(Bloomberg) — Harry Dean Canady will learn next month whether he’ll spend the rest of his life in prison for cheating taxpayers of more than $1 million and threatening to kill the U.S. agents who brought him to justice.

A convicted felon with an alcohol-fueled temper, Canady, 64, pleaded guilty in December to defrauding the federal crop insurance system and is behind bars pending sentencing.

His thieving was just a sliver of the largest fraud in the program’s 75-year history, a case that so far has ensnared 41 North Carolina tobacco farmers, insurance agents and claims adjusters whose law breaking cost taxpayers close to $100 million, federal prosecutors say.

“The system has checks and balances in place,” says Banu Rangarajan, 45, the assistant U.S. attorney who led the prosecution. “The problem is all the checks and balances here were involved in the fraud. The adjusters were paid off. The agents were paid off. Everybody was paid off.”

The continuing investigation comes as Congress — despite tight federal budgets — is poised to expand crop insurance, inviting new scrutiny to a system that subsidizes farmers and private insurance companies such as Wells Fargo & Co. and Ace Ltd. Elements of the corruption in eastern North Carolina’s tobacco belt went undetected for more than a decade, raising questions about oversight of the nation’s most expensive farm initiative.

Costly Program

The program may cost taxpayers about $90 billion over the next decade, according to the Congressional Budget Office.

In recent years, prosecutors have targeted crop insurance fraud in states including California, Florida, Tennessee and Minnesota. Gregory Torlai, 52, a Stockton, California, farmer, was sentenced in 2011 to 30 months in prison after filing $340,000 in false claims, including for lost crops on a rock- and-garbage-strewn lot he tried to pass off as a wheat field.

In Iowa, soybean farmer Mark Hoffman, 54, drew a 20-month sentence in 2005 and was ordered to repay $2.3 million after involving his wife Susan, 52, and son Justin, 31, in a scheme to cheat the government. An earlier North Carolina case featured a husband-and-wife team that had employees throw ice cubes at their tomato plants and beat them with sticks before filing more than $9 million in phony hail damage claims. Robert Warren, 66, was sentenced in 2005 to a jail term of 76 months; wife Viki, 60, got 66 months.

Corruption Ring

Canady was part of a ring of corrupt adjusters, brokers and farmers centered on Robert Carl Stokes, a Wilson, North Carolina, insurance agent who pleaded guilty in 2009 to defrauding the government and two private insurers of more than $16 million. Other rings operated elsewhere in tobacco country as growers and distributers took advantage of lax oversight to bilk the government, as shown by court documents, plea agreements and interviews with investigators.

“They’ve got to take the fraud out of it,” says Jim Pate, 64, a tobacco farmer and policy holder in Rowland, North Carolina. “I wouldn’t say it’s widespread, but there’s too much of it going on.”

The U.S. Department of Agriculture’s Risk Management Agency, which administers crop insurance, largely relies on technology to police the program. Government sleuths use weather data to verify claims of storm damage. Images from orbiting satellites can show whether a field was inundated with flooding or even planted with crops in the first place while high-powered computers detect unusual or overly frequent claims.

Fighting Back

In the past two years, RMA introduced new software to make better use of field inspection reports and held seminars for farmers and insurance agents to underscore the need for compliance. Some innovations followed a March 2012 Government Accountability Office study, which concluded: “RMA may be missing opportunities to identify and prevent losses to the federal government that result from waste, fraud and abuse.”

Even as mounting crop insurance costs mean that taxpayers have more at stake, there are fewer people minding the store. Over the past three years, the program’s total liabilities grew about one-third to $117 billion while RMA’s workforce fell 9 percent to 455 employees and the department’s inspector general, which handles criminal investigations, lost 6 percent of its staff, or 35 individuals.

“They don’t have it under control,” said John Brown, 62, an investigator in New Franklin, Missouri, with 20 years’ experience investigating fraud for the government and insurers. “I’m dealing with cases all over the country. It just seems to be relentless.”

Isolated Cases

The agency, in a written statement, said of the North Carolina case: “The criminal actions of a few individuals do not suggest a systemic problem.”

Officials acknowledge, however, that RMA has conducted no studies of the incidence of fraud. Some program supporters are concerned that revelations of corruption threaten its political backing. North Carolina Senator Kay Hagan won Senate approval of an additional $5 million annually for RMA’s anti-fraud efforts, saying that the alternative might “mean the end of federal crop insurance.”

The government’s first inkling of trouble in North Carolina came in 2005. RMA-paid experts at Tarleton State University’s Center for Agribusiness Excellence, using computers to sift insurance records, detected an unusually high $11.7 million in claims submitted over a two-year period by Stokes.

