West Hills Farms, LLC v. ClassicStar, LLC (823 F. Supp. 2d 599, 2011)

MEMORANDUM OPINION AND ORDER

JOSEPH M. HOOD, Senior District Judge.

This matter is before the Court upon the Motion for Summary Judgment made by Plaintiffs Arbor Farms, LLC, Jaswinder Grover, Monica Grover, MacDonald Stables, LLC, Nelson Breeders, LLC, and West Hills Farms, LLC [DE 482]. David Plummer, Spencer Plummer, and Strategic Opportunity Solutions, LLC, which did business as Buffalo Ranch, have filed a Response stating their objections [DE 514, 524], as have ClassicStar 2004, LLC, ClassicStar Farms, Inc., Tony Ferguson, GeoStar Corporation, GeoStar Financial Services Corporation, and Thom Robinson [see DE 515, 523], and John Parrott [DE 533]. In turn, Plaintiffs have filed replies in further support of their Motion for Summary Judgment [see DE 549, 550, 556]. Additionally, the Court has had the benefit of the parties’ additional briefs and oral argument on issues related to damages: the Plaintiffs’ Notice Supplementing the Amount of Damages Sought in Motion for Summary Judgment [DE 741]; Defendants GeoStar Corporation, ClassicStar Farms, Inc., Tony Ferguson, Thom Robinson, First Source Wyoming, Inc., and GeoStar Financial Services Corporation’s Notice of Objections to Plaintiffs’ Request for Damages and Motion for Briefing [DE 742, 744]; Defendant Parrott’s Notice of Objections to Plaintiffs’ Request for Damages [DE 743]; Plaintiffs’ Reply to Objections [DE 745]; Defendants GeoStar Corporation, ClassicStar Farms, Inc., Tony Ferguson, Thom Robinson, First Source Wyoming, Inc., and GeoStar Financial Services Corporation’s Reply in Support of Objections to Plaintiffs’ Request for Damages [DE 750]; and Plaintiffs’ Sur-Reply to Objections [DE 755]. [See also DE 756, Minute Entry Order for Hearing, September 29, 2011.]

I. Factual and Procedural Background

A. The ClassicStar Mare Lease Program

Between 2001 and 2005 the ClassicStar Mare Lease Program generated over $600 million in sales primarily to high income individuals with an interest in participating in the thoroughbred horse industry. The Mare Lease Program, in theory, allowed participants to lease valuable thoroughbred mares from an operation with a long track record of success in the thoroughbred industry and breed those mares for a season, keeping the resulting foal. During the relevant period, GeoStar Corporation (“GeoStar”) owned ClassicStar, LLC (“ClassicStar”), which represented to potential investors that participants in its (and its predecessor’s) Programs had sold horses for an average of 130% of the cost to lease the mare and produce the foal. ClassicStar warranted to its investors that it owned the mares involved in the Program and represented that the base price of a mare lease would be approximately 30% of the value of the mare.

Investors often purchased packages involving multiple pairings and carrying large price tags. Financing was available for these large purchases, and participants could finance half or more of their packages with a supposedly reputable third party lender. Moreover, the Mare Lease Program was marketed as structured so as to allow purchasers to claim tax deduction for the expenses associated with their breeding business including the loan, and investors were advised that no investor had ever had a deduction associated with the Program disallowed.

Finally, participants were provided the opportunity to exchange portions of their mare lease interests for other assets including working interests in coal bed methane developments stock in Gastar Exploration, Ltd. (“Gastar”), GeoStar’s publicly traded affiliate, and units in First Equine Energy Partners, L.L.C. (“FEEP”), an entity crafted by GeoStar’s principals which purported to have interests in both horses and coal bed methane properties.

B. The Ruse

If the potential for returns and the generous tax benefits associated with the Mare Lease Program seemed too good to be true, it was because they ultimately were. This was not apparent, of course to investors, because the participants were not told the truth.

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. It was represented to Plaintiffs that mare leases would be priced at approximately 30% of the cost of the mare, which was in keeping with industry custom where mare leases are priced at approximately 30-40% of the cost of the mare, and the agreements between Plaintiffs and ClassicStar stated in no uncertain terms that ClassicStar owned the horses that it purported to lease to participants. Yet, GeoStar maintained tax asset ledgers listing all of ClassicStar’s equine assets and which show that, at 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 dollars worth of mares in 2001, only $37 million dollars worth of mares in 2002, $56 million worth of mares in 2003, and $48 million worth of mares in 2004. 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.

Early on, ClassicStar glossed over its shortfall of thoroughbred inventory by providing participants listings of pairings denominated as “TBN” or “to be named.” Participants were encouraged to exchange their yet unnamed pairings for interests in GeoStar’s mineral programs, relieving ClassicStar of the pressure to produce an adequate number of thoroughbred pairings to its Mare Lease Program participants. Eventually, ClassicStar stopped using the “TBN designation” and started including quarter horse breeding pairs in the packages, although the cost of participating and the value listed for those horses still reflected those associated with thoroughbred pairings. Effectively, the prices were inflated beyond what the best quarter horse foal could be expected to bring at sale and substantially overstating the number of potential embryos which a mare could generate in a season. ClassicStar did not actually own the quarter horses. Rather, they were “on loan” from the Plummers and their aptly named business, Strategic Opportunity Solutions, LLC (“SOS”) which operated as Buffalo Ranch. Indeed, it was only in late 2004 that Tony Ferguson executed backdated lease agreements with SOS. Until those back-dated agreements were signed, ClassicStar had no formal arrangement to lease the quarter horses it included for the price of $400 million in the Mare Lease Packages for 2002, 2003, and 2004. Of course, according to Shane Plummer who handled the quarter-horse element of the business for ClassicStar, the quarter horses were never actually to be leased to ClassicStar or to be bred for Mare Lease participants — rather the quarter horse breeding pairings were placeholders, designed to support tax deductions then to be traded out for some other asset before breeding occurred.

