Suits allege fraud by Wilmington Trust

Tom Morello, raised in a Mayfair rowhouse as the son of a Philadelphia Naval Shipyard worker, made loads of money in Jersey Shore real estate.

And like entrepreneurs everywhere, he is always open to chances to make more.

So Morello was intrigued when his Wilmington Trust Corp. adviser suggested an investment in a thoroughbred racehorse business in Kentucky that promised high returns and tax breaks to boot.

What's more, Wilmington Trust was willing to lend him the money to get started. His adviser, Jerry Mauro, even accompanied him on a visit to Kentucky horse country.

How could he go wrong, he thought, following the lead of a company founded on the DuPont family fortune?

Morello plowed $6.2 million - much of it borrowed from Wilmington Trust - over two years into a business that allowed investors to lease mares for a breeding season and sell the foals.

But instead of riches from the sale of thoroughbred foals born on a pristine Kentucky farm, the investment brought Morello only headaches and the threat of financial ruin.

ClassicStar, a mare-leasing company centered on a horse-breeding farm near Lexington, collapsed in 2006, followed by allegations of massive fraud by its owners and affiliated companies. A recent estimate put nationwide losses at $600 million.

Morello's real estate development business is in shambles, and last month Wilmington Trust began foreclosing on his beach house in Ocean City, where his 87-year-old mother-in-law lives.

"I spent my whole life and finally got something that I could really enjoy and have my family enjoy. And right now it's in jeopardy, said Morello, 50, a Mount Laurel resident who is married and has four children.

Morello is fighting back with a lawsuit in federal court in New Jersey alleging that Wilmington Trust employees and others committed fraud by misleading him into investing in the mare-leasing program offered by the now-bankrupt ClassicStar even though they knew something was amiss.

At least two other individuals from the Philadelphia area, business partners Lew Teffeau and Leo Hertzog, invested in ClassicStar on the advice of Wilmington Trust, according to court documents. Hertzog has a lawsuit pending against Wilmington Trust, ClassicStar and others. Teffeau, whose claim in ClassicStar's bankruptcy is $12.3 million, has not filed a suit.

A fourth local man, Michael Ginaldi of Bucks County, invested in ClassicStar, but his lawsuit does not mention Wilmington Trust. Documents filed with Ginaldi's complaint show that in 2004 his mare-leasing fees ranged from $58,000 for Dreamy Maiden to $900,000 for Freckles Olena #5. He sold three foals in 2007 for $585,000.

Ginaldi did not respond to calls seeking comment. His attorney at Blank Rome L.L.P. in Philadelphia, Ian M. Comisky, did not respond to an e-mail or a voice mail.

Wilmington Trust has sought to have Morello's suit, filed in December, dismissed on technicalities.

The bank said in its answer to Hertzog's 2007 lawsuit that Hertzog got the idea to invest in ClassicStar from his business partner, Teffeau.

Furthermore, Wilmington Trust said, Hertzog relied on his attorney at Wolf, Block, Schorr & Solis-Cohen L.L.P., in Philadelphia, and on his accountant at Schwartz Lasson Harris Ltd., in Horsham, for advice as much as he did on Wilmington Trust.

"We are vigorously defending our position, which is stated in court documents related to the case," Wilmington Trust said in a statement.

Hertzog, reached in Florida, referred questions to his WolfBlock attorney, Brian Flaherty, who declined to discuss the case.

The Hertzog, Morello and Ginaldi lawsuits are among 24 against ClassicStar and related entities that have been consolidated in U.S. District Court for the Eastern District of Kentucky, where ClassicStar was located.

The lawsuits allege a bait-and-switch scheme, in which investors were enticed by the aura of thoroughbred racing - the sport of kings - and then pushed into other investments with supposedly guaranteed payouts.

The switch into other investments with links to the owners of ClassicStar, such as quarter horses or interests in a natural gas company, was necessary because ClassicStar was selling more thoroughbred mare leases than it had mares, the lawsuits allege.

