01/25/2011 7:02PM

IEAH investor the focus of lawsuit

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Litigation involving investors in IEAH Stables took a new twist Monday when Jason Galanis, a venture capitalist and consultant employed by a group offering to buy out IEAH and its bloodstock holdings, sued current IEAH shareholder Matthew Szulik.

In a $60 million lawsuit filed last month in North Carolina, Szulik - founder of the RedHat software company - claimed IEAH's major financial backer, James Tagliaferri of the investment advisory firm TAG Virgin Islands, defrauded him by investing in high-risk ventures like IEAH without his knowledge or consent. According to that suit, Tagliaferri used about $20 million of Szulik's money to finance IEAH.

In related court filings, Szulik also alleged that a proposed takeover of IEAH by Gerova Financial Group could constitute "additional fraud" against IEAH's shareholders because of "the illicit character" of past deals involving Gerova officers, employees, or associates, including Galanis. IEAH had scheduled a Jan. 14 shareholder vote on the Gerova deal, but that vote did not take place.

In his own suit filed Monday in a Boston federal court, Galanis alleges Szulik wanted to ruin Gerova's IEAH buyout offer as part of an elaborate tax-evasion scheme.

Galanis's suit alleges that "Szulik immediately determined that the IEAH-Gerova merger would be fatal to Szulik's planned tax-evasion scheme, since Szulik's private IEAH debt and equity securities - which Szulik alleges in the TAG litigation are worthless - would be converted into valuable, publicly traded Gerova stock as a result of the proposed acquisition, and could thereby undermine Szulik's improper tax strategy."

Galanis contends that "in an effort to prevent the proposed IEAH-Gerova merger, Szulik quickly orchestrated a campaign of disinformation" that was "focused heavily on making false, misleading, and disparaging statements regarding Galanis, including referring to Galanis is litigation to which Galanis is not a defendant."

Galanis's complaint contends that Szulik had used similar tactics in another proposed merger involving a Gerova predecessor, Asian Special Situation Acquisition Corp.

Galanis claims that Szulik, through his attorneys, threatened to sue Galanis if he did not attempt to persuade Gerova management to terminate their offer for IEAH.

Part of the alleged tax-evasion scheme, Galanis's suit claims, also involved a 10-percent in investment in IEAH Stable's Kentucky Derby and Preakness winner Big Brown.

According to Galanis's allegations, "Szulik extended a loan to IEAH and received in exchange a 10-percent equity interest in Big Brown, who was an unproven horse with no winning track record at the time it was acquired by the IEAH Group and Szulik for $4 million. . . . [As] a result of Big Brown's subsequent success at prominent races, it eventually became worth an estimated total of $60 million, as valued when the prominent farm Three Chimneys also acquired a 10-percent equity interest."

Big Brown, it should be noted, was a winner when IEAH struck a private deal with Paul Pompa Jr. to buy a majority stake in the colt. IEAH purchased its interest after Big Brown won his debut race by 11 1/4 lengths in maiden company at Saratoga on Sept. 3, 2007. Pompa reportedly had turned down an earlier private offer from Darley, because Sheikh Mohammed al-Maktoum's operation wanted to purchase 100 percent of the Boundary colt.

Galanis's suit alleges that Szulik "filed tax returns with the Internal Revenue Service improperly declaring depreciation deductions of several million dollars based on Big Brown's increased valuation ($60 million), when Szulik should have only taken deductions based on Big Brown's value at the time of his investment ($4 million)."

In his Boston court filing, Galanis also alleges that Szulik's demand that TAG Virgin Islands withdraw his money from certain investments "coerced TAG to remove Szulik from his immature investments by using funds of Galanis or companies owned by Galanis, totaling about $30 million.

IEAH's  president, Michael Iavarone, told Daily Racing Form earlier this month that the then-unidentified group proposing to purchase IEAH's assets did not involve Galanis or Gary Hirst, another individual mentioned in Szulik's lawsuit. In his own suit, Galanis described himself as an employee of a Gerova subsidiary, and in paperwork Gerova filed with the Securities and Exchange Commission last June, Galanis is listed as a member of the three-man Gerova Real Estate Committee, and Hirst is identified as president of Gerova Real Estate Group.

In a statement issued through his attorneys at Holland & Knight, Szulik said, "For the past year, I have invested substantial time and resources in uncovering the fraud perpetrated on me and my family by our former investment advisor, TAG Virgin Islands, and its principal, James Tagliaferri, who have a close association with Mr. Galanis, as Galanis's complaint admits. Galanis's frivolous complaint, based entirely on speculation, not facts, is clearly just an effort to divert the attention from the lawsuit we filed in federal court last month, alleging widespread fraud. The purported tax-evasion scheme Galanis and his attorneys alleged against me is utter nonsense. No one would scheme to lose $60 million in order to deduct some losses on his taxes; any rational person would rather earn a profit and keep most of that profit after paying taxes."

Szulik's statement added that "we will take all appropriate action against those who have made false and defamatory accusations against us in a transparent attempt to deflect scrutiny of their actions."