This was a case in which four thousand of investors invested forty-seven million dollars in a crooked “alternative” investment deal called KidZtime TV. My clients received cash settlements s from a Colorado “Super Lawyer” and an unwise “white knight.” We were interviewed on TV by the 9 News I-Team. We were in the Denver newspapers and business journals across the country several times. This gave us an opportunity to recruit additional plaintiffs and to galvanize the plaintiffs and witnesses. It was also the sort of thing you are very proud to show to your family and friends. Click article: KidZtime Sacks Two Ex Broncos
In 1995 Congress adopted the Private Securities Litigation Reform Act, one of the “tort reforms” in Georgia Congressman Newt Gingrich’s Contract with America. Lobbyists for the US Chamber of Commerce and others persuaded Congress that abuses in securities class actions in federal courts needed to be curbed. Congress overrode President Bill Clinton’s veto of the euphemistically titled bill. It was a boon for those who tend get named as defendants in class actions, public companies, their directors and officers, underwriters, brokerage firms, securities lawyers and public accounting firms.
The reform created significant impediments for investors in federal court, however. The effect of the reform was to encourage judges to view a securities class action complaint in a negative light and arm them to toss cases out based on weak rationales. Normally judges must give the allegations of a complaint the benefit of the doubt in determining whether to throw out a case on a motion to dismiss. The act also artificially raises the burden of proof and hampers case preparation by preventing the use of early discovery to build a case.
Then in 1998 Congress added the ‘‘Securities Litigation Uniform Standards Act of 1998" banning securities class actions in state court to skirt the 1995 reform.
In order to protect our clients from the draconian provisions of "reform" and the free rider problem of class actions, I was an early adopter of the mass tort approach in which numerous investors join together and consolidate their claims in a single case.
I learned about KidZtime from a whistleblower who worked for KidZtime before he separated from them after an altercation over commissions.
The group we represented in their efforts to recover consisted of fifty investors, many of them elderly and many of them professionals like doctors, lawyers, a financial planner and a rabbi. For those interested, the rabbi has a very pleasant summer job as the rabbi on the cruise ship Queen Elizabeth II. He spends several weeks in England when he is not on board the QE II.
KidZtime’s modus operandi was to buy lists of thousands of investors and subscribers from brokerage firms and financial periodicals. KidZtime promoted memberships in a series of LLCs. KidZtime cold called investors from phone banks throughout the US and gave investors a sales pitch about a new cable TV network. This network would program only wholesome children’s programming in the major cable markets and sell advertising. Then the network could be acquired by a cable TV giant at a hefty profit.
The wholesome programming angle appealed to grandparents who can have a lot of cash on hand for an impulse investment, especially one that might help their grandchildren. There were also celebrity endorsements. Broncos quarterback John Elway and olympic swimming multi-medalist Amy Van Dyken appeared in promos. There was a glowing proclamation from the mayor of Denver. The celebrities had no idea that KidZtime was running afoul of the law in dealing with investors.
To create the appearance the network was thriving, KidZtime bought some cheap airtime on community access cable channels, the Siberia of cable TV. KidZtime FEDEXed the cable operator a VCR of a cartoon show to put on the air, often without permission from the owner of the copyright for the program. Then KidZtime would send announcements to the investors touting the launch of the successful new “network” they had invested in.
Over half of the investors’ money was paid out to the promoters, Terry K. Vickery and Scott W. French, and their sales representatives as overrides and commissions. The promoters had felony convictions and civil orders against them for securities law violations. Notably, a former employee intended to testify that some of the sales representatives were on work release from jail and wore ankle monitor bracelets to the office.
I was convinced the state securities laws applied, despite KidZtime’s assurances to investors that the investments were not securities, given in reliance on Robert T. McAllister, a former federal prosecutor turned white collar defense lawyer. McAllister eventually landed in federal prison and was disbarred. https://www.fbi.gov/denver/press-releases/2012/former-denver-attorney-sentenced-for-financial-fraud. A few of the other defense lawyers were “Colorado Super Lawyers.”
