10/04/2011 2:18PM

Judge awards $65 million to plaintiffs in ClassicStar mare-lease program fraud

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LEXINGTON, Ky. – In a scathing 99-page ruling, District Court Judge Joseph M. Hood has made a $65 million judgment against the former operators of ClassicStar’s now-defunct mare lease program.

The judgment favors six plaintiffs – some of more than 200 who ultimately sued ClassicStar, GeoStar, and their principals and related entities for more than $500 million – who lost a total of $16,468,603. To arrive at his award, Hood tripled that total and added $15,636,273 in interest for a combined judgment of $65,042,084 to Arbor Farms, Jaswinder and Monica Grover, MacDonald Stables, Nelson Breeders, and West Hills Farms.

ClassicStar co-founders David and Spencer Plummer, its parent company GeoStar, and GeoStar executives Tony Ferguson – a former co-owner of Woodford Thoroughbreds in Versailles, Ky. – and Thom Robinson, and John Parrot were defendants in this case.

In his Sept. 30 ruling in the U.S. District Court in Lexington, Hood described a scenario resembling a Ponzi scheme, saying, “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 the plaintiffs’ money to use for their own ends, then worked to prevent the discovery [of] the ruse and to perpetuate the cycle of investment. . . . The gig is up.”

MORE: Read the full ClassicStar judgment (PDF) »

The mare-lease program generated more than $600 million between 2001 and 2005, Hood wrote, on the promise that investors would receive both high returns and significant tax benefits, but from the beginning the programs actually were designed to funnel investors’ money from ClassicStar to its parent company, GeoStar, to fund its mineral and energy exploration interests.

“From the beginning, ClassicStar sold more mare lease programs than its existing interests in Thoroughbred breeding opportunities could support, promising participants far more breeding pairings than it had Thoroughbreds to deliver. . . . [A]t the same time ClassicStar was selling an average of $150 million in mare lease packages in each of 2001, 2002, 2003, and 2004, it owned less than $10 million worth of mares in 2001, only $37 million worth of mares in 2002, $56 million worth of mares in 2003, and $48 million worth of mares in 2004,” Hood wrote in his judgment. “Even though ClassicStar’s horse wealth grew with each year, ClassicStar would have needed more than $300 million worth of mares to support $150 million of mare lease program sales in any given year, and its assets were never even close.”

To gloss over that inventory shortage, ClassicStar substituted less valuable Quarter Horse mares whose values were inflated and who were “designed to support tax deductions then to be traded out for some other asset before breeding occurred.”

ClassicStar and GeoStar then encouraged investors to convert their mare-lease holdings to stock, and GeoStar then used those funds for its mineral and gas drilling, according to Hood’s judgment.

“GeoStar moved approximately $330 million in mare lease program sales proceeds from ClassicStar’s accounts to its own bank accounts, then used the money to fund ClassicStar’s operations, oil and gas operations for itself, and its subsidiaries and related entities, including Gastar, and for the personal enrichment of GeoStar’s principals,” Hood wrote.

ClassicStar and GeoStar sold the complicated mare-lease programs as tax shelters, but failed to tell prospective investors that the Internal Revenue Service was investigating the programs. The IRS raided ClassicStar’s Kentucky farm in 2006. The IRS later alleged the operation had allowed its investors to file more than $500 million in false tax deductions. In 2009, ClassicStar co-founders David and Spencer Plummer pleaded guilty in Oregon to $200 million in tax fraud in the IRS case.

Without investors’ knowledge, GeoStar arranged to pay commissions to some investors’ attorneys who gave the mare-lease programs their stamp of approval and brought in new participants, Hood wrote. ClassicStar and GeoStar also arranged financing for investors through National Equine Lending Co., but that was a shell company controlled by ClassicStar and headed by David Plummer’s brother-in-law, Gary Thomson.

“ClassicStar transferred the amounts needed to fund the loans to NELC, and NELC transferred them back to ClassicStar as loan proceeds, often the next day,” Hood wrote.

ClassicStar, once a leading buyer of high-end broodmares and broodmare prospects, filed for bankruptcy in 2007. Earlier this year, GeoStar paid a $2 million settlement to ClassicStar’s bankruptcy trustee, James D. Lyon, to settle litigation against Ferguson and other executives. In 2010, GeoStar’s energy company spinoff, Gastar, settled with seven plaintiffs, paying $21 million.