Sex, Bets And Bikers

The raid was swift, and thorough. As dawn broke over one of Vancouver's seedier business districts last Aug. 20, a heavily armed team of law-enforcement agents smashed into the offices of Starnet Communications International, a four-year-old company that runs gambling and pornography sites on the Internet. Over the next three days authorities sifted through the company's files, hauling away boxes of papers and cartloads of computer equipment. The raid was the culmination of an 18-month probe of Starnet's operation, which authorities have described as "substantially and fundamentally an illegal enterprise." According to documents filed in Canadian courts in connection with the search warrant, Vancouver law-enforcement agencies claimed that the company routinely engaged in illegal gambling, distribution of hardcore pornography and money laundering, all using the Internet.

The raid on Starnet was big news in Vancouver, where the company had been heralded as an Internet success story. The company's stock, which is publicly traded on the U.S. over-the-counter market, was a hot buy, soaring from 37.5 cents last November to $29 last July. At its peak, Starnet's paper value neared $900 million. Now, with some of the company's bank accounts frozen, the stock has plunged to the single digits. Starnet vigorously denies the allegations of any illegal activity. "Bogus," says the company's lawyer. The company notes that police have not brought any formal charges against Starnet or anyone connected with the company. But law-enforcement agents clearly hope to make an example of Starnet, one of the first targets in a new battle against online crime.

Ken Lelek didn't start out to be an Internet pioneer. Back in the early '90s Lelek and a friend, Lloyd Robinson, ran an agency booking strippers for nightclubs. Lelek and some other friends, including Paul Giles, realized there was money to be made selling sex on the Internet. Pooling their money with other investors, they launched Starnet. (Lelek, through his lawyer, now insists his role in the company was always limited and he no longer has anything to do with it--a claim the police dispute.) The company's Web sites, which now include Sizzle.com, Chisel.com and Redlight.com, featured live strip shows and all manner of hardcore pornography. The company boasts it has porn customers in more than 60 countries. By 1997 the company had branched out to another lucrative online enterprise: gambling. Online customers could enter the cybercasino and play blackjack or craps, or put down wagers on college and professional sports. The company enlisted sports celebrities, including former heavyweight-boxing champion Larry Holmes, to endorse its gambling sites. Profits soared. Starnet's revenues for fiscal 1999 totaled $9.7 million. The company's stock was selling so well that Starnet applied for permission to trade on the prestigious Nasdaq market. In 1998 a "Nightline" broadcast about online businesses hailed Starnet as a "reputable pioneer of Internet gambling."

Back in Vancouver, the police had a decidedly more skeptical opinion of Starnet. For years British Columbia's organized-crime unit had been tracking the movements of the Canadian Hells Angels, which authorities there viewed as a dangerous motorcycle gang and one of the most threatening criminal groups in the region. They were particularly interested in the activities of Lelek's old partner Lloyd Robinson, whom prosecutors once identified as a leader in the outlaw biker group. The connection between Starnet and the Hells Angels, in fact, may have been tenuous. Robinson and Lelek had officially parted company years earlier, and Robinson never worked for Starnet--though his company did provide strippers for Starnet's live Internet shows. Nevertheless, people close to the company believe that the crime unit opened an investigation of Starnet based on the possible Hells Angels link. (Robinson could not be reached for comment.)

The Starnet probe, codenamed "Project Enigma," scoured the company's business connections, downloaded dozens of Web site pages, even searched through the garbage at the homes of company executives, looking for evidence of wrongdoing. The police also set up a sting, having officers pose as Canadian and American gamblers looking to put down wagers--a violation of Canada's tough gambling prohibitions. In Canada, like in the United States, it is illegal for companies to provide gambling services without a license, which Starnet did not have. (Unregulated Internet gambling has become so widespread in the United States that Congress is now considering banning it outright.) Police also allege that the company's adult-entertainment Web sites contain graphic depictions of sadomasochism, which violated Canada's antiobscenity laws.

In the weeks since the August raid Starnet officials have denied the allegations, suggesting the company is an innocent victim of the government's obsession with the Hells Angels. "The police are just rabid about bikers," says one source sympathetic to the company. Starnet's general counsel, Meldon Ellis, insists that the company has long outgrown its origins, and is now a professionally managed corporation. "Obviously, we're haunted by our past," he says. Ellis says the company has taken extraordinary measures to avoid inadvertently accepting illegal bets. The company also claims its pornographic Web sites, which are now up for sale, don't violate obscenity laws.

Starnet's troubles may be just beginning. NEWSWEEK has learned that the U.S. Customs Service and the Internal Revenue Service are now also investigating Starnet. The Monday after the raid, Starnet officials tried to empty the company's Vancouver bank accounts. But suspicious bank employees stalled the transaction until the police could freeze the accounts. Meanwhile Starnet has withdrawn its application to Nasdaq, and the company's president, Paul Giles, has moved the company's headquarters to the Caribbean haven of Antigua, outside the reach of Canadian and American regulators. That may give Starnet a brief respite from the prying eyes of the law, but the stakes for the mushrooming Internet gambling industry just got a lot higher.

Sex, Bets And Bikers | News