January 27, 2005 8:47 AM PST

Lawsuit alleges 'online currency' scam

A lawsuit claiming that a "gold backed" Internet currency scheme bilked investors out of more than $250 million can proceed against a bank implicated in it, a federal judge has ruled.

At the height of its popularity, the OSGold currency boasted more than 60,000 accounts created by people drawn to promises of "high yield" investments that would provide guaranteed monthly returns of 30 percent to 45 percent.

But around July 2002, the eve of the maturity date for the investment program, the company that offered the accounts suddenly ceased payouts. David Reed, who had founded the company called One Groupe International, eventually was discovered to have relocated from the United States to Cancun, Mexico.

Concluding they had been fleeced, a group of OSGold investors banded together to sue Reed and 19 other defendants including two Latvian banks that allegedly lent their imprimatur to the project. It was "fronted by the sale of a nonexistent gold-backed Internet currency and was fueled by a mammoth 'Ponzi' scheme disguised as a guaranteed high-yield investment program," the OSGold investors say in court documents.

U.S. District Judge Lewis Kaplan ruled on Friday that the lawsuit could proceed against the Latvian Economic Commercial Bank (Lateko), which had attempted to dismiss the charges. Kaplan, in New York, dismissed some charges against Lateko, including breach of fiduciary duty, but permitted the rest to stand.

"Lateko's apparently false denials to a possibly important business partner and its continued cooperation with (Reed and other defendants) even after the scheme suspiciously began to collapse tend to show conscious disregard or recklessness and give rise to a strong inference of fraudulent intent," Kaplan wrote.

Lateko's involvement began in December 2001, when it allegedly inked a deal with Reed and other defendants to provide anonymous debit cards that could be used to withdraw money from OSGold accounts from ATMs linked to the Cirrus network. Lawyers for Lateko in the New York offices of Baker & McKenzie did not respond to an interview request.

Suspecting something odd was going on, some companies involved in providing gold-backed Internet currencies tried to distance themselves from OSGold early on. In May 2001, the Gold and Silver Reserve (responsible for the e-gold currency) announced it would no longer link to companies that did business with "or make reference to" OSGold.

A Ponzi scheme is an illegal pyramid scheme in which some early investors are paid off with money from later investors in an attempt to make the system look legitimate. But when later investors demand their money, the fraud collapses. This type of scheme is named for 1920s-era swindler Charles Ponzi, who promised investors a 40 percent return in 90 days.

 

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