system in place to identify a problem long before it causes millions of dollars in losses. The low pay scale of inspectors may also have contributed to their willingness to accept bribes from wholesalers. With the current pay scale, staffing of quality employees in high-cost urban areas has always been a challenge for the inspection service, and an assignment in New York is obviously one of the most expensive work locations for an inspector. Inspection Service employees should be adequately compensated both for their work and for the area in which they reside. Most of these issues have been addressed in the Industry Reform Package.
     Support of Industry Reform Package. FFVA was an active participant in an Industry Task Force established specifically to address issues surrounding the Hunts Point case. We have always strived to first develop industry consensus before we approach USDA and the Congress with a plan to address our collective issues. We remain supportive of this effort.
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    One of the major results of this approach was an important section contained in the Agricultural Risk Protection Act of 2000. FFVA was very supportive of this legislation in that it addresses many of the issues that undoubtedly led to the Hunts Point scandal.
However, there are two major drawbacks of the legislation: first, it does not provide for restitution to growers who were defrauded of millions of dollars; and, second, it may lead to a false sense of security that the new programs and new funds will somehow automatically solve all the problems. Both of these issues are addressed in our final two points.
    Restitution. The past few seasons have not been good ones for Florida's fruit and vegetable growers. Our growers are facing a variety of issues: depressed farm gate prices; cheap and subsidized imports from developed and developing nations; mergers and consolidation at the retail level; natural disasters, including pest and disease infestations; various environmental regulatory requirements; and tight labor supplies.
    Growers understand a flood or drought and recognize that they have little control over natural phenomena. What a grower/shipper cannot control are issues relative to the government that affect their profitability. The Hunts Point scandal is a situation where the government was paid to perform a service; but, instead, it became an active participant in a scheme to steal from those it serves. Videotapes clearly demonstrate this undisputed fact. USDA must now step up to the plate and assume their responsibility. If this type of problem happened in the private industry, the employer would be held responsible for the employees' actions. USDA must assume responsibility for its employees as well.
    Millions of dollars have been stolen from growers and shippers. These dollars contribute directly to their profitability. It is imperative that USDA makes impacted growers whole for their losses. Restitution would not only demonstrate that the government is responsible for its employees' actions; but also, it would help restore credibility to the system and bolster an industry in which many are at the brink of bankruptcy.
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     Restitution needs to be swift. Growers and shippers have been dealing with corruption at Hunts Point for a number of years. Possible corruption at Hunts Point first surfaced many years ago, and the ''Operation Forbidden Fruit'' investigation took 3 years to complete. During this time growers and shippers were losing income. To date, FFVA has filed on behalf of its members almost $500,000 in PACA claims resulting from the scandal. Undoubtedly, some of those who have been injured have elected not to file PACA claims, partly because of the perceived difficulty in proving their claims through PACA, and the belief that the wholesalers may go out of business instead of pay reparation awards. One of the indicted wholesalers has already ceased operations. Therefore, most members of the industry see restitution from USDA as the most realistic chance of recovering their losses.
    Stakeholder Oversight. The funds for improvements provided in the Agricultural Risk Protection Act of 2000 are a very good first attempt at correcting the problems in the system that contributed to the Hunts Point scandal. Yet, this legislation alone does not correct future problems by itself. Implementation of the recommendations in the Agricultural Risk Protection Act of 2000 is necessary to correct the problems that exist within the inspection program. A method of ensuring rapid, complete, and continuing implementation would be the development of an oversight committee composed of users, or stakeholders, of the Inspection Service programs. Such an oversight committee could also assist with the rapid, fair and equitable restitution program and serve as a communication conduit both inside and outside of USDA.
    Many other USDA programs have formal and informal committees that provide oversight and input from users. Such a stakeholder committee for the Inspection Service would provide valuable input into the program; yet, if it only served as a communication tool between users and USDA, the committee would have significant value for the department and the industry.
    We greatly appreciate the committee's interest in reviewing this important issue. A viable and credible Federal inspection system is absolutely essential to an industry that grows, ships, and markets billions of dollars of highly perishable commodities each year. We believe significant progress is being made in identifying and funding improvements in the system; but, it won't truly be fixed until those who have suffered financially in the Hunt Point scandal are repaid for their losses.
