One of my favorite movies of all time is Mel Brooks’ The Producers with Zero Mostel as Max Bialystock and Gene Wilder as accountant Leo Bloom. They decide to produce the worst possible Broadway play–Springtime for Hitler–and sell several hundred percent of their show. The movie is wonderful and if you haven’t seen it it’s well worth the time.
Three federal lawsuits have been filed against ClassicStar LLC alleging the company oversold the breeding rights in various thoroughbred mares. In one lawsuit, filed in 2004, ClassicStar is alleged to have sold more than $160 million of mare lease rights when it only owned $40 million. As Leo Bloom would say, “You can only sell 100% of anything.”
Those lawsuits note that a federal investigation was ongoing. That reached fruition today when David Plummer, Spencer Plummer, and Terry Green all pleaded guilty to one county of conspiracy to defraud the United States. Acting U.S. Attorney Kent Robinson noted, “This nationwide fraudulent scheme is by far the largest criminal tax case in the history of Oregon.” Here’s some of how it worked.
Investing in race horses is done by wealthy individuals. It’s very expensive to do this, and you usually end up pooling your investment with others, especially if you are going to invest in the best horses. You’re betting on genetics, and sometimes it works and sometimes it doesn’t.
ClassicStar allowed investors to lease the reproductive capacity of specific thoroughbred horses. If the mare had a foal during the time that the investor held the lease, the investor would own the foal. And you get a tax deduction based on the losses incurred. Most investors financed their investments with loans from the purportedly independent National Equine Lending Company. But NELC wasn’t independent–it was owned by ClassicStar–and the money never really changed hands. Let’s add in that many investors apparently never had to make a loan payment and the fraud starts to stand out.
But that’s not all. ClassicStar also substituted less expensive quarter horse mares for thoroughbred horse mares as ClassicStar didn’t have enough of the thoroughbreds. So many individuals obtained tax deductions they weren’t entitled to, leading to refunds that they shouldn’t have received. The total size of the phony tax deductions is $500 million which led to a loss to the US Treasury of $200 million. Needless to say, the three who pleaded guilty are looking at very lengthy stays at ClubFed. Individuals who invested in ClassicStar are likely going to receive “Dear Valued Taxpayer” letters from the IRS in the very near future. And there are still the lawsuits to be resolved.
If you ever get the idea of selling more than 100% of anything, don’t. Only bad things can happen if you do.