A Better Farming Special Investigation: Faith in Arlan Galbraith, Ontario's Pigeon King

Wednesday, December 19, 2007

Masterminding Rich Profits from Pigeon Breeding - or a Multi-Million Dollar Scam?

No one involved and no police or government authorities have even hinted at wrongdoing. Nevertheless, the rapid growth of a business that has no apparent end market raises consumer protection concerns and some people even go so far as to allege a Ponzi scheme where investors may get hurt.

by MARY BAXTER, ROBERT IRWIN AND DON STONEMAN

Nearly three years ago, Noah Bauman took a plunge into the pigeon business.

He converted his former pig barn, a 90-sow, farrow-to-finish structure located on a secluded gravel road south of the village of Wallenstein in Waterloo Region, to house the birds. Today, his breeding flock numbers 600 pairs.

The muscular, hard-working entrepreneur is among hundreds of growers, in Ontario, the Prairie provinces and at last count 13 states south of the border, who hold contracts to sell their flocks' offspring to Arlan Galbraith, who incorporated Pigeon King International (PKI) on Feb. 19, 2007.

PKI literature explains that the company is building its inventory "for the next few years." It claims three eventual end markets for the birds: its own contract growers, "people who do their own marketing at higher prices" and "people who train the babies for flying and entertainment." Elsewhere the company claims one other end use for the birds: "People love to make soup and stew out of old pigeons."

No one in the pigeon industry, contacted by Better Farming, could identify any significant commercial value for PKI birds other than for sale to new investors. Many industry watchers predict the business will collapse the day PKI can't take in enough money from new entrants to pay money owed previous investors for the pigeons they produce.

Galbraith currently offers a variety of purchase and payment options that could change by the time this article appears. But based on a company representative's claim of 800 producers, a reported average of 200 breeding pairs per farm and a generally accepted production of 10 offspring per pair, existing PKI growers plus new recruits, could, within the life of their 10-year contracts, earn as much as $40 billion. That assumes PKI can continue selling virtually all of its production at current prices to the new producers it continuously recruits. This scenario would result in pigeon revenues exceeding the total income generated by all of current Canadian agriculture!

Curiously, this is a venture the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) will say little about. And the Pigeon King, as Galbraith is widely known, is wary of media inquiries.

Like several of the PKI contract growers interviewed, Bauman considers his investment a resounding success. Having paid PKI $80 per pair for his breeding stock, he receives $15 from the company for the birds' offspring. He parlayed a $48,000 original investment in breeding stock, and an average of 10 offspring per pair per year, into a $90,000 annual gross income.

Standing in a room where he showcases the wooden bedroom furniture that he also builds when not busy building pigeon shipping crates for the Waterloo-based PKI, Bauman says that the income from pigeon breeding has enabled him to keep doing what he wants to do the most - farming:

"I'd have to do a lot more than this if I didn't have the pigeons."

For Louis and Joanne Brunet, who live near Ste Anne-de-Prescott in eastern Ontario, the venture also appears to offer a way to obtain some financial security in an economic sector they fear grows more precarious by the day. Last spring, after receiving a flyer in the mail from PKI, the couple, along with their daughter Genevieve and her husband Jean Francois Gareau, opted to transform their former dairy barn to house pigeons. They bought 500 pairs at $500 per pair from PKI and received another 100 at no charge. PKI pays them $50 per offspring. They expect to market about 6,000 birds. Anticipated revenue is about $300,000 per year.

At the outset, a banker friend challenged the families' decision, Louis Brunet says, asking where the market would be for the birds. But Brunet wasn't concerned. He says that demand for racing pigeons is soaring worldwide and the birds' offspring are intended for racing and reproduction. Besides, he adds, in principle there is a lot of similarity between contract breeding and supply-managed dairy production. And who knows where the milk goes?

"There's nothing in agriculture that pays that much," Brunet says of the PKI program. "Two families can live really well (on 600 pairs)."

Like the Brunet family, Leo Donkers, a dairy farmer near St. Thomas, is conscious of the precarious state of agriculture today. Just look at the pressure being put on Canada at the World Trade Organization talks to dissolve its supply management system for dairy and poultry, he says. Dairy farmers have all their equity in quota and it "could be taken away tomorrow."

That's why Donkers decided to downsize his quota and diversify his farming interests. He's introduced dairy goats into his operation and, earlier this year, renovated a barn previously used for storage in order to accommodate 200 pairs of PKI pigeons. By early October, he was sending the company his first shipment of offspring.

PKI normally picks up marketable offspring monthly. Donkers would not release details but anticipates a 16 to 17 month payback on his investment, which includes birds, feed, labour and barn improvements.

Donkers isn't clear what the birds will be used for, but he's not concerned about end markets. It's the money that counts, and consultations with nearby breeders who have been involved in the same venture for three years convinced him that payment would be dependable.

That's Ben Thiessen's conclusion too. "I don't know and I don't really care" where the birds go, says this farmer, who grows cash crops and vegetables, including peppers, on his property near Calton, south of Tillsonburg.