Throughout this case, Plaintiffs have theorized that the participation of an actual independent lender might have exposed the overvaluation and underpopulation issues because such a lender would likely have wanted to confirm that participants did acquire the rights to leased mares and stallion pairings and that the prices paid bore some relationship to the value of the horses involved. That might be, and, of course, that is not what happened. Instead, the loans were placed with NELC, a small company and a shell formed by persons affiliated with ClassicStar and controlled by ClassicStar. Not surprisingly, NELC did not insist on independent confirmation of the value of the horses. David Plummer’s brother-in-law, Gary Thomson, acted as NELC’s manager and answered to David Plummer. Thomson has testified that NELC could not make a loan without ClassicStar’s consent, that it made no investigation of the collateral and relied totally on ClassicStar, and that it made no inquiries before accepting substitute collateral when Mare Lease Program participants exchanged their equine assets for interest in other GeoStar programs or entities.

NELC had no other business and no funds of its own. In fact, ClassicStar transferred the amounts needed to fund the loans to NELC, and NELC transferred them back to ClassicStar as loan proceeds, often on the next day. In fact, ClassicStar did not even treat the proceeds of these “loans” as “funds received.” As an example, NELC wrote $7 million check to ClassicStar for Plaintiff Arbor Farms’ financed interest on December 7, 2004; it wrote a $7 million check to ClassicStar for West Hills’ financed interests in December 7, 2004; and it wrote three checks totaling $21.5 million to ClassicStar for Nelson Breeders’ financed interests on December 8, 2004. ClassicStar’s bank records and the NELC general ledgers show that NELC received the money in the amount necessary to write out those checks through payments from ClassicStar on the same day they were made.

Of course, because a subset of the horses touted as available either did not really exist because of underpopulation of the Mare Lease Program or were, at best, extremely overvalued (quarter horses rather than thoroughbreds) when they were available, Plaintiffs and other investors should not have been able to claim the business deduction on their federal income tax returns as advertised by ClassicStar. Almost certainly the participants needed actual mares and not the promise of mares or mere placeholder horses to support current year deduction for expenses associated with those mares. Participants were then paying fees and taking deductions associated with breeding, board, and insurance activities which never occurred. By encouraging investors to take the deduction, knowing about the endemic underpopulation/ overvaluation problems, ClassieStar and its agents were working a tax fraud on the United States Government (triggering a criminal investigation into its practices and, eventually, convictions for that fraud for some of the individual defendants in this case) as well as perpetuating the misrepresentations it had visited on the participants with respect to the benefits of participating in a Mare Lease Program. Ultimately, the packages had precious little economic value to offer apart from the tax benefits, but ClassicStar never revealed earlier audits of its Programs by the IRS nor revealed that at least one participant had his deduction disallowed.

Of course, since ClassicStar never had sufficient equine assets to deliver the required number of pairings, GeoStar offered participants several alternative transactions through its subsidiaries, described in further detail below, each of which would relieve ClassicStar of its obligation to produce an equine pairing and ultimately disguise its lack of inventory. From the inception, according to GeoStar accountant Bill Bolles, GeoStar and ClassicStar intended at least 60% of participants to convert from mare lease to working interests and ultimately to stock. In other words, these exchanges were always necessary in order for the program to work. As Ferguson explained to Douglas C. Anderson, a third-party promoter paid to market the Mare Lease Programs, GeoStar ultimately sought to pump money into the gas program and drilling gas wells, from which the Court gathers that GeoStar acquired and operated ClassicStar as a means of financing the development of its mineral properties.

To make these conversions attractive, GeoStar represented to the ClassicStar participants that 90% of the conversions made could be deducted as intangible drilling costs on participant’s tax returns. Thus, GeoStar Controller Frederick Lambert issued letters to those participants converting their investments which represented that no less than $60 million in intangible drilling costs deductions were available for 2002. However, for the working interests in 100 wells owned in part by the subsidiary First Source Wyoming (“FSW”) at the relevant times, GeoStar ultimately was working with a maximum in $10,000,000 in working interests on a yearly basis. Nonetheless, GeoStar sold $30 million worth of interests in FSW in 2000, $30 million in 2001, and $70 million in 2002. The 2002 sales of interests in FSW were comprised almost exclusively of conversions by Mare Lease participants. For those conversions to work, a converting participant would need to take a deduction sufficient to offset the gain from the transaction — otherwise they would incur a tax liability. With respect to the wells in question for FSW, capital expenditures on wells averaged less than $100,000, with intangible drilling costs less than that. GeoStar nonetheless promoted the wells as having intangible drilling costs of well over $360,000 per well. In this way, GeoStar promoted a tax free conversion from mare lease to working interests which was ultimately a fabrication. Ultimately, of course, GeoStar never paid operating income to any of the working interests participants converted out of ClassicStar Mare Lease Programs nor actually account to these working interest participants from the revenues or expenses associated with the well operations. Rather, if participants received distributions, they related to a fixed percentage of the amount of the initial purchase, rather than actual operating revenues — and it came from sources other than the drilling programs. It did so with the intention that the interests would never actually be conveyed and would instead be converted into Gastar stock. When those conversions were made, the conversion rate for Gastar stock was based on the price of the stock at the date of the participants’ conversions to the drilling program so that no subsequent valuations were ever made for participants.

Ultimately, GeoStar no longer wished to offer Gastar stock as an “exit strategy,” so additional companies were created. By 2004, the FSW oil and gas conversion program had been terminated, and GeoStar began to offer the conversion of any quarter horse interests obtained from the Mare Lease Packages into shares of FEEP. The principal assets were purported to be quarter horse breeding interests traded to FEEP by participants and working interests in Wyoming wells — the same ones discussed above under the FSW iteration of this option.

Of course, GeoStar (along with others) was aware of the shortage of horses in the Mare Lease Program and the insufficiency of the gas interests, but $100 million of 2002-2003 Mare Lease Program interests were converted into the FEEP program. Another $82 million of the Mare Lease Program interests for the 2004 participants were slotted for conversion to FEEP by October 19, 2004 — even though FEEP acquired no assets at anytime and never actually operated. The private placement memorandum distributed to Mare Lease Program participants stated that GeoStar would buy back the FEEP units at the price the participants had initially paid ClassicStar for the breeding interests traded for the FEEP units. GeoStar ultimately decided that it would not honor this commitment. Effectively, then, the FEEP units never had any value.

