Saying that “the gig is up,” a federal judge in Kentucky has awarded $65 million in damages to six investors in the now-defunct ClassicStar mare leasing program that was a high-flying entity from 2001 until 2006.
In the 99-page opinion issued Sept. 30, U.S. District Judge Joseph M. Hood ruled that former ClassicStar operators had set up the mare leasing program with the intent to funnel money into gas exploration operations and then swap out stock into Gastar Exploration, a publicly held spinoff company.
The defendants who have been ordered to pay the investors are David Plummer and his son, Spencer Plummer; Geostar, the parent firm of ClassicStar; and Geostar executives Tony Ferguson, Thom Robinson, and John Parrot.
The two Plummers and Parrot, along with accountant Terry Green, have pleaded guilty to committing tax fraud totaling $200 million and each faces a five-year prison sentence. None have been sentenced yet because the federal investigation is continuing.
Noting that the case fit the criteria for damages to be awarded under the federal Racketeering Influenced and Corrupt Organizations Act, known as RICO, Hood awarded $49.4 million to the investors, three times their original investments. He also awarded the plaintiffs $15.6 million in interest.
The suit against ClassicStar in which Hood ruled was filed by former investors Arbor Farms, Jaswinder Grover, Monica Grover, MacDonald Stables, Nelson Breeders, and West Hill Farms.
With Plummer acting on its behalf, ClassicStar generated headlines when it became involved in the Thoroughbred industry, buying about $45 million worth of horses at public auction. ClassicStar also privately purchased some high-profile broodmares, inclulding the mare Xtra Heat, for which it paid a reported $1.5 million.
ClassicStar also entertained investors and potential investors with parties, and hosted large groups at major racing events, including the Kentucky Derby.
Download the ClassicStar ruling here.
In outlining ClassicStar’s mode of operation, Hood said the entity sold leases in mares allegedly owned by ClassicStar. Those mares were to be bred to prominent Thoroughbred stallions, with the mating producing a foal that would be profitable to the investors. Although some breeding did take place, Hood said that ClassicStar sold more leases than it could ever provide foals.
The court documents state that investors were told that their investments could be written off by filing claims to the Internal Revenue Service and that half of the investment could be financed through a lender.
Although ClassicStar sold more than $600 million in leases to high income individuals, it never owned more than $56 million in horses in any given year, the records state. In order to cover up the difference, ClassicStar substituted Quarter Horse breedings in its statements to investors, although it did not own those mares either.
The scheme was further enhanced by the fact that the lender to which the investors were referred was National Equine Lending Corp., which was also owned by ClassicStar. The court records state that National Equine Lending took the original payment and pretended to loan the money back to double the investment and the tax write-off.
“In the series of transactions described by plaintiffs, the court is hard put to find a representation made about the mare lease programs and subsequent investments to be truthful,” Hood said in the opinion. “The lion’s share of the investments were ultimately illusory (although the court cannot ignore that some Thoroughbred breeding actually occurred), the descriptions provided to investors omitted crucial facts, and, in large part, no one intended for the opportunities described to be realized.”
Also, ClassicStar had a goal of converting 60% of its investors from the mare leasing program into working interests and stock in Gastar, which operated the Geostar oil and gas company. However, Hood, wrote, most of the oil wells were never drilled.
“The funds transferred or ‘siphoned’ from ClassicStar went to support GeoStar’s oil and gas operations, including those operated by and through Gastar, and ultimately to pay the principals of Geostar, Ferguson, Parrot, and Robinson,” Hood wrote. “In other words, Ferguson, Parrot, and Robinson directed or permitted the transfer of funds from ClassicStar elsewhere knowing that ClassicStar had obligations that it could not meet.
“They used Geostar to loot ClassicStar to the detriment of plaintiffs and for their own gain of millions of dollars.”
Hood stated that the defendants had produced no evidence in their defense, instead stating a case that the plaintiffs had failed to prove their case. Also, the defendants claimed, according to Hood’s opinion, that if fraud did take place, the plaintiffs were willing participants.
“Plaintiffs have set forth a compelling and well-supported account of how defendants misrepresented the reality of the mare-lease programs offered through ClassicStar and how, acting together, they took plaintiffs’ money to use for their own ends, then worked to prevent the discovery of the ruse and to perpetuate the cycle of investment,” the judge concluded. “Whether that wrong is understood through the lens of a civil RICO claim, common law fraud, or breach of contract, the gig is up. Plaintiffs’ motion for summary judgment will be granted.”
ClassicStar’s bubble began to burst when the Plummers left ClassicStar in 2006. Shortly thereafter, federal agents raided the farm and seized records. Later that year, ClassicStar’s mares were sold at the Fasig-Tipton Kentucky fall mixed sale, generating more than $20.8 million that was used to pay off financial obligations to the sales company, Fifth Third Bank, and Taylor Made Sales Agency.
In 2007, John Sykes of Cloverleaf Farm II bought 48 ClassicStar mares for $9.8 million and later that year purchased ClassicStar’s Central Kentucky farm in partnership with Ferguson and named it Woodford Thoroughbreds. In 2009, Sykes bought out Ferguson’s interest in Woodford Thoroughbreds.
In September 2007, ClassicStar LLC filed for Chapter 11 bankruptcy protection, with court documents listing claims from more than 200 persons totaling nearly $1.4 billion.
Late last year, Geostar entered into an agreement to pay $21.15 million in cash to settle claims made in seven lawsuits.