He converted an old drive shed into a pigeon barn and raises what PKI calls "high flyers." He got 200 pairs last spring and, at press time, planned to market his first group of pigeons around Nov. 20.

In for the long haul Kris Harris, who lives near Tupperville in Chatham-Kent, is using pigeons as a way to launch into farming. Just 23, his age makes him a rare commodity in agriculture.

Harris says that he first heard of the opportunity in 2005 through a flyer in the mail. With his father's help - Kris is finishing up his mechanical engineering studies at the University of Western Ontario - he started up production about a year and a half ago with 250 pigeons. Since then, he's built another barn capable of housing 900 pairs.

The birds are more labour-intensive than chickens, he says, explaining that pigeons use a form of lactation to feed their young. That means that disease is a big challenge, he says. Parasites and bacterial diseases might be easily managed, but paramyxovirus (PMV), a virus that kills young birds, is another story. Vaccinations do exist, but Harris isn't confident of their efficacy. Of the 15 offspring per pair his breeder flock averages in a year, Harris estimates that about 10 survive. That's the number most growers reported to Better Farming.

Despite the high mortality rates, Harris is in for the long term. He has signed a 10-year contract with PKI, which gives him $25 per pigeon. Taking into account interest, labour and cash outlay, he figures that it will take about four years to reach "payback" with the venture. After that, if he maintains 1,150 pairs and maintains an average of 10 acceptable offspring per pair, his gross would be $287,500 annually.

No wonder contract breeders are enthused about the venture.

That enthusiasm can also be heard in the voices of company staffers who point to the company's growth and staying power.

"It isn't a small venture," says Ed Breault, a PKI sales representative for southwestern Ontario. He estimates that there are now 800 PKI contracts in effect. "They're all over Canada now and they're building all over the U.S. also."

Mark DeWitt, a company salesman based in eastern Ontario, says those who first became involved in the venture were Mennonites in the Kitchener-Waterloo area, where PKI has its head office. From there, Pennsylvania Mennonites became involved. He says that there is also a Hutterite colony in Alberta that is breeding 2,000 pairs of birds.

"The ones that find it easier to get into the industry are the ones that have some income and tend to be former milk producers who've sold cows and quota and therefore have a little more access to capital," he says. He notes that conventional lenders, such as banks or Farm Credit Canada, don't look at pigeons favourably yet because it's not something they are accustomed to financing.

Ken Wagler, a PKI salesman from Embro who provides technical support to new breeders, says along with those holding breeding contracts, the company maintains numerous holding facilities for inspecting, sorting and breeding. These are located across the country, he says. Wagler also notes that the company's eventual goal is to build a flock large enough to sustain four processing plants - two in Canada and two in the United States - and sell the birds for their meat. To do this, contracts are offered "to people to produce the breeding stock that is needed for future meat birds," he says.

Praise for the Pigeon King
PKI contracts differ and have been modified over time, but most of those interviewed mentioned three standard arrangements all based on the same birds. Growers can buy a pair of breeder pigeons for $100 and sell the offspring to PKI for $10. They can obtain the breeders for $250 per pair and sell them back for $25 per bird, or they can buy from PKI for $500 a pair and sell back for $50 per bird. The length of the agreement has also varied from three to 10 years, say growers.

With a high enough return on investment to ensure start-up expenses are covered within four or fewer years, a guaranteed market for up to 10 years, and a product that can be easily adapted to unused barn space, it's no wonder farmers throughout the province are considering signing on the dotted line.

But just who is behind this ambitious new venture, and behind the signing, and backing that 10-year contract from PKI's end?

"I'm behind the 10-year contract," says Arlan Galbraith, listed as PKI's president, sole executive officer and founder. "I've been buying pigeons under contract from farmers, paying for them in full and in many cases in advance, for the past six years, and that's the situation. And anybody who does business with me can verify that."

Talk to anyone involved with the Pigeon King and you'll hear an earful of praise for the company's founder. Wagler, for example, says he has the "highest respect" for Galbraith. "His honesty and his integrity - I've never come across anybody in business I would trust more."

Bill Top, who is from Drayton in Wellington County, worked for Galbraith for six months in 2005 and 2006. He recalls that Galbraith treated him very well, giving him a Dodge 3500 RAM to drive, a credit card and a base salary of $52,000 a year. The former farmer says Galbraith even prepaid part of a matching $52,000 performance bonus, slated to be released at the end of Top's first year of employment.

Galbraith supplied Better Farming with about 150 testimonials solicited from his grateful growers that say he has sometimes even paid them before picking up their pigeons. Many testimonial writers attack PKI's critics and their motives for spreading "false rumours." No one offers a specific rebuttal to the concern about end markets. Many simply profess blind faith in Arlan. In some cases this faith is expressed with religious zeal. Over and over again letter writers echo a common mantra: satisfaction and happiness with Arlan. The testimonials however, recognize honesty and trust, most: "Trust in a higher hand," trust in an omen or sign, or trust in Arlan Galbraith: all seem tied to producing pigeons for PKI.