Beginning in 2004, GeoStar committed to buy back numerous other mare lease and oil and gas working interests that its subsidiaries could not deliver, doing so itself and through its subsidiaries ClassicS-tar Financial Services, Inc. (“CFSI”), and GeoStar Financial Services Corp. (“GFSC”), GeoStar would offer a promissory note from one of the subsidiaries in consideration for the buy-backs. Of course, records reveal that these subsidiaries never had the cash to pay back the notes — indeed, never had assets besides unpaid accounts receivable from other GeoStar subsidiaries.

C. The Role of the Defendants

As described above, the scheme — for a scheme it was — was complex and involved many participants. Even before ClassicS-tar’s acquisition by GeoStar, when it was known as New Classic Breeders, LLC, and owned by the Plummers, the entity was the primary marketing vehicle for not only its own mare lease offerings but also a combination equine-mineral investment programs. Through its successful sales of the combined Mare Lease and drilling programs, ClassicStar generated a revenue stream which supported Gastar and GeoStar’s mineral exploration interests. That role continued once GeoStar acquired ClassicStar. NELC provided the loans which increased the size and feasibility of the packages for investors. GeoStar managed ClassicStar’s finances and, through its other subsidiaries, oversaw the development of mineral properties. GeoStar’s financial stability was used to reassure participants of ClassicStar’s ability to meet its obligations and, to prove the point, it actually guaranteed or paid for many of ClassicStar’s obligations. Gastar was designed to hold the mineral properties until they could be developed sufficiently so as to become marketable and its stock provided an additional and critical incentive to early participants in the form of liquid asset which would allow them to realize their gain. Gastar’s resources were also used to assure investors of the financial stability of the Mare Lease Program, as some investors were told that Gastar would purchase additional thoroughbred interests to populate ClassicStar’s Mare Lease Programs. Eventually, FEEP, GFSC, and other shells created by GeoStar and made offerings which took the place of the now more valuable Gastar stock. FEEP and GFSC opportunities were, as interests in FSW before them, ultimately used to disguise the overselling of the Mare Lease Program by purporting to relieve ClassicStar of its lease obligations through the exchange of other assets.

The individual defendants had their own particular areas of responsibility in making the scheme work. Robinson, Parrott, and Ferguson owned GeoStar. Robinson, who held the titles of CEO and President of GeoStar, made most of the financial decisions for the enterprise. He directed the purchase of New Classic Breeders, LLC, which became ClassicStar, from David Plummer in 2001 and executed the purchase documents. He, Ferguson, and Parrott personally guaranteed the loan documents with Fifth Third Bank which provided financing to the equine side of the enterprise, i.e., ClassicStar itself. Robinson’s involvement did not stop there. He also acted as ClassicStar’s co-manager, placed insurance for its inventory, oversaw its salespeople, and participated in presentations marketing the Mare Lease Programs to potential investors. Robinson also hired David Plummer to serve as GeoStar’s Marketing Director and ClassicStar’s head of marketing so that he could promote the combined mare lease and drilling programs. Robinson was listed in the FSW working interest promotions as a founder and key member upon whose services the success of the drilling programs depended. He participated in the transactions that led to the acquisition of Gastar by GeoStar, served as Gastar’s CEO and President from 2000-2004, and served as the Chairman of the Board of Directors for Gastar until 2006. He participated, as well, in the drafting of the conversion documents for what ultimately became the FEEP offering.

Parrott’s role was largely behind the scenes or at least he was a faceless presence to many investors in the Mare Lease Programs, but his involvement in the Enterprise was wide reaching. He reviewed and approved marketing materials used by ClassicStar, including attorney opinion letters, and negotiated agreements with various promoters of the Mare Lease Programs. It was Parrott who negotiated an agreement to pay Hanna Strader, the law firm who ultimately represented the Nelson, West Hills and Arbor Farms Plaintiffs in their purchase of Mare Lease Programs, a commission for persuading its clients to participate in the Program. He also drafted or revised the Mare Lease agreements used by ClassicStar, occasionally made presentations about the Mare Lease Programs, and executed documents as ClassicStar’s vice-president. Parrott drafted the organizational documents when GeoStar established FEEP and prepared the FEEP private placement memorandum (“PPM”) upon which various of the participants relied. He drafted and then executed the documents relating to the 2002 drfiling program offering on behalf of FSW. Finally, Parrott executed the documents through which GeoStar contributed certain of its mineral properties to Gastar and was often introduced as founder and partner of Gastar as.in the subscription agreement for the 2002 drilling program.

Ferguson had an active role as promoter of both the Mare Lease Program and the alternative investments. He was identified at various times on marketing materiais and contract documents as the President, Vice-President, or CEO of Gastar and GeoStar, the President of FSW, and as the President, Chairman, or the Co-Managing member of ClassicStar. He both promoted the programs himself and hired sales representatives and other employees to do so and was the individual who directed the payments of commissions to Handler Thayer. Together with Robinson and Parrott. Ferguson was a principal officer of Gastar and held himself out as a Gastar representative. Ferguson also “negotiated” and signed the Buffalo Ranch quarter horse leases — after the fact, as explained above. Ferguson was touted in FEEP’s PPM as FEEP’s tax partner and a member of its advisory committee.

Robinson, Parrott, and Ferguson did all of this knowing that the ClassicStar Mare Lease Program was oversold, knowing that they or others were marketing the Mare Lease Program for the “available” tax benefits, the true nature of NELC as a captive of ClassicStar, and the absence of assets in FEEP. They attended meetings where ClassicStar’s business, including the lack of mares, was discussed, received summaries of ClassicStar assets on various occasions, were aware of and facilitated the trade outs of interests to accommodate those shortages, and clearly had available to them information from which they could draw the conclusion that the programs were never intended to provide enough horses to deliver foals (or even the chance of foals) to participants.

David Plummer was GeoStar’s director of marketing and ClassicStar’s head of marketing. He promoted the combined equine-mineral programs and the Mare Lease Programs, often making presentations to potential investors. As a principal of SOS, which operated as Buffalo Ranch, he “leased” (or failed to lease, as the case may be) quarter horses to ClassicStar to make up the shortage of thoroughbred stock — knowing that quarter horses were never intended to be bred for participants. He helped to put together the schedules, including pairings that did not exist, for participants.

