<nettime> A Bizarre Internet Ponzi Scheme

[Felix Stalder <felix@openflows.org>]

[What is missing in this article is that Donald A. English claimed his
business to be a "Christian-based humanitarian organization". It seems
that a Christian audience is particularly gullible when it comes to
pyramid schemes, perhaps because of a general willingness to believe in
miracles. With god on your side, any return is possible. But how God and
aliens go together is beyond me.

A similar story from a while back:
http://www.nettime.org/nettime.w3archive/200009/msg00035.html ]



July 3, 2001
U.S. Charges Internet Operation Was a Huge Scam
http://partners.nytimes.com/2001/07/03/business/03PONZ.html?todaysheadlines

By KURT EICHENWALD

KLAHOMA CITY By last September, life was getting rough for Donald A.
English.

An unemployed single father, Mr. English was almost out of cash. His
family was threatened with eviction. Collection agencies were at the door.
His credit cards were mostly tapped out.

With the walls closing in, Mr. English, 53, decided to grab for a
distinctly modern solution to his crumbling finances: He started his own
dot-com.

But this was no ordinary Internet company. Instead, government
investigators said, it was the centerpiece of a huge scam. With it, they
said, this down-and-outer from Midwest City, Okla., established one of
history's fastest frauds, conning tens of thousands of small investors out
of as much as $50 million in a matter of weeks, until the scheme collapsed
early this year in scandal.

The rapid-fire rise and fall of Mr. English and his enterprise, EE-Biz
Ventures, is more than just a tale of potential fraud on Internet time. It
has also exposed, investigators said, a strange corner of the cyberspace
investing world, one permeated with financial fantasies spun by assorted
hucksters and believed by legions of the gullible.

It is a place of fictitious currencies and make-believe investments, where
100 percent returns over a few days are not only promised but expected.
Investigators have stumbled across imaginary banks hawking nonexistent
"digital" certificates of deposit, illusory trillion-dollar government
obligations and bogus business deals to "lease" millions of dollars in
cash.

The fantasy world is so detailed that, in one instance, the government was
struggling to cash a $9 million check posted in the English case, only to
find that the bank on which the check was drawn did not exist. And then
there are the bizarre individuals connected to the case, like the
purported financier who claims to be in radio contact with a 9-foot-6
extraterrestrial circling the earth in a spaceship.

"When you look at what went on here, you have to willingly suspend any
sense of reality," said J. Chris Condren, an Oklahoma lawyer appointed by
a federal court as a receiver for EE-Biz. "It's like Rumpelstiltskin. You
have to believe in fairy tales to buy into this."

Regardless of the oddities, government officials said, the harm done by
Mr. English is all too real.

"While a lot of this may seem silly and absurd, we have real victims and
real losses here," said Spencer Barasch, associate administrator for the
Securities and Exchange Commission's Fort Worth office, which is handling
the case. "And a lot of these victims are elderly and vulnerable."

These days, Mr. English sits in a federal prison here, charged with
contempt for ignoring a court order that he disclose the location of
almost $9 million that is missing. As for the victims, many still have not
accepted that they were cheated and send e-mails regularly to the S.E.C.
and other officials, demanding the release of the man who promised to lead
them to financial prosperity.

William B. Federman, a lawyer for Mr. English, declined to comment on the
specifics of the accusations against his client.

>From the beginning, there was nothing particularly clever about EE-Biz,
according to an S.E.C. complaint filed here. It was, the agency said, a
simple Ponzi scheme, in which early investors are paid bogus profits with
money from new investors. Eventually, as new cash stops coming in, the
music stops and the scheme collapses, leaving the latest investors with
huge losses even as early investors like Mr. English can walk away with
fortunes.

In the case of EE-Biz, court records show, investors who signed up opened
an account with a legitimate company that functioned like a bank, using an
Internet currency known as e-gold. Then, they transferred dollars in
e-gold ó a transaction known as a spend, involving as little as $20 or as
much as several thousand ó to an e-gold account, controlled by someone
else. The early investors received double their money back, with no
explanation of how it was done. As word spread of the payouts, investors
flocked to the site to participate.

Mr. English himself had been a victim of a number of similar schemes and
decided to open up his own, according to transcripts of chat room
conversations. Those transcripts indicate that Mr. English himself may not
have completely understood the bogus nature of the plan.

"The way it is set up is really kool, and we will make plenty and pay
everyone, too," Mr. English wrote in the chat room. But then, for several
minutes he struggled to understand how the plan could take in $300, only
to pay out $600 days later.

"Where does the additional $300 come from so everyone gets paid?" Mr.
English asked repeatedly. To solve that problem, Mr. English ultimately
suggested that he would invest money in other Ponzi schemes.

According to records of EE-Biz investors, the company was formed last Oct.
21 by Mr. English and five others. Mr. English took the title of chief
financial officer. The others ó who were mostly unemployed, with little
experience in the business world ó were each named president.

Yet Mr. English "was the only one who knew how the money was being made,"
George Anderton, one founder, wrote in a memo to the S.E.C. "He refused to
tell us but assured us that he had done massive work with his legal team
to ensure that everything was legal, moral and had the blessings of all of
the applicable regulatory agencies."

Actually, Mr. English had no such approvals ó and later, when he consulted
a lawyer, he was told that his idea could not be carried out legally in
Oklahoma, according to a confidential EE-Biz document.

The false assurances of compliance were part of an attempt to make EE-Biz
stand out from other Internet Ponzi schemes, investigators said. But Mr.
English went further, recruiting promoters for the site who were
compensated for chatting up EE-Biz in cyberspace.

EE-Biz was also dressed up in the garb of a quasi-charitable organization
to attract religious investors. Mr. English held the company out as a
humanitarian group helping families with their finances.

