The Tarter companies in Casey County are an American success story.
They trace their beginnings to 1945, when Chrisman Vanwinkle “C.V.” Tarter began making wooden gates with hand tools. Later the company made metal gates and then expanded into separate companies under Tarter family ownership to make farm and ranch equipment.
Today the various companies employ 1,400 people, and Tarter bills itself as “the largest manufacturer of farm gates and animal management equipment in North America.”
But amid this success, Tarter relatives are now at odds in a civil racketeering lawsuit alleging that $70 million was diverted from the companies over the past seven years.
Anna Lou Tarter Smith and her children, Luann Coffey and Douglas Tarter, who are all shareholders in Tarter companies, are suing Smith’s nephew, Josh Tarter, president of Tarter Industries; a Hong Kong firm called QMC Industry Co.; and an executive named Thomas Lewis Gregory, who resigned last year from the Tarter companies.
The allegations are that they defrauded the Tarter companies by using trade secrets and proprietary information against the family-owned businesses so they could pocket millions for themselves.
The lawsuit, filed in U.S. District Court in Lexington, says the money was diverted when Josh Tarter, Gregory and QMC charged “excessive prices” for supplies to Tarter companies when lower prices were available from other vendors.
Nevertheless, “by using this scheme to defraud, Josh and Gregory were able to divert cost savings from the Tarter companies to themselves, and thereby gain control of money belonging to the Tarter companies,” the lawsuit says.
The plaintiffs sued under the federal Racketeer Influenced and Corrupt Organizations Act, known as RICO. The 1970 law’s original purpose was to give federal prosecutors a tool against organized crime and mobsters, but the statute also has been applied to civil cases.
No criminal charges have been filed against Josh Tarter and Gregory, but the lawsuit says they “unjustly enriched” themselves.
The lawsuit also alleges that Josh Tarter, Gregory and a man named Xiaofeng Chen planned to move production from Casey County to China, a proposal that shocked relatives when they learned about it.
Josh Tarter and the other defendants concealed the plans to move production and other facts from the Tarter companies’ directors, managers, officers and shareholders, court documents say.
Josh Tarter could not be reached for comment Wednesday. A telephone for Gregory’s address in Campbellsville has been disconnected, and a telephone listing couldn’t be found for him in Florida, where the lawsuit says he is building a house near Key West.
Kerry B. Harvey, a former U.S. attorney for the Eastern District of Kentucky who is now in private practice, is among the Lexington lawyers who represent shareholders Smith, Coffey and Douglas Tarter. Harvey declined to answer questions about the suit.
“I don’t think I’d have anything to say beyond what’s in the complaint,” he said.
Tarter family-owned businesses have a big footprint in Casey County. The companies employ more than 1,000 people in Liberty and Dunnville, according to the county’s economic development website. Tarter also has a factory and distribution center in Utah.
The Tarter companies, headquartered in Dunnville, make not only gates and corrals but pallets, kennels, mowers, rodeo chutes, welded steel tubing and galvanized water tanks. The products are made by Tarter-controlled companies in Casey County, including Green River Gate Co., Liberty Water Tanks and Tarter Tube.
According to court documents, Josh Tarter and Gregory used confidential and proprietary information for personal benefit and for the benefit of QMC in Hong Kong.
The Tarter companies bought components for use in finished products from a variety of suppliers. By 2009, the Tarter companies began to get certain components from China because of significant savings.
The Tarter companies paid Xiaofeng Chen to act as their agent in China for these transactions.
Josh Tarter, Gregory and Chen formed QMC in Hong Kong. QMC “manufactures nothing, and is simply a pass-through entity,” the lawsuit says.
The Tarter companies order components from QMC, which then forwards those orders to suppliers in mainland China. Those suppliers make the components and then ship them to Tarter in the United States.
The Chinese suppliers bill QMC for the true cost of the components. But the suit says that QMC then “substantially inflates” that cost and invoices the Tarter companies for the goods at higher prices, diverting savings that belong to the Tarter companies.
In some cases, components provided through QMC “were of substantially lower quality and included many more defective products or ‘culls’ than was typical of other suppliers,” the lawsuit says.
In 2013, a customer asked for an alternative to the Tarter companies’ finish mower, a kind of rotary mower attached to the back of a tractor. Without obtaining competitive bids, Josh Tarter and Gregory steered this business to QMC, which had a Chinese manufacturer make the product, the lawsuit says.
When the first mowers arrived at Tarter companies for testing, they were “of unacceptable quality and should have been rejected,” the suits says, but Josh Tarter and Gregory sold them, “knowing of the defects.”
Customer complaints began coming in, and more than 200 mowers were returned for refunds, “all at the expense of the Tarter companies,” the suit says.
There are now “hundreds of the mowers in inventory” that cannot be sold either because they are defective or because the reputation of the products was ruined.
In January 2012, Anna Lou Tarter Smith and Luann Coffey, in the presence of other owners of Tarter companies, asked Josh Tarter whether he had any ownership interest in QMC. He vigorously denied any ownership and said it was wholly owned by Chen. At another business meeting in April 2016, Josh Tarter again denied any involvement in QMC.
Nearly a year ago, the plaintiffs learned that there were plans to make the Tarter companies’ entire farm implement line in China rather than in Casey County, where the company has been based for 72 years. Shocked by this, the plaintiffs eventually learned that Josh Tarter and Gregory had ownership interests in the Hong Kong company, according to the lawsuit.
The lawsuit says that Josh Tarter apologized to the Tarter companies owners for his misconduct on Sept. 6. But he wouldn’t return money to the companies, and he failed to make a full disclosure of all facts and circumstances surrounding his involvement with QMC.
Gregory resigned Sept. 14.
On June 20, the plaintiffs demanded that Josh Tarter fully disclose his relationship with QMC. They also demanded that he “disgorge the profits” made from QMC and turn that money over to the Tarter companies. The lawsuit says that neither he nor other owners in the Tarter companies responded to those demands.
Because of the ownership percentages among the Tarter family, “the result is a deadlock regarding QMC issues.”
The plaintiffs seek a jury trial, and they want the defendants to pay the Tarter companies all profits derived from all acts and omissions outlined in the lawsuit. They also seek an injunction to restrain the defendants from use of the Tarter companies’ trade secrets.