09/10/2006 11:00PM

Investors sue ClassicStar for fraud


Investor groups have filed two separate lawsuits against ClassicStar, the Kentucky-based commercial breeding company that was to begin dispersing its broodmares in November.

In the lawsuits, which were filed in Kentucky and Washington state, four groups of investors have accused ClassicStar of defrauding them of $500 million in a mare-lease program.

It was not immediately clear how the suits might affect the planned sale of about 75 ClassicStar mares - including Grade 1 producer Hookedonthefeelin and Turko's Turn, dam of 2001 Horse of the Year Point Given - at Fasig-Tipton Kentucky's fall mixed sale on Nov. 5. Fasig-Tipton chief operating officer Boyd Browning did not return phone calls on Monday. Calls to ClassicStar Farms were not returned.

West Hills Farms and Arbor Farms of Portland, Ore., and Nelson Breeders of Bellevue, Wash., filed suit in July in U.S. District Court in the Eastern District of Kentucky. Earlier, last October, the Anderson Corporate Finance and Investments filed a lawsuit in Seattle.

The Kentucky suit accuses ClassicStar, operated at the time by David Plummer and Tony Ferguson, of selling "mare lease programs with a total value of tens of millions of dollars greater than the Thoroughbred interests owned by the defendants" - specifically, selling $160 million worth of mare leases when ClassicStar actually owned only $40 million in bloodstock. Among other allegations, the suit contends that ClassicStar used investor funds to purchase more than $9 million in broodmares in 2004 when investors had been told they were buying into bloodstock ClassicStar already owned. In 2004, ClassicStar was a leading buyer of breeding stock, purchasing 12 mares for $9,835,000.

Both the Kentucky and the Washington lawsuits allege that a loan program operated by ClassicStar, which allowed investors to borrow from National Equine Lending Company to make payments for the mare leases, was illegal because it was closely connected to ClassicStar and its parent company, Ferguson-owned GeoStar.

The Kentucky suit contends that a "circular loan structure" and the ownership of the loan company by Plummer's brother-in-law - neither of which was disclosed to investors - along with other irregularities have led to a criminal investigation of ClassicStar and its affiliates by the Internal Revenue Service.

The IRS raided ClassicStar Farms on Feb. 23, but IRS officials have not returned calls seeking comments on the status of any investigation involving ClassicStar or its principals.

Plummer and his son, Spencer, left ClassicStar earlier in February, but Ferguson remains affiliated with the operation. There was no answer at Ferguson's Tampa home on Monday.

McIngvale defendants proclaim innocence

J.B. McKathan and Bob Baffert, two of the defendants in a lawsuit filed by Thoroughbred owner Jim McIngvale alleging secret commissions at horse sales, said Monday in Lexington, Ky., that they had done nothing wrong in their dealings with McIngvale.

McKathan, who was named as a defendant along with his brother, Kevin, said he could not comment further on the suit, which was filed last week in United States District Court in Galveston, Texas. McIngvale alleged in the lawsuit that a company affiliated with the McKathans received an undisclosed commission on a horse McIngvale purchased in 2003 while the two brothers were acting as McIngvale's advisors.

"I really can't talk about the suit, but I can say that we've done nothing wrong," J.B. McKathan said while attending the Keeneland September yearling sale.

The horse named in the lawsuit, a 2-year-old named Work, was bought by McIngvale for $950,000. The suit included a copy of a check that the consignor of the horse, Murray Smith, wrote to Our Team, LLC, the McKathanses' company, for $95,000.

Although Baffert was named in the lawsuit, no specific allegation was lodged against the trainer, who is based in Southern California and has a longstanding relationship with the McKathans. Baffert said on Monday that he had not yet read the complaint.

"We really don't know what part I'm involved in," Baffert said. "I didn't do anything wrong so I'm just waiting to see how it plays out."

- additional reporting by Matt Hegarty