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United States Department of Agriculture
OFFICE OF INSPECTOR GENERAL
     AUGUST 14, 2000
    Subject: Evaluation of Inspection Activities At Terminal Markets
    To: Kathleen A. Merrigan
Administrator Agricultural Marketing Service
    Attn: David Lewis, Deputy Administrator Compliance and Analysis
    We have completed our evaluation of the Agricultural Marketing Service's inspection activities at terminal markets. Our objective was to assist your staff in strengthening management controls over the fresh fruit and vegetable inspection process. We performed this work at your request.
    We have concluded that no single modification to your procedures will eliminate the risk of fraudulent activities at terminal markets. However, we have listed below our suggestions for improvements to your agency's existing or proposed management controls. and additional controls that could deter or detect fraudulent activities.
BACKGROUND
    The Secretary of Agriculture established AMS on April 2, 1972, under the authority of Reorganization Plan No. 2 of 1953 (5 U.S.C. App.). AMS carries out programs authorized by approximately 50 different statutory authorities, the primary ones being the Agricultural Marketing Act of 1946 (7 U.S.C. 1621–1627); the Agricultural Marketing Agreement Act of 1937 (7 U.S.C. 601–602, 608a–608e, 610, 612, 614, 624, 671–674); the Perishable Agricultural Commodities Act of 1930; the Agricultural Marketing Act of 1946; the Agricultural Fair Practices Act; and the Food Security Act of 1985.
    The Fresh Products Branch (FPB) provides inspection and standardization services for the fresh fruit and vegetable industry. FPB maintains offices at 38 receiving markets, operates the shipping point inspection program in Oklahoma, and technically supervises Federal/State inspection activities at 100 other shipping points in 49 States and Puerto Rico.
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    In 1999, nine fruit and vegetable inspectors stationed at the Hunts Point Terminal Market in the Bronx, NY, were arrested and charged with Racketeering Influences Corrupt Organizations (RICO) for accepting bribes for downgrading loads of produce so produce so that wholesalers could negotiate lower prices with producers/shippers. As a result, AMS developed a management action plan to strengthen inspection procedures and reduce the risk of further fraudulent activities. The original management action plan we reviewed contained 28 points designed to improve the quality of program personnel, training activities, and management controls. AMS subsequently revised its plan, which as of July 24, 2000, contained 25 points.
SCOPE AND METHODOLOGY
    We performed this evaluation in coordination with AMS' Compliance and Analysis Staff. We discussed the draft management plan and existing inspection procedures with AMS management and staff from the FPB. We reviewed AMS' policies, procedures, and regulations pertaining to inspected commodities at terminal markets. We visited our New York office to review data related to the Hunts Point investigation. We performed fieldwork from March through May 2000
    We conducted the evaluation in accordance with the Quality Standards for Inspections issued by the President's Council on Integrity and Efficiency (March 1993).
SUMMARY OF WORK PERFORMED
    We assessed the merit of each management control proposal in AMS' management action plan. We also evaluated AMS' inspection policies and operating procedures to determine the effectiveness of existing management controls. Our conclusions and suggestions are detailed below.
    1. Supervisors need to spend more time evaluating and monitoring activities at terminal markets. Currently, supervisors in larger offices spend a significant percentage their time in the office performing administrative tasks, rather than evaluating inspection activates at terminal markets. Supervisors in smaller offices spend most of their time performing inspections and very little time evaluating the activities of their staff. The supervisor at Hunts Point rarely conducted reviews of inspection activity. FPB staff stated that supervisors should be monitoring inspection activities, in addition to performing the administrative duties. We agree with AMS' planned actions. Also, AMS has not developed policy manuals that describe supervisory duties.
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    OIG Suggestions: We suggest that supervisors conduct a minimum number of followup inspections. They should complete daily activity reports of their work and use these to evaluate individual inspectors. Also, supervisory requirements should be documented in a procedure manual and distributed to field offices.
    2. AMS' current internal reviews of field office operations focus mainly on administrative activities. Its review of inspection activity and procedures is limited. In item 14 of its management action plan, AMS proposed improving its office check program by more vigorously monitoring inspection activities at terminal markets and by using database analyses to identify trends indicative of fraudulent activities. We agree with this planned action.
