To organic farmers, Kenneth Noel Nelson Jr. was the man with the golden manure: It was rich with Mother Nature's finest waste, robust for the soil and cheap in price.
But to federal prosecutors in California, Nelson's organic fertilizer empire had developed a stench.
On Thursday a federal grand jury indicted Nelson on 28 counts of mail fraud in connection with an alleged years-long scheme to dupe farmers and agriculture product distributors. The indictment accused Nelson, 57, of selling premium-priced liquid fertilizer touted as made from all-natural products such as fish meal and bird guano that instead was spiked with far cheaper synthetic chemicals.
The scheme, according to the federal indictment, enabled Nelson to become the largest purveyor of organic fertilizer to farmers in the western half of the U.S. and pull in at least $9 million in sales from 2003 to 2009.
This is the second indictment of an organic fertilizer producer in California in the last five months. It also has fueled fears among some farmers about possible contamination of their pristine fields and has raised questions about whether consumers bought produce that was billed as organic but may not have met federal organic requirements. Many consumers who opt to pay a premium for organic goods do so because they don't want pesticides and synthetic chemicals to be used in the production of their food.
Neither Nelson nor his attorney could be reached for comment Thursday. An arrest warrant has been issued for Nelson. Prosecutors with the Justice Department office in Sacramento said they expected Nelson to surrender to authorities soon.
The indictment is part of a growing effort by the U.S. Department of Agriculture's Office of the Inspector General to crack down on fraud and corruption in the organic industry — a segment of the food sector that has grown to more than $24 billion in the U.S. and has emerged as a lucrative business in the Golden State.
The agency has seven open investigations involving the federal National Organic Program, officials said.
In the Nelson case, the allegations highlight an industry whose regulatory system has relied heavily on trust. Those who don't follow the rules, prosecutors allege, have reaped plenty: Among other things, prosecutors are seeking the forfeiture of Nelson's 2006 Chevrolet Silverado, 2005 Mini Cooper, 2004 Porsche Cayenne and 2003 BMW 330.
"The motive in these types of cases is economic," U.S. Atty. Benjamin B. Wagner said. "Consumers pay a premium for organic products, and they should not be misled."
In the tight-knit world of organic farming, Nelson and his company, Port Organic Products Ltd., were well-known. He owned several ventures to sell fertilizer to the green-farming community, including Kern County-based AgroMar Inc., Sail-On Ag Products Inc., Desert Organic Express Inc., Action Fertilizer and Microbial Assisted Soil Health Inc.
The federal National Organic Program was established in 1990 to regulate the organic agriculture industry and make sure that the fruits, vegetables and other edible products being sold as organic were produced in a way that met certain standards.
The government requires that farmers not put any synthetic chemicals on their land for three years prior to harvesting — and selling — an organic crop. According to Justice Department officials, federal law also states that, with limited exceptions, organic crop producers cannot use fertilizers with synthetic ingredients such as aqua ammonia or ammonium sulfite to infuse nitrogen into the soil.
If farmers used such chemical fertilizer, they could lose their organic certification.
The federal government relies on two outside groups to ensure that certain farm supplies meet organic standards: the Washington State Department of Agriculture and the Organic Materials Review Institute, a nonprofit based in Eugene, Ore. Once certified, the product is added to a list of approved supplies maintained by these organizations — a list upon which organic farmers say they rely.
According to Thursday's indictment, Nelson was able to get both groups to certify his companies' fertilizers as organic — even though they included synthetic ammonia and other chemicals — by allegedly lying in his applications about the ingredients he was using.
Compounding the issue was the lack of a reliable test at the time to determine whether the nitrogen in such fertilizer came from synthetic or natural sources, industry analysts said. A spokesperson from WSDA could not be reached for comment Thursday. A spokeswoman from OMRI declined to comment.
Earlier allegations of wrongdoing in the organic fertilizer industry prompted Earthbound Farm, the nation's largest producer of organic greens, to roll out new internal testing programs. And in 2009, California Certified Organic Farmers, the state's top organic certifier, started requiring inspections of fertilizer makers that sell to its farmers.
POSTED: 8:50 am PST March 11, 2011
BAKERSFIELD, Calif. — United States Attorney Benjamin B. Wagner announced that a federal grand jury returned an indictment today charging Kenneth Noel Nelson, Jr., 57, of Bakersfield, with 28 counts of mail fraud relating to his alleged operation of a scheme to defraud customers of his organic fertilizer businesses, including distributors and organic farmers, by falsely representing his companies’ fertilizers to be organic products when he knew that the fertilizers contained prohibited synthetic materials. The indictment also seeks forfeiture of vehicles including a 2006 Chevrolet Silverado, a 2005 Mini Cooper, a 2004 Porsche Cayenne, and a 2003 BMW 330.
Under the Organic Foods Production Act of 1990, the United States Department of Agriculture (USDA) established the National Organic Program (NOP) to ensure that agricultural products being sold as organic are produced according to NOP standards and are produced and handled without the use of synthetic chemicals. Under NOP rules, organic farms are required to be free from synthetic chemicals, including synthetic fertilizers, for a minimum of three years before they could be certified to produce organic crops.
Nelson manufactured and sold fertilizers through Port Organic Products Ltd. and various affiliated businesses that he owned and operated, including AgroMar Inc., Sail-On Ag Products Inc., Desert Organic Express Inc., Action Fertilizer, and Microbial Assisted Soil Health Inc. The indictment alleges that when federal search warrants were executed at Nelson’s businesses, it was found that between at least 2003 and January 2009, he had defrauded his distributors and organic-farmer customers by falsely representing that his companies’ fertilizers were organic products suitable for use in organic agriculture. Nelson claimed that these fertilizers were made with purely organic ingredients including fish meal, bird guano, or blood meal. Such organic materials are more costly than conventional, synthetic fertilizer materials and are sold at a higher price than conventional fertilizers.