Not Controlled

The government’s suspicions were confirmed when Danny Denton, a local contractor, came forward to say that Stokes had offered to pay him for home renovations using phony crop insurance claims that would name Denton as a farmer. Denton rejected the offer.

Prosecutors thought it was an isolated case. It was anything but.

Stokes, now 62, had established the Hallmart Agency in September 1990 on a commercial strip near Wilson’s airport. Operating from a one-story building next door to a florist, he sold crop insurance from companies including Wells Fargo’s Rural Community Insurance Services unit, the industry’s largest provider. By 2003, he’d built a new 6,000 square-foot brick home on a tree-lined street about 3 miles from his office.

The insurance agent lured dozens of farmers with a simple sales pitch: buy your insurance from me and you’ll never pay a premium.

Typically, farmers pay their annual premiums at the end of the year after settling their accounts. In the event of a claim, the premium is deducted from the payout. Stokes was, in effect, promising that the farmers could count on cashing an insurance check every year.

Claims Adjuster

He could make such promises thanks to his relationship with Jimmy Thomas Sasser, 62, a local claims adjuster. When a farmer said he’d lost crops to drought or hail, Sasser would walk his fields verifying the damage. For an entire decade, Sasser “received cash pay-offs to falsify claims,” according to court documents.

Farmers paid Sasser to inflate their damage claims, sometimes passing him $400 to $2,000 at a time via Mark Pridgen, Sasser’s former brother-in-law who worked at Hallmart even though he lacked a license to sell insurance.

Typically, farmers in the Stokes ring would falsely report poor crops from an insured field, entitling them to an insurance payment, while diverting the actual production for sale under another name -- a practice known as yield shifting.

“They are very business savvy,” says Rangarajan. “They know how to manipulate the records as they need to. Some of these farmers needed no direction from Stokes.”

Full-Service Fraud

Stokes even installed a crop scale in his office, capable of generating the official weight tickets needed to support loss claims, prosecutors say. In January 2002, he obtained a state license to operate a check-cashing service. From then on, he’d be able to cash for his co-conspirators the illegitimate checks he’d arranged for them.

The Hallmart Agency was no longer an insurance agency. It was a vertically integrated conspiracy.

Arriving at the federal building in Raleigh in early 2009, Rangarajan, the assistant U.S. attorney assigned to the case, confronted a steep learning curve. The Detroit native won notice -- and an agency distinguished service award -- for her role in prosecuting a shipping company that had dumped toxic oil into U.S. waters.

Yet she knew nothing about farming. To learn, she went into the fields to see how tobacco is planted, harvested, cured and baled. Rangarajan spent hours with agents including Miles Davis, a 20-year veteran of the USDA’s Farm Service Agency who had joined the inspector general’s office several months earlier. “It was a very complex and difficult program to understand,” she said.

Changed Plea

In August 2009, Stokes was indicted. He pleaded not guilty, but changed his mind after getting a glimpse of the government’s evidence. One key: Pridgen’s decision to begin cooperating, after prosecutors gathered evidence that Hallmart over four years had routed $429,000 to him through his wife’s businesses. Prosecutors did not charge Pridgen’s wife.

In October, Stokes entered a new plea, telling the court, “I’m as guilty as can be.”

Though Sasser denied any financial dealings with Stokes, federal agents on Oct. 22, 2009, hand-delivered a letter informing him that he was a target of the investigation.

In Lumberton, meanwhile, Canady, a Lumbee Indian and millionaire, was expanding his pilfering to additional crops even after being questioned by agents in May 2007 and again in June 2008.

M.C. Farms

He also created a new business called “M.C. Farms,” falsely claiming that his daughter Melanie was the sole owner, and began filing insurance claims in her name. She was not charged with any wrongdoing.

Using his daughter’s identity allowed Canady to insure higher yields by exploiting a weak link in the program: New producers got more favorable terms. The tactic quickly paid dividends: M.C. Farms received an insurance payment on its tobacco crop of $102,983 in its first year of operation. One year later, he cashed a check for $180,996.

Canady was treating the U.S. Treasury as his personal ATM.

On Nov. 22, 2010, federal agents searched Canady’s house, in a neighborhood of single-story homes and trailer parks, just down state highway 301 from “Fuller’s Old Fashion BBQ.” During an earlier visit in June 2008, he had threatened to kill investigators, according to court papers. This time, agents found Canady working in the yard, a handgun lying on a nearby fence.

