Court upholds $18 million judgment in ‘classic ponzi scheme’

By Cy Ryan

Tuesday, Aug. 17, 2010 | 1:50 a.m.

CARSON CITY – A federal appeals court has ruled that a company and its owners are liable for $18 million for their part in duping hundreds of consumers into buying “Internet kiosk” businesses with promises of lucrative earnings.

The U.S. Ninth Circuit Court of Appeals upheld the ruling of Senior District Judge Lloyd George of Las Vegas, who granted a summary judgment sought by the Federal Trade Commission against Network Services Depot, its owners Charles and Elizabeth Castro and company officer Gregory High.

Network promoted the sale of Internet kiosks to be stand-alone computer terminals that could be placed in public spaces such as airports or hotel lobbies. A user could log in and he or she would be charged on a credit card.

Network, based in Brea, Calif., sold the kiosks to investors for amounts ranging from $4,400 to $7,000 per kiosk. It promised the kiosks could generate $1,000 a day if placed in the right location.

Network Services teamed with Ed Bevilacqua and his Internet kiosk companies of Escondido, Calif., and started collecting money from investors -- but Bevilacqua failed to install the kiosks, officials said.

The FTC cracked down on the two companies, which agreed to a settlement in refusing to continue the business. The order contained a judgment of $18 million, but was suspended due to Bevilacqua’s inability to pay. That amount would become due if it is found he misrepresented his financial situation.

Bevilacqua and his companies also agreed to withdraw claims to $1.5 million in a bank account seized by the FBI, according to the FTC.

By early 2004, Network Services said more than 800 consumers purchased the kiosk opportunities, putting up more than $18 million. The venture fell apart and the FTC called it a “classic ponzi scheme.”

Castro and High both denied knowing about the fraud of Bevilacqua, who was failing to install the units but getting part of the money investors were putting up.

The appeals court, in a decision written by District Judge Rebecca Pallmeyer of Illinois, said Castro received a large number of complaints from dissatisfied customers about the lack of kiosks being installed. Still, Castro continued his promotions with the promise of profitability for investors, officials said.

The appeals court backed up Judge George, saying that despite denials by Castro and High, there was undisputed evidence that both men had enough knowledge to incur personal liability.

The appeals court said Castro and High showed a “reckless indifference to the truth or falsity” of the sales pitch it was making to consumers.

It also upheld the decision that $238,300 in fees paid to defense counsel Jeffrey Benice should be put in a trust. The court said that money was derived from the unlawful kiosk scheme after Bernice should have been aware of it. It did permit Benice, of Costa Mesa, Calif., to retain $136,700 as his fee before the assets were frozen.