$17-Million TV Deal Was Fraud, Backers Allege

The pitch sounded irresistible: Amid the hyperviolent sewage of commercial children’s television, what could be more alluring than a cable channel devoted entirely to kids’ shows featuring wholesome stars such as Shari Lewis and Bill Cosby?

“No violence on the network--of course it sounded appealing,” said Jeanne D’Amato, a Sun Valley investor who put up $10,000.

Judy Klopfer, a Torrance nurse, invested 10 grand; a Westside minister put up his $125,000 retirement stash; a retired Lexington, Ky., dentist committed $60,000.

Now, they and about 1,200 fellow investors are wondering what happened to the more than $17 million they placed with a group of Southern California and Las Vegas investment promoters. The answer may be that much of the money raised to put the so-called Children’s Cable Network on the air has disappeared into the pockets of con artists, according to a class-action lawsuit filed last month in Superior Court.

Sources say the Federal Trade Commission is investigating the investment activities of several entities related to Children’s Cable Network. Securities regulators in at least four states have issued regulatory orders prohibiting the sale of interests in the enterprise on grounds that they are unregistered and therefore illegal securities.

The only money that investors have thus far been able to track down is about $650,000 apparently used earlier this year to buy shares in a second marginal cable channel venture, “My Pet TV,” which is operated by Michael Marcovsky, the former president of Children’s Cable Network, according to the lawsuit.

Designed to appeal to pet owners with features such as “Furriest Home Videos,” the channel briefly leased air time on several local cable systems last August but has otherwise failed to arrange longer-term air time in more than a year of effort, Marcovsky told The Times in an interview. He said he is negotiating with several large cable system operators to obtain time on their systems.

Marcovsky and executives of Children’s Cable Network insist that they are operating legitimate enterprises pursuing plausible business plans.

“No one I know in this entire operation had any intention of defrauding anybody,” Dominic Orsatti, chairman of Las Vegas-based Olympic Entertainment Group, the parent company of Children’s Cable Network, said in a telephone interview.

Olympic’s business, he said, is the purchase of cable rights to nonviolent children’s shows, including syndicated shows featuring performers such as Lewis and Cosby. The extent to which Olympic holds long-term rights to the programming it claims could not be determined, although some of the shows are more than 20 years old and may be available at low rates.

Olympic then relicenses the programming for an annual fee to independent “affiliates” on an exclusive regional basis. Some of those affiliates, Orsatti said, may have been unable to find cable systems to carry their programming or to sell advertising on shows that did air.

“I’m sorry these people lost money, but I can show you franchises from major corporations that haven’t made it,” Orsatti said. “There’s a Chili’s that’s just closed here on a major street.”

Licenses Sold by Telemarketing Firms

Orsatti also suggested that some investors’ problems may stem from the dishonesty of investment telemarketing firms to which Olympic sold territorial licenses. He and Olympic’s general counsel, Los Angeles attorney John Holt Smith, disavowed any responsibility for the business practices of the “affiliates.”

“I can’t run a credit check on everybody who wants to pay me for a license,” Orsatti said. “If [an investor] had a bad relationship with a licensee, it’s unfortunate. I can’t control the conduct of others.”

Olympic did apparently maintain a continuing relationship with several promoters, however. The company, which is publicly traded as an over-the-counter penny stock, provided the affiliates with promotional material, including biographies of its officers. Several investors said that when an affiliate was fully funded with $500,000 in capital (generally invested in units of $10,000 each), it was granted a conference call with Marcovsky, then Olympic’s president, who spoke of the potential of the Children’s Cable Network in glowing terms.

The state court lawsuit charges Olympic, Orsatti, Marcovsky and dozens of investment promoters with fraud, negligence and conspiracy in connection with the sale of interests in Children’s Cable Network.

The lawsuit states that what attracted many of the investors was the chance to strike a blow against exploitative children’s television while making a substantial profit.

“The materials they sent led you to believe this would just take off,” said Klopfer, a Torrance nurse who invested $10,000 of her retirement fund with Carousel Media Marketing.

In fact, even if all its claims and ambitions were genuine, Children’s Cable Network probably faced insurmountable hurdles in getting on the air. Major media conglomerates--including Fox Television, Walt Disney Co. and Viacom--have committed hundreds of millions of dollars and waited out years of losses to launch cable channels, paying cable operators as much as $10 per subscriber to secure scarce channel space.

The reality of the cable business is that it is almost impossible for a channel to win any significant access today unless it is closely aligned with a major cable company or television programmer.

Promoters of Children’s Cable Network contend that they can overcome this obstacle because federal regulations now require cable systems to leave open channel capacity for lease to independent programmers. But the lease prices are high--well beyond the purchasing power of any of the Children’s Cable Network’s “affiliates,” according to one affiliate manager.

