Big Brown Owner, Fined by NASD, Plans $100 Million Hedge Fund
By David Evans
May 28 (Bloomberg) -- Michael Iavarone, owner of Triple Crown contender Big Brown, was fined, censured and suspended by securities regulators for unauthorized trades in 1999.
Iavarone, 37, a former stockbroker, hasn't disclosed the regulatory actions as he plans to raise $100 million for a hedge fund that will invest in racehorses. Big Brown, a three-year old colt, would be the first horse to win the Triple Crown in 30 years, if it finishes first in the Belmont Stakes on June 7.
Iavarone, who rang the opening bell at the New York Stock Exchange this morning, is co-chief executive officer of International Equine Acquisitions Holdings Inc., a privately held Garden City, New York, company that owns Big Brown and about 80 other racehorses. IEAH, which will manage the fund, describes Iavarone on its Web site as a ``high-profile investment banker on Wall Street'' who became a horseracing executive. The site, www.ieah.com, doesn't mention his regulatory history.
``To me as a prospective investor in his hedge fund, that's clearly material information I'd want to know,'' said Alan Bromberg, who teaches securities law at Southern Methodist Law School in Dallas.
Iavarone, in an interview yesterday, said his seven-year Wall Street career consisted of selling penny stocks at four different brokerage firms, including A. R. Baron & Co. They are Lloyd Wade Securities Inc., Maidstone Financial Inc., both in New York City, and Joseph Dillon & Co., in Great Neck, New York.
Regulators Shut Down Firm
New York-based A.R. Baron pleaded guilty in 1997 to one count of enterprise corruption, a felony. Regulators shut the firm down. Iavarone was not charged with any crimes.
While Iavarone initially denied having had any sanctions in his career in the securities industry, he next said he had been fined, censured and suspended from trading by the NASD for 10 days in 1999.
The NASD, or National Association of Securities Dealers, a self-regulatory group, merged into the Financial Industry Regulatory Authority in 2007.
There were other complaints against Iavarone after he left A.R. Baron.
Keeneland Association of Lexington, Kentucky won a $554,156 judgment against Iavarone for failing to pay for five horses he bought at auction in 2003. The Internal Revenue Service obtained a $130,000 lien against him in 2004 for unpaid 2002 income taxes.
Paid the Judgments
``Back in 2003, I wasn't in good financial shape,'' Iavarone said. He said he paid all the judgments.
Iavarone was sued by the Showboat Hotel and Casino in Atlantic City in January 1999 for writing a bad check for $20,000, Superior Court of New Jersey court records show.
In the lawsuit, the casino alleged that it ``repeatedly made demands upon the Defendant for the aforesaid amount, but to no avail.'' In January 2000, the Superior Court of New Jersey entered a judgment against Iavarone when he failed to respond, for $14,090 plus costs. Iavarone paid the casino in July 2000, court records show.
Iavarone said an imposter was responsible. ``There was no bad check ever written,'' he said. ``Somebody took out a marker in my name, illegally.''
Big Brown won the Kentucky Derby on May 3 and the Preakness Stakes on May 17 by a combined 10 lengths. If he wins the Belmont Stakes, he would join Affirmed, Seattle Slew and Secretariat as the only horses to sweep the Triple Crown in the past 60 years.
Crack in Hoof
The Triple Crown is a demanding feat because it requires a horse to win at three different distances and on three different tracks over a five-week period.
Big Brown developed a crack in a hoof in recent days that has forced his trainer, Rick Dutrow Jr., to scale back his training ahead of the Belmont. Hoof injuries sidelined Big Brown for months last year and early this year.
The undefeated brown colt has produced a windfall for Iavarone and IEAH's investors. IEAH sold Big Brown's breeding rights for more than $60 million to Midway, Kentucky-based Three Chimneys Farm on May 17 just before the horse romped to victory in the Preakness, Iavarone said.
IEAH had bought a 75 percent stake in Big Brown for $2.5 million eight months earlier.
Iavarone, who was raised in Bethpage, Long Island, graduated from St. Joseph's College of Patchogue, New York, where he earned a bachelor's degree in business in 1993.
`That's a Mistake'
His IEAH's Web site includes an article about him from the Thoroughbred Daily News that says Iavarone has a bachelor's degree from the University of California at Los Angeles. ``That's a mistake,'' Iavarone says.
Iavarone has come a long way from his past as a stockbroker. In 1995, while working at A.R. Baron, Iavarone made unauthorized trades on three occasions, the NASD found.
He bought and sold more than $20,000 of stock without the permission of his clients, the NASD said. Iavarone, who wasn't charged criminally, was fined $7,500 and suspended for 10 days in 1999.
``I needed to make it go away as fast as possible,'' said Iavarone, adding that he neither admitted nor denied guilt. The records show he did consent to the findings of fact and violations by the NASD.
A.R. Baron defrauded investors out of more than $75 million before filing for bankruptcy protection in 1996, according to the New York District Attorney's office.
`Ran Up Prices'
One of Iavarone's customers at A.R. Baron was Vernon Bell, now a 65-year-old partner in a Huntington, West Virginia, heating and air-conditioning company.
``They invested your money in these supposedly up-and- coming stocks,'' said Bell, who filed a complaint with the NASD in 1997 stating he lost $62,000. He said in the complaint that Iavorone made unauthorized trades in penny stocks.
``They ran the prices up and then the bottom dropped out after they sold their shares,'' Bell said. ``I learned a lesson.'' He says he accepted a $10,000 settlement from Iavarone.
``That doesn't mean I did something wrong,'' says Iavarone, who recalls paying settlements to customers, but said he doesn't remember Bell.
Iavarone worked for A. R. Baron from 1993 until just before it closed in 1996. After that, he went to Lloyd Wade Securities for five months. Then he worked at Maidstone Financial for 10 months.
`I Did Very Poorly'
He ended his brokerage career at Joseph Dillon, where he worked for three years until December 2000.
Iavarone says he spent the next two years as a self- employed day-trader after the Internet stock bubble collapsed.
``Like everyone else, I did very poorly,'' he said.
In February 2003, he incorporated IEAH at his home in Holbrook, New York and entered the horseracing business, which he says has intrigued him since childhood.
After a rough start, he says he's raised more than $40 million, with plans to raise another $100 million for the hedge fund.
``Obviously Big Brown has become a big promotion for us and will really help us going forward in the advertising and promotion of the fund,'' Iavarone says in a video on IEAH's Web site. The video is from an interview by CNBC. He said in the interview yesterday the hedge fund would not own any interest in Big Brown.
As Iavarone uses the excitement surrounding Big Brown to drum up interest in his racehorse hedge fund, Bell, his former customer at A. R. Baron, urges prospective investors to be cautious.
``I know his past history,'' Bell said. ``I don't know if he's mended his ways. I wouldn't give him a second chance.''
To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net.
Last Updated: May 28, 2008 14:15 EDT |
