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Suspects are held as they wait to be questioned at the Klamath Falls Police Department after they were picked up in a cartel-related drug case last year. Law enforcement officials Thursday announced a new round of arrests in a spinoff of that case -- with a new Mexican drug cartel twist.

(Bruce Ely/The Oregonian)

A Klamath County man in debt to a Mexican drug cartel led local authorities to an elaborate money-laundering scheme involving food stamp cards that authorities broke up Thursday.

The scheme involved phony charges to state food stamp cards of as much as $20,000 a month. Law enforcement officials said a Mexican meat market in downtown Klamath Falls was at the heart of the conspiracy, and its two owners were among 34 people arrested Thursday.

The case is a spinoff of a major drug investigation in the same county brought to a close almost exactly a year ago. Oregon Justice Department officials at the time said that investigation tied a "large and violent" drug trafficking organization operating in Klamath County to Mexican drug cartels.

Severo Toro-Castellon

That investigation opened with the discovery in October 2012 of the bodies of two suspected drug traffickers in the rural area of Bonanza. The California men had been shot and buried and their pickup truck burned and abandoned at another location.

The investigation of that double homicide led to Thursday's operation. Law enforcement officials said a key suspect in that killing told Det. Eric Shepherd of the Klamath County Sheriff's Office he wasn't involved directly in the murders, but he owed about $67,000 to a Mexican cartel. He said he was stealing drugs from loads the cartel hired him to bring to Oregon.

"He got caught," said Klamath County Sheriff Frank Skrah. "They said 'Okay, pal. Do the right thing and pay us or you'll end up dying."

Rafael Ortega-Vargas

The suspect was paying off the debt by making regular payments at what Skrah said turned out to be a phony meat market – Carniceria Mi Pueblo on East Main Street.

Authorities didn't elaborate on the suspect's involvement, but his confession triggered a lengthy investigation of the market that eventually also involved investigators from the U.S. Department of Agriculture's Office of Inspector General.

According to a probable cause affidavit and law enforcement sources, investigators discovered that holders of Oregon Trail cards were getting cash kickbacks from the market rather than buying food.

The cards are issued by the state Department of Human Services to qualifying people to buy food. The cards act like a debit card, and are recharged by the state once a month to replenish the benefits. The cards are supposed to be used only for certain food purchases.

Jose Moremo-Hernandez

Instead, law enforcement officials said, workers at the meat market would post a charge to the card as if product had been sold. One official said by way of illustration that $200 would be charged to the card and the cardholder would walk out with $100 cash. Officials said in some instances cardholders got methamphetamine or alcohol.

"It was a massive fraud," Skrah said. "There was never or very little product. It's a front. It's fraud from start to finish."

Three men were accused of leading the conspiracy face charges of first-degree aggravated theft, computer crime, criminal conspiracy and unlawful use of food stamp cards. They were identified as Severo Toro-Castellon, 52; Rafael Ortega-Vargas, 45; and Jose Moremo-Hernandez, 33.

Skrah said his office learned that the scheme had been reported to law enforcement agencies outside Klamath County but hadn't been investigated. He didn't identify the agencies. He said his detective "did a fantastic job" on a complicated investigation.

By day's end, the government seized the two buildings used in the operation.

"We now own a meat market," Skrah said.

-- Les Zaitz

Go here to see The Oregonian's award-winning investigation into cartels in Oregon.