Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 1 of 30
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`Civil Action No.
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`20-8886
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
` -------------------------------------------------------- x
`MGG INVESTMENT GROUP LP,
`Plaintiff,
`- against -
`LEONARD C. GREEN & CO., PA d/b/a THE
`GREEN GROUP,
`
`Defendant.
` -------------------------------------------------------- x
`
`:::::::::
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`COMPLAINT
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`Plaintiff MGG Investment Group LP (“MGG”), by and through its undersigned
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`counsel, for its complaint against Defendant Leonard C. Green & Co., PA d/b/a The Green
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`Group (“Defendant” or “TGG”), alleges as follows:
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`NATURE OF THE ACTION
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`1.
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`This is an action to recover damages arising from a fraudulent scheme perpetrated
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`by TGG, together with Zayat Stables, LLC (“Zayat Stables”) and members of the Zayat family,
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`inter alia, to conceal the improper sale of collateral securing a series of loans made to Zayat
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`Stables by MGG.
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`2.
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`Specifically, Zayat Stables sold many horses and other equine assets that were
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`collateral under the loans and failed to report any of those sales to MGG or to make payment of
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`the proceeds of those sales to MGG, all as required by the applicable loan documents in the event
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`of a sale of equine collateral.
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`3.
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`Through documents produced in related actions involving Zayat Stables and the
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`Zayat family, MGG learned that TGG prepared false and misleading financial statements that
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`enabled Zayat Stables to hide these sales of equine collateral and to circumvent the requirements
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`of the applicable loan documents.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 2 of 30
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`4.
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`As a result of the concealment of sales revenue, manipulation of accounts
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`payable, and the concealment of other defaults under the loan documents by Zayat Stables,
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`members of the Zayat Family and TGG, as detailed in greater detail below, MGG was unaware
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`of the defaults by Zayat Stables under the loan agreements and did not accelerate the loan when
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`it could have, before Zayat Stables had sold much of the equine collateral securing the loan. By
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`the time Zayat Stables failed to satisfy its payment obligations on September 30, 2019, MGG
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`could not realize on the collateral that secured the loans because much of it had already been sold
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`and those sales were hidden from MGG by Zayat Stables and members of the Zayat family, all
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`with the active participation of TGG. To date, more than $24 million in principal, plus accrued
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`interest, remains unpaid, with little collateral against which MGG can recover. This state of
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`affairs would not have been possible without TGG’s wrongful acts.
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`5.
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`TGG had full knowledge that the annual and quarterly financial statements and
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`opinions and monthly financial reports it was preparing were being provided to, and relied upon
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`by, MGG. TGG also knew that Zayat Stables’ sales of equine collateral were not reported to
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`MGG, as they were required to be. Yet TGG nevertheless prepared audited financial statements
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`and financial reports that excluded those sales from Zayat Stables’ revenue. That deliberate
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`misrepresentation hid millions of dollars of revenue from MGG—in 2017 alone, Zayat Stables’
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`revenue from equine sales was understated by nearly $4.5 million.
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`6.
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`In addition to defrauding MGG, TGG also committed professional malpractice by
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`repeatedly failing to ensure that Zayat Stables’ financial statements were prepared, as required,
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`in accordance with Generally Accepted Accounting Principles (“GAAP”). Both the failure to
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`record revenue and the manipulation of accounts payable were violations of GAAP. But TGG
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`committed numerous other violations as well.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 3 of 30
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`7.
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`First, when TGG did record revenue from equine sales, it did so on a cash basis,
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`not an accrual basis as is required by GAAP. This had the effect of artificially delaying the
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`recognition of revenue from those sales.
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`8.
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`Second, as set forth in greater detail below, TGG violated the principles of
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`Objectivity and Independence, Due Care, and Integrity as set forth by the American Society of
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`American Institute of Certified Public Accountants (“AICPA”), by, inter alia:
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`a.
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`b.
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`c.
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`d.
