From...

by Polly Sprenger

(IDG) -- Britain's Serious Fraud Office brought charges this week against one of the country's free Internet service providers, saying that company officers deceived investors.

The office said directors of FreeDotNet had conspired to defraud investors of four million pounds ($6.5 million) through a deceptive prospectus containing false and misleading statements about the company's value.

The action marked the first time the office has brought its weight to bear against an Internet company. The move gave ammunition to British market watchers who have criticized the volatility of Internet investment.

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Despite making early promises to private investors that it would have spectacular success, the company has languished, and shares have never been floated on a public stock market. Last year, FreeDotNet recorded a pre-tax loss of 215,000 pounds ($347,000) on sales of 791,000 pounds ($1.27 million). According to Jupiter Research analyst Noah Yasskin, FreeDotNet isn't a major player in the free ISP market, and is unlikely to survive competition with the likes of Freeserve and AOL.

To make matters worse, two of the four company directors have previous convictions for fraud. According to a 1996 report, Brian Atkins and Peter Henry, who were among the company's founders and are named in the current action, met each other in prison.

FreeDotNet was founded in August 1996 to provide low-cost Internet service. It went on a fund-raising spree in September 1996. In April 1997, Atkins and FreeDotNet technical director Jon Brody founded a second company called Discount Telecom. The two began raising money for the new venture in July 1997.

Atkins, Brody and Henry, along with partner Marios Andreas Nicolaides, "conspired together to defraud the shareholders and investors in FreeDotNet PLC and Discount Telecom PLC by dishonestly diverting sums of money received from shareholders and investors," the Serious Fraud Office said in its statement.

In 1997, a London newspaper had raised questions about the Discount Telecom prospectus, noting that the directors had stipulated no salary or remuneration for themselves. Brody told the Daily Telegraph, "There are many and varied reasons for not putting directors' remuneration into the prospectus. We did not do so with our last launch – FreeDotNet – where we only took living expenses out of the company."

A Serious Fraud Office spokesman declined to elaborate on the charges, saying only that investment capital the group raised was diverted for uses other than those for which it was requested.

FreeDotNet officials referred all calls to a spokesperson, who did not respond to requests for comment.

Although it was an early standout in Britain's free Internet access industry, FreeDotNet's history has been rocky. At a shareholders meeting in October, a well-known London investor Simon Cawkwell, nicknamed "Evel Knievel," attempted to wrest control of the company.

Cawkwell, convinced he had the votes to turn things in his favor, left the meeting to oversee the changing of the locks at FreeDotNet's headquarters. Brody stepped up in his absence, and circulated printed materials among the assembled shareholders which convinced them to vote to leave the current management team in place.

According to reports of the incident, Brody lambasted Cawkwell for his adventurous investing habits, even as he admitted that Peter Henry and Brian Atkins had criminal records. Cawkwell is not named in the proceedings.

The four FreeDotNet officials were formally charged on Friday, Dec. 10, in a London police station, and released on bail. The Serious Fraud Office spokesman said the agency has no plans to disrupt the company's services, and that it has served no injunctions to that effect.

The FreeDotNet investigation spanned 17 months, beginning when an investor complained to the Department of Trade and Industry. According to the agency's mission, the Serious Fraud Office investigates only a small number of the most serious and complex fraud cases, usually where sums of money in excess of 1 million pounds are at risk.