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Jay
Hoyt and his wife, Betty, (above) are not as popular in
Burns as they once were.
In 1987,
Jay Hoyt wrote to investors, "When you think there's no
way this deal can be land and all those guys areg oing toend
up in jail, it's because you don't understand our tax laws
...nor the conoomics of the cattle business."
Until
an acrimonious split in 1988, two of Hoyt's brothers and
his sister worked in the
business. Hoyt's brother Ric, who ran the cattle
operations, is
cooperating with prosecutors.
 "I
get very upset to think the IRS let this go on for 20 years,"
says Ed Van Scoten. Much of the money the IRS says Van Scoten
and other investors owe consists of penalties and interest
that accrued while Hoyt jousted with the authorities.
Hoyt
faces 54 counts of bankruptcy fraud, mail fraud and money
laundering. The IRS, the FBI, the Securities and Exchange
Commission and the U.S. Postal Service have all investigated
him.
Burns Mayor Roger Reason worked for Hoyt in the '80s, as
did his son-in-law. Both later suffered tax problems.
There
are currently more than 800 separate Hoyt-related cases
in U.S. Tax Court. Bankruptcy claims against his operations
approach one billion dollars.
Former
U.S. Congressman Bob Smith formerly owned the house on the
next bluff over from Hoyt's.
Hoyt
admitted in a deposition last year that he obtained internal
IRS documents in 1990 that presented a road map of the criminal
case the agency was pursuing against him.
Even
after a bankruptcy court shut down most Hoyt operations
in 1995, prosecutors say he sold another $17 million in
partnerships in the next 19 months.
Working for Jay Hoyt put Wayne Corns into a financial hole
he has yet to dig himself out of. The former cowboy now
works for an excavating company.
The
IRS didn't
strip Hoyt of his enrolled-agent status until July 1997.
He remains nominally the partner in charge of numerous partnerships.
The
public record of documents of various investigations, depositions
and court proceedings involving Jay Hoyt runs to more than
eight million pages. If laid end to end, the paper trail
would stretch 1500 miles, or from Portland to Fargo, N.D.
A pending
case in California seeks to nullify a large chunk of investors'
tax bills on the
theory that the IRS knew long ago that Hoyt was unfit to
represent investors.
In February
1999, the U.S. Department of Treasury issued
a stay of collection, which gave thousands of Hoyt investors
some relief until pending tax issues are resolved.
Hoyt
is accused of defrauding investors of $100 million. Pooley
and others think he actually took between
$200 million and $400 million.
For
four years,
disgruntled Hoyt investors led by Joyce Heard of Ceres,
Calif., published a newsletter called The Phantom Cow.
Will Brown managed a 377,000-acre ranch for Hoyt. He says
his former boss simply didn't think people should pay taxes.
"Jay had a personal vendetta against the government and
particularly the IRS," he says.
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The last time anybody counted, there were 130,000 cows and
7,600 people in Harney County, a stretch of high desert and
ponderosa pine bigger than Connecticut, Rhode Island and Delaware
combined.
Harney County and its largest town, Burns, might seem an
unlikely location for a world-class scam, but they were
the breeding ground for what officials now say is the biggest
fraud in Oregon history. At the center of the con is a silver-tongued
Mormon, a cattle rancher whose round, boyish face is always
topped by a cowboy hat--straw in the summer, a beaver-skin
20X silver-belly in the winter.
"I've worked with a lot of scam artists and promoters over
the years," says Dick Pooley, a former senior IRS official,
"but Jay Hoyt's the biggest I've ever seen."
Late last year, in U.S. District Court in Portland, Hoyt,
59, and five of his associates were charged with defrauding
4,500 investors from 41 states of $100 million. Earlier
this month, Darrel Smith, one of Hoyt's co-defendants, pled
guilty and agreed to cooperate with the prosecution.
Hoyt declined several requests to talk to WW. But
an examination of court records and interviews with investors,
former employees and lawyers involved in the case reveals
a scheme
of extraordinary proportion, masterminded by a brilliant
opportunist.