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`e.
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`modifying and manipulating financial statements in response to directions
`from Zayat Stables;
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`discussing loans and investment opportunities between TGG and its client,
`Zayat Stables, and Zayat Stables’ principals;
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`attempting to profit from Zayat Stables’ financial difficulty by trying to
`buy breeding rights to Triple Crown winner AMERICAN PHAROAH at a
`discount;
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`sending a current employee to work as a bookkeeper in Zayat Stables’
`offices; and
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`fabricating expenses at Zayat Stables to account for personal credit card
`charges incurred by members of the Zayat Family.
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`9.
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`Because of these actions, TGG bears responsibility for MGG’s loss.
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`PARTIES
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`10.
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`Plaintiff MGG is a Delaware limited partnership located at One Pennsylvania
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`Plaza, New York, New York 10119. Pursuant to the Financing Agreement with Zayat Stables,
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`described below, MGG is the Administrative Agent and Collateral Agent and was appointed and
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`authorized by the lenders party thereto to enforce the rights and remedies of the lenders under the
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`Financing Agreement, the Pledge and Security Agreement referenced below and the other loan
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`documents referenced in the Financing Agreement (collectively, the “Loan Documents”).
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`(Financing Agreement § 10.01.)
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 4 of 30
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`11.
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`Upon information and belief, Defendant Leonard C. Green & Co., PA d/b/a The
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`Green Group is a Professional Association organized under the laws of New Jersey, with its
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`principal place of business located at 900 Route 9, Woodbridge, New Jersey 07095. TGG
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`advertises on its website that it is “an accounting, tax, consulting and advisory firm with a unique
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`approach—out of the box, entrepreneurial thinking. With a team of seasoned, highly successful
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`entrepreneurs, family business owners, real estate owners, investors and specialists in IRS audits
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`and thoroughbred racing, we see the business world through a special lens and find solutions in
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`ways our competition simply cannot.”
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`JURISDICTION AND VENUE
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`12.
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`This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.
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`§ 1332 because the amount in controversy exceeds $75,000, exclusive of costs, and the action is
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`between citizens of different states.
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`13.
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`This Court has personal jurisdiction over TGG pursuant to N.Y. Civil Practice
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`Law & Rules § 302(a) because TGG (i) transacted business in New York in connection with the
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`actions at issue here and/or (ii) committed a fraud that caused injury to MGG in New York and
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`TGG regularly does or solicits business, or engages in any other persistent course of conduct,
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`within New York. TGG has sufficient minimum contacts with this district to render this Court’s
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`exercise of jurisdiction permissible under traditional notions of due process.
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`14.
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`Venue is proper in this District pursuant to 28 U.S.C. § 1391(b) because a
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`substantial part of the events giving rise to these claims occurred in this district. TGG conducts
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`substantial business in this district, and many of the acts and much of the conduct that constitutes
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`the violations of law complained of herein, including the dissemination to MGG of false and
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`misleading financial information, occurred in this district.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 5 of 30
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`Background
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`RELEVANT FACTS
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`15.
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`Zayat Stables is a thoroughbred horseracing company. In 2015, Zayat Stables’
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`horse, AMERICAN PHAROAH, became horseracing’s 12th Triple Crown winner as well as the
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`Breeders’ Cup Classic champion.
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`16.
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`At all relevant times, TGG was engaged as Zayat Stables’ auditor and accountant.
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`Under that engagement, TGG was responsible for determining whether Zayat Stables’ “financial
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`statements are fairly presented, in all material respects, in conformity with U.S. generally
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`accepted accounting principles.”1 TGG also agreed to “assist in preparing [Zayat Stables’]
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`financials statements in conformity with U.S. generally accepted accounting principles.”
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`17. MGG is in the business of providing financing solutions to mid-size and growing
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`companies.
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`18.
