$55 Million Out the Window, Family Says

RALEIGH, N.C. (CN) - The former CEO of Red Hat, a Raleigh-based software firm, claims his family's financial adviser blew more than $55 million in a series of questionable and now worthless ventures, including loans to "persons involved in illicit or potentially illegal activities".

In his federal complaint, Matthew Szulik says he wanted to put his family's money in a conservative portfolio of blue-chip stocks and bonds, so he turned to James S. Tagliaferri, a longtime family friend whom the Szulik children called "Uncle Jim."

But Szulik says that Tagliaferri and co-defendant Patricia Cornell, owners and operators of TAG Virgin Islands fka Taurus Advisory Group, used his family's money for their own benefit and took millions in kickbacks along the way.

Among the losses, according to the complaint, were:

$18.6 million the defendants put into Conversion Securities, a business consultancy that has lost money every year since 2004, except for a small profit it 2009. These securities are "essentially worthless," Szulik says. He also questions a $400,000 loan to the CEO of Conversion Services, secured only "with worthless Conversion Services' equities."

$19.5 million to International Equine Acquisitions Holdings, which Szulik says "had a history of inadequate corporate management, has been repeatedly cited or sued for failing to pay its bills, and has been investigated by the SEC." Szulik says that these investments are "highly illiquid and ... essentially worthless."

$9.4 million to Protein Polymer Technologies, which according to its own Dec. 31, 2008 SEC filing, has "incurred operating losses since [its] inception in 1988 and will continue to do so for at least several more years," and whose auditors have expressed "substantial doubt about [PPTI's] ability to continue as a going concern," according to the complaint. Szulik says these securities too are "essentially worthless." (Brackets in complaint.)

$3.8 million to Paseo de la Reforma Partners, a Mexico City business, secured by a deed of trust on a property that hosts "a so-called gentlemen's club" called Bleu Club, owned by or associated with Penthouse Media Group, the porn empire. Szulik says he "would not have knowingly permitted the TAG defendants to invest their funds with entities in this line of business."

Szulik also cites another $2.2 million in questionable loans and $1.6 million in kickbacks for "undefined and virtually nonexistent consulting work."

The 35-complaint alleges that some of the defendants' dealings were with highly questionable people, including an online pornographer, and his father, who was sentenced to 27 years in prison for racketeering and then disappeared from a work-release program.

The situation is a huge come-down for both the lead plaintiff and defendant.

Szulik joined Red Hat, a leading provider of open source technology, as president in 1998, and became CEO and chairman in 2002. He retired in 2007 to deal with family health issues, after transforming the Red Hat into a New York Stock Exchange-listed company with a market value of more than $8 billion.

Tagliaferri founded Taurus Advisory Group in Connecticut in 1996, and was later a major backer of Big Brown, the thoroughbred who in 2008 won the first two legs of the Triple Crown: the Kentucky Derby and the Preakness Stakes.

Szulik seeks restitution and punitive damages for lost earnings and lost business opportunities, imposition of a constructive trust and court costs, on claims of fraud, constructive fraud, breach of contract, breach of fiduciary duty, legal malpractice, conspiracy, negligence, negligent misrepresentation, malfeasance in accounting, breach of implied covenant of good faith and fair dealing, violation of the Investment Advisors Act, SEC rules, and the North Carolina Investment Advisers Act.

The Szulik family's lead counsel is Gordon Katz, with Holland & Knight Boston.

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