Public Company Named in ClassicStar Suit

A publicly-traded company with alleged ties to the parent company of ClassicStar is now a defendant in the consolidated federal civil action against the former broodmare lease operator and others.

Gastar Exploration Ltd., a Texas-based natural gas company trading on the American Stock Exchange and the Toronto Stock Exchange, was recently named as an alleged federal racketeering co-conspirator in at least of three of the 24 lawsuits active under multi-district litigation oversight in a Kentucky federal court.

The company is accused in recent court filings of at one time playing an integral part in the alleged multi-level fraud schemes surrounding ClassicStar’s broodmare lease program, which is alleged by some plaintiffs to have bilked its customers out of nearly $600 million in investments.

Court documents claim Gastar was formed in 2000 by executives of GeoStar, which is the parent company of ClassicStar and other affiliated entities. Further, until 2005, Gastar is alleged by plaintiffs to have been managed by GeoStar and was the beneficiary of million of dollars gleaned from the broodmare lease program.

“Upon information and belief, Gastar purchased and/or developed substantial oil and gas assets with funds received from plaintiffs and other ClassicStar participants … and Gastar accepted funds from GeoStar which were derived from the mare lease program,” a complaint filed in early February claimed. “Gastar did so with knowledge of the fraud and conspired with the others involved in the scheme to conceal the true operation of the mare lease programs.”

From 2000 to 2005, Gastar and GeoStar had some of the same people in executive roles, including previously-named defendants Thomas E. Robinson, John W. Parrot, and Tony Ferguson, who is the managing member of ClassicStar. Robinson, who has been the chief executive officer of GeoStar since 1994, was also the president and CEO of Gastar from 2000 to 2004, and chairman of the board at Gastar from 2001 to 2005, according to Securities and Exchange Commission filings.

Also, J. Russell Porter, Gastar’s current chairman, CEO, and president, was at one time an executive vice-president of GeoStar, according to Gastar Canadian securities filings.

Complaints allege Gastar had no employees of its own from 2000 to 2005 – a period which coincides with the hey-day of ClassicStar – but instead contends GeoStar “performed all of (Gastar’s) managerial and operational functions.” GeoStar is alleged by plaintiffs to have had a controlling interest in Gastar until mid-2005, or about the time when Gastar purchased several energy properties from GeoStar for a reported $68.5 million in cash, stocks, and unsubordinated notes.

Gastar and GeoStar later clashed in court over certain aspects of the 2005 purchases, but the companies reached a settlement last year with a total payout by Gastar to GeoStar valued at $39.6 million in cash, land conveyance, and stock warrants, according to SEC filings.

In response to requests for comment from Gastar, the company in a brief written statement asserted it is not an affiliate of GeoStar.

“Gastar owns no interest in the mare leasing program to which these suits relate and does not believe that the plaintiffs in these cases state any valid basis for involving Gastar in the lawsuits,” the statement said in part. “Gastar intends to defend itself against the claims vigorously, but due to the pending litigation, cannot comment further regarding the specific allegations at this time.”

The company, which has yet to pass a deadline to formally answer the charges in court filings, also claims GeoStar currently has a 2.7% stake in Gastar. Court documents allege GeoStar and “its principals” have a 15% interest.

Gastar was originally incorporated in 1987 as CopperQuest Inc., and took on its current name following the 2000 merger with another company, according to Canadian securities filings. It began publicly-trading stocks in Canada in 2000 and was listed on the Toronto Stock Exchange in 2002.

The company began trading on the American Stock Exchange in January 2006, about one month before federal agents raided the former ClassicStar Farm near Versailles, Ky., and ClassicStar principal David Plummer’s Buffalo Ranch in Utah.

The raid by federal agents affiliated with the Internal Revenue Service spawned an active criminal investigation by the U.S. Attorney’s Office in Oregon. Plaintiffs in the civil litigation, most of whom were drawn as new players into Thoroughbred breeding and racing by ClassicStar’s marketing campaigns, claim fraud was performed by overselling interests in mare-lease packages that also failed to produce promised significant tax breaks to clients.

