Investors in Teen's Scheme May Have to Give Up Profits
Some early speculators in an Orange County teenager's $1-million Internet
sports-betting scheme may have to cough up their gains, legal experts say.
That's partly because some of Cole A. Bartiromo's "investors" openly
acknowledge that they figured the 17-year-old's plan was illegal, but
hoped to reap a bonanza before the scam collapsed.
Indeed, Bartiromo's sports-betting programs, guaranteeing returns of as
much as 2,500% within a few weeks, were such obvious frauds, some experts
said, that no one should be permitted to profit from them. Criminal
charges aren't out of the question either, even for those who eventually
lost money after profiting initially, they said. "If your investment helps
the managers of a scam defraud other people, then I think you are guilty
of aiding and abetting the fraud," said UCLA criminal law professor David
A. Sklansky, a former federal fraud prosecutor.
The Securities and Exchange Commission, which filed and settled civil
fraud claims against Bartiromo this week, in some cases has turned the
tables on participants by supporting efforts to recapture profits reaped
by early investors in such Ponzi schemes.
Neither the agency nor federal prosecutors are saying what they may do in
the Bartiromo case, which like typical Ponzi schemes appeared to pay early
investors with funds from later investors. The initial payouts helped give
the program legitimacy.
The SEC said the youth reeled in more than $1 million from at least 1,000
Internet surfers worldwide in November and December, using a Web site that
advertised "risk-free" returns from "safe bets" on sporting events. In
settling with the SEC, Bartiromo agreed to turn over $900,000 he had
transferred to an account at a Costa Rica casino.
Some of his participants said they comb the Internet in search of various
"investment" deals in which they can jump in early and secure a fast
profit before the programs collapse.
"I honestly don't believe any of these are legitimate when I start them,"
Heather Wallace in Fort Riley, Kan., told The Times this week.
"It's one of the reasons these things work. People figure they're the ones
who will make out" provided they get in early enough, said Malcolm Klein,
a USC sociology professor.
Those appointed to recover losses in such schemes aren't hesitating to go
after participants.
R. Todd Nielson, the U.S. Bankruptcy Court trustee in the case of Santa
Barbara money manager Reed Slatkin, said last month that he will seek to
recapture as much as $151 million in phony profits that some investors
received in Slatkin's alleged Ponzi scheme.
Also, the trustee in the 1996 collapse of the Syracuse, N.Y., family-owned
Bennett Funding Group Inc., one of the biggest Ponzi schemes in U.S.
history, recovered ill-gotten gains from investors in that $700-million
scam.
"It seems you can't root these Ponzi schemes out of the system," said
Michael J. Missal, the court-appointed receiver in a $50-million pyramid
scheme run as the Better Life Club of America Inc. "There always seem to
be people willing to get involved."
Missal said the SEC supported his efforts to file fraud actions against
Better Life investors who "earned" $50,000 or more each from their
investments in what was purported to be a way to help African Americans
invest.
Missal, a lawyer, had to file lawsuits accusing some investors of fraud to
help recover a total of $3 million. In some cases, investors in the
program began launching their own Ponzi schemes, he said, and opened
themselves up to criminal charges, though none were filed.
Trustees in the Slatkin and Bennett Funding cases have had special
bankruptcy laws they could invoke to recover gains, and Missal said he
benefited from the SEC case against the operator of Better Life because he
didn't have to prove what the agency already had: that the firm was a
fraud.
Reforms in securities law have made it more difficult for defrauded
investors to sue lawyers, accountants and other third parties, including
other investors, experts say. But once the government takes action,
victims have an easier road.
In the Bartiromo case, truly unwitting investors who lost money could use
the fraud allegations in the SEC settlement to get a leg up in seeking
money from other investors as well as from Bartiromo, experts say.
Should such investors hold legitimate claims, they also could force the
Bartiromo family into Bankruptcy Court and use special laws there to
recover money from participants who profited, said Lynn LoPucki, a UCLA
professor of bankruptcy law.
However, a criminal case against Bartiromo's investors would be difficult
to prove, Missal and other lawyers said. The main obstacle would be
showing that the investors had the intent required to further a fraudulent
scheme--a tougher standard to meet.
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Internet: Legal experts say the SEC in the past has supported efforts to
recapture gains in similar Ponzi schemes.
Los Angeles Times
January 11, 2002
By JAMES S. GRANELLI, TIMES STAFF WRITER
http://www.latimes.com/business/la-000002627jan11.story
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