Federal lawsuit reveals rift in Casey County family business

Published 8:26 am Friday, August 18, 2017


The Casey County News

International travel and intrigue. Luxury cars and houses in exotic locations. An overseas factory that didn’t manufacture products though millions of dollars of orders were placed. Accusations of financial mismanagement and fraudulent wire transfers. Knowingly selling defective equipment at a profit.

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Although these allegations read like a novel, they form the basis for a lawsuit among family members of Casey County’s largest employer.

Three members of the Tarter family in Casey County have filed a lawsuit in United States District Court in Lexington alleging that another Tarter family member, along with a senior Tarter officer, created a company in Hong Kong that diverted profits from the sale of Chinese components, thus enriching the two men.

The Tarter companies, which encompass six different entities, employ about 1,400 people and are headquartered in Dunnville.

Anna Lou Tarter Smith, Luann Tarter Coffey, and Douglas (Doug) Tarter, plaintiffs, filed the 47-page narrative of the suit Friday against Josh Tarter and Thomas Lewis Gregory.

Anna Lou Tarter Smith is the mother of Luann Tarter Coffey and Doug Tarter while Josh Tarter is her nephew.

The suit states Smith, Coffey and Doug Tarter are listed as shareholders in the various Tarter companies, including Tarter Industries, Tarter Management Co., Green River Gate Inc., Tarter Gate Co., Tarter Tube LLC, and Liberty Tank LLC.

Josh Tarter, as spelled out in the suit, was an officer of the Tarter companies and became a shareholder in 2012 with management responsibilities in relation to all the companies.

Gregory was a senior management employee of Tarter Gate until Sept. 14, 2016, when he resigned as a result of misconduct alleged in the lawsuit. Paid by Tarter Gate, Gregory had management responsibilities in relation to the other companies, the suit states.

Hong Kong QMC Industry Co. Ltd., also listed as a defendant, was incorporated on April 30, 2010, in Hong Kong, with Josh Tarter, Gregory, and Xiaofeng Chen listed as founding members. The suit states Chen is a non-party to the suit.

According to the suit, the Tarter companies have been owned since 1945 by the Tarter family and are now managed by the fourth generation.

The Tarter companies are now 50-percent owned by Anna Lou Tarter Smith, her daughter LuAnn Coffey, and her son Doug Tarter.

Josh Tarter owns 16.6 percent of the Tarter companies, and his two siblings, not named in the suit, each own 16.67 percent, for a combined 50-percent ownership.

The suit alleges Josh Tarter and Gregory had access to confidential and proprietary information of the Tarter companies, including marketing ad business strategies, financial data, pricing, costs, profit margins, order information, and knowledge concerning customer and potential customer relationships.

Gregory, who represented himself at times as vice president or general manager of the Tarter companies, also had input concerning the selection of suppliers to the Tarter companies.

Alleged fraudulent scheme

The Tarter companies purchased components for use in finished products from many suppliers.

By 2009, the companies had begun to source certain components from China because of significant cost savings from Chinese suppliers.

Chen was hired to act as a Tarter agent in China for these transactions and was paid for his work.

The Tarter companies were set to realize significant savings from using Chinese suppliers for a limited number of components.

In 2010, the suit states, Josh Tarter, Gregory, and Chen conspired to defraud the Tarter companies by diverting these cost savings to their own benefit.

To carry out the scheme, the trio formed QMC, which they controlled.

The suit further states, “upon information and belief, QMC manufactures nothing, and is simply a pass-through entity.”

QMC received orders from Tarter for components and forwarded the orders to suppliers in mainland China. The suppliers manufactured the components and shipped them to the Tarter companies, without QMC ever taking possession of the components, it is alleged.

The Chinese suppliers billed QMC for the components. QMC then substantially inflated the cost and invoiced the Tarter companies for the goods at the inflated prices, thus diverting savings that rightfully belonged to the Tarter companies to Josh Tarter and Gregory, the suit alleges.

In addition, the components provided through QMC were allegedly of substantially lower quality and included more defective products than typical of other suppliers.