Spencer Plummer, ClassicStar’s president and also involved with SOS, engaged in marketing and showed off ClassicStar’s farming operations. He was also President of ClassicStar Farms from April 2003 to February 2006, during which time it was owned and controlled by GeoStar. He also helped to prepare schedules which included “temporary assignment] of quarter horses instead of thoroughbreds to some of the ... investors,” with the knowledge that “GeoStar was trying to cover this shortage by convincing some of these ... investors ... to trade their mare lease interests to a new entity called FEEP and move into units of gas working interests.” He encouraged these trades by offering them written agreements to do so. In other words, he was actively marketing these Programs knowing that there were not enough horses to meet the commitments to participants and knowing that he would ultimately be encouraging a trade-out of mare lease interests for FEEP units to cover the shortage.

D. Plaintiffs

Plaintiffs are entities and individuals who purchased over $37 million in equine breeding pairings from ClassicStar from 2003 to 2005. Specifically, in 2003, the Grovers invested $4.483 million and MacDonald Farms invested $7.3 million. In 2004, Arbor Farms invested $7 million, Nelson Breeders invested $2.912 million, the Grovers invested $1.1 million, MacDonald Farms invested $4 million, and West Hills Farms invested $7 million. In 2005, MacDonald Farms invested $3 million.

Prior to investing, each was presented with an “Illustration” of its or their proposed participation, outlining the potential return on the investment, the associated tax benefits, and the availability of subsequent investments in GeoStar affiliates. Each received promotional literature detailing the thoroughbred assets owned by ClassicStar and the stock available for breeding. Each of these Plaintiffs also signed a Mare Lease Agreement which stated, as a term of the agreement, that ClassicStar owned the mares that were the subject of the Agreement.

Remmers, Sackhoff, and Nelson — as principals of Arbor Farms, West Hills, and Nelson Breeders — received, as well, an opinion letter authored by accountant Terry Green which “confirmed” the validity of the tax deduction for the entire cost of participating in the Programs, including that portion of the cost which was financed by the loan from NELC. A legal opinion letter prepared by the law firm of Handler Thayer purported to exhaustively analyze both the Program and the applicable regulations in order to reach a conclusion that the Program met all legal requirements.

Plaintiffs engaged legal counsel to review the program for them. Unknown to Plaintiffs was the fact that these attorneys had incentive, through commissions paid by ClassicStar and others associated with them, to render a favorable opinion. Plaintiffs MacDonald and the Grovers selected the law firm of Handler Thayer, and Arbor Farms, West Hills, and Nelson selected the law firm of Hanna Strader to opine regarding the availability of the tax benefits touted by ClassicStar. While both firms agreed to evaluate the soundness of the program for their respective clients and to negotiate the terms of their participation in the Program with ClassicStar, neither firm disclosed the fact that they would receive “commissions” based on Plaintiffs’ participation in the Mare Lease Programs.

Further, each of the Plaintiffs funded a portion of their investment through a loan from NELC. No one told them, of course, that NELC was funded entirely by ClassicStar. Nor did anyone tell them that investments in alternative programs were highly desired (indeed, necessary) because there simply were not enough horses to go around in the Mare Lease Programs and ClassicStar wanted to avoid its contractual liability to provide the pairings or at least the type of pairings that it had promised.

After substantial payment was received by ClassicStar, each Plaintiff received a document entitled “Schedule A,” which purported to identify the specific breeding pairings assigned to the receiving plaintiff. Of course, none of the Plaintiffs were told that ClassicStar did not own sufficient thoroughbreds to complete the number of packages sold or that fictitious or overvalued equine pairings were inserted into their Schedule A listings to make them appear full.

The specifics of each Plaintiffs’ participation were as follows.

1. MacDonald Stables

In 2003, Handler Thayer attorneys arranged for Lynn MacDonald, a member of MacDonald Farms, to participate in a teleconference attended by David Plummer. During that call, David Plummer described the basic attributes of ClassicStar’s Mare Lease Programs, including how thoroughbred mares were leased to investors for a breeding season, those mares were bred to proven stallions, and the investor would own any foal that resulted from the breeding opportunity. MacDonald then met with advisers from Handler Thayer and Ferguson in mid-2003. Ferguson described the same features of the Programs as David Plummer had and explained that GeoStar and Gastar were financial backers for ClassicStar. Indeed, Ferguson, who said that he spoke on behalf of ClassicStar, Gastar, and GeoStar, explained that Gastar would purchase the thoroughbred mares which would be available for inclusion in any Program packages that MacDonald Farms purchased. Ferguson also explained that MacDonald would have the option, in subsequent years, to exchange foals or mare leases for mineral assets, including Gastar stock, in such a way that would preserve the tax benefits of the program. The touted tax benefit was striking: MacDonald Farms would be able to deduct the entire cost associated with the Program — including the loan — as a business expense. To sweeten the deal, MacDonald was told that no participant in the Program or its predecessor had ever had their deduction disallowed. He was not told, however, that the Program was the subject of an IRS investigation — which it was.

During discussions with David Plummer, Ferguson, and advisors from Handler Thayer, each described to MacDonald how prior participants in the Mare Lease Programs had sold foals obtained from the Mare Lease Programs for an average 130% pre-tax return on their investment. They also explained that the price of a mare lease corresponded to approximately 30% of the value of the mare. With respect to that investment, they told MacDonald that a reputable lender with experience in the equine business, NELC, would provide financing for a substantial portion of the package. Lynn MacDonald was never told, of course, that ClassicStar was the sole source of funding for NELC. MacDonald also received an Illustration identifying ClassicStar as a “Division of the GeoStar Group” and which offered what was supposed to be a revenue projection based on historical returns. The document explained that there was an option to convert the investment into coalbed methane working interests and, eventually, Gastar stock. Handler Thayer undertook to review those materials and assured MacDonald that the tax structure of the Program would deliver the promised benefits. Neither Handler Thayer nor anyone else bothered to disclose to MacDonald that Handler Thayer was receiving a commission from ClassicStar commensurate with the amount of MacDonald Stables’ participation in the Mare Lease Programs.

