Ray Paulick<br>Editor-in-Chief

Ray Paulick

Strange Bedfellows

The median household income for a family living in the United States was $46,326 in 2005 -- about $1,000 less than what a bloodstock agent would make in the purchase of a $950,000 horse if the agent was working for a client who agreed to pay a 5% commission, considered a standard fee by many in the Thoroughbred industry.

That's the percentage James McIngvale claims he paid brothers J.B. and Kevin McKathan during the years they picked out horses for him, according to a lawsuit the Houston furniture store owner filed Sept. 7 against the Florida horsemen and Eclipse Award-winning trainer Bob Baffert.

The suit claims the three men received secret commissions and kickbacks from consignors on various horses purchased by the man known as "Mattress Mac." It provides one alleged example: a $950,000 son of Menifee bought on McIngvale's behalf at the Keeneland sale of 2-year-olds in training in April 2003. Based on the oral agreement McIngvale claims he had with the McKathans, they would have received $47,500 from him for recommending the purchase of the horse.

McIngvale alleges, however, that a check for an additional $95,000 -- equal to 10% of the purchase price -- was sent by the colt's consignor, Florida pinhooker Murray Smith, to the agents he assumed were acting in his best fiduciary interests. Combined with the $47,500 McIngvale would have paid them, that's a tidy $142,500 in commissions they allegedly received for recommending the purchase of one horse.

McIngvale contends, "based on information and belief," that the 10% commission was prearranged. Smith, in comments to Daily Racing Form, denied having a "prior arrangement," adding that "it's more customary than not to send a form of appreciation. Some people send wine; some people send flowers."

And some people allegedly send $95,000.

In his claim that receipt of the funds was "fraud by nondisclosure," McIngvale states, "The fact that defendants received secret commissions and kickbacks was material because such information would have affected McIngvale's decision to purchase a particular Thoroughbred racehorse."

The suit was filed, perhaps not by coincidence, just four days before the start of the Keeneland September yearling sale, where, over a two-week period, several hundred-million dollars will change hands, making $95,000 seem like pocket change to some people. In fact, some consignors and agents look at secret commissions to a buyer's agent as a marketing expense, a consulting fee, or just an option to consider under the free enterprise system.

Seems to me that flowers, wine, or even checks for $95,000 would be more properly directed to the person who put up the money to buy the horse -- the owner.

The suit says McIngvale investigated previous Thoroughbred purchases after "a number of disreputable business activities have been uncovered...including secret commissions, kickbacks, and fraudulent sales. These disreputable business activities are inherently undiscoverable through the use of reasonable diligence and to determine whether the foregoing business activities occurred one must conduct an investigation specifically designed to ascertain whether any fraudulent or illegal activity occurred."

McIngvale says he filed the suit against his former agents because he felt a "moral imperative to protect the 99% in this industry that are good, honest, and transparent."

Whether or not McIngvale's accusations hold up in court, his suit, along with a previous one filed by California vintner Jess Jackson, provides a lesson for other owners: Get agreements with agents in writing. The Thoroughbred Owners and Breeders Association's Sales Integrity Program developed a model buyer/agent agreement that spells out the business relationship and ethical standards expected. Take advantage of it, or someone eventually could take advantage of you.