Tuesday, August 24

PETER KENNEDY
British Columbia Bureau
Saturday, August 21, 1999

Vancouver -- Police yesterday raided the downtown Vancouver offices of Starnet Communications International Inc., a company that provides subscribers with pornography and gambling services over the Internet.

After an 18-month investigation into allegations relating to illegal gambling and the distribution of pornographic materials, police have also obtained warrants to search the homes of six of the company's directors and officers.

"This is a major investigation of a major company" said Constable Anne Drennan, a spokeswoman for the Co-ordinated Law Enforcement Unit, which has been set up by the RCMP and Vancouver police to fight organized crime.

Investors reacted by sending Starnet's stock plunging $9.04 (U.S.) to $4.06 yesterday on the Nasdaq Stock Market's OTC Bulletin Board.

Billed as a pioneer of interactive gambling and information, Starnet is best known for providing subscribers with live camera feeds of strippers performing at a Vancouver strip club known as No. Five Orange.

Ms. Drennan said no charges have been laid. She said the investigation involves allegations related to areas such as illegal betting and book making, making agreements for the purchase or sale of betting or gambling privileges, providing information intended for use in connection with book making, possession and distribution of pornographic material, and possession of the proceeds of crime.

Ms. Drennan described the investigation as complex and said it may take weeks to complete. She said investigators have determined that millions of dollars flowed through Starnet-controlled bank accounts each month as a result of its Internet-based gambling system.

"We do not anticipate any interruption to our services or our ongoing operations as a result of [yesterday's] actions, said Mark Dohlen, Starnet's chief executive officer. "But we are dismayed by this disruption of our three-year-old operations, have retained legal counsel and will vigorously defend our rights. It is regrettable that we were not given an opportunity to co-operate with authorities regarding their concerns . . . we are a fully reporting U.S. public company and our international operations comply with the laws of their respective jurisdictions."

While Ms. Drennan said stock market regulators in the United States have been informed about the investigation, a spokesman for the Securities and Exchange Commission in Washington declined to comment or say what steps U.S. regulators might take.

Starnet treasurer Chris Zacharias told Bloomberg News that police visited his home yesterday morning and "confiscated some Starnet-related records." He said he believed the raid was related to "bookie laws."

Mr. Dohlen has previously told The Globe and Mail that the company has a camera in the No. Five Orange club that takes pictures of women dancing.

He said the company transmits the live feeds over the Internet to clients who pay $19.95 a month to subscribe.

Starnet's chief financial officer John Carley has also said the club's owners receive "several thousand dollars a month" for supplying images of gyrating women.

However, the company has said it planned to divest its pornographic operations to focus on on-line gambling, which brings in about 80 per cent of its revenue. It has established two subsidiary companies -- World Gaming Services Inc. and Softec Systems Caribbean Inc. -- on the Caribbean island of Antigua to provide licences for its Internet gambling technology to other gambling operators.

The company's share price came under pressure recently after one of the companies licencing its Internet gambling technology said it planned to sue Starnet for $1-billion.