Trust is clearly important to Galbraith. On the main door of his office in Waterloo, he has pasted a white paper sign which states: "He who does not trust us is not to be trusted," and "My business is built upon everlasting trust." In a guide intended to help contract holders get breeding under way, an entire page is devoted to the following phrases: "Be humble," "Be kind," "Be true," "Be blessed," and" True to the end Arlan Galbraith."

They may admire and trust him, but the majority of those involved with Galbraith appear to know little about him. That's because, when it comes to his business and his personal history, privacy takes priority over trust and Galbraith holds these details tightly to his chest. Galbraith turned down two direct requests for an interview with Better Farming.

He explained each time that disappointment "in radio and newspapers and how they conduct business" was the reason why. He says the media have "twisted things." Shelley Mason, PKI's communications co-ordinator, also turned down another Better Farming request for an interview on Galbraith's behalf, saying that he was too busy with an upcoming office move. "Maybe talk to him after Christmas," she said on October 23. (Mason also refused an interview request, saying that she, too, was "so swamped I don't have time to do that kind of stuff. And I'm not interested right now in doing it.")

Two others working for Galbraith say this media shyness is a reaction to allegations of fraud that have been made by David Thornton, who runs an organization called Crime Busters Now on his website, www.crimebustersnow.com.

Since there is no apparent end use for PKI pigeons, other than for sale to other producers, Thornton, who pointed Better Farming to several contacts, alleges that Galbraith's venture is a Ponzi, a form of fraud similar to a pyramid scheme. Such schemes typically guarantee investors high returns over a short period of time. The catch is that the returns are not derived from a real investment. Instead, they are paid from the investors' own money and contributions of other investors.

Ken Wagler says that Thornton has "targeted" PKI and criticized its operation. "We don't want to respond in some way that makes him look like some kind of legitimate private investigator," he says. "This guy's a nut case."

Mark DeWitt also cites Thornton's actions as the reason for his hesitancy in speaking to the media. "We're under attack right now by a couple of wing nuts," he says, identifying Thornton by name but referring to the other individual only as "a former employee."

Yet it's not only the media who receive Galbraith's silent treatment.

In a "frequently asked questions" section included in his introductory guide for contract breeders, for example, many of the questions, such as one concerning the number of pigeons out on contract or how many pigeons he has in his holding barns, produce the same terse response: "We run a private business and do not give out those numbers."

Wagler interprets Galbraith's unwillingness to divulge information about his operation as a strategy to discourage competition during the business's start-up stage. Competition may be healthy in principle, but not when a fledgling industry is trying to get going, he says.

Controlling attitude
Yet if numbers pieced together from PKI representatives and growers are to be believed, Galbraith has signed tens of millions of dollars worth of contracts with growers and this industry is on the brink of becoming a major player within Canada's agricultural scene.

The size of Galbraith's venture reflects significant ambition. That's how Top remembers him. Top says Galbraith once told him he wanted to become known as the largest pigeon breeder in the world.

With that ambition comes a controlling attitude, made clear during one of Better Farming's requests for an interview, when he admitted that he was "choosing to make you (Better Farming) wait" for an interview.

Perhaps forgetting the admonition in his beginners guide to "Be humble" and "Be kind," Galbraith boasted: "I made Ontario Farmer wait for probably at least three years just to do a story just because I chose to, okay."

He said that the publication finally did a story on him "but I saw it before it went to print. I'm very happy with what he (the story's author) did."

Yet the question remains: just who is Galbraith and how is he managing to live up "to every commitment he's ever made," as Wagler puts it?

Information on Galbraith is scant. He was born in 1947. He and his brother Norman first caught the attention of fellow farmers with a value-added farming venture near Varney, on Highway 6 south of Durham in the municipality now called Southgate in Grey County.

Harry Johnson, who lives in that area and whose father sold some acreage from his farm to the brothers (they also bought a neighbouring farm), recalls that they finished hogs, cattle and sheep and also had an abattoir. They sold their meat products at a butcher shop they operated in Varney. As well, Southgate's mayor, Don Lewis, recalls buying feed in the 1970s from a small on-farm feed store the two also operated.

The Galbraiths were generally known to be bright and hard workers. Lewis and others in the area say the brothers were ahead of their time with the value-added approach they used in their farm business.

Friends and neighbours say the brothers briefly opened a second retail store in the late 1970s. "They had too much meat for up here in the little butcher shop," Johnson says. Public records show that the brothers filed for personal bankruptcy on June 30, 1980. At the time, Arlan declared personal liabilities of $470,000 and assets of $410,000. He received an unconditional discharge on Oct. 22, 1981.

The future pigeon king worked on pig farms before landing at a swine operation in the Sebringville area. During his nine-year employment there Galbraith did chores and helped out with artificial insemination. In this period he returned to his boyhood hobby of raising pigeons. He left the pigs around July 2004 and focused on his pigeon venture.