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`On or about July 26, 2016, Zayat Stables as the Borrower entered into a financing
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`agreement with certain affiliates of MGG, and MGG as Administrative Agent and Collateral
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`Agent (the “Financing Agreement”). A true and correct copy of the Financing Agreement is
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`attached hereto as Exhibit B.2
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`19.
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`The Financing Agreement provided for a term loan in the aggregate principal
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`amount of $25 million and a delayed draw term loan of up to $10 million.
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`1 A true and correct copy of the engagement letter between TGG and Zayat Stables for 2017 is attached hereto as
`Exhibit A. The engagement letters for all other periods relevant to this action are substantively identical to the 2017
`letter.
`2 Capitalized terms not otherwise defined have the meanings given to them in the Financing Agreement.
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`20.
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`On September 30, 2016, Zayat Stables and MGG executed the first amendment to
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`the Financing Agreement whereby MGG provided Zayat Stables with $5 million of the delayed
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`draw term loan, resulting in loans to Zayat Stables totaling $30 million (the “Loans”).
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`21.
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`The Loans were secured by all of Zayat Stables’ assets, including all of its horses
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`and the AP Breeding Rights, which were nine lifetime breeding rights for AMERICAN
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`PHAROAH that had been transferred by the wife and children of the principal of Zayat Stables,
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`Ahmed Zayat, to Zayat Stables as collateral for the Loans. Each of the nine AP Breeding Rights
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`entitles its holder to breed one thoroughbred mare with AMERICAN PHAROAH in each
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`breeding season over the course of the horse’s life and was extremely valuable given the success
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`of AMERICAN PHAROAH.
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`22.
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`Under the Financing Agreement, Zayat Stables affirmatively agreed to provide
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`MGG with comprehensive and accurate financial reporting, including the following:
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`a.
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`b.
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`c.
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`Monthly “flash reporting of key financial and operating metrics of the
`Borrower and its Subsidiaries” (Financing Agreement § 7.01(a)(i));
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`“[Q]uarterly financial statements, including a balance sheet, income
`statement and cash flow statement of the Borrower and its Subsidiaries as
`at the end of such quarter . . . certified by an Authorized Officer of the
`Borrower as fairly presenting, in all material respects, the financial
`position of the Borrower and its Subsidiaries as of the end of such quarter
`and the results of operations and cash flows of the Borrower and its
`Subsidiaries for such quarter and for such year-to-date period, in
`accordance with GAAP applied in a manner consistent with that of the
`most recent audited financial statements of the Borrower and its
`Subsidiaries” (Financing Agreement § 7.01(a)(ii)); and
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`Annual “consolidated and consolidating balance sheets, statements of
`operations and retained earnings and statements of cash flows of the
`Borrower and its Subsidiaries . . . and accompanied by a report and an
`opinion, prepared in accordance with generally accepted auditing
`standards, of independent certified public accountants of recognized
`standing selected by the Borrower and satisfactory to the Agents . . .
`together with a written statement of such accountant to the effect that, in
`making the examination necessary for their certification of such financial
`statements, they have not obtained any knowledge of the existence of an
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 7 of 30
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`Event of Default or a Default under Section 7.03 and (y) if such
`accountants shall have obtained any knowledge of the existence of an
`Event of Default or such Default, describing the nature thereof (Financing
`Agreement § 7.01(a)(iii)).
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`23.
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`Zayat Stables also agreed to “[k]eep, and cause each of its Subsidiaries to keep,
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`adequate records and books of account, with complete entries made to permit the preparation of
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`financial statements in accordance with GAAP.” (Financing Agreement § 7.01(e)).
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`24.
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`Under TGG’s engagement with Zayat Stables, TGG was responsible for preparing
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`the aforesaid financial statements and reports required under the Financing Agreement in
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`conformity with GAAP.
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`TGG and Zayat Stables Perpetrate a Fraud on MGG By Concealing Revenue From Equine
`Sales
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`25.