Ultimately, based on representations that the Mare Lease Programs would be populated with pairings of thoroughbreds of proven value, that MacDonald’s participation would have the particular tax consequences described, and that Gastar would be backing the Program financially, MacDonald purchased $14 million worth of Mare Leases in the 2003 Program. $1.4 million was wired from Wisconsin to ClassicStar in Utah. $5.6 million was wired from Wisconsin to NELC in Utah in satisfaction of a note, another $300,000 was wired for payment on a note and interest, and 5 separate checks totaling approximately $212,000 were mailed from Wisconsin to NELC in Utah.

MacDonald received and sent a number of items concerning the Mare Lease Programs through the mails, including (1) a July 15, 2003, letter from Toby Norton, written for ClassicStar, which explained the financing for his 2003 Mare Lease Program package, (2) an August 1, 2003, letter from Spencer Plummer, again written for ClassicStar, which enclosed an executed 2003 Letter of Understanding; (3) a September 30, 2003, letter from Mike Snow, written for ClassicStar itemizing sums due and sums received with respect to MacDonald’s 2003 Mare Lease Program package; (4) a December 12, 2003, letter from Mindi Morashita, written for ClassicStar, enclosing ClassicStar’s Broodmare and Stallion Pedigree CD; (5) a December 31, 2003, letter from Mike Snow, written for ClassicStar, confirming ClassicStar’s receipt of $5.6 million from NELC on behalf of MacDonald Stables; (6) a May 28, 2004, letter from Spencer Plummer, written for ClassicStar, telling MacDonald of the need to sign a Letter of Understanding for 2004 while inventor was still available; (7) an April 18, 2005 letter from Mindi Morashita enclosing a trade out agreement replacing quarter horses in MacDonald’s 2004 package with thoroughbreds; (8) his own letter returning that trade out agreement, once executed, to ClassicStar on April 25, 2003, and (9) a May 5, 2006, letter mailed from Florida from Tony Ferguson on behalf of GeoStar enclosing' a Gastar stock certificate. In late 2003 and again in early 2004, MacDonald received Schedules describing its assigned pairings from ClassicStar’s Utah office by both email and overnight courier.

The Schedule as described included far more pairings than Lynn MacDonald had expected based on the selection process, and, ultimately, Lynn MacDonald objected to the larger number of presumably less valuable pairings represented on that schedule in lieu of the fewer select pairings that he expected. Tony Ferguson assured him that the matter would be addressed. David Plummer later told MacDonald that ClassicStar temporarily lacked the thoroughbreds necessary to fulfill its mare lease obligations for that year and that he had assigned MacDonald Stables quarterhorses again instead of thoroughbreds. Ferguson arranged for MacDonald, who negotiated through its attorneys at Handler, Thayer, to exchange those pairings for 1,680,890 shares of Gastar stock and units in FEEP. Ferguson described FEEP, including its association with GeoStar and Gastar, to MacDonald, and Lynn MacDonald agreed to the substitution, relying on the description of FEEP’s assets, the put option, the GeoStar guarantee, and a recommendation received from Handler, Thayer. Of course, the shares were not delivered immediately — far from it. Rather they were delivered eighteen months after the agreed upon time for delivery. The shares were then restricted from being sold for one year.

In 2004, David Plummer assured MacDonald that he would be assigned the type of interests in the 2004 Program that he had expected to receive in 2003. MacDonald then purchased $8 million of 2004 Program pairings, sending two separate wires from Wisconsin to Utah for a total of $4,000,000 and mailing four separate checks from Wisconsin to Utah for a total of $164,000, and financing the remaining cost with a loan from NELC. When the Schedule of these pairings was received by overnight mail in late 2004, they were not the thoroughbred pairings promised. Again by negotiating with MacDonald through its attorneys at Handler Thayer, ClassicStar agreed to exchange the 2004 leases for additional FEEP and shares of an entity called GeoEquities, which was supposed to have additional valuable mineral properties and acquired and traded Gastar stock. MacDonald did not receive the promised Gastar stock until well after the delivery date at which time the one year transfer restriction began to run. Further, FEEP did not perform nor did GeoStar honor the guarantee. After accounting for the value received from horses and stock combined, as well as other sources, MacDonald suffered out of pocket losses of $4,733,885.68.

2. The Grovers

David Plummer and Ferguson introduced the Grovers to the Mare Lease Program during a series of meetings in late 2002 and early 2003. David Plummer and Ferguson again described the basic attributes of the Mare Lease Programs, including the lease of thoroughbred mares at 30% of their value, a history of favorable returns, the financial backing from GeoStar, the opportunity for future mineral investments and the realization of substantial tax benefits. The Grovers received an Illustration in October 2003 which identified ClassicStar as a “Division of the GeoStar Group,” and projected 130% appreciation on the horses with options to convert equine interests to coalbed methane working interests which would then convert to stock. Based on the representations made, the Grovers purchased $8 million worth of what they believed to be thoroughbred Mare Leases in the 2003 Program.

In early 2004, David Plummer and ClassicStar’s accountant, Terry Green, recommended to Grovers that they exchange substantial portion of these supposed equine interests for mineral interests which they were told represented more diversified strategy for generating profits while still preserving the tax benefits of the initial participation. Eventually GeoStar mailed Grovers the FEEP PPM which described a put option, the assets supposedly held by FEEP, the GeoStar guarantee, and the role of Ferguson and GEEI in the management of FEEP. Relying on these representations, the Grovers exchanged a substantial portion of their equine interests for FEEP units, ultimately exchanging substantially all of their remaining equine interest for an Installment Note from GFSC in the amount of $3,796,707, which came due on July 15, 2007. Even though the Grovers attempted to exercise the FEEP put option, it has not performed, nor has GeoStar performed on the guarantee, nor has any payment on the Installment Note been made to the Grovers.

Meanwhile in late 2004 and in reliance on representations from ClassicStar that the 2003 Program was performing as anticipated, the Grovers purchased an additional $2.2 million as part of the 2004 Mare Lease Program. The Grovers exchanged the majority of the 2004 pairings for FEEP units in early 2005 on terms largely similar to the 2004 arrangement. Again, neither FEEP nor GeoStar performed on the put or the guarantee, although requested to do so.