Hoyt's case is unique not only because his headquarters
were in a Mayberry-esqe town and because of the money involved,
but also because the scam went on for two decades. What's
more, the feds knew what Hoyt was doing nearly the whole
time. But instead of shutting him down, they punished his
victims, who today face tax bills of nearly half a billion
dollars.
"It's totally unreal that he could involve so many people
for so long and get away with it," says Eadie Corns, who
was bankrupted by Hoyt's schemes. "I look at the government
as being just as guilty as he is."
Located 290 miles southeast of Portland, Burns is a town
where ranchers leave their pickups idling in front of the
ElkHorn Club cafe while they eat breakfast and where kids
argue about whose dad owns the best bull.
In 1977, attracted by cheap grazing land, Jay Hoyt moved
his cattle-breeding operations to Burns from California.
He immediately started snapping up local ranches and leasing
vast tracts of Bureau of Land Management property in Harney
County. His operations would eventually cover 1.6 million
acres.
Shortly after Hoyt arrived in Burns, the area's biggest
and best-paying employer, the Edward Hines lumber mill,
shut down, laying off 1,000 people.
To local residents walloped by the mill closure, the rapid
expansion of the Hoyts' operations (two brothers and a sister
joined Jay in Burns) was a godsend. "They did a lot of good
things when they first came to town," says Burns mayor Roger
Reason.
Feed suppliers, the Ford dealership and other local merchants
survived and ultimately thrived on the Hoyts' business.
"I made a lot of money off the Hoyts," says Harney County
Judge Steve Grasty, who owned an auto-parts store before
running for office. "[They were] an incredible boost to
our economy."
The Hoyts ingratiated themselves in other ways. Soon after
arriving in Burns, they invited everyone in town to a steak
dinner at their cattle barn. "They cooked eight cows," recalls
Grasty. "They bought every paper plate, plastic fork and
knife in town and easily fed 2,500 to 3,000 people."
But what really won the townspeople's loyalty was Jay Hoyt's
paychecks. He nearly doubled the going rate for ranch hands
from $600 to $1,100 a month and gave many locals jobs they
had no hope of getting anywhere else. "My husband was fairly
convinced Jay was God," says Corns, whose husband, Wayne,
worked for Hoyt for 17 years.
Hoyt eventually became the county's second-largest employer,
supporting a payroll of nearly 200 people. "People used
to say, 'Even Hoyt's flunkies had flunkies,'" says Grasty.
By the mid-'80s, Hoyt and his family had built up what
the industry publication Cattle Fax called the nation's
largest purebred cattle-breeding operation. The Hoyts popularized
the Shorthorn breed and claimed that they had fine-tuned
its genetics to a point that they were producing "super-cows."
When Hoyt moved to Burns, most local cattle were either
Angus or Herefords; he was the first to introduce Shorthorns
to the harsh conditions of the high desert. He also brought
to Burns what were then considered innovative breeding techniques.
In addition to selling frozen bull semen for artificial
insemination, Hoyt practiced embryo transfer, a process
in which eggs--as many as 10 at a time--are taken from genetically
superior donor cows and placed into surrogate mothers.
For all his impact on Burns, Hoyt was an elusive, almost
mythical figure. His picture never appeared in the local
paper, the Burns Times Herald. According to former
employees, he had no close friends and no hobbies. He took
no interest in politics, and besides supporting high-school
rodeo, his only regular public appearance was at the Harney
County 4-H livestock auction.
Hoyt often arrived at the double-wide trailer that served
as his office at three or four in the morning and left before
noon. Although he sometimes helped cut hay or showed a new
employee how to load a cattle truck, Hoyt spent more time
studying the tax code or reading the Wall Street Journal.
He traveled frequently on company planes.
In a town where bungalows still sell for $60,000, Hoyt's
hilltop house, with an artificial stream on one side and
priceless view of the Silvies River and 9,700-foot Steens
Mountain on the other, is the local version of Pittock Mansion.