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`Based on documents and information provided to MGG in other related actions,
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`and upon information and belief, beginning no later than May 2017 and continuing through at
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`least as recently as January 2020, Zayat Stables and its principal, Ahmed Zayat as well as Justin
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`Zayat, President of Zayat Stables, and other members of the Zayat Family, with the active
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`participation of Defendant TGG, engaged in a fraudulent scheme whereby they sold off millions
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`of dollars of the equine collateral that secured the loans from MGG without obtaining MGG’s
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`consent, or making required payments to MGG, while concealing the sales from MGG. As a
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`result of the improper sale of the equine collateral, MGG is unable to recover the outstanding
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`loan balance owed by Zayat Stables.
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`26.
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`Under the Financing Agreement, in the event of a disposition (other than the
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`involuntary loss, damage or destruction of property or any involuntary condemnation, seizure or
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`taking, by exercise of the power of eminent domain or otherwise, or confiscation or requisition
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`of use of property), including the disposition of horses and other equine collateral, Zayat Stables
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`was obligated to use a certain percentage of the proceeds of the disposition (not less than 40%
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 8 of 30
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`and in some cases up to 100%, depending on the disposition at issue) to partially pre-pay the
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`outstanding principal of the loans. (Financing Agreement § 2.05(c)(ii).)
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`27.
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`Each of Zayat Stables’ sales were hidden from MGG such that MGG never
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`consented to any of the sales. Further, Zayat Stables made the sales in question for prices far
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`below the appraised value of the Equine Collateral, and TGG concealed those proceeds, and the
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`fact of the sales, from MGG in order to allow Zayat Stables to continue its fraudulent scheme
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`undetected.
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`28.
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`Any failure to pre-pay as required by Section 2.05(c)(ii) constituted an Event of
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`Default under the Financing Agreement. (Financing Agreement § 9.01(a).) Upon an Event of
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`Default, MGG may “declare all or any portion of the Loans then outstanding to be accelerated
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`and due and payable.” (Id. § 9.01.)
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`29.
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`By ensuring that none of Zayat Stables’ improper sales were ever reported to
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`MGG, as was explicitly required under the Financing Agreement, TGG played a central role in
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`the fraudulent scheme.
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`30.
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`In mid-2017 Zayat Stables began selling off horses worth millions of dollars.
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`Zayat Stables concealed these sales in order to keep the proceeds of the sales and avoid having to
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`use the sales proceeds to pay down principal on the MGG loans, as required by the Loan
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`Documents, and to conceal the continuing Events of Default under the Loan Documents that, if
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`discovered by MGG, would have allowed and caused MGG to accelerate Zayat Stables’
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`repayment obligations and/or exercise rights or remedies under the Loan Documents or
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`applicable law, at a time when there was significant collateral which could have been used by
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`MGG to pay off the loans.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 9 of 30
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`31.
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`TGG’s failure to include the equine sales at issue in this action rendered Zayat
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`Stables’ financial statements and reports false and misleading.
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`32.
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`The improper sales included Zayat Stables’ most valuable assets, most notably the
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`nine breeding rights to AMERICAN PHAROAH which were pledged to secure the Loans.
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`33.
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`The improper sales and, as set forth below, collections of insurance proceeds also
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`included other valuable Equine Collateral that was pledged to MGG to secure the loans pursuant
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`to the Loan Documents, including, but not limited to, Zayat Stables’ interests in EL KABEIR,
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`AMERICAN CLEOPATRA (and one of her foals), LEMOONA, AMANDREA, SOLOMINI,
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`JUSTIN SQUARED, SIENA MAGIC, EMMZY, EGYPTIAN PRINCE, LADY TNT, 2016
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`CRSONALITY (sp.), METROPOL, SASSY SIENA’s foal, NANOOSH, stallion shares in
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`PIONEER OF THE NILE, ESKENDEREYA, ZENSATIONAL, JUSTIN PHILLIP,
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`GRAMMAJO, DANYELLI, LEZENDARY, OLD GLORY, ASH N’ EM, MAJID, and stallion
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`shares in BODEMEISTER.
