Internet Update
Dateline: 08/23/99
Updated: 08/24/99
What stings worse than a bee as far as investors are concerned? Worse than declining profits? Worse than declining sales? The scandal of a police raid that threatens to bring down the whole house of cards. That was the case Friday as Vancouver police raided the offices of Starnet Communications and the homes of six of its officers. The stock, which closed at $13.88 last Friday and had been as high as $26 recently, plummeted to $4.06 before the dust had settled, the largest drop on any U.S. market that day.
This was not a small raid by any standards. Over 100 police officers from the RCMP, the Coordinated Law Enforcement Unit (CLEU), the Vancouver City Police and other agencies (including the RCMP's High Tech Crime Unit in Ottawa) pounced on Starnet's Carrall Street offices around 5:30 AM Friday after an 18 month investigation into the company's activities. Armed SWAT team members used battering rams to break down the doors of the executive suite. Three floors of the building were occupied by the police.
Search warrants showed the police action was based on allegations of illegal gambling, the possession and distribution of obscene material, possibly even child pornography and possession of the proceeds of crime.
The police began their investigation, code named "Project Enigma", in December 1997. Undercover officers using secret identities began placing bets at Starnet licensed gambling sites in October. Payouts of winnings were requested and cheques received were mailed from Vancouver, Antigua and Puerto Rico. According to one source reports Stockhouse, seized computer files show that not all gambling transactions were conducted offshore.
Investigators with CLEU joined the company's adult websites using credit cards and found images of sadomasochism, bondage and other degrading acts they believe constitutes prohibited obscene material.
The police even searched through the personal garbage of one Starnet director to get company letters and minutes of meetings. The company's long distance phone records were also checked.
The company, unlike many Internet companies, was profitable. It pulled in a net profit of $2 million U.S. for the year ending March 31 on revenues of $9.8 million. That's nine cents a share and compares with a loss of five cents a share the previous year.
In a press release later in the day, Starnet CEO Mark Dohlen said the company was retaining legal counsel and would "vigorously defend our rights". He indicated that there would be no interruption of the company's operations, but the RCMP say they have the company "shut down".
Dohlen added "It is regrettable that we were not given an opportunity to co-operate with authorities regarding their concerns . . . we are a fully reporting U.S. public company and our international operations comply with the laws of their respective jurisdictions."
What this raid will mean for Starnet's investors and its 163 Vancouver employees remains to be seen. Their websites appear to be operating (no doubt hosted offshore). The company may have to revamp some of its operations. It may have to move some that were run from Vancouver to the Caribbean.
Much will depend on any future court proceedings although at this writing, no charges have yet been laid. In the meantime, the company's stock is at the lowest price it's been since March. Worth getting into at this stage? That depends. Are you a gambler?
Update - Aug. 24, 1999: A report from The Vancouver Sun's David Baines this morning sheds more light on the allegations against Starnet by the police.
On the child pornography issue, Baines says "Police allege that a consultant to Starnet told them he had been given a 'staff-demo access code' enabling him to access, through the Sizzle site, images of child pornography. No details were provided."
While Starnet's gaming sites clearly state that they do not accept bets from Canadian or American residents, undercover officers successfully placed bets on Starnet sites.
In press releases issued by Starnet, company CEO Mark Dohlen asserted that staff are back at work after the weekend disruption and also reiterated plans to sell off its erotic websites by auction and focus on gaming exclusively.
Vancouver police spokeswoman Anne Drennan says the police have been fielding many calls from worried investors asking whether they should bail out of the stock - advice the police cannot offer. She says some men were very emotional, crying and saying they had lost their entire life savings. "It was hard. It was sad. I feel bad for them, but what can you say?" she said.
What's that expression about putting all your eggs in one basket?
Starnet took bets, warrants disclose - Aug. 24 report from The Vancouver Sun.
Police raid Internet porn firm - Aug. 21 report from The Vancouver Sun
Starnet Plummets Back to Earth - Aug. 20 report from Stockhouse.com
Starnet Communications Announces Investigation Without Charges - Aug. 20 report from Stockhouse.com
Police raid homes and offices of Starnet executives - Aug. 20 report from Stockgroup.com (go down the page a ways to find it!)
Now on to our usual Monday features!
Click on the title above for this week's Movers & Shakers table.
Of the 87 stocks on our three indices, 29 moved by 10% or more during the week. Of those, 17 were advancers and 12 were decliners.
Of the advancers, two stocks, Innofone and Research in Motion are in their second week of double digit gains. In fact Research in Motion hit an all-time high this week and is off just slightly from that mark.
One other stock on the list, AdvanteXCEL, is in its second week of double digit declines and I Crystal is in its third week of large declines, the first time we've seen double digit moves in one direction since I started charting the Movers & Shakers.
The biggest upward move was Online Production Services which jumped over 40% on the week to $1.01. But it is still well off the high of $4.20 set in March. It was followed closely by the high flying Research in Motion.
And as noted in our lead article, Starnet Communications took a whopping 70% tumble after police raided the company's Vancouver premises on Friday. Ouch!
It is interesting to note which Internet stocks are the most volatile. There are only 8 stocks out of the 48 from our mainstream Canadian Internet Stock Average on the Movers & Shakers list. There are 11 from the 25 on our Metamorphosis Index. And there are an incredible 10 out of 14 from our Yankee Index. All of the latter are from the OTC BB exchange.
Canadian Internet Stock
Index
Metamorphosis Index
Yankee Index
As I just got back from vacation, there are no new additions to our indices this week, but they have been updated with this week's closing prices.
Since it's the big item in the news, I've done up a revised profile of Starnet Communications.
Comments? Suggestions? Why not post them on our Bulletin Board or email me.
E-mail me!
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08/16/99 - Investing
in Canada for Americans
The ins and outs of trading in Canadian stocks for Americans.
08/12/99 - Info
for Ex-pats
Thinking about moving to the U.S.? Here's how it will affect your
RRSPs, pensions and taxes.
08/09/99 - Internet
Update: iWave.com and eStation.com Profiled
Along with our Movers & Shakers list and updates to our
Internet indices, we profile two new additions to our indices.
08/05//99 - A
Question of Balance
Daryl Maddeaux, artist and philosopher, is building spires and
inspiration for kids and businessmen.
08/02/99 - Internet
Update: Dispatch and AdvanteXCEL Profiled
We profile two new stocks added to our indexes as well as our
usual Monday look at the Internet Movers & Shakers.
Disclosure: The author may own shares in some of the securities listed.
Updates: I've added two new categories of Net Links to my pages. They are Biotech and Info for Non-residents. Both are still in their formative stages and I will be adding more links as we go along. If you know of any good links that would be suitable to add, please let me know.