Inside, the house is decorated with knick-knacks from Hoyt's
wife's gift shop. Following Mormon edict, the pantry contains
enough food to last a long winter. A free-standing fireplace,
large enough to barbecue a heifer in, dominates the kitchen
and living room. Family photographs cover the refrigerator;
grandchildren's toys cover the floor. On a recent day, the
only indication that there was a crack in the Hoyt empire
was a sheaf of bankruptcy papers on the kitchen counter.
Jay Hoyt saw himself a more than simply a cattle breeder.
Judging from his marketing brochures, he was a champion
of the little guy, a Robin Hood in cowboy boots. Rather
than taking from the rich, he would reclaim from the government--legally--what
rightfully belonged to the working man. He was, as one brochure
put it, "Harvesting Tax Savings by Farming the Tax Code."
Specifically, Hoyt sold partnerships through which investors
could own a few cows and some ranchland, or as another brochure
described it, "Quality Investments for Folks That Dream
About Owning a Piece of the Country."
Over 20 years, Hoyt helped an estimated 4,500 people realize
those dreams by selling them a slice of the American West.
Investors were attracted by the promise of hefty returns
(one of Hoyt's partnerships, the Timeshare Breeding Service,
promised 24.3 percent returns--tax free) and the security
of knowing that they were investing in cattle, one of the
world's basic commodities.
Most of all, they were seduced because investing in a Hoyt
partnership wouldn't cost them a dime.
Here's how the deal worked: Before an investor gave Hoyt
any money, Hoyt would assign the investor a portion of the
cattle-breeding operation's expenses. The investor then
claimed those expenses as a tax deduction. Hoyt prepared
nearly all of his investors' tax returns, which enabled
him to assign them sufficient deductions to claim a refund
for all taxes paid in the previous three years--in theory,
a legal strategy.
When investors got their refund checks, they sent 75 percent
to Hoyt and pocketed the rest. Essentially, all the cash
that flowed into Hoyt's operations was actually coming from
the government--or as Hoyt referred to it, "Sam." In the
long run--or so the plan went--the partnership's cows would
be sold at a profit.
In communications with investors, Hoyt emphasized that
he was an "enrolled agent" of the IRS. Although many say
they understood the designation as an endorsement, it simply
meant that he was licensed to represent clients in front
of the IRS. As head partner and tax preparer, Hoyt tried
to ensure he was investors' only source of financial advice.
"Out here," he wrote to investors, "tax accountants don't
read [cattle] brands and cowboys don't read tax law. If
you must have a tax man to give you specific personal advice
as to whether or not you belong in the cattle business,
stay out."
Almost by definition, those attracted to no-money-down
investments were unsophisticated. To find prospects, Hoyt's
sales team used direct mailings and cold-calls, targeting
people with steady income but little savings, people Hoyt
reportedly referred to as "Joe Six-Pack."
Hoyt was creative in his search for investors. In 1989,
he needed some new propects and the Oregon High School Rodeo
needed money. Hoyt had an idea, recalls former employee
Will Brown. He'd let the kids raffle off the use of a new
Ford pickup for a year. The plan worked, raising cash and
yielding a bucketful of names of potential investors.
Word of mouth proved to be Hoyt's best advertising. For,
instance, Ed Van Scoten, a 64-year-old Cornelius resident,
heard about Hoyt from his nephew, who had already invested.
"Unless people quit eating beef entirely, there's always
going to be a need for breeders and ranchers," says Van
Scoten, who grew up on a farm and as a boy showed purebred
cattle in competitions. "So I thought, let's give it a shot."
Convinced he was on to a good deal, he talked his son into
investing.
Via folksy newsletters, Hoyt established a close relationship
with investors. Every summer, many of them flew into Boise
and made the 190-mile drive to Burns for ranch tours and
a barbecue at the Harney County Fairgrounds. "There was
a lot of trust there," Van Scoten says.
In reality, what investors were buying was a lot of bull.