    OIG Suggestion: We suggest that AMS' internal reviews include improved procedures (e.g., incorporating inspection and workload data into the analysis to highlight areas of concerns)that facilitate the evaluation of the performance of supervisors and inspectors.
    3. FPB does not analyze information related to appealed inspections. Generally, producers/shippers and receivers appeal AMS inspections when they believe that an assigned grade does not accurately reflect the quality of the commodity. Appeals are denied when the commodity in question has lost its identity (e. g., it has been commingled with similar commodities from other producers/shippers), or because an excessive period of time has elapsed since the inspection. Most commodities are perishable and can only remain in a market for a short time.
    OIG Suggestions: AMS should use data such as producer and wholesaler names, type of commodity, reason for an appeal, and whether the appeal was granted or denied, to identify trends indicative of fraudulent activities. AMS also needs to implement regulations which will ensure producers/shippers have adequate time to request an appeal inspection. Shippers should be encouraged to use lot numbers on their containers to identify their shipment.
    4. In item 1 of its management action plan, AMS proposed improving its training process.
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    OIG Suggestion: We agree that AMS could provide better training to all inspectors in terminal markets and, in addition, emphasize ethics and fraud awareness.
    5. In item 5 of its management action plan, AMS proposed additional development of its database. Prior to the Hunts Point incident, AMS' database did not include information that could be used to monitor inspections in terminal markets for fraudulent activities. FPB's database system is now being used to generate reports that are being reviewed and analyzed by program management. The inclusion and analysis of this data should provide management with an effective system to monitor trends indicative of fraudulent activity. If the performance at a particular market or by a specific inspector is outside normal expectations, it may indicate that additional training is needed or that illegal activities have occurred.
    OIG Suggestion: AMS should develop a strong database of information that is used to perform trend analyses of inspection activities across the country.
    6. In item 3 of its management action plan, AMS proposed expanded use of digital imaging. Originally developed as a training tool, digital imaging now gives AMS the ability to provide increased assurance to producers/shippers that commodities were properly inspected. However, all of the digital images that we observed had specific examples of product defects, such as a few pieces of decayed fruit, and not identification markings that would provide a producer with assurance that they are viewing the commodity they shipped. Inclusion of identification markings, such as box lot numbers, package labeling, and the shipping vehicle tag numbers would provide increased assurance to producers/shippers.
    OIG Suggestion: AMS needs to develop digital images that capture product damage and key identification markings of the commodity shipment.
    7. In item 12 of its management action plan, AMS proposed the use of a team inspection process, with team members being rotated within the terminal market every few weeks. This could lower the risk of fraudulent activity. However, implementing this process could be costly. Another alternative could be the traveling inspection team discussed later in this memorandum.
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    OIG Suggestion: AMS should consider more cost effective alternatives to the team inspection concept.
    8. In item 15 of its management action plan, AMS proposed improving communication with the industry. We agree that AMS needs to increase customer service, especially with the producer/shipper industry. AMS has communicated mainly with members of the wholesale industry and would benefit by improving communications with producers/shippers and increasing producer/shipper awareness of policies and procedures. Also, AMS should inform producers/shippers about the procedures for reporting questionable activities to OIG.
    OIG Suggestions: AMS should develop a customer satisfaction questionnaire that would be given periodically to producers/shippers and wholesalers after inspections.
    9. AMS does not have an independent review team that specifically monitors inspector performance. Such a team would conduct unannounced inspections at terminal markets and report to the national office. This could deter abuse and promote uniformity of inspections nationwide.
    OIG Suggestion: AMS should develop an oversight review team consisting of experienced inspectors.
    10. In item 20 of its management action plan, AMS proposed to minimize the number of cash transactions. AMS allows shippers to make cash payments, usually for past due accounts, directly to inspectors. Since AMS mediates disputes between producers/shippers and wholesalers, cash transactions could create the appearance that inspectors are not impartial.
    OIG Suggestion: AMS should eliminate all cash transactions related to the inspection of products at terminal markets.
    11. In item 9 of its management action plan, AMS proposed the rotation of inspectors within a multi-person market. However, AMS believes that it is cost prohibitive to rotate inspectors into different terminal markets under its current employee pay structure. However, it may be economically feasible to rotate supervisory inspectors and require a minimum vacation period, such as 2 weeks, for inspectors. AMS should monitor for irregularities during this period.
