The Killing of Alydar
Once upon a time he was one of the fastest thoroughbreds in the world. In 1990 he was put down after breaking his leg—an accident, it was assumed, until last year.
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Cihak came barreling into Texas. His salary, as vice chairman, was $450,000 a year (he also got a $1 million bonus for taking the job), and most of his expenses were paid for, including an apartment at the Four Seasons Hotel and his dinners and $200 bottles of wine at the pricey Cafe Annie. He hired various consultants, many of them old friends, to work on various bank projects. He also started looking to make very large loans. According to the deal Cihak had made with Abboud, he could authorize a loan of up to $120 million without having to go through a traditional loan committee. And one of the first loans he made, less than four months after First City was recapitalized, was for almost $50 million to Calumet.
When Cihak told the First City loan officers not to check Calumet's credit reference at the Kentucky bank where it already had a loan, they didn't consider the demand unusual. First City certainly didn't want to tip off the bank that it was trying to lure away a big client. But they were perplexed that he told them not to audit the financial statements or appraisals of the farm presented by Lundy and Gary Matthews, Calumet's chief financial officer. Nevertheless, when the deal was completed, in July 1988, Cihak was treated as a hero by Abboud and the other executives. Texas had just legalized pari-mutuel betting, and First City officials believed the Calumet loan would bring them a host of new horse-racing clients. They even took out an advertisement in the Wall Street Journal trumpeting the bank's addition of Calumet to its loan portfolio.
But within weeks, First City loan officers received a phone call from Matthews, asking for even more money. The officers couldn't believe what they were hearing. Matthews was telling them that Calumet was already unable to make its loan payments. Cihak suddenly stepped in, signed off on the larger Calumet loans, and said the farm just needed more time to weather the depressed horse market. Cihak also said he was going to transfer the Calumet loan to Structured Financing, a bank section created by Cihak and headed by one of his handpicked associates.
And that seemed to take care of that. For the next two years, the loan was handled by Cihak himself. As for Calumet, no one could have imagined that it was already veering toward bankruptcy. As 1990 rolled around, the farm had new white fences and more than one hundred Calumet horses at racetracks all over the country. One of the horses, a son of Alydar named Criminal Type, was on his way to winning seven times in eleven starts that year, earning $2.2 million for the farm. Meanwhile, Alydar remained indefatigable in the breeding shed. Lundy had his great stallion serving one hundred mares a year, which meant Alydar went to the shed about two hundred times; it took him an average of two mounts per mare to get her pregnant. A normal stallion goes through only fifty to seventy mares a year. Alydar was known around Kentucky as J. T. Lundy's ATM, a constant source of cash. The Calumet grooms called him the "cock of the walk." Ironically, his old rival, Affirmed, was also at Calumet in 1990, leased by the farm to be one of its stallions. When the two chestnut-colored horses were out in their paddocks, they would stare at each another, their manes flicking in the breeze. Occasionally, Affirmed would start running on his side of the fence, and Alydar would take off after him on the other side. Even then, twelve years after their races, they remained competitors.
It was hard to imagine that anything could have shattered such an idyllic scene, certainly not the little piece of news that came out of Houston in October 1990 that one Frank C. Cihak had resigned as vice chairman of the First City Bancorporation. In the 29 months since First City had been restructured, the bank's pool of bad loans had grown from nothing to $433 million. According to stories in the Houston newspapers, the bad loans had been generated by Cihak. Although he was being given a graceful exit—the bank would continue to pay him $450,000 a year as a consultant—other officers would be taking control of the loans he had made.
But Cihak's resignation was to have immediate and catastrophic effects on Calumet. Lundy and Matthews were contacted by a First City vice president who told them their loan was being restructured. The time had come for Calumet to pay, he said. If Calumet didn't come up with $15 million by February 28, 1991, then First City would foreclose, taking all the farm's horses and assets.
That conversation took place on October 25, 1990. Less than three weeks later, Alydar was dead.
Julia Hyman Tomala missed the news that Alydar was dead. She also missed the news, eight months later, that Calumet Farm was declaring bankruptcy and that its president, J. T. Lundy had resigned. She was then thirty, consumed with her career as a white-collar-crime prosecutor for the U.S. attorney's office in Tampa, Florida, where she had been born and raised. In late 1991 she moved to the U.S. attorney's office in Houston, which desperately needed prosecutors to deal with numerous criminal allegations that were flooding into the office regarding the huge number of Texas bank failures. For her, Texas was where the action was: From 1986 through 1992, 485 banks and 238 savings and loans in Texas went under, including First City Bancorporation. And the first case she was handed concerned the activities of the infamous Frank Cihak. Tomala began investigating the transactions between Cihak and his cronies whom he had hired as bank "consultants." Within months, she had bank documents not only piled up on her desk but also stacked in the hallway outside her office. "What's required in this kind of work is a tenacity to follow very complex paper trails," says Jim Powers, a chief prosecutor at the U.S. attorney's Houston office who initially supervised her First City work. "And Julia was about as tenacious as they come."