Some defendants are also accused of facilitating the exchange of oversold mare programs for energy company investments through GeoStar. Included in the allegations is use by GeoStar of its shares in Gastar stock.

“Upon information and belief, Gastar, also with knowledge of the scheme, issued shares of its stock to GeoStar, in order for GeoStar to be able to complete the working interest exchanges and to placate dissatisfied participants who had not received the promised value,” one complaint alleged.

In addition to federal racketeering, which includes allegations of mail and wire fraud, Gastar is named in one complaint as a defendant in several other counts, including common law fraud, negligent misrepresentation, theft by deception, unjust enrichment, and conspiracy, among others

A ‘Classic’ history

With Plummer as the front-man, ClassicStar first made news by purchasing about $45 million worth of equine stock at public auction from 2001-2004, according to The Bood-Horse research. Included in the buying spree were seven-figure hammers for Bless ($4 million), Banshee Winds ($2.4 million), Win's Fair Lady ($2.2 million), Turko's Turn ($2 million), Gaviola ($1.9 million), Profit Column ($1.6 million), Hookedonthefeelin ($1.525 million), Stylelistick ($1.3 million), Celtic Melody ($1.3 million), Nannerl ($1.25 million), and Roll Over Baby ($1 million).

Other prominent mares were purchased privately, such as the reported $1.5 million acquisition in 2002 of national champion Xtra Heat.

ClassicStar held lavish marketing parties, and was able to compile a client list that included wealthy businessmen and physicians, and in some cases, professional athletes, including plaintiff Greg Minor, a former NBA player.

But ClassicStar garnered different kinds of headlines as its operation began to unravel following the IRS raids in early 2006, which was preceded a few weeks by the departure from the organization of Plummer and his son, fellow defendant Spencer Plummer.

* In July 2006, the first federal lawsuit was filed against ClassicStar and affiliated defendants.

* In November 2006, a total of 65 head affiliated with ClassicStar were sold for $20,837,000 in a dispersal at the 2006 Fasig-Tipton Kentucky fall mixed sale. Some or all of the proceeds from that sale were slotted to pay off financial obligations to such entities as Fasig-Tipton, Fifth Third Bank, and Taylor Made Sales Agency, which handled the ClassicStar consignment.

* In May 2007, court documents show ClassicStar sold 48 mares for $9.8 million in a private deal with Woodford Thoroughbreds, which is a Florida limited liability company managed by Ferguson and former Cloverleaf Farm II owner John Sykes.

* In June 2007, deed records show the ClassicStar Farm complex near Versailles was sold off in two transactions – a $4.1 million purchase of 305 acres and related property by another Sykes-affiliated entity, and a $4.5 million purchase for 282 acres and related property by a Ferguson-affiliated company. The farm now operates as Woodford Thoroughbreds.

* In September 2007, ClassicStar LLC filed for Chapter 11 bankruptcy protection in Kentucky federal court, with court documents declaring more than 200 individuals and entities had filed claims approaching $1.4 billion.

* In October 2007, seven federal lawsuits, including the first one filed in July 2006, were consolidated in Kentucky federal court under the auspices of federal Multi-District Litigation (the current collection of 24 lawsuits in the MDL litigation features more than 70 total plaintiffs and 40 defendants, including in the latter group accounting firms and financial advisors, among others).

* In April 2008, a Kentucky federal judge ordered the Chapter 11 reorganization bankruptcy be converted to a Chapter 7 liquidation. A motion filed by the U.S. Trustees Office claimed ClassicStar had liquidated nearly all of its “hard” assets prior to filing for Chapter 11 protection.

A judge in the bankruptcy case recently granted a motion by the trustee to depose, among others, both Gastar and Porter. Lexington attorney John O. Morgan, who represents the trustee, said the ordered examination, called a Rule 2004 deposition, carries broad authority that allows the trustee to seek whatever testimony and documents it may find useful in attempting to recover funds.

As in the recent civil lawsuit filings, the trustee’s motion notes the “overlapping” executives involved with running both Gastar and GeoStar prior to 2006. The depositions will help gather information about “pre-petition finances and business activities” related to ClassicStar, GeoStar and Gastar, and “begin evaluating potential claims and sources of recovery for the estate,” the motion said.