Felony Conviction

That was a problem for the farmer -- Canady wasn’t legally entitled to possess firearms, a consequence of his 1997 felony conviction for involuntary manslaughter. In September of that year, Canady ended an argument with his brother Thomas, 37, by driving over him with a truck, fatally injuring him.

Three years after his conviction, federal agents confiscated six firearms, including two 12-gauge shotguns, a .38-caliber handgun, a .25-caliber semiautomatic Beretta, and 180 rounds of ammunition.

As investigators closed in, the pressure got to Sasser, the claims adjuster. At 10:20 p.m. on Saturday Nov. 19, 2011, furious at Pridgen for cooperating with investigators, Sasser called his home number. “Let me catch you somewhere, I will whip your g*d*** m*****f****** ass,” he said into the answering machine, according to a criminal complaint.

After receiving two more calls, including one threatening his wife, Pridgen called Davis. The investigator and an Internal Revenue Service agent drove to Pridgen’s home, arriving just past midnight.

Two days later, agents took Sasser into custody. He spent Thanksgiving 2011 behind bars.

Death Threat

Not long after emerging from jail, having lost 12 pounds in eight days, Sasser agreed to cooperate with prosecutors.

On Jan. 23, 2012, Sasser called Canady to tell him that federal agents had questioned one of his insurance claims, citing photos and satellite data.

Unaware that Davis was recording the call, Canady threatened the investigator by name. “If he comes to my house again, I’m going to assume he’s trying to kill me. I’m going to try to kill him first,” Canady said.

He called back a few minutes later, boasting that he kept a machete in every room of his house, along with a bow and arrow and a “high-voltage” gun.

When agents arrested Canady on June 21, 2012, they found a .22 caliber handgun tucked beneath his bed. Five days later, citing “the extreme risk of danger,” a judge ordered him jailed pending trial.

$21 Million

Canady pleaded guilty in December to multiple counts of fraud, aggravated identity theft, money laundering, unlawful possession of a firearm and threatening a federal official. He faces a maximum sentence of 67 years in prison.

On Feb. 20, 2013, Sasser was sentenced to 48 months in jail and ordered to make restitution of $21 million. His wife, Tammy, replied “no, sir” when asked by Bloomberg News in a telephone call if she wanted to comment.

Stokes’s handsome brick home, assessed at $814,801, is on the market for $399,000. His former office is shuttered and bears a “for sale” sign. Inside, desks and chairs are stacked alongside a tower of boxes.

Price Paid

Reached by phone, Stokes, who is on probation and confined to his home, declined to discuss the case. He says he sold shrimp after he was released from prison in May. Now, he calls himself retired and says he lives on Social Security.

Of the largest crop insurance fraud in history, he says: “I’ve paid my price for it.”

By court order, Stokes is required to repay taxpayers and the insurance companies he defrauded a total of $16,582,215 --in monthly increments of $200.

The lessons of the sprawling North Carolina fraud are still being assessed.

Trying to impress upon North Carolina farmers the cost of tolerating the crooks in their midst, Risk Management Agency officials visited Wilson last year to warn locals that specific farmers, entire counties or the tobacco crop itself could be excluded from the program.

Officials stressed their ability to monitor compliance using technology. Data mining could speedily review millions of insurance claims, as they had in the Stokes case. Likewise, a pair of NASA satellites orbiting the earth provided images of growing areas for Tarleton researchers to match with weather and soil data.

Money Saved

Tarleton’s efforts are credited with preventing about $80 million in improper costs each year between 2001 and 2011, according to RMA.

Last year, data mining identified 2,465 insurance policies -- 0.2 percent of the total -- with unusual losses. USDA and its insurers are responsible for conducting spot checks of those policies. “We are extremely vigilant with extensive focus on adjuster, staff and agent training, utilization of data mining, interaction with RMA, and an intensive annual audit program,” Wells Fargo said in a statement.

Rangarajan says the key to breaking the North Carolina case was the investigators poring over claims forms and weight tickets and questioning suspect farmers, adjusters and agents.

“That data mining was just the start,” she said. “The hardest work is literally the agents sitting in the back room analyzing documents. Without them, I can’t make my case.”

Brown, the investigator who helped RMA break the 2003 North Carolina fake hail damage case, says fraudsters are innovating to stay ahead of the government. Crooked farmers soak up tips from the government seminars, videotaping presentations in search of loopholes. They usually find some, he says.

“They have no intention of growing a healthy crop -- none whatsoever,” he says. “They’re farming for insurance money. And they’ll pull every single gimmick that they can to extract money from the taxpayer.”

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