Lawsuit alleges 'online currency' scam

[R.A. Hettinga]

<http://news.com.com/2102-1030_3-5553141.html?tag=st.util.print>

CNET News

 Lawsuit alleges 'online currency' scam

 By Declan McCullagh

 Story last modified Thu Jan 27 08:47:00 PST 2005



A lawsuit claiming that a "gold backed" Internet currency scheme bilked
investors out of more than $250 million can proceed against a bank
implicated in it, a federal judge has ruled.

At the height of its popularity, the OSGold currency boasted more than
60,000 accounts created by people drawn to promises of "high yield"
investments that would provide guaranteed monthly returns of 30 percent to
45 percent.

 But around July 2002, the eve of the maturity date for the investment
program, the company that offered the accounts suddenly ceased payouts.
David Reed, who had founded the company called One Groupe International,
eventually was discovered to have relocated from the United States to
Cancun, Mexico.

 Concluding they had been fleeced, a group of OSGold investors banded
together to sue Reed and 19 other defendants including two Latvian banks
that allegedly lent their imprimatur to the project. It was "fronted by the
sale of a nonexistent gold-backed Internet currency and was fueled by a
mammoth 'Ponzi' scheme disguised as a guaranteed high-yield investment
program," the OSGold investors say in court documents.


U.S. District Judge Lewis Kaplan ruled on Friday that the lawsuit could
proceed against the Latvian Economic Commercial Bank (Lateko), which had
attempted to dismiss the charges. Kaplan, in New York, dismissed some
charges against Lateko, including breach of fiduciary duty, but permitted
the rest to stand.

 "Lateko's apparently false denials to a possibly important business
partner and its continued cooperation with (Reed and other defendants) even
after the scheme suspiciously began to collapse tend to show conscious
disregard or recklessness and give rise to a strong inference of fraudulent
intent," Kaplan wrote.

 Lateko's involvement began in December 2001, when it allegedly inked a
deal with Reed and other defendants to provide anonymous debit cards that
could be used to withdraw money from OSGold accounts from ATMs linked to
the Cirrus network. Lawyers for Lateko in the New York offices of Baker &
McKenzie did not respond to an interview request.

 Suspecting something odd was going on, some companies involved in
providing gold-backed Internet currencies tried to distance themselves from
OSGold early on. In May 2001, the Gold and Silver Reserve (responsible for
the e-gold currency) announced it would no longer link to companies that
did business with "or make reference to" OSGold.

 A Ponzi scheme is an illegal pyramid scheme in which some early investors
are paid off with money from later investors in an attempt to make the
system look legitimate. But when later investors demand their money, the
fraud collapses. This type of scheme is named for 1920s-era swindler
Charles Ponzi, who promised investors a 40 percent return in 90 days.

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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'