Ken Knight, president of the Canadian Pigeon Fanciers Association, recalls Galbraith raising pigeons in 2001 as a hobbyist and selling them on the Internet. In November 2002 Knight noticed Galbraith's ad in Pigeon Fancier showing him posing with Mike Tyson, with fists up, along with bodyguards and a limousine in the background.

A caption read: "fighting over the price of genetics." After that, Knight recalls, Galbraith's sales took off "like a wildfire."

A veteran high-profile pigeon fancier, who according to a 2005 report in the Arizona Republic owns about 350 birds, Tyson bit off a piece of Evander Hollyfield's ear during a prizefight, is an admitted cocaine addict and convicted rapist. He's someone Galbraith has termed, in the same 2002 advertisement, "a real gentleman and a friend." Tyson is also the only end market for PKI pigeons, other than contract breeders, that Galbraith will reveal.

By 2005, Galbraith had moved his offices to 4-299 Northfield Drive East, a Waterloo strip mall. Previously, he had run the operation from the basement of a modest house he rented in Waterloo. In his breeding guide, Galbraith also boasts a significant expansion of staff in both Canada and the U.S. In November of this year his website claimed he had more than 50 staff and associates.

The guide also lists several assets: "Arlan Galbraith currently has 10 distribution facilities, seven in Canada and three in the United States. There are plans to add additional facilities in the near future."

"Beautiful retirement home'
Yet his employees have different accounts about what buildings are company-owned. "He doesn't own all of the buildings," Wagler says, explaining that Galbraith's practice is to take long-term leases on empty buildings and then hire people to manage them. DeWitt, on the other hand, says that "we own a number of different holding facilities, both in Canada and the U.S., because when we pick up the birds from the farmers at the farm gate we have to take them somewhere in order to sort them and, you know, look at distribution."

Better Farming was able to confirm some assets, including vehicles owned by Galbraith, and property located in Clute Township near Cochrane.

A September 2006 PKI newsletter issued to participating breeders describes the 300-acre property as Sacred Dove Ranch. Public records confirm that Galbraith paid $80,000 for the property in September 2006.

As part of the deal, the vendor has until Sept. 15, 2008, to clear all timber from the land. The PKI Breeder's Guide revised in October 2007, describes "a river full of fish and a land full of deer, moose, bear, timber wolves and cougars, bobcats, lynx and fox." The guide says "long term plans include meat pigeon (squab) production, meat processing, horse breeding and breeding of rare breeds of birds and animals." It also promises a guest house "where our staff and breeders can enjoy free accommodation to vacation with their families on the ranch."

Denis Lalande, local roads board treasurer, confirms construction is taking place on the property on a barn and "a beautiful retirement home."

The company, however, won't own a 5,000-square-foot office building in Moorefield, north of Waterloo, in which it plans to house some of its administration later this year or early next year. That building is leased from its owner, A.L.M.A. Poultry Inc. "I know nothing of him (Galbraith), except that he is going into that building," says Larry Brouwers who identified himself to Better Farming, as the landlord.

PKI and Galbraith claim to be debt-free. There is no mortgage on the Cochrane area property and there are no liens against vehicles. Nevertheless, an entity called Arlan Galbraith Financial has been offering 18 per cent annual interest rates to investors. If Arlan Galbraith Financial is a company, it does not appear to be registered in Ontario, or incorporated in Canada.

There's even more mystery over where the PKI pigeons actually end up. In the start-up manual, three destinations are listed: other breeders who have contracts with PKI, wholesalers and those who train the birds for flying sports and entertainment.

Over the years, it appears as if the emphasis has shifted on which of these destinations is the most prominent. When Bill Top first began to work for the company in August 2005, he believed that there were markets for the birds outside of other PKI contract breeders. He says he'd heard rumours of large numbers of birds being sold to other countries, mainly to build sport bird populations, although he saw nothing that documented those sales.

Top says that he was hired to promote the business in the United States with those who had expressed interest in signing a breeding contract with PKI. One of the sales tools he was given was a brochure outlining the opportunity. In a copy of that brochure, obtained by Better Farming, the birds were described as "Squabing (sic) Homer Meat Pigeons." The brochure made no mention of the birds being used as multipliers to generate production breeding stock.

In contrast, by October of this year, staff were downplaying the birds' sport and meat uses and instead emphasized their role as a multiplier flock. DeWitt notes that a bird training facility being built in Cochrane is more to sustain "Arlan's hobby as much as anything." But the abattoir that he predicts may go there is part of Galbraith's long-range plan for the birds, he says. And Wagler says in no uncertain terms that the current birds are multipliers: "What he (Galbraith)'s done is he's offered contracts to people to produce the breeding stock that is needed for future meat birds."

This perception is reinforced by the company's website, which currently claims PKI is developing "a special line of squabbling (sic) meat pigeons where the offspring from the nucleus flock will be used to repopulate our existing breeding flocks on a global basis. We will eventually offer quality squab at a very affordable price on a massive scale."

