Individuals claiming they were bilked out of millions of dollars by ClassicStar's high-profile mare lease and breeding program are awaiting answers to a recent complaint filed on their behalf in the United States District Court's Lexington, Ky., division.
The 29-page document levels against ClassicStar, along with affiliated individuals and entities, felony criminal allegations of racketeering, including mail and wire fraud, as well as a variety of civil charges for more than $20 million in claimed losses suffered by the plaintiffs. The plaintiffs are investors heading up limited liability companies based in the states of Washington and Oregon.
All told, the lawsuit says the defendants in a four-year period "converted a Thoroughbred horse breeding operation into a vehicle used to defraud unsuspecting purchasers of nearly $500 million." Although government officials looking into possible criminal charges aren't talking, the legal action, filed in late July, potentially sheds some bright light on the stunning raid Feb. 23 by Internal Revenue Service agents on ClassicStar's Thoroughbred operation near Versailles, Ky.
The lawsuit claims in part that ClassicStar, which formerly included Utah-based entrepreneur S. David Plummer, knowingly misrepresented its program as a legal loophole for saving millions of dollars in federal taxes, mostly in the realm of capital gains.
It also charges that ClassicStar didn't own interests in all the broodmares marketed by the company, and grossly over-inflated the value of the advertised $160 million mare inventory by four times the actual portfolio value of $40 million.
To conceal this alleged zealous overselling, the suit claims ClassicStar "contrived to substitute, in large part, non-Thoroughbred mares (from a "roundup" horse breed used to herd livestock in the West) for a number of Thoroughbred mares which should have been included in the lease."
The substitute plan, although not believed to have been implemented, would have featured the placing of artificially inseminated embryo implants from Quarter Horses into "surrogate roundup" mares, the suit says.
"Plaintiffs at all times believed, and the defendants led them to believe, that their entire investment was in Thoroughbred horses," the suit claims. "The defendants did not disclose the involvement of the Quarter Horse embryos, surrogate mares, or artificial breeding to plaintiffs until plaintiffs had paid for the Mare Lease Program."
Included in accompanying evidence exhibits is a copy of the lease agreement between ClassicStar and West Hills Farms, an entity managed by Oregon custom home-builder Walter Remmers. A spreadsheet details the 50 mares West Hills leased for 2005 at a bottom-line cost of more than $16 million, a figure that included related stallion, boarding, and insurance fees.
Only seven of the listed mares were Thoroughbreds, a group that included, with 2005 stallion mating in parentheses, Cross Your Heart (Cozzene), Classic Approval (Vindication), Xtra Heat (Elusive Quality), Nannerl (Giant's Causeway), Turko's Turn (Gone West), Gaviola (Unbridled's Song), and Win Crafty Lady (Storm Cat).
The remaining 43 mares listed were Quarter Horses, most of which were mated to stallions currently standing at Plummer's Buffalo Ranch cutting-horse operation in Utah. Plummer and his son, Spencer Plummer, exited ClassicStar's Kentucky operation just weeks before the IRS raid.
West Hills and another plaintiff, Arbor Farms, each paid out $7 million on invoices issued in late 2004, the suit claims. Arbor Farms is headed by Dennis Sackhoff, Remmers' business partner in Arbor Custom Homes in Beaverton, Ore. Further obligations were secured by loans obtained from National Equine Lending, a Utah company allegedly operated by one of Plummer's relatives.
The third plaintiff, Nelson Breeders, is a company comprised of Bryan and Laurel Nelson of Bellevue, Wash. The lawsuit says the Nelsons incurred more than $28 million in financial obligations to ClassicStar. A letter of understanding included as an exhibit said that for an up-front investment of $2.9 million, the Nelsons' participation would generate tax savings of approximately $11 million, and net after-tax mare lease revenue of about $9 million.
The suit also accuses company officials of using investors' funds for unintended purposes, including the purchase of personal property, and for gas and oil land exploration by affiliated companies Geostar Corp. and Gastar Exploration Ltd.
"(The) defendants have continuously engaged in criminal activities...as part of their overall scheme for at least four years and will continue indefinitely unless prevented," stated the lawsuit, which was submitted by the Lexington law office of Frost Brown Todd.
Neither S. David Plummer nor his former associate, current ClassicStar managing member Tony Ferguson, returned calls from The Blood-Horse seeking comment. Ferguson is believed to be a Tampa-based executive with Geostar, a company that is a minority shareholder in the publicly-traded company, Gastar (AMEX: GST). Geostar is the manager of ClassicStar. Gastar officials likewise did not return a call from The Blood-Horse .