Promoters touted the leasing program's tax benefits. Setting up a horse farm as a limited-liability company allowed investors to write off expenses, even though the "farm" was nothing more than an arrangement with ClassicStar, which kept the mares on its farm.

The Internal Revenue Service did not like the arrangement. It raided ClassicStar's Kentucky offices in February 2006, according to court documents. Eight months later, the IRS told Morello that his 2004 horse-related deductions were not allowed and that he owed $1.8 million.

When the tax deductions were eliminated, the already shaky scheme imploded because investors no longer found it attractive.

Among those caught in the aftermath are Morello and Hertzog. Morello borrowed from Wilmington Trust $3.8 million of the $6.2 million he put into ClassicStar. Hertzog borrowed all of the $10.5 million he invested in ClassicStar.

For Hertzog, the story began when he and Teffeau sold their direct-marketing firm, CC3 in Ivyland, in 2002 for an undisclosed amount. In 2001, the company had $92 million in sales.

Hertzog deposited his share of the proceeds with Wilmington Trust's wealth-management division, according to his lawsuit.

Kevin Coccetti, Hertzog's wealth adviser, introduced the idea of ClassicStar leasing in late spring 2003.

Coccetti had local help wooing Hertzog for ClassicStar. That help, according to Hertzog's lawsuit, included Wilmington Trust colleague Martin L. Wolf and David S. Forman, a Cherry Hill broker, who also leased mares, according to court documents.

The lawsuits allege that ClassicStar paid Forman a 7 percent commission on the sale of mare leases and that some of that money was passed on to certain Wilmington Trust employees.

Wilmington Trust said in court documents that Coccetti and Wolf no longer work for the company. Coccetti, whose address is a post office box in Wycombe, could not reached.

Wolf, a West Chester resident, said he left Wilmington Trust early last year because of an illness. In a court document, Wilmington Trust identified Wolf as a lawyer and a certified public accountant.

That was how he was portrayed during negotiations over ClassicStar investments, and it boosted the confidence of investors, according the Hertzog and Morello lawsuits.

However, public records show that Wolf's license as a lawyer expired in 1989 and that his license as a CPA expired in 1990. Still, he insisted last week: "I am technically a lawyer and technically a CPA."

Accompanied by Coccetti and another Wilmington Trust employee, Clyde Mease, Hertzog visited the well-known Keeneland Yearling Sale in Lexington and ClassicStar's nearby farm in September 2003.

Hertzog was hooked. That fall, he told Wilmington Trust to wire $6 million in borrowed money to ClassicStar.

Soon after, an executive at ClassicStar's parent company approached Hertzog about swapping mare leases for interests in a Houston natural gas company. The link was GeoStar Corp., which owned ClassicStar and a large stake in Gastar Exploration Ltd.

Hertzog made that swap in August 2004, but he never was able to access the shares. In a Securities and Exchange Commission filing, a Kevin Coccetti is listed along with Hertzog as having received shares in Gastar.

ClassicStar and Coccetti persuaded Hertzog to swap his second set of mare leases, which cost $4.5 million in December 2004, for interests in quarter horses, according to Hertzog's lawsuit.

ClassicStar even agreed to pay the interest on the $4.5 million, but that stopped in December 2006. Two months later, Wilmington Trust declared Hertzog in default on the $7.05 million he owed it from the ClassicStar loans.

Hertzog, whose net worth was about $30 million when he first invested in ClassicStar, sold other assets at the bank to settle the debt.

Morello, whose attorney is Stephen J. DeFeo at Brown & Connery L.L.P. in Westmont, has had a harder time since the collapse of ClassicStar. When he got caught up in ClassicStar, Morello's net worth was about $15 million, thanks to the housing boom.

Now, in part because of the housing downturn, Morello is facing insolvency. His lawsuit says his main construction lender has sued him in Florida and New Jersey, trying to hold him liable for $16 million in debt.

"I'm in a big whirlwind of fire right now," Morello said.