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    OIG Suggestions: AMS should determine the feasibility of rotating supervisory inspectors between markets and require minimum vacation periods.
    12. Inspectors have the ability to inflate how much product is reported on inspection certificates and AMS does not verify this information with shipping documents. Thus, inspectors can avert an appeal by inflating inspected product. When a producer requests an appeal, it may be denied if it appears that significant portions of product have left the market.
    OIG Suggestion: AMS needs to establish controls to provide reasonable assurance as to the accuracy of product reported on inspection certificates.
    13. There is minimal communication between the Perishable Agricultural Commodities Act (PACA) Branch and FPB. Most complaints come to the PACA office. However, neither PACA nor FPB have a system to document these complaints, or communicate the information to the other branch. FPB could monitor the logs for common trends that need to be reviewed.
    OIG Suggestion: AMS should require PACA and FPB to maintain complaint logs and periodically report this information to each other.
    AMS reviewed and provided comments which we considered and incorporated into this document. We do not plan any further work at this time.
    ROGER C. VIADERO
    Inspector General
     
    AUGUST 7, 2000
    The Honorable Richard Pombo
    Chairman
    Subcommittee on Livestock and Horticulture
    House Committee on Agriculture
    Washington, D.C. 20515
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    Dear Chairman Pombo,
    Thank you for holding the hearing on July 27 regarding the false inspection tickets prepared by graders of the Department of Agriculture at Hunts Point Terminal Market in the Bronx, New York. I applaud your efforts and encourage you to continue to explore this matter so that we can get a true understanding of the impact these graders have had on the produce growers and shippers in the State of Oregon and throughout the Nation.
    Many growers and shippers in my district feel that they have been negatively impacted by the false inspection tickets prepared by the graders in the Hunts Point Terminal Market. Recently, I received a statement from one produce distributor who represents many growers in my district. This statement outlines the impact the graders have had on his operation. I would like for this statement to be made part of the record for the July 27 hearing and would ask that I be able to relay any additional information I receive from the growers in my district as you continue to review this matter.
    Again, thank you for your work on behalf of the produce growers throughout Oregon who have been impacted by the USDA's inspectors at the Hunts Point Terminal Market.
    Sincerely,
    GREG WALDEN
    Member of Congress
STATEMENT OF CENTRAL PRODUCE DISTRIBUTORS, INC.
    This statement is made in response to, and in conjunction with the report filed by the Secretary of Agriculture and the Inspector General pursuant to section 203 of the Agricultural Risk Protection Act of 2000 analyzing the economic losses to the produce industry as a result of false inspection certificates prepared by graders of the Department of Agriculture at Hunts Point Terminal Market, Bronx, New York and the restitution of those persons damaged by the fraud committed.
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    I make this statement on behalf of Central Produce Distributors, Inc. (Central Produce) in my capacity as president and part owner of the business. Central Produce has filed complaints under the Perishable Agricultural Commodities Act of 1930 (PACA) in an effort to recoup money fraudulently acquired by certain ''listed'' Hunts Point produce firms who, in conjunction with various USDA inspectors, misrepresented the quality and condition of onions Central Produce shipped to these produce firms.
    Currently, Central Produce has complaints filed against six of the ''listed'' Hunts Point produce firms for violations of PACA. These complaints stem from 162 shipments made by Central Produce to Hunts Point firms and represent $400,712.35 in reduced contract payments. A substantial portion of the claims stem from shipments made during the last 6 years.
    Central Produce is a small family-owned onion packing shed located in Payette, Idaho. Shipments to Hunts Point over the past several years have made up a significant portion of our company's business. Given the uncertain, and of limes penurious status of the farm economy, and the sluggish onion market over the past several years, the crimes committed by the Hunts Point firms and USDA inspectors have had a significant and compounding impact on the revenue generated by Central Produce.
    Given the procedure involved, and the potential complexity of our claims, we have made significant expenditures in pursuing our case. We have engaged the services of legal counsel to prepare and file our PACA claims. Additional costs have been incurred in Central Produce's efforts to gather evidence sufficient to establish these claims. Many of these claims go back over 10 years and it has taken a concentrated effort to obtain and organize this information. In a number of cases, we have been unable to located NY [sic] inspections and have expended considerable resources in an effort to obtain whatever information we can. Of course, future costs are certain given our claims are only at the informal complaint stage of the PACA administrative procedures. Future filing fees will exceed $1,800 and our potential attorney fees could be substantial.
