11 January 2004 – LAWFUEL – The law news network – 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 $44
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
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.