McAllister hired yet another “Colorado Super Lawyer” as the defense expert in the criminal case – a venerated professor of securities law at Denver University. The professor opinioned that the investment was not a security. Therefore, said she, the defendants could not be prosecuted under the Colorado Securities Act.
The professor rendered her opinion despite a recent appellate case won by the Colorado Division of Securities. There were also findings by state securities administrators that the KidZtime investments were securities. These findings were made in more than a dozen cases where state securities commissions had ordered KidZtime to cease and desist selling the investments. In addition, there were tapes of meetings that showed that the “partners [sic]” in the LLC were disenfranchised. Management held the meetings by conference call in which investors were only able to listen and not could not speak or ask questions. They were unable to take part substantively in management of the LLC's. Accordingly they were wholly dependent on the efforts of management to earn a profit from the enterprise – the hallmark of what is a “security.”
As the case grew, I brought in a respected colleague to improve the match up against the defense attorneys. We put together a strong case. We prevailed on motions to estblish alter ego liability and were able to proceed against individual defendants. We could readily demonstrate that the securities were sold in violation of the registration and licensing requirements of the Colorado Securities Act.
Moreover, we were ready to show that KidZtime was a scheme to defraud, a Potemkin village, named after a Russian Prince . During the late eighteenth century, Prince Potemkin allegedly had cardboard villages erected along the road to impress Queen Catherine the Great as she rode through the countryside during a visit to the Ukraine. The purported network had no ad revenue and practically no viewers, despite all the claims made to sell the securities and lull existing investors. We could demonstrate how the lawyers unlawfully aided and abetted KidZtime, in part by helping conceal management’s history of criminal conduct and prior securities violations, and their role in furthering the scheme.
McAllister failed to get any of our claims dismissed, including the racketeering claims. We took the case to the media. We urged investors to pester the Colorado Division of Securities, which created critical mass and created pressure for then Attorney General Ken Salazar to get involved. That something turned out to be fourteen criminal indictments. Click articles: Busted;
Larry Posner, one of the Super Lawyers representing the defendants, had the case delayed pending the criminal prosecution. That worked out just fine, because once the jury convicted the SOBs, we could use the special verdict on each element as the basis for summary judgment. We would be sure to win judgment because courts, for reasons of “judicial economy” and consistency, like to avoid retrying matters that have already been litigated with the same defendants.
While we waited out the criminal prosecution, we continued to beef up the case. The group grew larger. Our cooperation with the Colorado Division of Securities and many other state securities commissioners yielded many important documents. I secured the assistance of former employees of KidZtime.
The outcome of the criminal cases were convictions for Vickery, French, Vickery’s brother in law and others. French, believing he would be able to leave afterwards, brought his girlfriend to his sentencing. After his sentence was pronounced, two officers grabbed French by the arms and swiftly took him through a tunnel in the courtroom and right back to jail without any opportunity for goodbyes. They both appeared to be rather startled. Click article: The Crime: Kidztime
Our legal team negotiated a settlement with McAllister's insurer. We negotiated a settlement from a purported “White Knight” — a publicly traded company that made a fraudulent and untimely attempt to swap interests in KidZtime for stock at a time KidZtime was already under intense regulatory scrutiny and more or less imploding. The acquiring company failed to disclose any of the legal and financial woes that beset KidZtime. The judge granted summary judgment against the remaining defendants.
The defendants’ made the poor decision to try to shoot the messengers–the whistleblower, the plaintiffs, and their attorneys. Our legal team overcame these attempts to destroy our case or rattle us.One defense lawyer threatened to sue me for defamation even though a defamation case cannot be brought over statements made in connection with a lawsuit. Of course anything I said about his client in the press was true. This backfired as it often does. The personal attacks in the media, a SLAPP suit against the whistleblower, the threats to me, and the frivolous grievances all demonstrated we were up against sociopaths. We knew we were on the right track.
Most of our success, however, was directly attributable to a brave and remarkable group of plaintiffs who were ready, willing and able to stay the course of justice against the odds.