DENVER-Investors in two start-up prepaid cellular phone businesses have filed a class-action lawsuit against the businesses’ promotors, claiming they bilked investors out of more than $58 million.
The lawsuit, filed in Denver District Court, alleges that 12 individuals and 10 businesses conspired to cheat investors in a “boiler-room” scheme designed to look like a start-up cellular business that would target credit-challenged customers. The investors claim the defendants were able to raise within about two years in excess of $58 million from more than 5,500 investors throughout the nation. Today that money is almost gone, unaccounted for and many of the businesses are in bankruptcy. An ongoing audit by Deloitte & Touche has yet to be able to account for a large portion of the money, according to the lawsuit. About $3 million remains locked in an escrow account under orders from a federal judge.
The suit names Lawson M. Kerster, Edward D. Duncan and Brian J. O’Shaughnessy as key conspirators in the scheme. The two businesses funded by the investors-One-Stop Wireless of America Inc. and Pre-Paid Cellular Inc.-have filed for Chapter 11 bankruptcy protection. The remaining businesses and individuals named in the lawsuit worked with One-Stop Wireless and Pre-Paid Cellular to sell partnership units to the investors. These defendants include David Chadwick and his company, C/Net Solutions Inc., which served as a consulting firm to the businesses.
Chadwick co-founded Las Vegas-based Chadmoore Wireless Group Inc. with Robert Moore and resigned his positions as company vice president and director of engineering in 1996 after a due-diligence procedure found he was convicted of a felony in 1992. That conviction now has been dismissed, say those familiar with the case.
The missing money has prompted heated accusations from both sides. The defendants have yet to file a response to the lawsuit, but say the plaintiffs’ lead attorney Jon Mower is an investor in the businesses and filed the lawsuit after his efforts to recover his own investment failed.
In an April letter to its investors, the corporate partners indicated that after receiving criticism from several investors about the way the businesses were managed, “it became increasingly clear that serious questions regarding management competency and judgment had arisen.”
The corporate partners decided the hire C/Net Solutions and Chadwick to address the charges of mismanagement. Chadwick found that the available cash to develop the partnership operations was only $3 million-significantly less than the amount expected. Chadwick also discovered that millions of dollars had been invested in business transactions and had been paid as deposits on additional business deals that were proving to be unsound. Chadwick took steps to recoup the funds, which included shutting down unprofitable operations.
Mower thwarted this effort by successfully freezing the remaining $3 million that was in escrow account, claimed the letter.
“In trying to recover his own investment and that of his California law partner at the expense of the rest of the investors, Jon Mower himself caused the ultimate demise of these businesses,” said D.J. Poyfair, lawyer with Freeborn & Peters, representing some of the defendants. “He should and soon may well be sued by some of the same investors he wants to represent. We deny the charges because they are false.”
The lawsuit claims the businesses are part of a long line of boiler-room schemes designed to defraud investors nationwide and involving most of the same participants. Aashish Desai, one of the attorneys for the plaintiffs, charged that some of the defendants are now promoting new businesses in Denver under the names Biotech and 3-D PetroQuest using the same offering materials.
Desai said Colorado is a haven for limited partnerships because the state’s securities laws make it more difficult to prosecute investment fraud than in other states.
