Police raid Internet porn firm
Shareholders in Starnet, an Internet gambling provider, react with a massive selloff.
Jeff Lee and Lindsay Kines Vancouver Sun
Police raided Internet gambling and pornography provider Starnet Communications Inc. early Friday, alleging the publicly traded company was involved in illegal gambling, gaming, betting and distribution of prohibited pornography.
The raid on the downtown Vancouver offices and the homes of six of its officers immediately triggered a massive panic sell-off of the company's stock, resulting in the largest drop on U.S. markets of the day. The company had capital market of more than $1 billion before the raid.
Starnet, which began as a distributor of Internet pornography and moved into the field of Internet-based gambling, had never made its business secret.
It traded on the NASD-operated Over-The-Counter system in the United States, and its stock was so hot that it recently traded at a high of $26 US.
The stock was a darling among small investors, although questions about the legality of on-line gambling has caused big Wall Street brokerages to stay away from such companies. Still, Starnet was positioning itself to get listed on NASDAQ.
But all that came crashing down Friday, when more than 100 police officers from the RCMP, Coordinated Law Enforcement Unit, Vancouver Police, and other agencies descended upon Starnet's offices at 425 Carrall Street in Vancouver. The raid was a culmination of an 18-month investigation into Starnet's activities, including its Web-based gambling business and live Internet sex shows.
Search warrant documents indicate the police believe Starnet was not only involved in illegal gambling and bet-taking, but also possession and distribution of obscene material and child pornography.
By the end of the trading day, panicked investors had dumped more than 10.6 million shares, shearing nearly 70 per cent off the price. It dropped more than $9 US to finish trading at just over $4 US, with no signs that would be the bottom.
Police and media offices fielded hundreds of frantic calls from people across the U.S. wanting to know if news of the raid was true.
Company officials refused to talk to The Vancouver Sun. But in a press release issued on Canada Newswire, Mark Dohlen, the company's chief executive officer, put on a brave face.
"We are dismayed by this disruption of our three-year-old operations, have retained legal counsel and will vigorously defend our rights," he said, adding that he didn't anticipate any interruption of its services or ongoing operations.
Not so, according to RCMP Corporal Frank Henley.
"Our people have control of their company. There is nothing coming out of their Vancouver offices and they are shut down here. They have indeed been interrupted," he said.
Starnet is based in Vancouver but has a subsidiary, Softec Systems Caribbean Inc., in Antigua. Police would not say if law enforcement agents in the U.S. and Caribbean were also involved, but acknowledged that the company's operation was so sophisticated that they called upon the services of the RCMP's High-tech Crimes Unit in Ottawa.
"This is a massive investigation into a major company with extremely complex connections," Vancouver police Constable Anne Drennan said.
In a raid coordinated between the RCMP and Vancouver police, officers took over the first three floors of 425 Carrall at about 5:30 a.m., seizing vast amounts of computer equipment, accounts and other evidence. An Emergency Response Team was used to breach several doors on the upper floors, but police encountered no resistance from the three employees and one security guard on the premises.
Inside they found an astounding array of equipment, Henley said.
"It was like a Star Wars movie. It was a techno-geek's dream come true."
Police will likely remain in remain in control of the offices over the weekend, he said.
Drennan said police believe the company and its officials engaged in illegal betting and bookmaking, the possession and distribution of prohibited pornography, and possession of the proceeds of crime.
Starnet started by providing live sex shows over the Internet, using the facilities of No. 5 Orange club on Main Street.
At one time the club was partly owned by Steve Ng, who is embroiled in the casino affair that is engulfing Premier Glen Clark.
Ng was also an early investor in Starnet, but his lawyer, Ravi Hira, told reporters Friday his client is no longer involved in Starnet. Ng and his partner in No. 5 Orange, Tony Ricci, later split. Ricci took over No. 5 Orange, and Ng's companies assumed control of the Marble Arch Hotel and the North Burnaby Inn, where a controversial casino was to have been located.
In Friday's raid, police said they searched the homes of six Starnet directors and officers, including those of Dohlen, treasurer Chris Zacharias and chief operating officer Jason King. Police did not release the names of the other individuals.
A check of records at the provincial Register of Companies identify Jack Carley as chairman of the board, Jason Bolduc as president, Zacharias as treasurer, Dohlen as CEO and Paul Giles as a director. In an interview with Bloomberg, a financial news service, Zacharias said the home of King had also been searched.
Some of the company's 163 employees gathered outside the offices while police searched the premises. People attempting to enter were stopped and interviewed by police.
Drennan said investigators discovered that millions of dollars generated from the Internet gaming operations flowed through Starnet-controlled bank accounts each month.
Search warrant documents obtained by The Vancouver Sun show that police began their investigation -- code named "Project Enigma" -- in December, 1997.
Staff Sergeant Mike Ryan, head of CLEU's proceeds of crime section, stated in the information to obtain the warrant that investigators -- using secret identities -- began placing bets last October at Starnet-licensed gaming Web sites such as Casino Land, Superbet.com Casino, Oz Gaming and Aztec Casino.
In some cases, investigators played casino games such as blackjack, slots, poker and pai gow poker over the Internet. In other cases they bet on professional hockey and football.
Investigators also requested payouts on their wagers and received cheques in envelopes mailed from Vancouver, Puerto Rico and Antigua, the documents indicate.
Also last October, CLEU's internet pornography sleuths began investigating Starnet's adult Web sites, gaining access to the sites with credit cards. The search warrant says investigators found a number of images depicting sadomasochistic scenes of bondage, beatings, whipping and degrading acts at Web sites such as www.redlight.com. The warrant says a police expert believes the images constitute prohibited obscene material under the Criminal Code.
The search warrant documents also reveal that during the course of their investigation, police tracked e-mail messages, traced the origins of gaming software, and even went through the garbage of one Starnet director to get company letters and meeting minutes.
In once case, police found a letter dated January 28, 1999 addressed to the office of Antigua's prime minister saying unless the government immediately approved its licensing proposal, Starnet would be forced to move to St. Kitts.
In April, police also searched Sprint Canada's office in Richmond, seizing copies of Starnet's contracts and billing records for all outgoing long-distance calls and all incoming toll-free calls over three months.
Friday's raid isn't the first spot of trouble for the company. In July one of the company's former clients, Las Vegas Casino, said it would file a $1-billion US lawsuit against Starnet for what it described as serious deficiencies in its gaming technology. That same day the company's stock value dropped by half.
Earlier this month Starnet went on the offensive, filing a countersuit in B.C. Supreme Court alleging Las Vegas Casino had made "false and malicious" statements, and noting no such suit had been filed.
Although Starnet had its beginnings in on-line pornography, it quickly expanded in Internet gambling and developed proprietary software that it licensed to nearly 50 companies. Dohlen had said recently that the company wanted to sell its pornographic Internet sites and focus on the gambling operations.
But Starnet had also apparently been aware of the questionable legality of Internet gambling. In May, Bloomberg reported that Starnet's rise in popularity came despite legal restrictions for on-line gambling that prompted the company to refuse bets from U.S. and Canadian residents.
It also set up a subsidiary in Antigua to operate its casino unit out of the range of U.S. legal authorities. The company charged companies up-front fees of $100,000 each and royalties ranging from 15 to 40 per cent of gross revenues to use its technology.
For the year ending March 31, Starnet reported revenue of $9.8 million US, nearly three times the previous year. Net profit was $2 million US or nine cents a share, compared with a loss of $1 million or five cents the previous year.
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