Instead of returning the defective components for a refund, Josh Tarter is accused of using his position to accept defective products sourced through QMC, even if the products had to be sold at a substantial loss.

“As a result of the conspiracy to defraud the Tarter companies, QMC has received more than $70 million from the Tarter companies over the last seven years. The defendants’ profit, from their scheme is measured in the millions of dollars at the Tarter companies’ expense, and continues through the date of the filing of this complaint,” the suit alleges.

Denials and damaged reputations

In 2013, and again in 2016, Josh Tarter repeatedly denied any ownership in QMC, telling his relatives that Chen owned QMC. 

“Even though the Tarter companies have engaged in hundreds of transactions with QMC since 2010, neither Josh nor Gregory has ever fully disclosed to plaintiffs the nature and extent of their relationship to QMC, or the profits they have made therefrom,” the suit states.

In addition, Josh Tarter and Gregory made frequent trips to China, billing Tarter companies for travel expenses.

The defendants also are alleged to have used Tarter employees for services to QMC, including engineering and other professional services.

Gregory, through QMC, is also accused of selling defective products to Tarter companies’ customers, knowing the products were defective.

As a result, Tarter bore the cost of repairing the defective products, not QMC.

“In order to hide the poor quality of QMC’s products, Gregory would repeatedly lie, and direct Tarter companies employees to lie, about the quality of QMC products,” the suit states.

As an example, finish mowers purchased through QMC were of “unacceptable quality,” and should not have been sold through the Tarter companies.

“Josh and Gregory caused them to be sold, knowing of the defects,” the suit states.

Hundreds of mowers, remaining in Tarter’s inventory, cannot be sold either because they are defective or because the reputation of this product in the market has been ruined by its repeated poor quality, according to the suit.

Questions arise

In the beginning of 2013, Tarter companies’ purchasing and material staff began to question why a foreign company such as QMC, previously unknown within the industry, had become Tarter’s primary supplier.

When confronted by Anna Lou Tarter Smith in 2013 and again in 2016, Josh Tarter assured her he had no interest in QMC.

While procedure called for seeking bids from other companies, QMC was selected to supply products without other competitive quotes.

In September 2016, when the plaintiffs asked again about QMC, “Josh’s assistant, J.R., told J.J. Tarter, Doug’s wife, that QMC was expanding its production of Tarter companies’ products, and would eventually manufacture the Tarter companies entire farm implement line in China, rather than in Casey County,” the suit states.

Later, evidence came to light that Josh Tarter and Gregory had an ownership interest in QMC.

In November 2016, the Tarter companies got quotes from other suppliers and were alarmed by the amount of savings in using suppliers other than QMC. One quote for gear boxes would reportedly have saved the Tarter companies $1 million annually.

No remorse

When his relatives confronted Josh Tarter with proof of his ownership in QMC in September 2016, Josh showed no remorse, responding, in essence, “it is what it is,” the suit states.

The next day, he apologized for his alleged misconduct but declined to return any money to the Tarter companies, it is claimed.

“Neither Josh nor Gregory has ever made a full disclosure to all of the shareholders, members, or officers of the Tarter companies of the details of their involvement with QMC and any related entities,” the suit states.

Fruits of the fraud

According to the suit, Gregory purchased a boat and is building a house near Key West, Fla.

Josh Tarter purchased luxury automobiles and a house valued at $5 million in Park City, Utah.

“Neither individual’s salary at the Tarter companies was sufficient to support his extravagant lifestyle,” the suit states.

Damages sought

The plaintiffs are seeking:

• Compensatory damages to compensate the Tarter companies for damages incurred by the alleged acts of the defendants.

• Judgment requiring the defendants to pay over to the Tarter companies all profits derived from their alleged actions.

• Punitive damages in an amount to be decided at trial.

• Damages and attorney fees.

• A permanent injunction restraining the defendants from using Tarter companies’ trade secrets.

• Demand for trial by jury.

• A lawsuit presents only the plaintiffs’ side of an issue. The defendants have not responded to the suit