DEBRA W. YANG
United States Attorney
Central District of California
Thom Mrozek, Public Affairs Officer
January 10, 2005
ORANGE COUNTY MAN PLEADS GUILTY IN $4.9 MILLION
"PONZI" SCHEME INVOLVING ADULT-ENTERTAINMENT PHONE LINES
A Mission Viejo man pleaded guilty this afternoon to federal fraud and money laundering charges for running a telecommunications company that purported to sell investments in adult-entertainment pay-per-call telephone lines, but was in fact a Ponzi scheme that collected more than $4.9 million from victims in the United States, Australia and Hong Kong.
Michael Freedman, 46, of Mission Viejo, pleaded guilty today before United States District Judge Stephen V. Wilson in Los Angeles. Freedman pleaded guilty to two counts of wire fraud, one count of mail fraud, and four counts of money laundering. Freedman entered his guilty pleas pursuant to a plea agreement in which he acknowledged that he owned and controlled Asia-Pacific Spectrum Communications, a Los Angeles-based company that was at the center of the Ponzi scheme.
Between May 1995 and May 1998, Freedman fraudulently raised and received approximately $4,942,000 from approximately 450 victim-investors. Each victim-investor was required to pay Spectrum an up-front fee of as much as $4,500 for each psychic or phone-sex telephone line that Spectrum purportedly set up and activated. In return, Freedman represented that Spectrum would arrange for programming and collect the revenues generated by the phone lines. Freedman also collected additional fees for advertising services to market the investors' phone lines. Freedman prepared and sent false advertising invoices showing publications in which investors' phone lines would purportedly be advertised and the purported costs of such advertising.
In reality, Freedman spent only a very small portion of advertising fees collected from victim investors to actually advertise phone lines. Between May 1996 and January 1997, for example, Spectrum represented that it had spent more than $4.4 million for advertising, when in fact Spectrum spent less than $160,000 during that period. Freedman used the vast majority of the advertising fees collected from victim-investors to pay other investors their purported returns, as well as for his own personal benefit, including the purchase of a residence and payment of personal credit card bills.
In order to induce investors to continue paying for advertising, Freedman regularly prepared and sent false call revenue reports, which purported to summarize call activity and revenues generated by investors' phone lines. Freedman fabricated the revenues reported in these reports, and the investors' phone lines generated only a small fraction of what Freedman reported. Between May 1996 and January 1997, for example, the total revenues generated by calls to victim investors' phone lines amounted to less than $30,000, or less than 1 percent of the total revenues of over $4 million reported in the call reports that Freedman fabricated.
Instead of using investors' funds to purchase phone lines and advertising as promised, Freedman diverted the vast majority of those funds toward unauthorized uses, including $2.1 million in Ponzi payments back to investors. Freedman also misappropriated more than $1 million of the investors' funds for his own personal uses, including $351,000 transferred to a personal bank account, $217,000 to pay Freedman's American Express bills for shopping sprees and trips to Las Vegas, and $186,000 toward the purchase of a $575,000 home in Westlake Village.
Freedman admitted that he committed various money laundering offenses to promote the Ponzi scheme and to conceal the fraudulent proceeds of the scheme, including by transferring approximately $800,000 of investors' funds to an offshore trust in Singapore.
Freedman also pleaded guilty to a scheme to defraud the Silver State Bank in Nevada by writing and depositing insufficient funds checks drawn on closed Spectrum accounts.
Freedman is scheduled to be sentenced by Judge Wilson on June 6. The wire fraud, mail fraud and money laundering counts carry a maximum possible sentence of 110 years in prison and a potential fine of $3.25 million. Freedman is expected to be ordered to pay approximately $2.9 million in restitution to the victims.
This case is the product of an investigation by the Federal Bureau of Investigation.
Release No. 05-004
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