By Don Engel
Founder & Former President
Thoroughbred Information Agency

      Are there more thieves per capita in the horse business than elsewhere?  Probably not, but there are still enough to meet the demand. 
     What the Thoroughbred business does have is an uncommonly large number of investors who don't take even the most rudimentary precautions against being swindled, and they provide attractive targets for unscrupulous operators. 
     One of the great mysteries of the Thoroughbred world is the tendency--even compulsion--of otherwise prudent people to check their common sense at the front door of the horse business and place themselves in the hands of advisors whose qualifications and reputations they've made no effort to check. 
     As in any area of life, there are plenty of people waiting to cheat you, but the most effective of the predators in the Thoroughbred business are those who play the role of advisors to new investors. (There are plenty of free-lance crooks, of course, and we'll discuss them later, but those closest to you are in the best position to do harm.) 

Kickbacks
     As in other businesses, the most common means of cheating people is by kickbacks, when the seller of a horse pays the advisor of the purchaser to influence his client--without the knowledge of the buyer. In most jurisdictions, that's criminal behavior, a type of fraud, and it's criminal behavior in the horse business, too, but it's extremely rare for anyone to bring charges. 
     If the seller is honest, you can defend yourself against this kind of thing just by asking him whether the purchase price includes any commissions. If he says he's paying your advisor a commission and you didn't know about it, you know your advisor is a thief. 
     But if the seller is dishonest and is engaging in simple bribery, he won't admit it, and you'll have no way of knowing that it happened. Many sellers pay honest commissions to honest brokers, so there's nothing at all wrong with commissions, as such. Undisclosed commissions are the problem. 

At Public Auction
     Since more horses are sold at public auction than privately, there are more opportunities for monkey business there. Again, the kickback is king, and it works the same way, except that you're in a better position to defend yourself. Your defense here is that you know how much you're going to bid, and nobody else does--unless you tell them. 
     What you're defending yourself against is a scheme that typically is initiated by your advisor's asking the seller what price would make him happy. Then your advisor tells the seller that he'll guarantee that price if the seller will kick back to him everything above that figure that you bid. 
    If the seller is as crooked as your advisor, they make a deal, which might be played out like this: The seller wants $200,000 for his horse, your advisor influences you to bid $300,000 and comes away with a $100,000 kickback. 
     Sometimes the arrangement is initiated by the seller, and sometimes the kickback is simply a percentage of the amount you bid above a specified level. Either way, when your adviser is representing both you and the seller, that's called "double agency." It's only wrong if you don't know your advisor is also representing the other party, too.
     If your advisor is a professional consultant, he'll probably bill you for a commission of 5 per cent of that $300,000. Often, he isn't a professional and is just helping you out because he's a nice fellow who wants to assist someone new to the business. Instead of the 5 per cent commission that an honest professional would have charged, you've paid a $100,000 commission--33 1/3 per cent. You just didn't know it. 
     You'd be surprised how many investors believe that free advice is somehow superior to professional advice, and many of them wind up paying a heavy price for it.
     In many other cases, of course, the advisor is a professional, often a trainer who expects to train racehorses that you buy with his assistance.
     But this undisclosed double-agency scam works only if the seller knows how much you're willing to bid on his horse. With that knowledge he can bid against you to drive the price up past the horse's true value. Your greatest protection, obviously, is in not giving your advisor advance notice of how much you plan to bid. 
     A major-league variation of this gambit is for your advisor actually to purchase the horse prior to the time it enters the ring--secretly, of course--and then persuade you to bid until he's made a satisfactory profit. You can be sure that if you prove to be unpredictable in your bidding, he won't pull this one on you twice. 
     And always remember that there'll always be another horse. The more you lust to purchase any specific horse, the more vulnerable you are. 
     In cases in which you don't attend sales yourself and have a representative (usually called an "agent" in this situation) bid according to your instructions, you can protect yourself by having your agent use a cellular telephone. You can bid as if you were there, with your agent can relaying your bids to the auctioneer. If for some reason that isn't possible, you'll just have to trust your agent.
     Kickbacks are the most widespread form of skullduggery and the hardest to defend against, but there are other ways that you can be bilked.

Private Purchases
     The crudest is for your advisor to steal in a private purchase by telling you that the price was higher than it really was and pocketing part of payment before handing the money to the seller. You can head that off by making your check payable to the actual seller of the horse. If your advisor insists that he is to receive the check, get a new advisor. 
      (If the purchase price includes sales tax, make out a separate check for the amount of the tax made payable to the appropriate state agency. People have been known to collect sales tax and simply pocket the money--a neat little bonus.) 
     Another problem can arise when your advisor sells a horse for you privately. He can tell you the horse was sold for less than the actual price and pocket the difference, but you can easily defeat that ploy by requiring that the check be made payable to you and then contacting the purchaser to make sure that you received the total amount that he paid. 

Defending Yourself
     Whether you buy privately or at public auction, you should carefully examine any horse that you're considering purchasing. Unless you know that you can trust the seller--most are honest, after all--don't take his word for anything. Check it out. 
     The catalog pages at auctions are supposed to be accurate, and a significant error can be grounds for canceling a purchase. So you should assume that sale-catalog pages are accurate. Private purchases are something else altogether. You should never buy a horse privately without independently verifying all the seller's representations. Again, most sellers are legitimate, but until you learn which ones they are, be wary. 
     At auction, unpredictability is your best protection. Just stop bidding earlier than you've led your advisor to expect and once in a while don't bid at all on a horse that your advisor has recommended strongly. If he's made a deal with the seller, he won't be able to deliver but won't know it until it's too late to alert the seller, who may well wind up with an unsold horse and considerable anger. At your crooked advisor, not at you.
     By far the best way to protect yourself, though, is to have an honest advisor--and be sure to read our "12 Rules for Newcomers to the Thoroughbred Business" before you spend a penny.