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`34.
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`Specifically, in 2017, Zayat Stables and TGG concealed from MGG, at a
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`minimum, the following improper equine sales:
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`a.
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`b.
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`c.
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`d.
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`e.
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`JUSTIN SQUARED for $275,000, on or around May 15, 2017;
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`SIENA MAGIC for $512,000, on June 23, 2017; and
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`EL KABEIR for $500,000, on or around September 20, 2017;
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`stallion shares in PIONEER OF THE NILE and BODEMEISTER for over
`$1.5 million, in September 2017; and
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`AMERICAN CLEOPATRA for $1.3 million, on or around November 15,
`2017.
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`35.
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`In addition to these sales, upon information and belief Zayat Stables and TGG
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`also concealed insurance claims of $407,000 for EMMZY and $500,000 for EGYPTIAN
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`PRINCE in 2017.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 10 of 30
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`36.
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`In 2018, Zayat Stables and TGG also concealed from MGG, at a minimum, the
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`following improper equine sales:
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`a.
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`b.
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`c.
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`d.
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`e.
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`LADY TNT for $335,000, in or around March 2018;
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`2016 CRSONALITY for $250,000;
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`METROPOL for $200,000, in or around April 2018;
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`SASSY SIENA’s foal, for $86,000 without MGG’s knowledge that
`SASSY SIENA had been bred;
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`NANOOSH, sold a larger percentage of the horse for a lower valuation
`than reported to MGG.
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`37.
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`From December 2018 through June 2019, Zayat Stables also purported to sell all
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`nine of the AP Breeding Rights, with proceeds totaling $3.3 million. An appraisal conducted in
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`June 2017 concluded that the nine AP Breeding Rights had a fair market value of $10.8 million.
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`38.
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`Despite its obligation to do so under the Loan Documents, Zayat Stables did not
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`inform MGG of any of the purported sales of the AP Breeding Rights and did not use the
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`proceeds to pay down the principal on its loan from MGG. Instead, MGG only learned of the
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`purported sales of the AP Breeding Rights in January 2020 when it uncovered Zayat Stables’
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`fraud.
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`39.
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`In 2019, Zayat Stables and TGG also concealed from MGG, at a minimum, the
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`following improper equine sales:
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`a.
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`b.
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`c.
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`LEMOONA for $150,000, on or around March 6, 2019; and
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`A 55% ownership stake in AMANDREA for $115,500, on or around
`October 11, 2019; and
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`SOLOMINI for $250,000, on or around December 3, 2019.3
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`3 On or around January 2, 2018, MGG entered into a partial lien release agreement with Zayat Stables whereby
`MGG partially released its secured lien against SOLOMINI so as to allow Zayat Stables to sell 50% of its 100%
`ownership stake in SOLOMINI. MGG retained a security interest in Zayat Stables; remaining 50% ownership
`stake.
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`40.
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`Each of the secret sales made in 2017, 2018, and 2019 were at prices far below
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`the appraised value of the horses in question.
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`41.
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`Upon information and belief, Zayat Stables’ pattern and practice of purporting to
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`sell Zayat Stables’ pledged equine collateral out from under MGG’s security interests and
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`without MGG’s knowledge goes beyond the sales detailed above.
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`42. MGG did not consent to any of the sales listed herein, and MGG was not
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`informed of any of the sales beforehand.
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`43.
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`Finally, Zayat Stables did not make any principal payments as the result of any of
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`these sales of Equine Collateral, as was required pursuant to Section 2.05(c)(ii) of the Financing
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`Agreement.
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`Zayat Stables Defaults on Its Loan Payments and MGG Brings Suit
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`44.