The Grovers received materials which repeated the representations that had been made to them via email, mail, and overnight courier, sent from Utah to Nevada. Jaswinder Grover has identified a number of items related to the Mare Lease Program that he received through the mail or wires, including (1) an August 25, 2003, letter from Linda Ridley, written for ClassicStar, enclosing a Mare Lease Brochure and CD Packet and a Due Diligence & Mare Lease Information Booklet; (2) a December 16, 2003, letter from Mindi Morashita, written for ClassicStar, enclosing a 2003 ClassicStar Pedigree CD; (3) a December 31, 2003, letter from Mindi Morashita, written for ClassicStar, and enclosing the Grovers’ 2003 Mare Lease Agreements and Schedule A; (4) a December 31, 2003, letter from Spencer Plummer, on behalf of ClassicStar, providing suggestions for how the Grovers’ horse business should be managed and concerning material participation; and (5) a December 23, 2004, letter from Morashita, written for ClassicStar, enclosing the Grovers’ 2004 Mare Lease Agreements and Schedule A of horse pairings. Jaswinder Grover also mailed, from Nevada to Utah, at least six separate checks, totaling $5.58 million.

All told the Grovers paid over $5.5 million cash to ClassicStar. They did receive $400,000 from the sale of few thoroughbred foals and distributions from racing partnership into which ClassicStar transferred certain other foals, as well as payments in settlement of this matter from other sources, but ultimately have remaining out of pocket losses on their equine investment totaling $3,466,633.68. As the Court understands it, those assets exchanged for mineral interests remain an unrealized investment — notwithstanding the promises made and as described above.

3. Nelson Breeders

Nelson was first approached by third-party promoter Anderson, in late 2003 or early 2004. David Plummer, who represented himself as speaking for both ClassicStar and GeoStar, then met with Nelson in early 2004. David Plummer again described the basic attributes of the Mare Lease Programs, including the lease of thoroughbred mares at 30% of their value, a history of favorable returns, the financial backing from GeoStar, the opportunity for future mineral investments and the realization of substantial tax benefits, if Nelson participated in the Program in the manner prescribed by ClassicStar. Nelson also received an Illustration which outlined several conversion options including acquisition of shares in an entity called First Energy Partners, Inc., which would then be exchanged for Gastar shares. A second Illustration carried over the same representations except that it substituted an entity called GeoEquities, LLC, for Gastar. Nelson engaged Hanna Strader to evaluate the Program for him. Hanna Strader produced an opinion letter upon which Nelson relied stating that the Program could perform as promised by ClassicStar. Relying on the opinion letter and the representations made by David Plummer and others Nelson made payment of $2.9 million to ClassicStar and signed notes with NELC totaling another approximately $2.5 million.

From ClassicStar, Nelson received via mail, email, or over night courier at least seven pieces of correspondence which traveled from Utah to Washington, including (1) Illustrations; (2) the ClassicStar Brochure and Breeder’s Handbook; (3) a June 28, 2004, letter from Boyce Sanderson of ClassicStar providing information about ClassicStar personnel who could help him develop his horse business and the requirements of material participation; (4) a September 24, 2004, letter from Steve Peck enclosing an invoice for payment due on the 2004 Mare Lease Program; (5) a December 6, 2004 letter from Morashita enclosing the 2004 ClassicStar Mare and Stallion Selection CD; (6) a December 24, 2004, letter from Morashita enclosing Schedule A pairings for the 2004 Mare Lease Program; and (7) a December 31, 2004, letter acknowledging receipt of $25,-088,00 from NELC on behalf of Nelson Breeders for payment due on the 2004 Mare Lease Program.

Nelson received little in return, except for some funds which were gained from the sale of single thoroughbred foal and payments from others in settlement of claims related to this matter, yielding an out of pocket loss currently valued at $1,887,914.40. ■

4. West Hills and Arbor Farms

West Hills became familiar with ClassicStar’s Mare Lease Programs through 2004 presentation by David Plummer and Anderson and subsequent meetings in which David Plummer and others participated. During those meetings, these individuals represented that the prices charged for participation represented approximately 30% of the value of the thoroughbred mares used in the programs, that the projected returns were based on historical performance, that GeoStar’s financial backing gave ClassicStar access to substantial assets to support the Program, and that the structure of the Program conformed to IRS requirements and that no participant had ever had a deduction disallowed. Through its representatives, Arbor Farms attended several of these later meetings and received the same representations. In mid-2004, West Hills and Arbor Farms each received an Illustration similar to the others which represented that their initial cash purchase would generate substantial returns and set forth various conversion options. In July of 2004, West Hills and Arbor Farms each signed a letter of understanding for the purchase of $14 million of mare lease pairings through the end of 2004. West Hills and Arbor Farms paid ClassicStar $7 million and executed an NELC note for the remaining $7 million of their purchases. Unbeknownst to them, their packages would be predominantly filled with fictional quarter horse pairings.

Dennis Sackhoff and Walter Remmers, members of Arbor Farms and West Hills Farms, respectively, would later learn about the inclusion of quarter horse pairings, but they were assured that the values listed were accurate and that the horses existed. They did not know, prior to 2006, that ClassicStar did not own sufficient thoroughbreds to fill participant’s packages, that overvalued pairings were included in their Schedule A packages, or that NELC was funded solely by ClassicStar, among other things. These men have identified a number of items received through the mails, including their company’s respective Schedules, which were received by overnight courier.

Ultimately, West Hills and Arbor Farms received for their $14 million investment a few thoroughbred foals with value of approximately $2.4 million and $2 million, respectively. They have since received funds in settlement of their claims from other parties, as well. At present, as presented by Plaintiffs, Arbor Farms’ out-of-pocket losses on the investment total $3,323,236.60, while West Hills’ net losses come to $3,056,933.51.

II. Standard of Review

Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A genuine dispute exists if “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “On summary judgment the inferences to be drawn from the underlying facts ... must be viewed in the light most favorable to the party opposing the motion.” United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962). While the moving party must demonstrate that no genuine issue of material fact exists, in response, the non-moving party must move beyond the pleadings and present evidence in support of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). “Conclusory assertions, supported only by Plaintiffs own opinions, cannot withstand a motion for summary judgment.” Arendale v. City of Memphis, 519 F.3d 587, 605 (6th Cir.2008).