PKI literature and its website claims "Hinterland Squabs" is the registered trademark brand name for squabs that we are going to market in the future." Better Farming retained a trademark agent who reported: "I'm unable to find any trademark containing the words 'Hinterland Squabs', I also checked the ownership records, and there are no trademarks owned by 'Pigeon King International Inc.' or an individual named Arlan Galbraith filed with the Canadian Trademarks Office."

Little-known to racers
If there are any PKI birds being sold for show or sport, many of those involved in leading these pursuits haven't seen them. Nick Oud, president of the Canadian Racing Pigeon Union Inc., says that he's not aware of any PKI birds being raced in Canada. And even though Galbraith claims in his breeder guide to have 50 years of experience in "breeding, flying and marketing high quality pigeons," Karen Clifton, executive director of the American Racing Pigeon Union, says that she hasn't heard of Galbraith participating on the racing circuit - she's only heard of him in reference to PKI. Given that the union has 600 clubs, that's no great surprise, she says. However, Galbraith is not listed as a member in the union's database.

Clifton says that it would be impossible to know if PKI birds are being used in races, because the organization has no way of keeping track of where owners are buying birds or what their source of the birds might be. She did say, however, that she would likely be aware of birds that are distinguishing themselves in races, and their owners.

Bill Fletcher, a former president of the Canadian Pigeon Fanciers Association (1994-1998), a judge on the pigeon show circuit and an Ontario-based trader in cull pigeons and poultry for meat, says that, with the exception of an announcement of the sale of birds to prizefighter Mike Tyson, he has never heard of Galbraith other than in recent years in connection with Pigeon King International.

Despite PKI claims to the contrary, those involved in racing and showing say that the market for sporting pigeons is in decline. Membership in the organizations is also falling, says Monica Collins, secretary-treasurer of the Canadian Racing Pigeon Union, noting that the union recently launched a membership campaign to try to counter the decline.

And while keeping track of pedigree is not essential and there is no central registry of pigeon bloodlines, it often plays a role in the valuation of a sport bird, say most of those involved. It's the combination of pedigree and performance that gives a sport bird its value, says Silvio Mattacchione, an Ontario-based consultant on racing pigeons. "Unless those two things are there, the bird has no value," he says, other than about $2 in a cull market.

Such tracking would involve paperwork, he says. No reference to bloodline paperwork is made in the PKI's guide to raising pigeons. And, even though it lists six different types of pigeons, no instructions are given about interbreeding. Nor does Top recall seeing any paperwork concerning pedigree in Galbraith's office at PKI. The company has, however, advertised its birds in pigeon sporting publications and has also listed its name and a link to its website on other sport pigeon breeding websites.

The birds' value as meat products is just as mysterious. The major market for pigeon meat is as squab - young birds. These are considered a delicacy in Asian, French and Italian cuisines and demand for fresh squab is significant in centres such as Toronto, Montreal and Vancouver.

Stewart Taulson, a poultry expert with British Columbia's ministry of agriculture, fisheries and food, says that the province has between 20 and 22 squab producers and 600,000 to 650,000 birds are now processed annually there. Figures for Ontario show a market that's much smaller: in 2006, only 97,640 birds were processed here.

George Pang, a B.C. producer who has a breeding flock of 2,000 pigeons, says the birds are ready for market when they are about four weeks old and weigh between 12 to 16 ounces.

Definitely not meat birds
According to the latest PKI contract, birds are collected at a minimum of 20 weeks old. That's an increase of four weeks over contracts previously issued by the company. Paul Miller, a veterinarian who specializes in pigeons with the Pennsylvania Veterinary Laboratory, says that the PKI birds he's seen are small and are derived from flying breeds. In some cases, adult racers may weigh only 12 to 14 ounces. Miller says that he sees birds from breeders with PKI contracts or fields inquiries from them at least once or twice a week. "These birds are definitely not meat birds," he says.

Bill Fletcher agrees. "These birds from the Pigeon King aren't any good for meat, or anything," he asserts. Fletcher often buys cull birds from those involved in pigeon showing or racing pursuits. He says that he has never acquired PKI birds - with one notable exception. Last April, he bought 1,100 of the birds from a breeder whose contract with the company was cancelled. He paid $1 for each bird but doubts that he'd ever buy PKI birds again. "The only reason I bought them was because it was in April," he says, explaining that he is often low on stock at that time of year.

Fletcher says that racing homers are heavier and, for him, are the preferred birds to acquire when buying from the sport industry. In squab production, many of those involved say White King, Utility King and Carneau are among the breeds of choice in North America.

Federal export statistics also show that while exports of pigeons intended for display, show, racing, recreation and competition have held steady over the past five years, exports for the purposes of breeding rose by the thousands in 2006 and hundreds in 2007. Of those exports, 99 per cent were destined for the United States. Federal officials would not release the exact number of birds being exported specifically for breeding because the information might identify the shipper. The spike in breeding exports however corresponds to PKI's sales efforts in the United States.