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    We understand a number of Hunts Point firms have filed for bankruptcy, and those which have not may do so in the very near future. The USDA has communicated to Central Produce and its attorneys that claims against the Hunts Point firms should be filed. The message we have received from the USDA is that although these firms may be financially unable to pay for the committed wrongs, complaints should be filed in light of the potential for congressional allocations. Given the likely financial incapabilities of the Hunts Point firms, Central Produce recognizes the economic risks it has assumed in pursuing these claims. Nonetheless, given the clear fraud which has been committed by USDA inspectors, and the critical economic position in which the victims of these crimes are found, we believe congressional funding for the wrongs committed by the employees of the USDA is a proper and necessary means of compensating the claimants involved.
    Central Produce appreciates the congressional consideration of this issue and looks forward to a decision which till make victims whole.
    Dated this 31st day of July, 2000,
    RAYMOND G. SAITO
    President, Central Produce Distributors, Inc.
     
The Packer, June 26, 2000
GOOD FROM BAD
    Hunts Point fallout may lead to better inspections. Some good can come from nearly every situation.
    Even the bribery debacle at Hunts Point has yielded some positives.
    Kathleen Merrigan, Administrator of the Agricultural Marketing Service, which oversees produce inspections, reports that Congress has approved $71 million in funding to modernize the inspection service and that a permanent produce industry advisory panel is under consideration at the U.S. Department of Agriculture.
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    In a fragmented industry in which governmental issues get complicated, a unified voice would be a powerful ally. Issues regarding the Perishable Agricultural Commodities Act, research and exports could be discussed with industry representatives directly and efficiently. Better outcomes would result.
    And modernization of Government inspection facilities, equipment and processes is essential if a repeat of Hunts Point is to be avoided. No amount of modernization can stop all corruption, but this can help. Technology and improved training can level the playing field for everyone in the industry.
    This could be the silver lining in a troublesome chapter in produce industry—and USDA—history.
     
KB&R Trading Corporation
    KB&R Trading is a distributor of fresh fruits and vegetables sometimes referred to as a buying broker. We purchase produce from growers all over the United States and re-sell that produce to customers mostly located in the east coast. Many of our customers are located in the Hunts Point Terminal Market and have had representatives of their firms indicted for possibly bribing Federal Inspectors to downgrade produce that they may have inspected
    As a buying broker we mostly do not examine the produce that we sell. KB&R Trading did not issue a request for the Federal inspections and we were not present when the produce was examined. There has been no suggestion or accusation of any wrongdoing by KB&R Trading.
    USDA's plan to recapture damages for those harmed will possibly create huge amounts of money lost by those who have done no wrong, the buying brokers. Under the present procedures a grower files a complaint against the innocent buying broker and in turn the buying broker files a complaint against the customer that might have bribed the Federal Inspector, The buying broker is now possibly in a position that he can't recapture the money from the customer and could be responsible personally even though he did no wrong.
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    The following is a simple example; Rob's Apple Farm feels that and inspection on his trailer of apples has been down graded and a credit of $5,000 was deducted from his invoice. Since be sold it to KB&R Trading who then resold it to Rays Produce in Hunts Point he files his complaint against KB&R. Trading to recapture his damages of $5,000. Upon receipt of the downgraded inspection and complaint KB&R Trading then filed a complaint with the PACA against Rays Produce for the $5,000 credit that was deducted.
    The Judicial Officer for USDA rules in favor against Bob's Apple Farm against KBR Trading and in turn in favor of KBR Trading against Rays produce. Ray decides to file bankruptcy and not pay KB&R Trading. The innocent KBR Trading is now responsible to pay the $5,000 award against them or rheir PACA License will be revoked and KB&R Trading will be put out of business.
    As one of many buying brokers in the industry I do not think this scenario is very fair. If truly there is damages, they should be paid by those guilty of the crime not the innocent middleman. As Congress reviews the testimony and reports from the USDA and the industry, they must be careful in their considerations on how they act so that further innocent people are not harmed by these actions.
    Sincerely,
    MATTHEW ANDRAS