A copy of the search warrant used by IRS agents for the Feb. 23 raid is also included as an exhibit. The document notes that the IRS used undercover agents to obtain evidence to support the issuing of the warrant, including tax return information, promotional material, contracts, and recordings of conversations with S. David Plummer, Spencer Plummer, and other ClassicStar employees.
Information sought on more than 20 individuals and entities listed in the warrant included bank records, ClassicStar client files, client lists, contracts, correspondence, brochures or newsletters, personnel records, horse ownership records, and computer records, among others.
It isn't known if criminal charges will be filed against any of the defendants in the civil suit. A call by The Blood-Horse to Oregon-based U.S. District Attorney Allan Gartan, who is heading a federal investigation, wasn't immediately returned, and a search of the federal court system's Web site yielded no listing of active cases.
Charges in the civil suit are based in part on violations pursuant to the federal Racketeer Influenced and Corrupt Organizations Act (RICO). Those found guilty of racketeering can be fined up to $25,000 and/or sentenced to 20 years in prison. The law also forces those convicted to forfeit all gains netted through illegal activities. The act also contains wording that allows plaintiffs to sue for triple damages in civil actions.
The defendants have until Oct. 30 to answer the complaint filed on behalf of West Hills, Arbor Farms, and Nelson Breeders.
Public records also indicate that a little more than two months after the Feb. 23 raid, two-year real property mortgage agreements totaling about $14 million and signed by Ferguson were extended to ClassicStar from Fifth Third Bank and Fasig-Tipton, respectively.
"The mortgage was signed essentially to secure some outstanding obligations owed to Fasig-Tipton," said Fasig-Tipton executive vice president and chief operating officer Boyd Browning of the $6.5-million agreement.
A dispersal of 90 ClassicStar mares is scheduled for Nov. 5 during the Fasig-Tipton Kentucky November sale in Lexington. Included in the mix is grade I winner Hookedonthefeelin, who is the dam of 2006 Humana Distaff Handicap (gr. I) winner Pussycat Doll. She is in foal to Distorted Humor.
Others will include Turko's Turn (in foal to Storm Cat), the 2001 Kentucky Broodmare of the Year and dam of 2001 Horse of the Year Point Given, and Ballado's Halo (in foal to Elusive Quality), a stakes-placed full sister to champion Ashado.
Browning declined to elaborate on the extent of the "outstanding obligations" to Fasig-Tipton, including whether the dispersal was in some way related to ClassicStar's financial situation.
"I'm not going to get into the particulars," Browning said.
ClassicStar burst upon the Thoroughbred scene in 2000, purchasing more than $45 million in bloodstock at public auction from 2001-04.The company was known for throwing elaborate parties and related marketing gatherings aimed at prospective investors, many of whom were new to the racing industry.
It is not known how many investors participated in ClassicStar's programs.
At least 60 yearlings out of mares currently or formerly affiliated with ClassicStar are being offered in a single consignment at this year's Keeneland September yearling sale, which started Sept. 11. The group is offered in the Taylor Made Sales Agency, Agent LXXXIII consignment.
ClassicStar Farms is listed as the property owner of almost 500 acres near Versailles, according to Woodford County (Ky.) records. The property was purchased for more than $6 million combined in 2002-03 from Under The Rainbow and Applewood Farm.
An unrelated lawsuit filed in 2005 against ClassicStar is still plowing its way through the federal district court system in the state of Washington.
Plaintiff Anderson Corporate Finance & Investments claims it is owed about $6.2 million in unpaid commissions earned during its time acting as an agent for ClassicStar from 2003-04.
The Anderson suit says, "the purpose underlying the Mare Lease Program was and is to enable high net worth individuals with large income streams to obtain write-offs against the payment of federal income taxes...typically, each participation is in the multiple millions of dollars."
The lawsuit doesn't provide the number of investors Anderson allegedly recruited for the mare lease program, noting only that the financial company "successfully provided to ClassicStar numerous participants..."
(Editor's Note: The original online version of the following story reporting on an investors lawsuit against ClassicStar incorrectly stated that a private company, Geostar, merged with a publicly traded company, Gastar, earlier in 2006. According to Tony Ferguson, who currently manages ClassicStar, GeoStar is the owner of ClassicStar and is a minority shareholder in Gastar. In addition, the article incorrectly stated that a report from the Kentucky Secretary of State's office listed Gastar as the managing entity of ClassicStar; the report listed for ClassicStar's members/managers a Michigan address that had been used by both Gastar and Geostar. The Blood-Horse regrets the errors.)