III. Motion for Sanctions and Request that Adverse Inferences Be Drawn

Plaintiffs ask this Court to draw an adverse inference as to certain facts as a result of the decision of the individual defendants to invoke the Fifth Amendment privilege against self incrimination and to remain silent in the face of discovery in this matter. It was the individual defendants’ right to assert that privilege, but it may not be used to unfairly prejudice other parties to a civil action. For this reason, a court may appropriately preclude such a party from offering evidence in support of the position whose basis he refuses to disclose, and adverse inferences against parties to civil actions in the face of silence which results from invoking the privilege is permissible in certain situations. See Baxter v. Palmigiano, 425 U.S. 308, 319, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976).

However, adverse inference can only be draw when independent evidence exists as to the facts about which the party refuses to answer. See, e.g., Doe ex rel. Rudy Glanzer v. Glanzer, 232 F.3d 1258, Í264 (9th Cir.2000); LaSalle Bank Lake View v. Seguban, 54 F.3d 387, 391 (7th Cir.1995). Defendants insist that, in this action, Plaintiffs cannot lay a foundation for each fact on a question-by-question basis in deposition or at trial, as should be done, to permit the inference to be drawn. They argue that the foundation could never be laid because of the arrangement, permitted in this case by the Court, whereby Plaintiffs submitted lists of subjects about which questioning would take place at deposition and in response to which the defendants were to submit a declaration identifying any subjects about which they would assert the Fifth Amendment privilege against self-incrimination. [See Order, dated December 2, 2008, 5:06-cv-243-JMH, DE 285.] At the time, the Court intended for the parties to avoid the expense and time associated with arranging depositions where these defendants simply asserted the Fifth Amendment privilege against self-incrimination in response to every question asked of them, which was widely anticipated at the time the issue was addressed by the Court. The individual defendants’ argument that no adverse inference would ever be permitted in the face of such an arrangement seems more than a little too coy to the Court at this point. Frankly, they had their cake, and now they want to eat it, too.

Having considered the pleadings, though, determining whether an adverse inference should be drawn would be largely academic at this point. Frankly, Defendants has offered no evidence, by way of an affidavit or otherwise, to support the existence of a material issue of fact or to contradict any of Plaintiffs’ evidence. Each, in turn, has argued instead that Plaintiffs’ evidence is insufficient to support a finding in Plaintiffs’ favor as a matter of law. Certainly, the lack of affirmative evidence, coupled with his own assertion of a privilege against self-incrimination in response to the allegations against him, could warrant judgment in Plaintiffs’ favor, see, e.g., City of Chicago v. Wolf, No. 91-0-8161, 1993 WL 524383, at *3 (N.D.Ill. Dec. 13, 1993) (granting summary judgment on all but one issue where evidence support plaintiffs’ RICO claims and all defendants had invoked the privilege against self-incrimination in response to substantive allegations and one defendant had pled guilty to facts supporting RICO violations in criminal matter), but the evidence presented by Plaintiffs stands on its own without the inference. So, the Court leaves the issue of whether an adverse inference should be drawn for another day.

Similarly, with respect to Plaintiffs’ request that the Court sanction GeoStar and GFSC for their failure to participate in certain aspects of the discovery process by prohibiting them from bringing evidence or defending the case against them, the Court need not reach a conclusion today. Plaintiffs can obtain relief on their claims which are before the Court in the present Motion for Summary Judgment without such a decision, so — for the moment — the Court declines to issue the sanction requested.

IV. Impact of the Guilty Pleas of Defendants David and Spencer Plummer and John Parrott

Defendants David and Spencer Plummer and John Parrott have pleaded guilty to conspiracy to defraud the United States by impairing and impeding the United States Revenue Service, in violation of 18 U.S.C. § 371, in proceedings before the United States District Court for the District of Oregon, Criminal Actions No. 09-391-HA and No. 10-81-KI. These criminal cases stemmed from the same overall scheme which is the subject of the present lawsuit.

A guilty plea is an “admission of all the elements of a formal criminal charge.” United States v. Skinner, 25 F.3d 1314, 1316 (6th Cir.1994) (quoting McCarthy v. United States, 394 U.S. 459, 466, 89 S.Ct. 1166, 22 L.Ed.2d 418 (1969)). Thus, when a defendant pleads guilty, he admits and is estopped from relitigating the material facts alleged in the information or indictment, and a plaintiff is entitled to introduce pleas from criminal cases in subsequent civil cases to establish “all matters of fact and law necessarily decided by the conviction.” Emich Motors Corp. v. Gen. Motors Corp., 340 U.S. 558, 569, 71 S.Ct. 408, 95 L.Ed. 534 (1951); see also Gray v. Comm’r, 708 F.2d 243, 246 (6th Cir.1983) (defendant estopped from denying liability in a civil suit for tax fraud after pleading guilty to tax evasion in prior criminal action arising out of same conduct); SEC v. Quinlan, No. 02-60082, 2008 WL 4852904, at *4 (E.D.Mich. Nov. 7, 2008) (“Collateral estoppel bars ‘successive litigation of an issue of fact or law actually litigated and resolved ... even if the issue recurs in the context of a different claim.’ ”) (quoting Taylor v. Sturgell, 553 U.S. 880, 892, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008)). The doctrine of collateral estoppel may be used offensively by a litigant who was not a party to a prior proceeding, and the doctrine extends to those facts and law “distinctly put in issue and directly determined in the criminal prosecution.” Emich, 340 U.S. at 569, 71 S.Ct. 408; see also Columbia Pictures Indus., Inc. v. T & F Enters., Inc., 68 F.Supp.2d 833, 839 (E.D.Mich.1999) (offensive use of collateral estoppel was proper in civil case where defendant pled guilty to copyright offense in prior criminal action; mutuality of parties not required).

Hence, the Court treats the admissions of the Plummers and Parrott, i.e., the matters of fact and law necessarily decided, at the time they entered their guilty pleas as established for the purposes of this litigation with respect to the individuals making those admissions. None of the parties dispute that the Court can do so. What the Plummers and Parrott do contest, though, is what facts and law were “necessarily decided by the conviction” and argue that it should only include the very words recited at the hearing or written in their plea agreement documents.

