10/26/2009 11:00PM

Guilty plea in ClassicStar fraud case


LEXINGTON, Ky. - ClassicStar co-founders David and Spencer Plummer, who made the commercial breeding operation the Thoroughbred industry's leading mare buyer in 2004, have pleaded guilty to conspiracy to commit tax fraud through a complex mare-lease program.

According to a joint release issued by the Justice Department and the Internal Revenue Service, David Plummer, his son Spencer, and Terry Green, a certified public accountant who assisted the Plummers with the mare-lease program, pleaded guilty Monday at a federal court hearing in Oregon.

ClassicStar advertised its mare-lease program as a tax shelter for the wealthy, but the Justice Department called the program "a fraudulent tax product" through which investors, aided by Green, reported fraudulent deductions.

"The investors in the mare-lease program filed tax returns with the IRS claiming false tax deductions of over $500 million, which resulted in a tax loss to the government of over $200 million," according to the release.

Under the mare-lease program, "investors leased the reproductive capacity of specific Thoroughbred mares," the Justice Department said. "If the mare had a foal during the time that the investor held the lease, the investor would own the foal. Mare-lease promoters told investors that they could take deductions on their federal income tax returns for the losses generated by the Thoroughbred horse breeding operation. These deductions reduced or eliminated the investors' taxes, and many investors received tax refunds, including refunds for years prior to their investments. These deductions were fraudulent because, among other reasons, the mare-lease program used fraudulent loans to finance investors' participation, and the program induced investors to lease Thoroughbred mares that the operators of the program knew ClassicStar could not provide."

ClassicStar arranged to finance investors' participation in the lease program through a company it controlled.

The IRS raided ClassicStar's Kentucky farm on Feb. 23, 2006, and later that year the operation sold 65 of its fillies and mares at auction in Kentucky to raise more than $20 million for creditors. In September 2006, the first of many investors filed lawsuits against ClassicStar, alleging they had been defrauded of $500 million through the mare-lease program. A year later, ClassicStar filed for Chapter 11 bankruptcy protection, facing multiple lawsuits and about 200 creditors claiming $1.4 billion, according to court documents.

Tony Ferguson, a principal in ClassicStar's parent company GeoStar, partnered with former CloverLeaf II Farms owner John Sykes in 2007 to buy ClassicStar's remaining 49 broodmares and 600 acres of farmland privately. The pair founded a new breeding operation, Woodford Thoroughbreds, but Ferguson sold his holdings in Woodford to Sykes earlier this year.

The Plummers and Green could face prison. But after Monday's hearing, assistant U. S. attorney and lead prosecutor Allen Garten told The Oregonian newspaper that the Plummers and Green are cooperating in the continuing investigation of ClassicStar. Garten also said the IRS is pursuing ClassicStar investors in order to recoup federal tax revenue they owe.