Justice Department officials said the venture was a Ponzi scheme.
Michael Freedman, who operated Asia-Pacific Spectrum Communications out of a Ventura Boulevard office in Encino, Calif., pleaded guilty earlier this year to two counts of wire fraud, one count of mail fraud and four counts of money laundering.
Freedman was sentenced to 63 months in federal prison and ordered to pay $2.9 million. The scheme netted more than $4.9 million from victims in the United States, Australia and Hong Kong.
Federal prosecutors said that from May 1995 to May 1998 telemarketers secured fees of $4,500 from investors, who were led to believe their money would be used primarily to establish the sex chat lines.
Instead, prosecutors said, about $2.1 million was used to pay off other investors while about $1 million went to Freedman for his own personal use, including $351,000 transferred to a personal bank account, $217,000 to pay his American Express bills for shopping sprees and trips to Las Vegas and $186,000 toward the purchase of a $575,000 home in Westlake Village, Calif.
Prosecutors said Freedman spent only a very small portion of advertising fees collected from the investors to actually advertise phone lines. He prepared and sent false advertising invoices showing publications in which investors' phone lines would purportedly be advertised and the purported costs of such advertising.
In order to induce investors to continue paying for advertising, Freedman regularly prepared and sent false call-revenue reports, which purported to summarize call activity and revenues generated by investors' phone lines, according to court documents.
Freedman fabricated the revenue reported, and the investors' sex phone lines generated only a small fraction of what Freedman claimed they had. Between May 1996 and January 1997, for example, the total revenue generated by calls to the phone lines amounted to less than $30,000, or less than 1 percent of the total revenues of over $4 million reported in the call reports that Freedman fabricated.
Freedman admitted that he committed various money laundering offenses to promote the Ponzi scheme and to conceal the fraudulent proceeds of the scheme, including transferring approximately $800,000 of investors' funds to an offshore trust in Singapore.
In January, Freedman also pleaded guilty to a scheme to defraud the Silver State Bank in Nevada by writing and depositing insufficient funds checks drawn on closed Asia-Pacific Spectrum accounts.