A new piece from today's Vancouver Sun.
Starnet took bets, warrants disclose
Police information also details lurid images of sado-masochism and degradation pulled from Starnet's sites.
David Baines, Sun Business Reporter Vancouver Sun
On Nov. 3, Eric Wickberg bet $15 that the New York Rangers would beat the point spread over the New Jersey Devils. He lost.
But winning was not the point of the exercise. Wickberg was a Vancouver police detective assigned to the Coordinated Law Enforcement Unit, which was conducting a covert investigation into Internet gaming sites operated by Vancouver-based Starnet Communications International Inc.
The bet was one of dozens placed by Wickberg and his CLEU colleagues, as outlined in a 61-page information document filed by police to obtain a warrant to search Starnet's Carrall's Street office and the homes of 15 Starnet officers, directors and associates.
However, Starnet has said that due to the uncertain legality of Internet gambling in Canada and the United States, the company does not accept bets from residents of those countries.
The same search warrant information details in lurid detail the images of sado-masochism and degradation that police officers pulled from Starnet's pornography Web sites.
Police further allege that a consultant to Starnet told them he been given a "staff-demo access code," enabling him to access, through the Sizzle site, images of child pornography. No details were provided.
The allegations shocked investors, who had taken comfort in Starnet's assurances that, in an effort to attract institutional investors, it was getting out of the porn business.
Even the New York office of mainstream brokerage firm Nesbitt Burns, a subsidiary of the venerable Bank of Montreal, was considering a possible $30-million US share offering.
But Starnet's share price, which was riding the hot air of Internet gaming mania, crashed Friday when local police, accompanied by a SWAT team and computer specialists from the U.S. Internal Revenue Service and the U.S. Customs Service, invaded Starnet's Carrall Street office and seized equipment and records.
On Friday, after news of the search broke, Starnet's stock price dropped 69 per cent to $4 US on the OTC bulletin board in the United States. On Monday, it recouped some of that loss, closing at $5.60 on huge volume of 6.8 million shares.
Vancouver police representative Constable Anne Drennan said police fielded about 100 calls from anxious investors Friday and more Monday.
"The investors were almost exclusively from the United States, just frantic investors," she told a news conference.
"They wanted to know if they should sell. Of course, we couldn't give that kind of advice."
She said some callers were emotional, saying they had lost everything.
"Men were crying over the phone, saying their entire life savings had been wiped out. We've never dealt with anything like this.
"A lot of people have been affected. It was hard. It was sad. I felt bad for them, but what can you say?"
Drennan said about 50 police officers are poring over computer desks, records and other material seized during the search, which lasted until 8 p.m. Sunday.
She said charges are pending, but they could be a way off due to the huge amount of information to be analysed.
Starnet chief executive officer Mark Dohlen said the company "will continue its operations and proceed with its strategic plans following minor interruptions to service over the past weekend."
He insisted that his firm -- which has a gaming licence in the Caribbean island country Antigua but no licence to offer games of chance in British Columbia -- has been complying with all applicable laws and regulations.
"Starnet is a cutting-edge company that is a pioneer in Internet gaming," he said in a release.
"We believe the selective investigation into the operations of our company is a result of a misunderstanding of Internet issues as they relate to the process of our business and the venues in which our services are offered. There is little or no legal precedent relative to this business."
In a separate release, Starnet re-confirmed its plan to dump, through an auction process, its porn sites.
"This divestiture will allow Starnet to focus all available resources on the further development of its core Internet gaming businesses," the company said.
According to the search warrant information, Starnet was incorporated in the Barbados in November 1996, and its directors included Mark Dohlen, Jason Bolduc (who has since left the company) and Roy Gould, now vice-president of Vancouver brokerage firm United Capital Securities Inc.
In March 1997, Starnet merged with a Delaware corporation to allow the firm to re-domicile in that jurisdiction.
Initially, Starnet's sole business was distributing Internet porn from it offices at 425 Carrall, the former office of engineering firm H.A. Simons.
According to the search warrant information, its early operations were partly financed through a $207,869 loan from Celestine Fund Management Inc., a privately-held investment fund based in the British Virgin Islands.
In June 1997, Celestine sold the debt to DGD Wealth Management, a B.C. company headed by Gould, the Vancouver broker.
The following month, Starnet began to diversify its operations, incorporating World Gaming Services Inc., based in Antigua, to operate Internet gaming Websites, and Electronic Financial Services Caribbean Inc., to handle the monetary transactions.
With hundreds of companies clamouring to jump on the gambling bandwagon, Starnet quickly realized that it could make more money licensing its betting technology than on taking bets.
It set up another Antiguan subsidiary, Softec Systems Caribbean Inc., and offered licences for $100,000 each, plus royalties ranging from 10 to 40 per cent of gross revenues. By last month, it had licensed nearly 50 companies.
The prospect of a continual stream of cash flowing into Starnet's coffers excited investors, who bid up the stock to $26 US in July, giving the company a total stock market value of $1 billion Cdn.
Starnet also advertised that it would help its licensees get gambling licences from the Antiguan government, which charged $100,000 US per year for a gambing licence.
It developed a close relationship with Antiguan officials. On July 8, it announced that Clare Roberts, who served as Antigua's attorney-general and minister of justice from 1994 to 1997, had been appointed a director of the company.
According to the search warrant information, Roberts attended an Internet gaming conference in Vancouver in June, where an undercover officer asked him whether the Antiguan government allows its licensees to take bets from the United States.
According to the information, Roberts replied, "Officially it's discouraged, but if you want to, you know, they can't really stop you."
In late July, news of a dispute between Starnet and one of its biggest licensees, rocked Starnet's share price.
Claude Levy, who represented Las Vegas Casinos Inc., said Starnet's gaming technology was grossly deficient and claimed to be filing a $1-billion US damage claim against Starnet. Starnet's share price dropped by nearly half to $13 US.
Starnet rejected Levy's claims and noted that, days earlier, Starnet had cancelled his firm's licence for non-payment of $203,000 in licensing fees that had been owing since May 31.
Levy's firm never did file a lawsuit, but Starnet did, claiming in B.C. Supreme Court that Levy had made "false and malicious" statements about the company.
However, according to the search warrant information, Levy had been complaining about Starnet's service for months.
Vancouver police searched the curbside garbage of Starnet officer Paul Giles in February 1996 and found e-mail from Levy complaining of overbilling.
Levy said the overbilling left them "wide open to massive chargebacks, with very little recourse to the clients."
He further stated: "Many consumers already don't trust the Internet with their credit cards, and many don't trust the online casinos, but Starnet is doing the most damage to the industry, just because you have so many incompetent people, acting like they know what they are doing."
Police also found in Giles' garbage a copy of his will which stated:
"Starnet owes me $50,000 US, Roy [Gould, the broker] has $130,000 US or more" and "options exercised by Roy should be an additional $60,000 US or more."
The will also indicated that Gould held, on Giles' behalf, 500,000 to 550,000 free-trading shares in an account at United Capital Securities.
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