Moreover, powerful competition has entered the market for “wholesome” kids’ fare. Just last month, the well-established cable channel Nickelodeon, which is owned by the media conglomerate Viacom, said it would team up with Children’s Television Workshop, the creator of “Sesame Street,” to offer a channel of educational programming starting in January.

Orsatti conceded in an interview that his network has been engaged in “a tremendous uphill battle.” Of more concern to state and federal regulators, however, is the conduct of some of Children’s Cable Network’s investment promoters.

Several of these firms have been operating in ways strongly suggestive of investment “bucket shops” or “boiler rooms,” according to investors. They raised money through unsolicited contacts with investors, or “cold calls,” enticed them with hard sells and assurances of 25% annual returns, and provided them with scanty documentation of their investments, often after the money had already been paid, according to the lawsuit.

Firm, 2 Men Are Among Defendants

One of the most active firms appears to have been Carousel Media Marketing, which operated out of well-appointed offices in Encino and San Diego under the supervision of two men identified by investors as James Alex and Jay Scoratow. Carousel, Alex and Scoratow are named as defendants in the lawsuit.

Neither Alex nor Scoratow returned telephone calls The Times placed to their last known office numbers, where answering machines took the calls.

Scoratow has also failed since February to respond to inquiries from IRA Resources, a San Diego pension administration firm to which Carousel referred investors who wanted to convert their retirement nest eggs into Children’s Cable Network investments. Liane Bruno, president of IRA Resources, said Carousel has not provided her with the annual tax documents investors needed to prepare their federal tax returns this year.

The lawsuit, documents reviewed by The Times and interviews with investors indicate that Carousel and other dealers eventually established more than 33 regional “affiliates,” each one funded with at least $500,000 of investors’ funds.

Although Olympic claimed in public filings to the Securities and Exchange Commission that its affiliates had more than 9 million cable subscribers, that figure appears to be wildly misleading.

In fact, it represents the number of cable system subscribers in regions in which Olympic sold licenses. Orsatti acknowledged that Olympic had no way of knowing whether any of its affiliates were actually airing even an hour of programming on any cable system in the country. “All it means is that if they had contracts and they were running, they would have access to 9 million homes,” he said of the language in his SEC disclosure document. “This is a broad brush here.”

There is little evidence that any affiliates aired more than a few hours of programming a week--and even then only on “leased access” channels in which cable systems make air time available to independent programmers in small, expensive and undesirable blocks.

“We don’t know of a single hour of programming,” said David Parisi, the Los Angeles lawyer who filed the suit.

The promoters also failed to disclose to investors the enormous overhead they imposed on the affiliates.

According to documents provided to investors and cited by the lawsuit, Carousel paid itself as much as $325,000 out of every $500,000 raised from individual investors. That money covered commissions, “marketing fees,” advertising and promotion, and other expenses.

An additional $100,000 went to Olympic Entertainment for the one-year territorial license and “series acquisition,” leaving only $75,000 for each affiliate to pay cable systems to carry its programs and for other working capital.

Some of that money was paid by Carousel to Cable Marketing and Management, a Burbank cable consulting firm operated by Sheldon I. Altfeld, a former television producer and host of a computer World Wide Web site under the name “The Cable Maven.” Altfeld and Cable Marketing are defendants in the lawsuit.

Mixed Signals on Concept

Altfeld acknowledged in an interview with The Times that he received as much as 14% of the capital raised by Carousel to try to arrange air time for affiliate programming--a sum that may have amounted to as much as $2.4 million.

In July 1997, Altfeld wrote investors in praise of the “leased access” idea, which he called “an exciting and innovative method for curtailing the channel capacity problems that exist in cable today.” One month later, the Cable Maven wrote again to report his findings that the “original concept of buying leased access time on a local cable system and selling local advertising doesn’t work.”

“I was the only one who made an effort on the investors’ behalf to try to deal with the money we had to work with,” Altfeld said in an interview. Of the initial investments, he said: “We have no idea where the money went. I never solicited anything.”

Altfeld said he arranged to shift about $650,000 of investors’ funds--almost all that remained of $17 million by the end of last year--into a private placement of shares in Marcovsky’s My Pet TV venture.

“In my opinion, that was the best opportunity for the investors,” he said. Altfeld contended that a majority of the investors in each affiliate he represented approved the transfer by written ballot, but he acknowledged that the voting was not overseen or audited by any independent entity. Parisi, the attorney representing a group of Children’s Cable Network investors, said he believed the vote may have been a sham.

“We haven’t found one person who thought they voted to do that,” he said. Added Brian Kabateck, another lawyer involved with the suit: “This is just a shell game, moving money from one place to another.”

Still, even investors who may have lost their entire investment harbor wistful dreams of what might have been. “It appears we were totally swindled of our funds by the people involved,” said Walter Stump, a Pennsylvania Realtor who sank $90,000 into Children’s Cable. “Long term, it could have been a sound investment if we weren’t dealing with unscrupulous people.”