FTC Obtains $18.9 Million Judgment Against Ponzi Scheme Operators

At the request of the Federal Trade Commission, a federal court has imposed a judgment of $18.9 million against operators of an “Internet kiosk” business opportunity scam, clearing the way for the FTC to distribute more than $2 million to the victims of their illegal Ponzi scheme.
The court found that the operators of the scam violated the FTC Act and the agency’s Franchise Rule by duping hundreds of consumers into buying Internet kiosk business opportunities with promises of lucrative earnings. In its final order, the court banned the key defendants from promoting any future business ventures and barred all defendants from making further misrepresentations.

As a result of the court order, consumers will be reimbursed more than $2 million. This amount includes approximately $450,000 in funds that the court froze at the FTC’s request, as well as $1.5 million in funds that previously had been seized by the FBI and had been the subject of a civil forfeiture action brought by the Office of the U.S. Attorney.

The court previously found that some funds that the defendants paid to their attorneys should go to victims of the scheme as well. One attorney agreed to return $40,000. The court ordered the other attorney to return $238,000.

The FTC’s complaint, filed in 2005, charged the California-based defendants with misrepresenting the earnings potential of the Internet kiosk business opportunity and misrepresenting the availability and/or profitability of locations for the machines. The free-standing kiosks housed a computer and a mechanism to accept payments. The Internet kiosks were designed to allow the public to access the Internet, for a fee, from locations such as hotels, bowling alleys, and convenience stores. According to the FTC, more than 450 consumers purchased thousands of kiosks.

The U.S. District Court for the District of Nevada agreed with the FTC that the venture was a Ponzi scheme. “Revenue” payments sent to investors each month did not come from the kiosk businesses, but from the infusion of money paid by new investors. In fact, the defendants installed only a small fraction of the kiosk businesses they had sold. This left the majority of investors holding worthless interests in nonexistent kiosks.

The FTC’s complaint named Charles Castro, Elizabeth Castro, Gregory High, Network Services Depot, Inc., Network Marketing, LLC, doing business as Network Services Marketing,
LLC, Net Depot, Inc., Network Services Distribution, Inc., and Sunbelt Marketing, Inc. as defendants (collectively the Castro Entities), and Phyllis Watson as a relief defendant. The Castro Entities are located in Orange County, California. The FTC also filed a separate complaint against a set of entities based in San Diego County, California, who worked closely with the Castro Entities to perpetrate the scam. The entities named in that complaint, Edward Bevilacqua, Bikini Vending Corp., 360 Wireless Corp., and MyMart, Inc., agreed to settle the FTC’s charges and have been banned from selling any business venture or franchise in the future.

The participation of these defendants in the kiosk scam has landed two key principals, Edward Bevilacqua and Charles Castro, in California state prison. As a result of criminal prosecutions brought by the Office of the San Diego County District Attorney, they were indicted on 48 counts of securities fraud by a San Diego County Grand Jury in September 2006. Bevilacqua pleaded guilty to felony securities fraud in February 2009 and is serving a seven-year prison term. Castro pleaded guilty to felony securities fraud in 2008 and is serving a three-year term. The FTC referred the cases to the San Diego District Attorney in 2005.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.