Six former investors in the ClassicStar Thoroughbred mare leasing program that operated in Central Kentucky from 2001 to 2005 have won a $65 million judgment.
U.S. District Judge Joseph M. Hood on Friday entered an opinion in the Lexington court against the ClassicStar defendants — including former farm operators David Plummer and his son Spencer Plummer; ClassicStar parent GeoStar; and GeoStar executives Tony Ferguson, Thom Robinson and John Parrott.
In a summary judgment, Hood ruled that the defendants had deliberately set up a complicated and fraudulent mare leasing scheme to funnel money into gas drilling operations, then swap out stock in a publicly traded spinoff, Gastar Exploration. From the beginning, Hood said, the program was almost entirely bogus.
"The gig is up," Hood wrote in the opinion.
He awarded the plaintiffs damages of $49.4 million, three times their original investments, because he said ClassicStar's actions met the requirements for the Racketeering Influenced and Corrupt Organizations Act, or RICO. He also awarded $15.6 million in interest.
Barry Hunter, the Lexington attorney for the six plaintiffs, could not be reached for comment. The six former investors involved in last week's judgment are Arbor Farms, Jaswinder Grover, Monica Grover, MacDonald Stables, Nelson Breeders and West Hills Farms.
It's unclear how much money they actually could get; ClassicStar is bankrupt.
There are still more than a dozen lawsuits pending against ClassicStar, as well as its ongoing bankruptcy.
Three of the defendants — David Plummer, Spencer Plummer and Parrott — and an accountant named Terry Green have pleaded guilty to $200 million in tax fraud in federal court in Portland, Ore. Each faces five years in prison but none has been sentenced, and federal prosecutors are still pursuing evidence, raising the possibility of further criminal charges.
Hood granted the motion for summary judgment in August, but damages were not spelled out until Friday.
Hood's opinion also details how the fraud worked. From the beginning, he wrote, ClassicStar sold far more in mare leases than it could have fulfilled with potential foals. Some breeding did occur: The Plummers spent millions of dollars on mares at Keene land and Fasig-Tipton and sold foals as well, and the farm itself existed.
"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 that was truthful," Hood wrote. "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."
But they promised investors a tax shelter that collapsed spectacularly, according to court documents. To back it up, ClassicStar provided opinions from law firms and accountants who secretly were being paid commissions.
How it worked
ClassicStar sold leases in Thoroughbred mares. According to sales promotions, ClassicStar allegedly owned the mares, which would be bred to proven sires, to potentially produce a profitable foal to sell. Investors were told that half the cost could be financed through a lender and that the whole investment could be used as a claim to the Internal Revenue Service. ClassicStar also promised profitable "conversion" opportunities to exchange the leases for interests in gas wells that could pay off the whole thing.
Using this ruse, ClassicStar sold more than $600 million in leases, averaging about $150 million a year, to "high income individuals with an interest in participating in the Thoroughbred horse industry," but it never owned more than $56 million in any year, according to the court record.
To camouflage this, ClassicStar began substituting quarter horse breedings in the documents sent to investors, but ClassicStar didn't own these mares either. They were "on loan," allegedly, from the Plummers, who had a ranch in Utah. But even these matings apparently were on paper only.
To finance the loans, ClassicStar referred investors to a shell company it controlled, National Equine Lending Corp. Unknown to the investors, it took the original payment and then pretended to loan the money back, sometimes the next day, to double the investment and the tax write-off.
All of this was a complicated scam to raise money for drilling gas wells, many of which were never drilled.
According to an accountant for GeoStar, which controlled ClassicStar, the operation "from its inception ... intended at least 60 percent of participants to convert from mare lease to working interests and ultimately to stock" in Gastar, according to Hood's opinion.
To make this swap appealing, GeoStar hugely inflated the tax benefits from the gas exploration, more than tripling well drilling costs to fabricate enough tax liability to completely pay off the mare leases. But the IRS caught on and quickly began to disallow related deductions.
(Last November, Gastar Explorations agreed to pay $21.15 million to the defendants and the bankruptcy trustee; GeoStar has agreed to pay the bankruptcy trustee $2 million.)
In 2006, the IRS raided ClassicStar's Woodford County farm, and the lawsuits started flying. GeoStar and Ferguson blamed the Plummers, while David Plummer pointed the finger at Ferguson. Hood noted that GeoStar completely controlled ClassicStar, down to signing for the checking accounts and scooping up more than $115 million in mare lease revenue.
Hood also wrote that an earlier version of the mare lease program, run by David Plummer, had been raided and that the IRS was investigating ClassicStar as early as 2004.
Hood wrote in his opinion that the defendants have put forth no evidence in their defense but have claimed the plaintiffs failed to prove their case. Or, if there was a fraud, that the plaintiffs were willing participants, they claimed. That won't wash, he said.
Hood wrote: "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 plaintiff's money to use for their own ends, then worked to prevent the discovery of the ruse and to perpetuate the cycle of investment."