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`TGG helped Zayat Stables and members of the Zayat family hide the existence of
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`numerous events of default by Zayat Stables under the loan documents, which would have
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`allowed MGG to declare events of default, accelerate the loan amounts and collect the loan
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`amounts due against the collateral before the collateral had been dissipated. Because of TGG’s
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`actions, MGG did not become aware of the events of default caused by the concealed sales until
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`January 2020.
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`45.
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`On September 30, 2019, Zayat Stables failed to pay the principal and interest on
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`the term loan, as was required pursuant to Section 2.03(a) of the Financing Agreement, giving
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`rise to an Event of Default under Section 9.01(a) of the Financing Agreement.
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`46.
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`On or about December 4, 2019, MGG sent Zayat Stables a notice of default and
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`reservation of rights.
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`47.
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`In January 2020, by virtue of Ahmed Zayat’s confession to such, MGG became
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`aware of the sales which had been concealed by Zayat Stables, the Zayat Family and TGG.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 12 of 30
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`48.
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`Thereupon, as a result of the improper equine sales, the breaches of the Financing
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`Agreement, and other actions by Zayat Stables and the Zayat family, MGG brought an action in
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`Kentucky state court, MGG v. Zayat Stables, et al., Civil Action No. 20-CI-00248 (the
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`“Kentucky Action”), asserting several claims, including claims for fraud.
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`49.
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`In the Kentucky Action, MGG secured summary judgment against Zayat Stables
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`based on Zayat Stables’ breaches of its repayment obligations under the loan documents,
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`awarding MGG $24,534,166.13 in damages, which is largely unavailable because of the sales of
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`equine collateral by Zayat Stables and members of the Zayat family, and the actions of TGG.
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`Additionally, Ahmed Zayat and Justin Zayat moved to dismiss MGG’s fraud claims against
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`them, which motion was denied.
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`50. MGG’s claims against other members of the Zayat family are currently pending in
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`Florida and New Jersey, and Zayat Stables and Ahmed Zayat currently have pending bankruptcy
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`petitions in New Jersey federal court.
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`51.
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`In litigating the Kentucky Action, MGG subpoenaed TGG and TGG produced
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`documents in response to the subpoena. Those documents form the basis of several of MGG’s
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`allegations in this action. Before MGG received TGG’s production, MGG had no way of
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`uncovering TGG’s wrongful conduct in connection with its financial reporting duties.
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`TGG Actively Participates in Zayat Stables’ Fraud
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`52.
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`Zayat Stables did not accomplish this fraud on its own. It needed the help of an
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`accounting firm that was willing to produce false, misleading, and deceptive financial
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`statements, which permitted Zayat Stables to defraud MGG and avoid its obligations under the
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`Loan Documents. Zayat Stables found that willing partner in TGG.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 13 of 30
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`53.
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`At all relevant times, TGG was fully aware that the monthly, quarterly, and
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`annual financial statements and reports and opinions it prepared for Zayat Stables were being
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`provided to, and relied on by, MGG.
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`54.
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`As early as March 2, 2017, Jim Benkoil of TGG wrote to Dane Joella at MGG to
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`introduce TGG as Zayat Stables’ “accountants/auditors.”
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`55.
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`Thereafter, in furtherance of the fraud, there was, at Zayat Stables’ explicit
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`direction, little subsequent communication directly between TGG and MGG. Specifically, on
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`March 4, 2017, Andrew Berkowitz, the COO of Zayat Stables, directed Mr. Benkoil that Zayat
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`Stables “do[es] not want you to deal directly with MGG and Dane . . . or to answer any email
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`with them without running the email response by us first.” A true and correct copy of this email
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`exchange is attached hereto as Exhibit C.
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`56.
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`TGG was in possession of a copy of the Financing Agreement by no later than
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`March 27, 2017, when David Bodner at Zayat Stables sent the Financing Agreement, and
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`relevant amendments thereto, to Mr. Benkoil at TGG by email. In addition, TGG was
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`consistently copied on monthly interest statements sent to Zayat Stables by MGG.
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`57.