Former PKI salesman Top says that, when he started with PKI in 2005, there were only seven farms in the United States involved in the venture. By the time he left the company in February 2006, that number had jumped to well over 100 with another 30 to 35 preparing to sign on, he says.

Prices out of line
Before speaking with Better Farming, Top told his story to Brian Tapscott, OMAFRA's alternative livestock specialist. Tapscott says that he's had inquiries from potential investors but no complaints from PKI growers. He advises prospective growers to investigate the industry before jumping in: "Your buying decision should be based upon markets."

He refers media inquiries to ministry spokesperson Brent Ross who confirms that he's had no complaints from growers. He notes that "the domestic market in Ontario is fairly small" for pigeons. He has a list of agencies prospective investors can contact for further information.

Lawyer Steven Sofer says however that if the birds are being used solely for breeding other birds to sell to contract breeders there could be a legal problem. Sofer is with the Toronto-based firm of Gowlings.

He's worked in enforcement at the Ontario Securities Commission and has acted for people who have lost money through fraud and those who have been accused of fraudulent practices.

Sofer says that it's not a crime to buy back birds from "Mr. X" to sell to "Mr. Y." But if selling birds from early investors are used to supply new investors and if that's the only business "then that is the Ponzi scheme."

Sofer says that the illegal part of such a scheme has to do with all the representations around it as to what is exactly taking place. Typically that's where the Ponzi prosecutions take place: "It's for the lying part."

Then there's the matter of price.

No matter which way you cut it the prices at which breeding pairs are sold to those with contracts - $100 $250 and $500 - don't appear to relate to prices found in the broader market.

Wagler admits purchase prices are high but reasons that breeding stock typically sells for more than market animals. Of course birds generated by production stock will be priced differently he says.

"Those birds won't be selling for $25 or $50" he says. "They'll be at the meat price. And that is why even right now Arlan (Galbraith PKI's owner) will put birds into a barn. If somebody doesn't have money for breeding stock he'll put a contract out there for 10 years and he'll buy everybody's bird for $8 - that's the meat price - and he'll put the birds in your barn for free."

Yet even in the intensely competitive squab industry prices for breeder pigeons run between $45 and $120. (Acquiring these birds is another matter. Mattacchione who had at one time considered entering the business says that those who are already involved are reluctant to give potential competition a leg up by selling them breeding stock.)

In the racing and show industry there can be some higher prices says Mattacchione. He says that a racing pigeon can bring anywhere from $10 to $1 000 at auction in Canada depending on their performance and pedigree. Internationally he's heard of racing birds being sold for as much as $300 000 but that is "totally uncommon. Ninety-eight per cent of pigeons sold in Canada are probably never going to bring more than $25 or $50."

Prices of breeder pairs offered to contract holders also constantly fluctuate. Recently PKI began advertising free birds with a buy guarantee of $8 per bird.

Kris Harris says that knowing someone has paid nothing for birds that he paid more than $200 for is not an issue. "I believe the difference is that you're basically investing in the company so he can use the money to expand and he can pay a high rate of return on it." It takes money to expand the company as fast as Galbraith is doing he adds.

Yet Sofer says that the price fluctuation could be problematic if one person is paying one price and another pays a different price for what is essentially an identical product.

Prices are supposed to be determined by supply and demand he says. Market prices can change but if the market is set by a person in the absence of some other explanation such as a sudden shortage or surge in demand "this price should be the same."

'Where's the end market?'
It has been more than a year since Bill Top quit working as PKI's first U.S. salesman but he remains perturbed.

He says that the prices Galbraith pays for birds aren't in line with birds raised for meat. There is no indication that bloodlines important to fanciers and racers are being taken into consideration. "The market isn't squab and it isn't fanciers."

Top says that when he learned new PKI contract holders were the primary market for the pigeons "I felt real uncomfortable." He says that after this he struggled to answer when prospects asked about the market and that he confronted Galbraith who "told me he was in the business of selling 100 per cent breeders and that's it" Top recalls. "That's his market."

Top isn't the only one with questions.

"Where is the end market?" asks Ron Bolton manager of CIBC's agriculture department Ontario region. Bolton says that he has clients who have become involved in breeding pigeons but they are financing the venture themselves. His bank won't finance pigeon breeding based upon cash flow.

Bolton says that as a lender he wants to know if there is a sustainable market for the end product. "If it is just to sell (the birds) to the next guy I'm not convinced that is a viable market."

Bolton also suggests that the conventional milk market provides more security than farmers such as Leo Donkers and Louis Brunet have suggested pointing out that markets for milk are known quantities and that the risks involved with quota are also known.

Furthermore Dairy Farmers of Ontario (DFO) maintains a fund of $4-$4.5 million with producer and processor contributions which will mitigate farmers' losses for shipped milk if a processor goes under says Patrick Hop Hing director of DFO's finance and administration division.

Agricorp on DFO's behalf and under regulation monitors the credit-worthiness of processors in Ontario.

In contrast the PKI contracts examined by Better Farming make no provision for what might happen if the company cannot honour its commitment to buy the birds.