Elements of Hoyt's partnerships were legitimate: The partnerships
owned cows, they owned ranchland and they had a legal right
to pass expenses along to investors.
Still, there were questions about issues as basic as the
quality of Hoyt's cattle.
Part of the allure of Hoyt partnerships was that the "super-cows"
would eventually sell for big profits.
For five years, Mike Schnitker was Hoyt's breeding expert.
It was he who reached inside cows to harvest ovaries, extracted
bull semen and carried out the artificial insemination.
The truth, Schnitker says, is that many of the so-called
super-cows were the bovine equivalent of nags. "It was a
big ol' joke," he says. In fact, the Hoyts' breeding records
were in many cases pure fiction. "I think they were just
inventing cows on the computer," Schnitker adds.
One of the ways that Hoyt established the alleged superiority
of his cattle was selling them for high prices at major
auctions. Such sales, held annually in San Francisco, Denver
and other western cities, bring together everyone from the
nation's leading breeders to buyers from McDonald's.
But many of those auctions had about as much integrity
as professional wrestling. Often, when a Hoyt cow was on
the block, says Brown, a number of "shills" in the audience
would bid the price up to an agreed level, at which time
a "mark," either caught up in the excitement or truly ignorant,
would pay far more than the cow was worth. "It was like
watching The Sting," Brown says.
Hoyt didn't just inflate the value of his cows. By his
own admission, he grossly overstated how many cows he bought
for his partnerships. For instance, court documents show
that Hoyt said his investors owned 17,611 cows in 1986,
but he later admitted the correct number was 6,409.
Today, prosecutors say even the latter number was overstated.
At the heart of the criminal charges against Hoyt is the
allegation that over the years he sold 38,000 cows to investors
while never having had more than 5,000 on hand. His motivation
for doing so was simple: Each cow generated a lot of expense.
Not only did the cows (in theory) cost a lot to acquire,
but they cost a lot to maintain. If Hoyt could invent a
cow's genetic heritage, why not go the extra step and simply
invent the cow?
The IRS was suspicious of Hoyt's schemes as early as 1977,
when it began annual audits of his partnerships. By 1980,
according to IRS documents, agents believed his operations
were bogus. The losses he was claiming for his partnerships,
the IRS believed, were grossly exaggerated.
In 1984, according to court documents, the IRS Criminal
Investigation Division began to prepare a case against Hoyt
for fraud. The division believed he was overstating the
value of cows, the number of cows and, most importantly
for investors, the validity of the deductible expenses.
But saying Hoyt was a fraud and proving it were two different
things.
In 1986, the IRS decided to take the bull by the horns.
Until then, its detective work had consisted largely of
crunching numbers and reviewing documents. Internally, IRS
personnel referred to Hoyt's cows as the "phantom herd,"
but there was only one way to determine how many cows the
partnerships really owned.
The IRS dispatched auditors to Burns to count cows. What
transpired was a scene worthy of the Keystone Kops.
Cows are identifiable by their ear tags, so the auditors
randomly selected tag numbers and ordered Hoyt to produce
those cows. On the first day, recalls Brown, the auditors,
who barely knew a horse from a cow, saddled up and rode
out into a pasture the size of Portland. Several of the
requested cows were produced. Satisfied, the auditors returned
to Burns for the evening.
Hoyt cowboys then worked all night long, Brown and others
say, to move those very same cows to an adjacent pasture.
In the morning Hoyt drove the inspectors the long way around
to the entrance of a different pasture. The auditors saw
most of the same cows they'd already seen, with a few new
ones mixed in. After a few days of this, the inspectors
were completely frustrated--but also completely fooled.
"I couldn't believe how stupid the IRS was," Brown recalls.
The story is now legend in the Sacramento IRS office.
Over the years, despite nearly continuous investigations,
Hoyt managed to stay one step ahead of the law--stalling,
producing blizzards of paperwork and cutting deals when
cornered. Even when he admitted wrongdoing, his operations
continued unabated.