The indictment charges that Nelson caused aqueous ammonia, ammonium sulfate, synthetic urea, and other nonorganic, synthetic substances to be included in his companies’ fertilizers. These chemicals are commonly used in conventional fertilizers but are not permitted to be used in organic-crop production. By mixing in these cheaper ingredients, Nelson allegedly produced fertilizers at a lower cost than if he had used 100 percent organic ingredients, and thereby increased his profits. From 2003 through 2008, Nelson, through his companies, obtained profits in excess of $9 million from the sale of purportedly organic fertilizers.
The Organic Materials Review Institute (OMRI) and the Washington State Department of Agriculture (WSDA) provide independent listing of fertilizers and other products that meet NOP requirements. Organic farmers, distributors, and others relied on WSDA and OMRI organic listings as indication that the products complied with NOP standards. The product labels for Nelson’s companies’ fertilizers frequently stated that the fertilizers were “OMRI Listed” and claimed that the products contained only authorized organic ingredients that were suitable for organic-crop production. According to the indictment, the product labels failed to disclose that the fertilizers actually contained nonorganic, synthetic materials and therefore, could not be used for organic agriculture.
The indictment alleges that Nelson obtained and maintained organic listings for his fertilizers from OMRI and WSDA based on the submission of false applications and renewal applications to OMRI and WSDA in which he failed to disclose the true ingredients in the fertilizers. The indictment alleges that he did not disclose to OMRI or WSDA that he was using synthetic materials, and that if he had, OMRI and WSDA would not have listed the fertilizers as approved organic products.
This case is the product of an extensive investigation by the USDA Office of Inspector General (OIG) and the FBI with assistance from the California Department of Food and Agriculture, USDA Agricultural Marketing Service, and the Kern County Environmental Health Services Department. Assistant U.S. Attorney Kirk Sherriff is prosecuting the case.
The USDA-OIG conducts investigations into allegations of fraud and other potentially criminal activity affecting USDA programs including the NOP. Special Agent in Charge Lori Chan for the Western Region of the United States stated, “The USDA-OIG is committed to bringing criminal violators who undermine the NOP program to justice in order to uphold the high standards behind the USDA organic label.”
U.S. Attorney Wagner said: “The indictment in this case alleges flagrant fraud in the labeling and marketing of a fertilizer product as ‘organic.’ Consumers pay a premium for organic products, and they should not be misled by companies that seek to profit by falsely categorizing their products as organic. We will continue to work with USDA investigators, with the FBI, and with our colleagues in the U.S. Attorney’s Office for the Northern District of California in examining production and labeling practices in the organic fertilizer industry.”
This case is the second recent investigation in California involving the organic fertilizer industry that has resulted in federal criminal charges. In October 2010, Peter Townsley, the founder and former president of California Liquid Fertilizer, was arrested in Los Angeles after being charged in a similar case indicted in the U.S. District Court for the Northern District of California. The indictment in that case charged that Townsley had defrauded oversight agencies and customers by labeling and certifying a liquid fertilizer product as organic when in fact it contained synthetic ingredients. Townsley has pleaded not guilty in that case and is awaiting trial. That case was also investigated by the USDA-OIG and the FBI.
If convicted, Nelson faces a maximum sentence for each count of 20 years in prison, a $250,000 fine, and up to three years of supervised release. The actual sentence, however, will be determined at the discretion of the court after consideration of any applicable statutory factors and the Federal Sentencing Guidelines, which take into account a number of variables.
The charges in an indictment are only allegations, and the defendants are presumed innocent until and unless proven guilty beyond a reasonable doubt.
Last Friday, the President issued a proclamation declaring this week National Consumer Protection Week. This case, and several other matters handled by this office, reflect our mission to protect the public from fraud and substandard products that are marketed to consumers. Just in the last year, this office has taken a number of actions to protect consumers of agricultural products:
• This office is currently prosecuting Frederick Scott Salyer, 55, of Pebble Beach, the former owner of SK Foods, a major tomato products company that has facilities in several locations in California including Lemoore, Ripon, Williams, and Monterey. Salyer is charged with violations of the Racketeer Influenced and Corrupt Organizations Act in connection with various schemes to defraud SK Foods’ customers through bribery and food misbranding and adulteration. The indictment in the case, returned by a grand jury in February 2010, alleges that Salyer and others at SK Foods knowingly sold and shipped product that did not meet contractual specifications and contained mold levels in excess of thresholds established by the FDA. Salyer has pleaded not guilty and is awaiting trial. Ten other former SK Foods employees and customers have pleaded guilty to various federal offenses, including introducing adulterated and misbranded food into interstate commerce with intent to defraud and mislead.
• In January of this year, civil attorneys in this office, working with the FDA, executed a seizure warrant to take custody of 80,000 pounds of cheese manufactured by a cheese maker in Traver, Calif. that posed a potential health threat to consumers. The cheese maker is cooperating with the government’s investigation.
• In April of 2010, the owner of a slaughter house in Manteca, Calif. was sentenced for misdemeanor violations of aiding the sale of uninspected beef. The defendant admitted that he operated a custom market on his property in which he allowed the resale of uninspected beef products, some of which did not meet USDA standards for human consumption. The case was investigated by the Food Safety and Inspection Service of the U.S. Department of Agriculture.