Other lenders are mostly steering clear of PKI. Tim Kydd a spokesperson with Farm Credit Canada says that there's "nothing of significance in the pigeon market for the FCC."

He says that he contacted a few of the FCC's account managers and credit staff and no one could think of any loan applications that have gone through.

For his part Vance Petersen Scotiabank's director of agri-business banking for Ontario says Scotia loans to pigeon raisers are not dependent upon cash flow from the pigeons to pay them off.

Raymond Sheaffer Jr. a spokesperson with the Pennsylvania office of the U.S. Department of Agriculture's Farm Service Agency (FSA) says the FSA isn't in the "habit of making pigeon loans." (The agency operates a lending branch which helps bankroll those who can't get financing from other sources for their farm.)

However the agency does have two pigeon breeder loans both of which were for the purchase of breeding pairs. He says that the FSA is concerned because there appears to be a conflict in the birds' end use. "FSA cannot be involved in operations that are raising animals for racing or hobbies" he states in an email to Better Farming.

Complaints to police
Judy Langford a spokesperson with the Canadian Federation of Independent Business says that the organization has received complaints that Galbraith was using his membership in the organization as an endorsement of his business. She says Galbraith was asked to stop the practice. "He's agreed" she says.

Wally Hogg staff sergeant with the Waterloo Regional Police Service's fraud branch also confirms that the police services have received third-party complaints about PKI. He says that the complaints come from different individuals but are all from the same organization which he would not identify. "We are aware of them (PKI)" Hogg says. "However we haven't received any complaints from victims and we really don't investigate third-party complaints."

He also says that in the case of Ponzi and pyramid schemes often complaints are not registered with police until the fraud nears the end. "As long as things are rolling along and they're getting their money back they're not concerned" he says of the victims.

Sofer the lawyer with experience prosecuting Ponzis says that police don't need a direct complaint from a victim to investigate. But like everything else they have scarce resources. "Unless an investor actually complains about something like this it doesn't get to be high on the agenda" he says.

Meanwhile some of those in the Mennonite and Amish communities whom Galbraith first approached with his venture are starting to take matters into their own hands.

Ira Stoll is a case in point. He lives in the Amish community east of Aylmer in Elgin County. Two years ago in February 2006 he and his brother Mark visited Arlan Galbraith at the PKI headquarters on Northfield Drive East in Waterloo at the behest of their uncle David Wagler (no direct relation to Ken Wagler) in the United States who had been watching the PKI scheme unfold on both sides of the border.

For a couple of years the Amish community near Aylmer had been receiving literature from Galbraith and Stoll had seen ads in the farm media. "It just didn't make sense" Stoll reasons. "We let him (Galbraith) know that we were aware of what was going on and we were not happy and we did it in a friendly way."

Stoll says that he told Galbraith the old story of the farrier who offered to shoe a farmer's horse at a penny for the first nail and double that price for the next nail and so on. There are 32 nails needed to hold four shoes on a horse. Better Farming calculated that the cost for the last nail alone is more than $21 million.

"We left with a friendly handshake and told him to take his calculator."

Stoll believes that with only new investors as a market Galbraith is involved in a scheme that will ultimately lead to some people losing their investment.

Stoll says the Amish "were very involved" in an Oklahoma earthworm scheme (see sidebar on page 21) that was revealed to be a Ponzi in 2003.

Stoll says that some people "still believe it was an honest deal." Some of those people have since moved into pigeon production he says. He adds that Amish and Mennonites are susceptible to these schemes because of an upbringing that emphasizes trust.

"We are programmed not to be investigating. We aren't in the world system."

Stoll says that he has heard that a huge number of birds have been shipped to Hutterite communities in Western Canada. In fact pigeons have proven especially popular in Manitoba where pregnant mare urine (PMU) producers were left with empty barns two years ago when Wyeth the sole PMU buyer scaled back its purchases due to a lack of demand for the company's hormone product.

Stoll sees his community divided over the issue of the pigeons. "They won't believe us nearly as quickly as they believe him (Galbraith)" Stoll asserts.

Articles that Stoll's brother Mark wrote for publications aimed at Amish communities question whether it is right to take part in schemes where "someone else has to lose money so you can make some."

Arlan "looks so honest" Ira told Better Farming. "He sounds so honest." Moreover the Amish want to believe Stoll says. "Small enterprises are hard to come by. A lot of (Amish) are working away. They want to be home with the family."

"We told him (Galbraith) he would run out of people. But he told us that 'the world is big.'" BF

Rabbits worms and Jerusalem artichokes: Ponzis with an agricultural twist

In 2003 Gregory Bradley the 40-year-old founder of the Oklahoma-based B & B Worm Farms died. According to news reports at the time the business had the largest network of worm growers in the U.S. It was only after Bradley's death when the venture declared bankruptcy that it was revealed to be a Ponzi.

The scam ran five years and involved 1 800 investors and raked in $18 million US in sales according to an article in The Oklahoman.

