Police blotter: Dot-com magnate loses fraud appeal

Court requires Bidbay.com founder to pay $987,000 for defrauding investors in scheme with three convicted criminals.

Declan McCullagh
Declan McCullagh Former Senior Writer
Declan McCullagh is the chief political correspondent for CNET. You can e-mail him or follow him on Twitter as declanm. Declan previously was a reporter for Time and the Washington bureau chief for Wired and wrote the Taking Liberties section and Other People's Money column for CBS News' Web site.
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What: IRS agent turned dot-com exec appeals jury verdict finding conspiracy to defraud and violations of federal securities laws.

When: Decided Feb. 17 by the United States Court of Appeals, 8th Circuit in Missouri.

Outcome: Jury verdict in civil lawsuit for $987,000 in damages upheld.

George Tannous
George Tannous

What happened, according to court documents: After George Tannous quit his job as an IRS agent in 1993, he set up shop as a tax adviser. Business eventually slumped, and Tannous decided to cash in on the dot-com boom by buying rights to the Bidbay.com domain name in 1999 for $1,000. He planned to create a rival to eBay with a patent he had purchased that covered auctions through multi-level marketing.

To drum up investors for this dot-com business, Tannous turned to Wes Cooley, an ex-congressman from Oregon who was convicted on charges of lying in a voters guide about serving in Korea, and Don Dayer, a felon previously convicted of tax fraud. Dayer in turn enlisted "John Montgomery," a felon whose real name was DeElroy Beeler and who had been convicted of bank fraud and was awaiting sentencing at the time.

Editor's note: This account was detailed in several court documents, including an opinion from the U.S. 8th Circuit Court of Appeals. Dayer disputes this account. He says he left the company before the incident occurred and was not a defendant in the case.

Montgomery began telling people, including an oral surgeon from St. Louis, that investing in Bidbay.com was a great deal because eBay was going to buy the company. Also, Montgomery said, an initial public offering was being planned and Bidbay.com stock could be flipped for a tidy profit.

Those statements were not true. Bidbay.com's IPO registration statement had already been withdrawn and was no longer being processed by the Securities and Exchange Commission. And eBay did not buy Bidbay.com.

After losing their money, unhappy investors sued Tannous, Cooley and Montgomery, accusing them of conspiracy to defraud and violations of the Securities Act.

Cooley, the former Republican politician, responded by claiming he had experienced three strokes and could no longer remember anything, according to an Associated Press article from the trial. An attorney for Tannous argued that the investors were actually trying to trade on insider information about the purported deals and should be held responsible for their own losses.

The Bidbay.com trio lost. A federal jury in Missouri ordered Cooley and Tannous to pay back investors, finding Tannous personally liable for approximately $987,000 in compensatory damages and $11 in punitive damages.

Tannous appealed. He lost again last week. The 8th Circuit did acknowledge that the $11 in punitive damages may have been wrongly awarded because of improper jury instructions, but declined to do anything about it.

A postscript: Instead of buying Bidbay.com, eBay actually sued the site and forced it to change its name to Auctiondiner.com. It is now called Auctioncities.com. It eventually did have an IPO and trades at 5 cents a share on the over-the-counter market as of Thursday, down from $1.50 last July.

Excerpt from the unsuccessful appeal written by John J. Allan, a lawyer for Tannous (Click for PDF): "When it is considered that the first investment of the plaintiffs, $700,000, was invested with a complete stranger, over the telephone within 5 days after the first call, based on marginal information by an experienced, if not knowledgeable, accredited investor, on the referral of his own friends and acquaintances who had made a 'million' investing with these same people, what was the proximate cause of the investment?

"It has to be considered that if the jury was required to be convinced on clear evidence that Tannous knew what Beeler was doing and saying, the jury might not have found him responsible for this man's statements. When you consider that the stock is now trading, you have to consider where there is any fraud at all.

"When the evidence showed (oral surgeon and investor) Kenneth Rotskoff invested $200,000 more dollars, after having cause for concern about the wisdom of his investment and against the advice of his family and financially knowledgeable brother in law, it has to be considered that the jury may not have found George Tannous liable at all with the required standard of proof.

"In this case it seems clear that the Rotskoffs were getting information about a security from one who was not licensed to sell them and without checking the investment more thoroughly. This may be negligent, it may be equally at fault but it should have been considered by the court in light of the shallow evidence of George Tannous about his actual knowledge of Beeler's representations."

Excerpt from the 8th Circuit's opinion rejecting Tannous' appeal: "As an initial matter, Tannous waived his argument regarding sufficiency of the evidence because the issue was not developed in his briefs as required by Federal Rule of Appellate Procedure. It is thus considered abandoned...Sufficient evidence exists supporting the verdict."