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`TGG knew that Section 7.01(a)(i) of the Financing Agreement required Zayat
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`Stables to provide MGG with “internally prepared flash reporting of key operating metrics” of
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`Zayat Stables every month. In fact, TGG was directly involved in the preparation of these
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`monthly reports.
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`58.
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`TGG also knew that Section 7.01(a)(ii) of the Financing Agreement required
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`Zayat Stables to provide “quarterly financial statements, including a balance sheet, income
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`statement and cash flow statement of the Borrower and its Subsidiaries as at the end of such
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`quarter . . . fairly presenting, in all material respects, the financial position of the Borrower . . . in
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`
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 14 of 30
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`accordance with GAAP. . . .” Upon information and belief, TGG was directly involved in the
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`preparation of these quarterly statements and reports.
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`59.
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`TGG also knew that Section 7.01(a)(iii) of the Financing Agreement required
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`Zayat Stables to provide MGG with “consolidated and consolidating balance sheets, statements
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`of operations and retained earnings, and statements of cash flows” on an annual basis. Section
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`7.01(iii) also required a “report and an opinion, prepared in accordance with generally accepted
`
`auditing standards, of independent certified public accountants of recognized standing” that
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`contained “a written statement of such accountants” that they “have not obtained any knowledge
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`of the existence of an Event of Default” or “if such accountants shall have obtained any
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`knowledge of the existence of an Event of Default . . . describing the nature thereof.” TGG was
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`directly involved in the preparation of these annual reports and provided the required opinions
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`thereon.
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`60.
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`Zayat Stables made clear to TGG that the materials TGG was preparing were
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`being furnished to, and relied up by, MGG. In an August 18, 2017 email, Mr. Berkowitz sent
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`Mr. Benkoil at TGG a “link to a google document . . . that we will be maintaining internally for
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`the MGG reporting process.” He then detailed the manner in which Zayat Stables reported cash
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`balances to MGG and the manner in which he wanted revenue to be recognized in the monthly
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`reports. A true and correct copy of this email is attached hereto as Exhibit D.
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`61.
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`TGG knew that MGG was relying on the monthly “flash reporting” and the
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`quarterly and annual financial statements, reports and opinions it prepared for Zayat Stables.
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`62.
`
`TGG knew that MGG was relying on the materials and opinions it prepared for
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`Zayat Stables, and it, together with Zayat Stables, perpetrated a fraud against MGG by, among
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`other things:
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 15 of 30
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`a.
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`b.
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`c.
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`d.
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`hiding revenue from the equine sales described above;
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`manipulating financial statements to hide breaches of the Financing
`Agreement;
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`failing to uncover the extent of Zayat Stables’ fraud, and failing to report
`such fraud in the financial statements provided to MGG; and
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`omitting from its annual financial reporting a required statement as to the
`existence of Events of Default under the Financing Agreement.
`
`A.
`63.
`
`TGG and Zayat Stables Hide Revenue from MGG
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`TGG, as Zayat Stables’ accountant, was an active participant in and materially
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`aided Zayat Stables in concealing the equine sales described above from MGG.
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`64.
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`The work done by TGG in 2017 plainly demonstrates that TGG was an active
`
`participant in Zayat Stables’ fraud: the financial statements for that year audited by TGG, sent to
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`MGG show a total of $7,755,550 in equine sales revenue, but TGG’s own internal work papers
`
`show equine sales revenue in the amount of $12,238,300. In just that one year, TGG helped
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`Zayat Stables hide nearly $4.5 million in equine sales revenue from MGG.
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`65.
`
`As reflected in TGG’s 2017 internal work papers, this discrepancy was caused, in
`
`part, by the failure to report numerous equine sales that were consummated in 2017, including (i)
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`the sale of JUSTIN SQUARED in May 2017 for $275,000; (ii) the sale of SIENA MAGIC in
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`June 2017 for $512,000; (iii) the receipt of $407,000 in insurance proceeds for EMMZY in
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`August 2017; (iv) the sale of EL KABEIR in September 2017 for $500,000; (v) the sale of
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`AMERICAN CLEOPATRA in November 2017 for $1.3 million; and (vi) the receipt of $500,000
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`in insurance proceeds for EGYPTIAN PRINCE in December 2017.