Those documents alone are damning, but the Court believes that it is fair to consider, as well, the facts that the government stated it could prove if asked to do so and to which the Defendants did not object.

When the Plummers entered their guilty plea, the government explained that it could prove a variety of things, none of which were disputed by the Plummers:

... [AJmong the means by which these defendants conspired to defraud the United States [of] significant tax revenues is:

One, they drafted or caused to be drafted fraudulent quarter horse mare leasing agreements.

Two, they encouraged investors to participate in a subsequent investment in something called [FEEP], which was an artificial entity whose principal purpose was to extinguish loans that never really exist[ed] and cover up the lack of thoroughbred mares.

Three, they concealed the fact that they were funneling a large part of the money from this Mare Lease Program to the parent company’s bank accounts for purposes unrelated to the breeding of these thoroughbred mares.

Fourth, the caused law firms to prepare favorable tax opinions and distribute those opinions to investors.

Fifth, they caused investors ... to file tax returns that were false.

Its list of proof included evidence to support the 54 overt acts listed in the charging document, among which (1) that, on September 7, 2001, accountant Terry Green sent a tax opinion letter concerning the Mare Lease Program to David Plummer and (2) that, on December 5, 2003, Green sent an email to the ClassicStar controller, with copies to Spencer Plummer, describing the need for ClassicStar to fund the artificial loans or recycling of money from ClassicStar to NELC to the investor and back to ClassicStar. The government also stated on the record that it could demonstrate that on March 8, 2004, Spencer Plummer participated in a conference call in which he attempted to reassure an investor’s financial adviser that, while ClassicStar was purportedly not affiliated with NELC, the owner and operator of NELC was his uncle and that he could be controlled; that (4) that David Plummer had met with investors in Portland in March and June of 2004; and (5) that on May 25, 2005, Green sent an email message to Spencer Plummer and another ClassicStar employee in which he said that he IRS had requested the investors original Schedule A and that they needed to “work back and prepare it.”

David Plummer, when asked what he was admitting that he did “in [his] words,” stated:

I am guilty of assisting people to take tax deductions, which they would not have been entitled to under a full disclosure basis with the Government or with anyone who looked at it closely.

He also stated that he “agreed with [Spencer Plummer and Green] and people of GeoStar and ClassicStar that this did happen; that we did conspire.” In his Petition to Enter Plea of Guilty, however, David Plummer went into more detail, about his own actions and his complicity with others, as follows:

In 2000 and 2001 I sold my mare-lease business to individuals involved in the oil and gas business, the owners of GeoStar. I continued to work for them in the mare-lease business, primarily responsible for sales. With new capital in the business it grew rapidly, increasing more than 10 fold in the first year under new ownership. The new owners wanted to take money from the mare-lease business to use in oil and gas ventures and I went along with that. The investors were not told that more than half of the cash they paid for mare lease programs was transferred to oil and gas programs in which the mare lease participants had no legal interest.

Additionally, up to half of each participant’s investment was a loan. Borrowed funds could support a tax deduction, but only if there was really a loan from an unrelated financial institution. Using NELC, a controlled financial entity, GeoStar orchestrated a series of paper transactions where the cash contributed by the investor was essentially loaned back to him. This had the effect of doubling the deductible investment without having the additional money at work in the business.

A third problem with the mare-lease business was the insufficient inventory of mares to fill the contracts the participants had bought. While ClassicStar bought many high quality horses, it did not keep pace with the sales of mare-lease programs. For the most part, the investors were not made aware of this shortfall.

Each of these three problems, if known to the IRS, would have impacted the deductibility of the mare lease investments. ClassicStar was operated in a way to keep the investors and the IRS from knowing about any problems that would have impacted deductibility.

Spencer Plummer, in his guilty plea to the charge of conspiracy, admitted that he was President of ClassicStar Farms from April 2003 to February 2006 during which time ClassicStar Farms “was owned and controlled by GeoStar.” Through that position he “met with investors/breeders who wanted to participate in ClassicStar’s Mare Lease Program, and offered them assistance.” He also admitted that investors who took out loans did so through NELC, “an entity that was controlled by ClassicS-tar and its parent company GeoStar.” He admitted further actions, stating:

I was aware that GeoStar was taking most of the operating capital from ClassicStar and not providing sufficient funds to buy thoroughbred horses to meet on-going breeding commitments. I helped temporarily assign ' quarter horses instead of thoroughbreds to some of the- breeder/investors. I also knew that GeoStar was trying to cover this shortage by convincing some of these breeder/investors to trade their mare lease interests to a new entity called FEEP and move into units of gas working interests. I encouraged investors/breeders to do this by offering written agreements, but GeoStar never really funded FEEP nor did it actually exchange anything of value to the investors.

In other words, he admitted his own acts and complicity with others in the commission of acts by them as alleged in the charging document.

John Parrott stated in Paragraph 24 of his Plea Agreement that:

As Vice President of GeoStar Corp. Between approximately 2001 and 2009, I assisted in the preparation of documents and other activities designed, pursuant to conversations and agreements with others, to allow taxpayers to take deductions to which they were not entitled, relating to their investments in the ClassicStar Mare Lease Program and related endeavors.

Parrott admitted in his guilty plea that, between 2001 and 2009, he knowingly and intentionally conspired with others to defraud the United States by impeding the Internal Revenue Service in its collection of income taxes and that he personally committed “a number of overt acts in furtheranee of’ that conspiracy. Much as with the Plummers, the government stood ready to prove those overt acts. Thus, when he admitted that he assisted “in the preparation of documents and other activities, pursuant to conversations and agreements with others, to allow taxpayers to take deductions to which they were not entitled, relating to their investments in the ClassicStar Mare Lease Program” in furtherance of the conspiracy, he admitted his complicity in those overt acts.

In reality, the parties have no reason to object to the Court’s judicial notice of the charging documents against them or their guilty pleas, for they do not suggest that either the contents of the Information (or, for that matter, his Plea Agreement) are not “capable of accurate and ready determination by resort to sources whose