The Latest Scoop on Starnet

23 August 2000
It was a busy week, in terms of court activity, for Starnet Communications International. Charges of illegal porn distribution are out of the picture, but the battle over whether the company conducted illegal gambling operations will likely continue for at least six more months.

During the early morning hours of August 20, 1999, Canadian law enforcement officials raided the offices of online gambling software developer Starnet Communications International, along with several company officials' homes, on suspicions that the company was involved in illegal gambling, child pornography and money laundering.

Documents and computer records were seized from 107 computers, 56 computers were taken and more than 80,000 pages of documents (either taken during the raid or downloaded from computers) are being examined. The complexity of the raid was daunting for law officers, who attended a three-day training course to prepare for computer searches.

No charges have been filed against the company, but two bank accounts containing more than $6 million were frozen pending the investigation's outcome. Company officials have applied to the courts for release of the accounts, and are still awaiting an answer. (Click here to read the Chambers Brief.)

Meanwhile, the Organized Crime Agency of British Columbia on August 11 filed an affidavit before the state Supreme Court requesting a deadline extension to keep most of the seized items until February 2001 because the research is so complex and time-consuming. An extension was granted yesterday.

"While we are disappointed with the ruling, it is consistent with the Court's past opinions," lamented Starnet President and CEO Meldon Ellis. "As we expected the Court to grant additional time to the RCMP to complete their investigation, we have prepared for this contingency. We have instructed our lawyers to file an appeal with the British Columbia Court of Appeal immediately and believe that our case has considerable merit. We will proceed with this appeal expeditiously and hope to be in a position to set an appeal date within a few months."

The OCA's affidavit outlined a number of concerns driving the investigation of Starnet. Such issues include the development and resale of online gaming products and services to companies outside of British Columbia; receipt of bettors payments in Starnet's Vancouver bank accounts; payment from those account for betting lines for gambling purposes; information showing that Starnet licensees accepted bets from numerous Canadian and American citizens; and the possibility that not all of Starnet's licensees were operated at arm's length.

Many of the issues have been addressed over recent months Ellis said. "Restructuring efforts have been designed to enhance the clarity of our operations and eliminate potential misunderstandings of our operations and eliminate potential misunderstandings of our operations," he explained. "What has become increasingly clear to management over the past year is that while legal institutions in North America have struggled to adapt to the new reality of I-gaming, several international jurisdictions have been more proactive. These jurisdictions provide stable launching pads for our operations and form the foundation of our strategic growth plans."

On the bright side, company officials have been vindicated of allegations of child pornography. One employee's predilection for nasty material kept authorities busy searching Starnet computers for such materials, to no avail. The employee has long since been dismissed, and the government recently admitted that Starnet wasn't involved in child pornography. The affidavit reads: "No pornographic images of children were found within the computer system operated by Starnet, and no charges will be recommended to the Attorney General of British Columbia, as the result of this investigation, in regard to Starnet having distributed prohibited pornographic images over the Internet."

Starnet's legal battles have been hard on the company's bank accounts. The company reported in its third-quarter financial statements released March 15, 2000 that legal expenses had forced it to take one-time charges exceeding $3 million. At that time, legal fees had hit $.17 million during one quarter, including a $1.5 million provision for future legal costs.

Ellis remains optimistic, however, explaining, "Revenues are rapidly and consistently growing, and as investments in new software and online parimutuel services decline over the next two quarters, we anticipate generating significant positive earnings."

"Over the past year, we have built a better Starnet, with enhanced products and services," he continued. "As a result, we are better positioned than ever to capitalize on industry growth and look forward to a strong year."