Tomala discovered that Cihak had set up a complex scheme to steer more than $4 million in First City loans and fees to his consultants, who then gave Cihak part of the money as kickbacks. At Cihak's 1993 trial she told the jury that he had come down to Texas to use First City as his "personal piggy bank," which in turn helped lead to First City's own failure, putting thousands of people out of work. Although the once-swaggering Cihak, wearing a gray suit, royal blue tie, and unlaced white athletic shoes, offered a rambling courtroom plea for leniency, even mentioning that he had made a halfhearted suicide attempt, an unsympathetic federal judge sentenced him to prison for twelve years and seven months. Tomala immediately went back to work investigating Cihak, and in 1995, she had him indicted again for another series of multimillion-dollar kickback schemes with other "consultants." This time, he got a 22-year sentence. Cihak was probably going to prison for the rest of his life.
Still, Tomala wasn't finished. After Cihak's second trial, she decided to find out why Cihak, a racehorse investor himself and a Kentucky Derby fan, had been so determined to get the bank into the equine-lending business. She knew that a few months after the First City loan to Calumet was funded, Cihak had received a personal $1.1 million loan from a Kentucky entity called Equine Capital Corporation (ECC). Curious, she started retracing the money coming in and out of the ECC and learned that the money had not come from the ECC at all. Through a series of convoluted check-kiting maneuvers, Lundy and Gary Matthews had provided the $1.1 million to the ECC, which was run by Lundy associates, and the ECC had then passed on the money to Cihak, which he wasn't asked to repay. Cihak then used that money to lease two Calumet mares and pay for them to get into the breeding shed with Alydar. He also had arranged a deal with Lundy to buy one-time breeding rights to another Calumet stallion, Secreto, which were worth $125,000 on the open market, for a mere $1.
In return for access to Calumet's best horses—and the possibility of getting a foal of his own that might someday be a successful racehorse—Cihak agreed to become J. T. Lundy's financial patron, pushing through the $50 million loan at First City and then protecting Lundy when loan officers became anxious about Calumet's financial condition. To Cihak, it must not have seemed like a particularly perilous deal. He no doubt assumed, as everyone else did in the horse business, that Alydar's stud fees would generate the money necessary to pay back any bank loan. Calumet itself had drawn up a document showing that Alydar's "stud fee revenue potential" could be nearly $25 million a year.
Actually, it was journalist Carol Flake who first learned that Alydar's earnings were not even close to what Lundy suggested they were. After poring over Jockey Club records, she discovered that Alydar was often performing on mares for free. Either the mares' owners had already paid for the trips to the breeding shed years earlier through one of the lifetime breeding rights that Lundy had been selling, or they had received free breeding rights from Lundy in exchange for something Lundy wanted. To pay for a stallion, for instance, Lundy offered that stallion's owner a series of visits to Alydar's breeding shed. In other instances, Lundy simply gave his closest buddies free passes to Alydar. By 1990 the free passes to Alydar were outnumbering the ones that were paid for with stud fees.
In her 1992 Connoisseur story, Flake hinted that Alydar's death might not have been accidental. After learning that the farm's insurance policies on Alydar totaled $36.5 million, making him the most heavily insured horse in history, she went so far as to suggest that Alydar might have been worth more dead than alive. Yet no law enforcement official had shown any interest in pursuing the issue—until Tomala began flipping through records about Calumet in 1996.
What she realized was that Lundy had to have been frantic in the months before Alydar's death. There was no way he was going to be able to come up with that $15 million payment to First City by February 1991. An accountant who had studied Calumet's records told Tomala that the farm was then losing almost $1 million a month. Lundy was unable to find new bankers to loan him money, and he was equally unsuccessful in persuading investors from as far away as Japan to purchase a minor interest in Calumet. What's more, Lundy couldn't get any more income out of Alydar, who was already being bred so often that, according to one veterinarian, the muscles of his hind end were constantly sore. And Lundy suffered another blow in 1990 when his best horse that year, Criminal Type, who was favored to win the Breeders' Cup, the most lucrative purse in horse racing, was injured just before the race, depriving a clearly distraught Lundy of the chance to receive millions.
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