Stocks And Studs: When Thoroughbreds And Investment Funds Mix

by | 01.09.2020 | 11:17am

When revelations broke in late November that Phoenix Thoroughbreds, the big-spending new ownership group of mysterious origins, had been named in a money laundering case in New York, the racing world was abuzz. According to sales records, Phoenix has spent tens of millions of dollars in bloodstock over the past three years. Its website states it has over 300 Thoroughbreds worldwide and includes horses in training, broodmares and stallion shares.    

Was this, people asked, the final chapter for a group that claimed to be the first “regulated” international investment fund for Thoroughbreds? 

Whether or not it's the end remains to be seen; the British Horseracing Authority told media in November that it was investigating. Phoenix Fund Investments has denied accusations that it served as a money laundering operation for the cryptocurrency company OneCoin that allegedly bilked billions of dollars from people around the world. Phoenix has not been charged, but the investment fund and its CEO, Amer Abdulaziz Salman, were named in sworn testimony by a cooperating witness in the federal money laundering trial of attorney Mark Scott, who was found guilty in a case prosecuted in the  Southern District of New York.

Not long after Phoenix began signing seven-figure tickets on horses at public auction in 2017, Abdulaziz said the fund would be registered in Luxembourg and strictly regulated by that country's financial regulatory agency, CSSF.

“We have fund managers to report back to, and transparency has to be 200% regulated in Luxembourg,” Abdulaziz told the Racing Post. “We like the transparency.”

But in the wake of the money laundering trial allegations, the Racing Post reported Phoenix's Luxembourg Fund was in voluntary liquidation and had “never operated as a functioning investment fund at all.”

For some, the concept had always seemed a little strange – after all, most people in racing have heard the expression that  the best way to make $1 million with Thoroughbreds is to start with $10 million. 

“There's an old adage on Wall Street,” said hedge fund expert Stephen Brown, a professor of finance at New York University's Stern School of Business when asked by the New York Daily News about investing in racehorses in 2008. “Never invest in an asset that eats.”

Ownership syndicates have been around for decades, offering people the chance to own a piece of a racing or breeding prospect, but most of them market themselves as an experience, a way to get an insider pass to the winner's circle, more than a true money-making venture akin to a stock. However, Phoenix wasn't the first or only group to market itself as a publicly-accessible financial investment duty-bound to make profits from Thoroughbreds. 

In the 1980s, as the bloodstock bubble was growing ever-bigger and yearlings were hammering for unsettlingly high prices, several racing industry stalwarts tried to sell the public on the idea of horses as investments. The greatest campaign was launched by Spendthrift Farm

In 1983, Spendthrift had become an establishment in Central Kentucky. Leslie Combs II had grown the business from 126 acres of land he bought in 1937 to 6,000 acres just outside Lexington. Combs was born with the gift of gab, honed during his time as an insurance salesman in West Virginia and put to good use in Kentucky. He expanded the practice of syndicating breeding stallions, taking the typical syndicate from a handful of investors to 20 or more and raising total syndication values to unheard-of levels. He acted as an advisor to newcomers at Thoroughbred auctions and was the top consignor at Keeneland's July Selected Yearling Sale every year from 1949 to 1964. 

Despite that success, the farm was heavily in debt in the early 1980s. A series of feature articles published by the Lexington Herald-Leader in 1987 chronicled the operation's rise and fall, blaming its predicament in part on excessive spending and financial conflicts of interest by Leslie and his son/successor, Brownell Combs. In 1982, the pair asked investment firm Lazard Freres and Co. to come up with plans to sell 40 percent of the farm to private investors. That sale never happened, and the Combses blamed the collapse of the deal on premature reporting in local media. 

Brownell Combs

Then, they came up with a better idea – to put Spendthrift on a national stock exchange. With the help of consultant Garth Guy, the farm first offered a “private placement” – a sale of stock to investors by invitation only, while reserving the right to open up to the public later. The farm assembled marketing materials for the offering, outlining the farm's assets and liabilities, and showing that its equity had grown at a rate of about 50 percent annually for the past six years as auction prices continued to rise. The farm asked Richard F. Broadbent III to appraise its horses, resulting in an $85.2 million valuation. After calling hundreds of people suggested by the Combses, Guy had sold 32 percent of Spendthrift tp 34 investors for $31,737,500. 

Six weeks later, Spendthrift issued more shares to private investors, setting up for a public offering in late November 1983. According to a report filed with the Securities and Exchange Commission, the farm initially wanted to offer 1.65 million shares at $17 each, but brokerage firms wouldn't take it on, suggesting they'd be biting off more than the market would be able to chew. Instead, the farm went public with 650,000 shares debuting at $12 each. 

