Fourteen Indicted in Kids' TV Scheme

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A Colorado grand jury has indicted 14 individuals for securities fraud and other alleged crimes related to the promotion of children's programming network KidZtime to small-scale investors.

According to indictments unsealed last week by Colorado Attorney General Ken Salazar, the defendants and their Colorado corporation, Capital Funding and Financial Group, participated in an illegal investment "scheme" between 1995 and 1999.

Network affiliates raked in an estimated $47 million from investors in the United States, Canada, Holland, Portugal, Germany, Spain, the U.S. Virgin Islands and South Korea, according to the attorney general's office.

This is only the latest suit against the venture or its affiliates. To date, 21 states have filed suits related to the investment venture, known as either KidZtime or the Children's Cable Network, according to Colorado officials. Class-action lawsuits were also filed, including complaints in California and Colorado.

The Colorado case may also result in a change in that state's laws. Legislators are angry that it took Colorado a longer amount of time to shut the venture down than other jurisdictions.

Colorado officials began investigating KidZtime in 1996, but were unable to seek prosecutions because the state does not have what's called a cease-and-desist law. The KidZtime case prompted Colorado lawmakers to introduce a bill revising state securities law.

The Children's Cable Network concept-later renamed KidZtime-was first floated by telemarketers in 1995.

Previous legal actions, including a suit filed in U.S. District Court for the Central District of California by the Federal Trade Commission, named longtime cable executive Michael Marcovsky as the architect of the venture designed to locally distribute wholesome, non-violent programming for children.

KidZtime purported to hold the rights to children's programming that featured marquee performers such as Shari Lewis and Bill Cosby, according to marketing materials provided to investors.

According to the marketing pitch used by both KidZtime and Children's Cable Network affiliates, media markets would be divided into 50 units and sold to investors for $10,000 each.

Of the $500,000 collected per market, plaintiffs allege, the CCN or KidZtime corporation retained all but $75,000. That amount was to be paid to a local management company.

The ventures were intended to put kid-friendly programming on local access channels and sell advertising time-the intended means for earning profits. But some investors said their markets never received tapes, and others said they were sent tapes of poor quality.

In lawsuits, investors alleged that an ad-sales mechanism was never put in place. Investors also claimed the funds collected were used only to attract more investors.

The latest indictments are against the KidZtime Colorado corporation, which had offices in Denver, Lakewood and Columbus, Ohio. Named in the suit are officers of Capital Funding and Financial Group, KidZtime TV Inc., KidZtime TV Management Group and the owners and managers of several independent sales offices.

Capital Funding and Financial Group split from the founding Children's Cable Network in April 1996, according to press reports. The two entities sued each other over business differences.

The Colorado indictment includes charges of securities fraud, theft, racketeering and computer crime. All 84 counts are class 2 to class 6 felonies under state law.

The investigation was jointly conducted by the Colorado Attorney General's Office, the state Securities Commissioner's Office and the U.S. Securities and Exchange Commission. The attorney general's office will try the case.

FTC SETTLED EARLIER

Other states ordered KidZtime to refund investors' money, said SEC Colorado office spokesman John Smith, but he didn't know how much actually made it back into investors' hands.

The Marcovsky-linked Children's Cable Network corporation was targeted by "Operation Risky Business," a Federal Trade Commission anti-investment fraud initiative, in 1998. The FTC filed the California lawsuit, shutting down what was left of that incorporated unit.

The FTC claimed the CCN unit had raised $16.5 million. In the months prior to that suit, CCN executives allegedly notified investors that revenues had dwindled to about $650,000.

Executives added that they intended to invest that remaining money in a later Marcovsky venture, My Pet TV, according to the FTC. The latter concept was peddled at the 1997 cable trade shows.

The FTC obtained a restraining order in that action. The court froze the assets of CCN and appointed a receiver.

Federal Trade Commission spokesman Mitch Katz said his agency reached a stipulated agreement Marcovsky in May 1999. Marcovsky and another CCN executive were personally ordered to hand over a total of $304,000 to the federal agency.

Marcovsky also agreed to a $200,000 performance bond requirement. Should the former cable executive attempt to begin any business "generally related" to CCN or My Pet TV, he will be subject to "significant" civil penalties and loss of the bond amount.

The corporation was ordered to refund $600,000, an order that was suspended by the court "because of the venture's financial situation," Katz said.

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