Hoyt's house is a monument to 20 years of futile pursuit
by the feds. In 1994, having placed millions of dollars
in liens against Hoyt, the IRS seized the house, which,
according to tax records, is assessed at $342,000. In 1995,
the house sold at auction for $60,100. The buyer? Jay Hoyt
and his family. They never moved out.
While Hoyt held on to his house, many of his former workers
are not so lucky.
In 1994, Eadie Corns noticed a strange man taking pictures
of her house. Less than a week later, she says, she was
summoned to the IRS office in Portland and told to bring
an inventory of belongings. The IRS wanted $200,000 in back
taxes and gave the Cornses 30 days to sell their house.
The house fetched $38,000, and the Corns moved into a rented
mobile home. No sooner had they settled their federal tax
bill than the state of Oregon came calling. The Corns declared
bankruptcy; five years later, they have nearly finished
paying the state. "We were better off than others," Corns
says. "A lot of people didn't have a house to sell."
Like nearly everybody who worked for Hoyt, the Corns were
not employees. Hoyt made them partners in his operations
and directed them to deduct ranch expenses from their tax
returns. Most workers were financially unsophisticated and
didn't question the arrangement. The problem was, the IRS
later disallowed the deductions, saying they were based
on bogus expenses.
Today, it's hard to find a family in Burns that hasn't
suffered the stress and expense of large bills for back
taxes. "There were 197 people working for Hoyt in '87,"
says Brown. "Nearly all of them ended up in trouble with
the IRS. It's rolled through this town like a plague."
Investors like Van Scoten fared no better. Nearly all of
them owe back taxes, penalties and interest--going back,
in some cases, to the 1970s--because their deductions were
also disallowed. In total, the IRS says Van Scoten owes
about half a million dollars. "Who are they trying to kid?"
he says. "They could never get $500,000 from me if I worked
five lifetimes."
It almost goes without saying that Hoyt's partnerships,
in addition to being what the IRS calls "abusive tax shelters,"
made no money for investors.
In the late '80s, Van Scoten contemplated retirement. He
contacted Hoyt's office to find out when the profits from
cattle sales would begin. When the response finally came,
it made him uncomfortable. "I hate to use the word 'threatening,'"
he says, "but there was a degree of, 'You've got to continue
to support this operation.'"
Facing the loss of his pension and his house, Van Scoten
wonders why the little guy is the one paying for the feds'
inability to shut Hoyt down.
That's the hundred-million-dollar question: How did Hoyt
stay in business so long?
Dick Pooley, the former head of collections in the Sacramento
IRS office, where most of the Hoyt investigations took place,
has advised Hoyt investors in the decade since his retirement.
Even today, Pooley says, the IRS has 30 people working on
various aspects of Hoyt's case.
He thinks that Hoyt was simply too clever for government
agents. "The bureaucracy was always a year or two behind
him," Pooley says. "What I saw on the part of the IRS was
a great deal of incompetence and a reluctance to get into
complexities."
For the IRS's part, Bill Steiner, a spokesman familiar
with the case, says it's very difficult to stop an operator
as smart and determined as Hoyt. "It's easier to go after
the people who have been duped than to go after the promoters
of the scheme," he says.
Today, Hoyt is holed up in Burns awaiting his criminal
trial, which is scheduled for January, 2001. To the astonishment
of his neighbors, who believe he has hordes of cash salted
away, he has claimed indigence and will be represented by
a court-appointed lawyer. His wife, Betty, still runs Trends
& Traditions, a gift shop on Burns' main street, but
Hoyt's operations have been shut down and he keeps a low
profile.
"If I were in Jay's shoes," says Eadie Corns, "I'd be afraid
to show my face."
Hoyt's 26-year-old daughter, Hayley, admits it is difficult
at times for her and other family members to live normally
in Burns, but she says their faith helps them cope. "We're
Mormons," she says. "We're good Christian people, and we're
honest." As for her father, Hayley says he remains the "happiest,
kindest man on the planet."
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Willamette Week | originally
published July 28, 1999
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