B & B claimed to sell worms to industrial users home gardeners and nurseries to aid composting. Typically it would provide worms to contract farmers for $10 000 promising to buy back the worms produced for between $7 and $9 US per pound.

It worked by word of mouth a website and seminars some of which featured credible authorities on vermiculture and alternative waste management.

A 2003 news release from the State of Connecticut Department of Banking says that at first the company did exactly what it said it was doing. Eventually the earnings from new and existing investors formed the company's main income.

After Bradley died payments ceased. Several states filed lawsuits. The Oklahoma Securities Department sued for $14 million US.

A "super rabbit" known as "Rex rabbit" forms the basis of two Ponzis in the 1980s.

Phoenix-based Money Tree Financial drummed up $1.1 million US from 40 Arizona residents including a group of airline pilots. The scheme proposed to sell the rabbit's mink-like pelt to New York stores for a premium freeze-dry the meat and sell it at more than $16 US an ounce to South Korean mercenary soldiers guarding Saudi Arabian oil fields. The scheme was marketed as a tax shelter.

The second rabbit venture involved about 650 investors who paid $3.5 million US and pledged a further $18 million in notes to Agricultural Services Associates.

Investors were paying for an interest in white doe rabbits implanted with embryos.

The rabbits were raised and bred on a farm managed by Promorex Corporation and sold the pelts to Scotia Trading Co. However David B. Johnston the owner of the company which controlled Agricultural Services Associates secretly loaned money to Scotia to buy the pelts at artificially high prices.

Investors eventually caught on and sued Johnston. Investors never got their money back.

In 1981 American Energy Farming Systems of Marshall Minnesota convinced 450 farmers to part with $19 million to grow Jerusalem artichokes with promised earnings as high as $36,000 per acre. Seed cost about $1,200 per acre. The crop was promoted as fuel alcohol a feed a food and a sugar crop. The company collapsed when it could no longer attract enough money from new participants to pay existing investors. Fred Henderson former vice-president and secretary of the company was sentenced to a year in jail and fined $20,000. Farmers received no compensation for their losses. BF

Ponzi schemes: If it sounds too good to be true it probably is
According to the website of the Ontario Securities Commission a Ponzi scheme is a form of fraud offering investors a high rate of return by using money contributed by new investors to pay those who have invested before. The fraud comes to an end when the number of new investors falls and there is no new money to pay the returns.

The scheme is named after Carl Ponzi who convinced 10,550 investors in the Boston of the 1920s including three quarters of the Boston police force to invest a total of $9.8 million US in a scheme which played on the value of international postal reply coupons in different currencies.

At first investors were pleased and the scheme thrived. Then the media took notice. Eventually Ponzi was arrested and landed in bankruptcy court.

Steven Sofer a lawyer with the Toronto-based firm Gowlings has acted for people who have lost money through fraud and also those who have been accused of fraud themselves. He says that the number of Ponzi and pyramid schemes is on the rise. He attributes this phenomenon to the fall in interest rates 10 to 15 years ago. People are looking for a place to generate money with liquidity and security. The markets have had their ups and downs and within a "world of uncertainty" people can be led to believe that a venture is sound and stable when it may not be.

Sofer says it never fails to amaze him how people will set reason aside and accept a sales pitch. Often all it takes is listening to the pitch and some testimonials from others who are making money from the scheme and people deliver their trust he says. When the venture fails victims often won't complain. "Embarrassment is a huge huge factor that people who prey on the unsophisticated take advantage of" he says.

He notes that men are particularly vulnerable because they will figure they ought to have known it was a scheme. And those perpetrating a scheme tend to avoid those likely to complain he explains.

Wally Hogg a staff sergeant with the Waterloo Police Service's fraud branch says that with Ponzis and pyramid schemes often complaints aren't registered with police until the fraud nears the end. That's because in a Ponzi scheme" as long as things are rolling along and they're getting their money back they're not concerned" he says of the victims.

Sofer believes that our laws offer adequate protection against such schemes. The challenge comes in enforcement. Ponzis are tough to investigate he says and it's hard to pinpoint the exact crime taking place the location of the money and in many cases the location of the bad guy. In addition police resources are frequently limited. Unless an investor complains such schemes get a low priority.

Both Sofer and Hogg point out that Ponzis are often multi-jurisdictional. This requires effective co-ordination of different police forces and determining who will be the lead investigative agency. How long a victim waits to report the crime may also affect how much money eventually gets returned. Sofer says early action in one case in which he was involved meant victims got 50 to 60 per cent of their money back. But that's the exception. "In other cases we've been involved with it's been only 10 or 15 per cent."

Sofer and Hogg say: If it sounds too good to be true it probably is. But what steps can you take to determine the validity of an investment or business opportunity?

Sofer recommends that people check the company's website and take the trouble to read the documentation carefully and do their own verification without relying on the person who told them about it. He also advises discussing the scheme with an independent person they trust such as a lawyer accountant or financial advisor.

As well he recommends obtaining the names of one or two who are directly involved and advises people to make sure they have an opportunity to randomly pick these names from a list of several. BF