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Police Blotter: Dot-com swindler goes to prison

Appeals court upholds verdict, revokes bail for church elder convicted of bilking dot-com IPO investors out of their life savings.

Police Blotter is a weekly report on the intersection of technology and the law.

What: Church elder appeals conviction on charges of bilking investors out of their life savings for nonexistent IPO of an Internet company.

When: Superior Court of New Jersey rules on September 17.

Outcome: Conviction upheld.

What happened, according to court documents:
Before mortgage fraud, there was dot-com fraud. And there was Henry Bazarte, a New Jersey man convicted of swindling his friends and acquaintances into investing in a broadband-provider scam.

Bazarte was a self-employed financial consultant, who was also an elder in a Jehovah's Witnesses congregation. Frank Schembre, a member of defendant's congregation, said that in early 2000, he asked for help in investing in conservative funds.

Schembre was eventually convinced to write a check for $180,000 for shares in an Internet company called TSI Broadband, on the theory that it was about to hold an initial public offering. But it turns out that TSI was a closely held company in financial difficulties and in fact was, at the time, in the middle of laying off most of its employees.

Schembre never received any shares of stock in TSI and never got his money back. The company went out of business in January 2001, according to a report in The New York Times.

Four other would-be dot-com millionaires--including a waitress--gave Bazarte money to invest in TSI. State investigators later determined he used those funds to pay his own mortgage and other debts. Those investors lost their money too.

Bazarte apparently managed to convince these investors that he was trustworthy through his relationship with Bruce Keller, another member of the same congregation.

Keller was disabled and struggling to meet his mortgage payments. Bazarte convinced him to take out a second mortgage on his home; Keller eventually gave him his life savings of $330,000 to invest. In return, Bazarte wrote Keller monthly checks of $5,000. Keller spread the word that the investments were real.

In reality, though, Keller's monthly "profit" checks were coming in large part from subsequent investors, and the $330,000 fund was actually losing most of its value.

Bazarte, who filed for bankruptcy in 2002, was eventually charged with a series of fraud-related crimes. He was convicted of theft by deception, falsifying records, misapplication of entrusted property, and failure to file New Jersey income tax returns.

He appealed, raising mostly technical points about cross-examination, improper comments by a prosecutor during closing arguments, and ineffectiveness of counsel. He lost, with an appeals court revoking his bail and reinstating his prison sentence.

Excerpts from the New Jersey Superior Court's opinion:
According to Keller, soon after he invested the money he began receiving monthly checks, which he assumed were profits. The checks were from TR Associates and NRG Associates. At some point, when Keller asked for information to help prepare his taxes, defendant told him that the money was tax-free; Keller understood that the investment was in government securities.

Defendant never revealed to Keller that the investments were unprofitable. At some point in 2000 or 2001, Keller finally learned from others in the congregation that his money had all been lost. At no time did defendant reveal to Keller that the "profits" he was receiving actually came from other investors' money.

The state introduced evidence that contrary to his representations to Keller, defendant had invested Keller's money in highly risky and speculative stocks. Moreover, defendant did not place the money into an account in Keller's name; instead he first placed the money into an account in the name of defendant and Christopher Mazzei. Defendant then moved the money into an account in defendant's sole name. When these investments began losing money, defendant sent Keller checks from Keller's own principal to make it appear that the investments were still profitable.

Later, defendant wrote Keller checks which the state's accounting expert, James Blong, traced back to funds defendant obtained from other investors. These investors included Frank Schembre and "investors who purchased TSI Broadband shares." Further, according to Blong, at least $10,000 of Keller's money was transferred to defendant's bank accounts and was never returned to Keller...

Defendant's explanation for all of the state's proofs was as follows. Defendant denied defrauding investors by inducing them to invest in TSI Broadband stock. He claimed that he genuinely believed that TSI was going to engage in an IPO and he thought the stock was a good investment. In that regard, defendant claimed familiarity with various important and knowledgeable investment experts who knew about TSI.

Because he worked with Glenn Russo of Russo Ventures, which was helping TSI obtain financing, defendant also claimed he attended meetings with TSI executives. However, he claimed that he knew nothing about TSI's financial problems, and had no idea it was not going to make a public stock offering, until May 29, 2001.

While he further admitted knowing that investment in a possible IPO was risky and appropriate only for a very limited class of high-income investors, he testified that he believed it was appropriate to encourage Margaret Hajdu, a waitress, and other relatively nonaffluent investors, to invest in TSI. He claimed that Hajdu and the other small investors were not actually investing in TSI itself, but that they were buying some of defendant's "founder's stock" in the company, i.e., shares he owned in GM Russo which represented his contingent right to buy TSI stock in the event of an IPO...

Having reviewed the record, including reading the entire voluminous trial transcript, we are not persuaded that any of the errors in the trial rose to the level of plain error. Not only did the state present a very strong case through witness testimony, but much of the state's case rested on a paper trail of financial documents. Blong's testimony was particularly devastating to defendant, because he meticulously documented the trail of funds from the small investors, through several different bank accounts, and finally to Keller.

The state thus established that defendant took money from later investors and misapplied it to pay "profits" to Keller, thus concealing from Keller the fact that his investment account was experiencing devastating losses. Further, while defendant attempted to explain away the state's case, no rational jury would have believed him.

This was not a case in which we harbor doubts as to whether the jury might have reached a different verdict but for the improperly admitted evidence. Even on a cold record, defendant's testimony can only be described as preposterous, and perhaps as important, inconsistent with the documentary evidence.