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`66.
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`TGG knew about these sales, as shown by the fact that the sales were recorded in
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`TGG’s own work papers, and it knew that the sales and associated proceeds were not disclosed
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`to MGG in Zayat Stables’ audited financial statements.
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 16 of 30
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`67.
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`Indeed, TGG regularly corresponded with Zayat Stables about their joint efforts to
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`conceal equine sales revenue from MGG. In a February 2018 email exchange between Zayat
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`Stables’ CFO Glenn Weiss and Jim Benkoil at TGG regarding the financial reports for December
`
`2017, Mr. Benkoil sent revised financial statements that “delet[ed] Cairo Healer sale and add[ed]
`
`$50K to cash & AP.” When Mr. Weiss questioned why payroll was “still so high once the Cairo
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`Healer sale was removed,” Mr. Benkoil responded that he “left the bonuses on the P&L” but
`
`could “eliminate them today.” A true and correct copy of this email exchange is attached hereto
`
`as Exhibit E.
`
`68.
`
`On the same day, Mr. Benkoil and Mr. Weiss also corresponded about moving the
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`sales of CAIRO HEALER or SO LONG SONOMA in order to hide from MGG improper
`
`distributions made to members of the Zayat family in December 2017.
`
`69.
`
`TGG further reduced reported revenue by improperly using the proceeds from
`
`sales to pay operating expenses, instead of paying them to MGG, as required. For instance,
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`Diane Massa of TGG sent an invoice received from McKathan Brothers to Mr. Benkoil on April
`
`9, 2019, and he responded that the invoice “will be paid from proceeds” and that the invoice
`
`should not be posted to accounts payable. A true and correct copy of this email exchange is
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`attached hereto as Exhibit F.
`
`70.
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`In addition, TGG concealed the revenue from Zayat Stables’ improper sale of EL
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`KABEIR by classifying the proceeds as capital contributions, not as revenue.
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`16
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`Case 1:20-cv-08886-KPF Document 1 Filed 10/23/20 Page 17 of 30
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`B.
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`TGG and Zayat Stables Manipulate Zayat Stables’ Financial Statements to
`Conceal Breaches of the Financing Agreement
`
`71.
`
`In addition to hiding substantial amounts of revenue from MGG, TGG and Zayat
`
`Stables also concealed numerous breaches of the Financing Agreement by further manipulating
`
`Zayat Stables’ financial statements.
`
`72.
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`Section 7.03(a) of the Financing Agreement requires that “the ratio . . . of (x) the
`
`sum of the aggregate principal amount of all Loans outstanding at any such time plus trade
`
`payables and other accounts outstanding for more than 120 days . . . to (y) Total Equine
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`Collateral Value” (the “Loan to Equine Collateral Value Ratio”) not exceed “50% at any time on
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`or after January 26, 2017” (emphasis added).
`
`73.
`
`Any failure of Zayat Stables to remain in compliance with the Loan to Equine
`
`Collateral Value Ratio would constitute an Event of Default under the Financing Agreement.
`
`(See Financing Agreement § 9.01(c)(i).) As noted above, upon an Event of Default, MGG may
`
`“declare all or any portion of the Loans then outstanding to be accelerated and due and payable.”
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`(Id. § 9.01.)
`
`74.
`
`Zayat Stables fell out of compliance with Loan to Equine Collateral Value Ratio
`
`by the fall of 2017 because it did not possess sufficient Total Equine Collateral Value.
`
`75.
`
`To hide Zayat Stables’ failure to comply with the Loan to Equine Collateral Value
`
`Ratio, TGG manipulated accounts payable reported on the financial statements, which had the