Internet Scam Had Its Attractions

A day after a Mission Viejo teenager was accused of bilking investors out of $1 million in an Internet-based scheme, some of those who lost money said they suspected it was a scam all along--but got in anyway in the hope of earning a quick payout.

These investors said they regularly comb the Internet in search of various “investment” programs in which the strategy is to jump in early and secure a fast profit before the program collapses.

Meanwhile, court records showed that the accused youth’s family struggled financially in the 1990s, making two appearances in U.S. Bankruptcy Court in the last nine years.

On Monday, the Securities and Exchange Commission alleged that 17-year-old Cole A. Bartiromo operated a scheme that fraudulently advertised “risk-free” returns of as much as 2,500%. The SEC said more than 1,000 participants worldwide sent money to Bartiromo, apparently duped in part by the urbane persona that he adopted online.

Bartiromo agreed to settle the SEC case without admitting or denying guilt and to return $900,000 he had sent to an account at a Costa Rican casino.

The case was only the second time that the SEC has filed charges against a minor for running an investment scheme, and it raised new questions about the potential for technology-savvy teens to be lured into Internet-based fraud.

However, some who got involved in the program described Bartiromo’s “Invest Better 2001” as one of many such Net-based “games” in which early entrants hope to profit while being on constant alert for warning signs that the program is unraveling.

“I honestly don’t believe any of these are legitimate when I start them,” said Heather Wallace, a homemaker and mother of two in Fort Riley, Kan., who said she lost $715 in Bartiromo’s program. “If you’re not figuring that 90% of them are scams, you’re in the wrong line of business.”

Initially Scheme Made Good on Its Promises

Miki Terry, an investor in Charlotte, N.C., who said she lost $800 with Bartiromo’s game, said most of these games are “illegal or borderline-illegal pyramid schemes, multilayer marketing plans, chain letters and Ponzi schemes.”

In a classic Ponzi scheme, investors are promised huge returns, and the earliest entrants are paid with money collected from later entrants, giving the program the initial appearance of legitimacy.

Bartiromo promised to pay high returns by making sports bets with participants’ funds.

Some investors said they lost money in Bartiromo’s program only because there was little sign of trouble before the scheme suddenly disintegrated during the first week of December.

Initially, Invest Better 2001 apparently made good on its promises. Shortly after the scheme was launched in November, many investors said they received payouts from Bartiromo.

Julie Hatch, an investor in St. Anne’s-on-the-Sea in northern England, initially put in $2,000 and was paid $4,000 in return, she said. Hatch plowed that money back into the plan and took out $8,000. At that point she made her “big plunge,” investing nearly $27,000--which now appears to be lost.

“It was all very seductive,” Hatch said. “At the end of the day, greed got the better of us all.”

Hatch was taken in by the seeming professionalism of “Tom Manning,” the alias used by Bartiromo.

“I certainly did not think I was in contact with someone of only 17 years old. The language used in the e-mails was mature and to some extent worldly wise and also witty at times,” Hatch said.

For example, in one dispatch to investors, Bartiromo said: “There is nothing illegal going on here, just those that want to join together to form success are doing just that. Big Brother and the SEC don’t want to see any program work for a variety of reasons. Revenue escapes from their tax base and they can’t have Johnny Lunchbucket make easy untaxed dollars from these programs. This goes against the grain!”

Some of Bartiromo’s investors said they troll the Internet in search of similar programs, which appear to go by a variety of names, including “gold games.”

Some investors said they commit small amounts to the games. Sometimes they lose money right away and move on to the next game, they said. If they receive a payout, they attempt to keep playing. They say that the games almost always collapse and that the trick is to watch for signs as to when that’s happening. Those signs can include late or missed payouts, delayed answers to investor questions or complaints, sudden rumors or the disappearance of a Web site, Wallace said.

Terry described the games as so-called biz opps, where the strategy is to “skim the cream” before they fall apart.

SEC officials would not comment as to whether Bartiromo’s investors themselves might have broken securities laws. But other experts doubted that was the case. Securities laws are aimed mainly at the people operating schemes.

According to one victim, Bartiromo used stalling tactics to avoid paying investors as the game progressed.

Neville Sison, another English investor, said that under the Manning alias, Bartiromo asked him not to complain to Evocash, one of the e-commerce sites used to move funds between investors and Bartiromo. “You will only lock the funds forever this way, if you complain to Evocash. Please tell them it was [a] misunderstanding,” Bartiromo told Sison in an e-mail on Dec. 11.

Four days later, Evocash responded to Sison’s inquiry, saying, “The account in question has been closed by the account holder and is no longer in use.”

Bartiromo, who friends described as an avid sports memorabilia collector with his father, told investors he was betting on professional football games and other sporting events.

“He would list the positions he had on upcoming games on the forum,” Terry said. “He would say how much he was betting on a team and that he was covering his bets in various ways, sometimes making two or three bets on the same game.”

Bartiromo would paste copies of betting forms from a Las Vegas sports book on the Web to convince investors that he was putting money into wagers, Terry said. But it isn’t known whether any bets actually were placed.

Teen’s Family Had Financial Problems

Bartiromo used a system of juggling funds between numerous e-commerce sites to evade regulators, according to an e-mail he sent to one investor.

The funds “are almost always in transit, being transferred from a sports book and back,” Bartiromo said in the e-mail. “When they are transferred back, even then, we hold all the funds in a ‘unknown’ account to the public to protect the funds from hacking attempts which could freeze accounts and delay the program. Also, this protects us against Big Brother or the SEC or what have you ever being able to freeze funds, as they will not be able to get to them.”

Bartiromo’s lawyer did not return phone calls Monday or Tuesday. How the youth came up with the scheme idea--and whether he had help--remain unclear. But more details emerged Tuesday about his family.

His parents first filed for bankruptcy protection in U.S. Bankruptcy Court in Santa Ana in early 1993, when their combined bill payments exceeded their $2,800 monthly take-home income by nearly $200 a month. Among the debts they listed was $4,000 owed on a time-share at the Jockey Club Resort in Las Vegas.

In June 1993 the court discharged the debts, wiping the slate clean for the Bartiromos to start over.

But four years later, Bartiromo’s father, John Bartiromo, a Southern California Edison employee, filed another bankruptcy petition after falling more than $23,000 in arrears on his mortgage, and the lender sent a statement that put the total owed at $237,419.

John Bartiromo proposed paying $500 a month for 36 months to wipe out the default. The court quickly approved a proposed plan of repayment, but a month later, in May 1997, the court dismissed the case and prohibited him from filing another bankruptcy petition for six months.

Cole Bartiromo was the talk of Trabuco Hills High School on Tuesday as well as on the baseball field, where he surprised teammates and coaches by showing up for practice.

Some classmates described him almost in heroic terms, saying what he did was smart and gutsy, according to students.

“Most people don’t think what he did is a bad thing,” said P.J. Sandoval, a teammate on Bartiromo’s baseball team. “They’re amazed how a minor can pull off such an intricate scheme.”

Although Sandoval didn’t think Bartiromo was much of a hero, he said: “I think it’s a huge deal, especially with the amount of money he took and the number of people he took it from. He had to be pretty patient, tenacious and risky. But he was pretty genius too.”

Sandoval said Bartiromo’s case was discussed in his civics class. “Kids were asking, did he commit the crime or was it the stupid people who fell for his scheme?” he said.

Many of the players asked Bartiromo how he pulled off such a scheme by himself. But none of them got any answers, Sandoval said.

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Times staff writers James S. Granelli, Bonnie Harris, Dave McKibben and Mai Tran contributed to this report.