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.