The $60 million lawsuit by retired Red Hat Chairman and Chief Executive Officer Matthew Szulik has been referred to arbitration, according to the News & Observer.

The suit was filed by Szulik against TAG Virgin Islands.

In the suit, the Sulik famiy says the firm began putting their money into sketchy ventures, including loans to “persons involved in illicit or potentially illegal activities.”

In the papers filed with the U.S. District Court in Raleigh two days before Christmas, the Szuliks say that beginning in 2007, TAG Virgin Islands Inc., based in St. Thomas, “defrauded the Szuliks by, among other things, using the Szuliks’ money … for their own benefit.”

One of the businesses where the Szuliks’ money should not have gone, the suit says, was a Mexico City property associated with Penthouse magazine. There, it says, are “a so-called gentlemen’s club called Bleu Club and a members-only club associated with Penthouse.”

The suit includes James S. Tagliaferri, who operates TAG Virgin Islands and whom Szulik met during a pickup basketball game in the 1980s, and Patricia Cornell, who signed the original agreement with the Szuliks.

Szulik and Tagliaferri were friends for 25 years, the papers say, and Szulik’s children referred to him as “Uncle Jim.” The Szulik’s began having the company, which was then called Taurus Advisory Group and was based in Connecticut, manage investments in 1996.

In 2008, The New York Times identified Tagliaferri as the source of money behind Big Brown, winner of that year’s Kentucky Derby and Preakness horse races.

The suit is on behalf of the Szuliks, several family trusts and Matthew Szulik’s 96-year-old father, Raymond, for whom he and his wife care.

In addition to the potentially illegal activities, the suit claims, TAG used the Szuliks’ money “to fund and gain control of companies having little to no earnings, poor prospects, and weak and incompetent management.”

It also alleges the defendants in the suit “received millions in kickbacks” for putting the Szuliks’ money “in these corrupt companies.”

The suit, which includes numerous invoices from TAG to International Equine Acquisitions Holdings, says kickbacks of $1.6 million came in the form of “undefined and virtually non-existent ‘consulting’ work….”

The Szuliks lost $60 million on the deals, the suit claims, and it says that was more than half of what they had invested.

In 12 years at Red Hat, Matthew Szulik led a small Durham-based startup focused on free open-source software to a New York Stock Exchange-listed company with a market value of more than $8 billion.

He started as president in 1998, became chief executive officer the next year and chairman in 2002 and retired in 2007 as CEO and chairman last year.

Read the full report here.

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