That would be the highest price the stock would ever command. The Herald-Leader's series in 1987 characterized it as “declining almost continuously” and falling to $1 or less in late 1986 before it was removed from the American Stock Exchange.

There were several reasons the venture failed. For one, the auction bubble finally burst in the mid-1980s, not long after the public offering. Average prices for Spendthrift yearlings at Saratoga's Select Summer sale went from $653,077 in 1984 to $186,467 two years later. Changes to the tax laws in 1986 also had a dramatic impact on the bloodstock business, reducing write-offs wealthy owners and breeders could take when their horse operations lost money. But perhaps just as critically, the average person playing the stock market didn't have the patience or long-term vision most horsemen do when it comes to return on investment. Big farms like Spendthrift then (and now) had quarters where income was flat, and quarters after the auctions when they made most of their money for the year. That kind of inconsistency didn't sit well with outsiders – no matter how the Combses worked to educate them.

Lawsuits would later question whether the appraisals on the farm's bloodstock were accurate. A number of investors who bought in during the private placement eventually brought suit against the farm, asking why the prices on many broodmares had inflated significantly from the time of their purchase by Spendthrift to their appraisal months later. A federal appeals court later rejected most of the civil suit. 

In the end, the Combses sold their shares of Spendthrift and the farm declared bankruptcy in 1988. It was sold in foreclosure to MetLife in 1993 and changed hands several more times before being purchased by its current owner, B. Wayne Hughes, who has given back the farm its status as a top player in the stallion and bloodstock market. 

Spendthrift wasn't the only Thoroughbred breeding outfit that got creative with investments in the early 1980s, although it is the only one this author could find that offered publicly traded shares. Around the same time, top breeders Bert and Diana Firestone created Catoctin Thoroughbred Partners, a group that would own an entire foal crop from its breeding operation. The Firestones engaged a Wall Street firm to draw up a private placement. Bert Firestone retained a slim majority interest in the crop and partners took the remaining share. Catoctin Thoroughbred Partners owned the horses until the end of their 4-year-old seasons, sharing expenses and racing and auction profits at the end. A Blood-Horse article in January 1984 indicated Firestone had sold 100 shares, comprising 49.9 percent of the 1981 foal crop, for $7.5 million.

The Securities and Exchange Commission has records of three total Catoctin partnerships, which filed updates in 1983, 1984, and 1985. After getting a flurry of press about the idea in 1984, on the brink of Spendthrift's offering, all mention of Catoctin Thoroughbred Partners seems to evaporate – possibly because the Firestones became more focused on their investments in Calder Race Course and Gulfstream Park. Firestone eventually sold his Virginia-based Catoctin farm to Japanese investors in 1989.

Years later, Michael Iavarone and International Equine Acquisition Holdings (IEAH Stable) would frame itself as an investment similar to a hedge fund.

“All you have to do is write one check and we're gonna make you money in Thoroughbred racing,” Iavarone told the Associated Press in 2008.

Big Brown was IEAH's best-known success, but he wasn't its only top-level horse

Iavarone had come with a stock market background (although it was in penny stocks, a far cry from the high-profile Wall Street trader he portrayed himself to be during the rise of IEAH). Unlike traditional ownership syndicates, IEAH offered investors percentages of the group's entire holdings, rather than individual horses. Profits would come from purses, breeding rights sales, and horse sales, with IEAH taking 2 percent of total assets and 20 percent of the profits. IEAH had early high-profile success that other syndicates only dream of – there was 2008 Kentucky Derby/Preakness winner Big Brown of course, but also stakes winners Benny the Bull, Kip Deville, Court Vision, and Stardom Bound.

IEAH was also responsible for the foundation of the Ruffian Equine Medical Center at Belmont Park, which its owners initially thought would be a cash cow. It ended up being a money-losing enterprise that sucked cash out of IEAH and closed after two years (though it has since been reopened in association with Cornell University). 

Then there was a lawsuit from Matt Szulik, who sought $60 million from James Tagliaferri, a consultant Szulik claimed accepted kickbacks for his investments into “sketchy businesses,” including IEAH. Tagliaferri would eventually be found guilty of investment adviser fraud, securities fraud, and wire fraud that lost his clients $50 million. Iavarone and his partner Richard Schiavo were never charged with any criminal activity related to IEAH. After that one-two punch, IEAH ran its last horse in 2013, although Iavarone has since returned to the game, racing horses in his own name.

If history is any kind of teacher, the Phoenix Thoroughbred Fund may only be in the middle of its journey. IEAH and Spendthrift spent years in court sorting out investors' accusations and dispersing their horses. In the meantime, the group is celebrating –  in December, its horses completed a hat trick of three wins on three continents in just three days.

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