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What's in the Brooks indictment about horses?

January 26, 2010

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Steve Kallas, a New York attorney, longtime Standardbred owner, and correspondent to The Horseman And Fair World magazine recently reviewed the 72-page federal indictment against David Brooks and discusses what facts from Brooks’s harness racing holdings have been deemed relevant by the government in its prosecution. 

Brooks is being prosecuted for, among other things, securities fraud, mail and wire fraud, insider trading and false filing of tax returns.  Below is a summary of the relevant allegations set forth in the indictment. 

Who Is The Defendant?

Under the general description of who defendant David Brooks is, there is an entire paragraph in the indictment that discusses Brooks as a member of the United States Trotting Association whose biography was included on the USTA website under a listing of the sport’s leading owners.
The indictment goes on to say that “Brooks or companies he owned or controlled held title to approximately 100 trotting horses and breeding horses.” While that may be a low estimate, the indictment goes on to state that defendant Brooks spent millions of dollars each year relating to the care and training of these horses and was also “intimately involved in the management of the business.”
The tie-in in the indictment is that there is no connection between DHB Industries Inc. (“DHB”) and Brooks’s personal horse business which, according to the indictment, was often funded with DHB monies. 

In addition, the indictment discusses many companies privately owned or controlled by defendant Brooks, including Perfect World Enterprises LLC and VAE Enterprises LLC. These companies, according to the USTA, are the owners of harness racehorses and/or broodmares. 

Unauthorized And Undisclosed Executive Compensation 

One “component” of the defendants (David Brooks, the founder and former chairman of DHB and Sandra Hatfield, the former chief operating officer of DHB, are the two defendants) “scheme to defraud” DHB shareholders and the investing public was “the payment by DHB or one of its subsidiaries of expenses related to Brooks’ horse business,” according to the indictment. 

A few paragraphs later, the indictment sets forth a chart that lists alleged payments by DHB of the expenses of Brooks’s horse business. These payments, from either DHB or subsidiaries of DHB, include:  $106,062 in the year 2000 for “horse vitamins” (later disclosed in the indictment as purchased from the company “Supernatural Products”); $109,600 in the year 2001 for “Brooks’ Horse Trainer’s Salary and Expenses;” and $42,761 in July and September 2000 for “Horse Medical Treatments.’ 

The chart goes on to list three “Bonus for Brooks’ Horse Trainer” DHB checks: in December 2003 for $10,000, December 2004 for $20,000 and December 2005 for $10,000, as well as a separate 2002 DHB check for $8,460 to “Brooks’ Horse Trainer.” 

Other listings on the chart include a subsidiary’s check in July 2003 for $10,000 for “Brooks’ Horse Broker” and a subsidiary’s check in February 2002 for $34,000 for “Attorneys Representing Brooks in Matter Regarding his Horse Business.” 

The indictment states that the horse business payments “included, but was not limited to,” the payments set forth above. 

Vehicles For Brooks’s Personal, Family and Non-DHB Business Use 

Under this part of the indictment, it alleges that “the defendant Brooks used more than $50,000 of DHB funds to purchase trucks and equipment trailers that were used exclusively for the benefit of his non-DHB horse businesses.” These purchases are cited later in the indictment as proof that Brooks failed to tell DHB’s independent auditors about these and other personal purchases which, as a result, were never disclosed to investors or to the Securities and Exchange Commission (“SEC”), the government’s regulatory and enforcement entity for the purchase and sale of stock in public companies like DHB. 

The Tax Fraud Scheme
According to the indictment, part of the tax fraud scheme included giving year-end bonuses, paid by DHB, to non-DHB employees, including at least one horse trainer. In 2003, for the first time, defendant Brooks was given permission by the DHB board of directors to pay out year-end bonuses.
At a holiday party in late December 2003 in Miami Beach, Fla., defendant Brooks gave out bonus payments to both DHB and non-DHB personnel. The non-DHB personnel were awarded over $150,000 in bonuses at the party.
According to the indictment, “the non-DHB personnel were transported to Miami Beach and provided accommodations at DHB’s expense.” Presumably, the $10,000 horse trainer’s check from December 2003 was given out at this 2003 holiday party. 

The indictment goes on to allege similar year-end holiday parties in both 2004 and 2005, where non-DHB employees were given over $200,000 in bonuses in 2004 and over $100,000 in bonuses in 2005. As discussed above in relation to the horse expense chart in the indictment, in 2004 a $20,000 bonus was given to Brooks’s horse trainer and in 2005 a $10,000 bonus was given to Brooks’s horse trainer. 

What Does It All Mean? 

Obviously, allegations in the indictment are just that: allegations. The government is attempting to prove at trial that these horse-related expenses and others were part of a massive scheme by both defendants to take DHB money and pay for many non-DHB expenses. The main part of the case relates to insider trading (six counts of the 21-count indictment are against defendant Brooks for insider trading and three are against defendant Hatfield) and the filing of false tax returns (two counts against defendant Brooks). By paying out horse-related and other personal expenses and not reporting it as income to himself, defendant Brooks is accused of, essentially, income tax evasion. 

The bigger crime, relating to DHB’s armor vest sales to both the military and local police departments, gave rise to Brooks selling about $185 million dollars worth of his DHB stock before it was discovered that vests were either overvalued or inventory nonexistent. The government, as part of this criminal indictment, is trying to have the defendants forfeit about $190 million (about $185 million in assets from defendant Brooks and about $5 million in assets from defendant Hatfield). 
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