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Canadian Police Say Starnet Benefited from Illegal Online Bets by Canadians

David Baines of the Vancouver Sun reported Thursday that the affidavit refers to a warning issued to Starnet licensees in January 1999 by the company's then-chief executive, telling the licensees to immediately stop taking bets from Canadians.

But the licensees continued to do so, according to the affidavit, which cites successful efforts by Royal Canadian Mounted Police investigators to place bets later in 1999.

Starnet continued to benefit from such wagering by collecting royalties from the licensees, the Sun said in its report on the affidavit.

In addition, one licensee - Good Guys Investments C.A. -- was allegedly controlled by directors of Starnet, contradicting the supposed arms-length relationship between the company and its licensees. Good Guys is a Venezuelan company doing business as Aztec Gaming.

The Sun obtained a copy of the affidavit, a lengthy document filed with the British Columbia Supreme Court (which is not the province's top court) in support of prosecutors' request for a six-month extension of a freeze on two Starnet bank accounts. The money, US$6.9 million, was frozen by court order shortly after a spectacular raid on Starnet's headquarters in Vancouver in August 1999.

After the raid, Starnet moved its headquarters to St. John's, Antigua. The company has made numerous changes in its directors and top management, and has tried to negotiate a settlement of the long-running police investigation.

Starnet reported last week that the court granted the six-month extension of the freeze. The company said it would file an appeal with the British Columbia Court of Appeal.

On Aug. 17, Starnet reported that an affidavit had absolved the company of allegations that it had distributed illegal pornography over the Internet. But the company never announced the details of the affidavit that dealt with potential violations of gambling laws.

The affidavit asserts, according to the Sun report, that Starnet's headquarters in Vancouver was the source of most of the services it provided to licensees, and that the company was therefore conducting illegal gambling operations in Canada.

Starnet's receipt of royalties from its licensees' acceptance of bets from Canadians is a key legal issue in the fight over the frozen funds. Canadian authorities argue that they have the right to permanently seize the funds if the money is ultimately proven to be derived from criminal activity.

In opposing the extension of the freeze, Starnet argued that the biggest chunk of the money -- $5.6 million - is the proceeds from the exercise of warrants in Starnet stock. That money could never be properly forfeited as the proceeds of criminal activity, Starnet's lawyers argued, regardless of what Starnet might be convicted of.

The Crown prosecutor, according to the Sun, agreed on the source of the $5.6 million. But she argued that warrants and options in Starnet stock were only exercised because the price of Starnet's stock was increasing rapidly. The jump in stock price was directly related to Starnet's growing revenue from royalties, she argued, and the royalties were derived from illegal gambling in Canada.

"Initially, they were looking at the Canadian betting aspects," Meldon Ellis, Starnet's chief executive, told RGT Online last week. "Now they're going for a much broader scope, shifting to how the company benefited.

"They want to establish a case over all of Starnet's revenue, as big a claim as they can get."

Ellis said that until the prosecutor makes a final report to the Crown counsel, the government basically takes the position that there is nothing to negotiate. The prosecutor wants another six months to complete the report, which is why it wanted the freeze extended.

"At worst, we're talking about historical violations," Ellis said. "There will be financial consequences," he warned, but he still hopes for a negotiated settlement rather than a trial, which could drag things out for many more months.

Meanwhile, Ellis is optimistic about Starnet's appeal of the extension of the freeze. The extension was granted by the same judge who issued the original order, he noted, while the appeal will be heard by different judges.

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