The promotion lured investors from around the world. According to
information later seized by inspectors for the Postal Service, EE-Biz
victimized people from all 50 states and the District of Columbia, as well
as from Canada, Australia, New Zealand and other countries.

"Their lives are lived in the virtual world rather than the real world,"
Mr. Condren, the EE-Biz receiver, said of the investors, many of whom he
has contacted. "They live all day long on the Internet. They stay up all
night on the Internet."

To manage the Web site, Mr. English hired an Internet specialist named
Kevin Thiesse. Before taking the job, Mr. Thiesse and a colleague spoke
with Mr. English "and asked him whether EE-Biz Ventures was a `Ponzi'
scheme," Mr. Thiesse wrote in a subsequent e-mail to investors. Mr.
English "assured us that EE-Biz Ventures was not a Ponzi scheme and that
he was legitimately investing the funds offshore."

Money for EE-Biz poured in so fast that Mr. English's money problems were
quickly solved. Banking records show that he opened multiple accounts,
with tens of thousands of dollars running through them.

With the flow of cash came a taste for spending. Weeks after being unable
to pay his rent, Mr. English paid $23,000 for a silver Ford Mustang. Days
later, he returned to the dealership with $25,000 for a pickup truck.
Receipts show that he also spent tens of thousands of dollars for new
computer equipment, videocassette recorders and other big-ticket items.
The good life, it seemed, had come to the English home.

Soon, problems cropped up. Demand for EE-Biz was so strong that the
computer systems crashed, stopping not only the payouts but also the
influx of new money. Then in December, investors ó many needed cash for
the holidays ó slowed their contributions. Payouts stopped completely, and
complaints began.

"I need at the least a full refund of the $3,000 spend if you do not
intend to pay anyone back," one investor wrote. "Remember, I have cancer
and am unable to work for the next six months."

A couple in their 70's wrote Mr. English, explaining how they had been
heavily in debt when they heard of EE-Biz and had taken out a loan to
participate. "Had EE-Biz rolled just one more time, we would have been
well on our way to recovery," the couple wrote. "We sure would be most
grateful to you and EE-Biz for any help we may receive at this low tide in
our lives."

As the pleas for help came in, Mr. English thrashed about for new money.
Before Christmas, he sent an e- mail to investors, asking for financial
support. Then, he sent another e- mail, saying that if everyone did not
put in more money, their initial investments would be lost. That shocked
the specialists running the EE-Biz Web site.

"The letter was nothing less than a letter of extortion," Mr. Thiesse
wrote in a subsequent communication to investors. "It was requiring
investors to make further spends in hope of obtaining their money."

Distressed, Mr. Thiesse and a colleague made some calls and became
convinced that EE-Biz was a scam. They shut down the site.

But with a list of as many as 56,000 gullible investors, EE-Biz attracted
other get-rich-quick schemers. According to court depositions, Mr. English
and several other EE-Biz founders met at a Florida hotel with a man
promising to engineer a giant currency trade. For the deal, the group was
told that they needed to raise more than $1 million, which would be used
to "lease" $100 million from a shadowy Hong Kong entrepreneur.

The proposal was ridiculous on its face -- why would anyone put his own
money at risk so that others could take huge profits? But the EE- Biz
investors sensed nothing wrong, and forwarded several hundred thousand
dollars. The money has since disappeared.

Investors contacted the government, and the S.E.C. quickly filed a
complaint against Mr. English and EE-Biz, demanding that he return the
money. Mr. English was also put on notice that he was a target of a
criminal investigation.

Mr. English broached the idea of a plea deal, under which he would return
$9 million that the government concluded had disappeared. The money, he
said, would be provided by a benefactor named Garry Stroud, a resident of
Canada who claimed to be the principal in a Swiss bank, Euro Credit and
Exchange. The government agreed, after receiving sworn affidavits from
both men that the money would not come out of the proceeds from EE-Biz.

In March, a $9 million check arrived from Mr. Stroud. But officials soon
learned it was all a ruse: Euro Credit was not a real bank.

In a letter to the S.E.C., Mr. Stroud accused the government of failing to
cash the check properly. The check, he wrote, should have been sent by
courier to his bank's offices in Geneva, which would then cash it. But
investigators checked out the story, and found that the offices were
nothing more than rental space and that Mr. Stroud had given instructions
that checks sent to the address were to be forwarded to him in Canada.

"He wrote a check that would only be cashed when it was sent back to him,"
said Harold R. Loftin Jr., an S.E.C. lawyer in the EE-Biz case. "The whole
thing was ridiculous."

The more they examined Mr. Stroud, the more uncomfortable investigators
became. The primary financial asset he listed was a half interest in a
purported Peruvian debt, which he said was now an obligation of the
American government for more than $1 trillion. The half interest was
granted to him by the woman who said she was in contact with a space
alien.

Why would Mr. Stroud, who did not return phone calls, go through the
charade? Largely, officials say, to get a crack at the EE-Biz investors.

According to a recently filed S.E.C. suit, Mr. Stroud has a history of
defrauding investors. Already, he has informed EE-Biz investors that he
deposited money they lost in accounts at Euro Credit. And while the
investors can see the money in their name at the Euro Credit Web site,
they cannot take any out. To do that, they have to send more money to Mr.
Stroud, who says he will then provide a bank card that will allow
withdrawals from any A.T.M. On top of that, he is offering the investors
an opportunity to participate in another program to double their money.

And how have they responded? Many investors have already sent Mr. Stroud
their money ó throwing another $300,000 away, by the S.E.C.'s estimate.
Now they are anxiously awaiting the delivery of working debit cards that
investigators believe will never come.

Copyright 2001 The New York Times Company | Privacy Information





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