Special Report: Invest and you could go to jail

Kaplan, who has been known to use apseudonym and is said to look like a shorter version of Steven Seagal, the action-movie star, has created a business that generates millions in profits but through activities that are of questionable legality in its core American market.

Welcome to the new reality of the City of London. With the stock market in the doldrums, there are slim pickings in the business of new issues. Indeed, most of the traffic is going the other way — long-standing public companies are being taken off the stock market by private-equity groups.

So when companies with drawbacks like those of Betonsports come along, blue-chip firms are more willing to work with them than they would have been a few years ago. Shell companies, which list on the promise of finding investments and delivering jam tomorrow, are also back in vogue.

And the activity is taking place on AIM rather than the main market. The junior market is the place where rules are lighter, and where it is up to a company’s nominated adviser to assess a business’s suitability for flotation.

Unsurprisingly, some experts think there may be a case for tightening up the processes that allow businesses to list on AIM so easily. Andrew Buchanan, manager of Close Brothers AIM VCT, said: “I dare say (the processes) could be improved. But it is up to investors whether they want to invest in a particular company.”

Meanwhile, floating on AIM remains a bit like taking a driving test: if you fail at the first attempt, just take it again. That is what Betonsports did.

Its first attempt, in the summer of 2002, is said to have failed because of market conditions and negative sentiment at the time towards Sportingbet, a rival internet bookmaker that does business in America. This time the risks did not seem to deter investors.

Kaplan, the Betonsports founder who has in the past gone under the name Greg Champion, especially when speaking to the press to promote his online bookie, now prefers to leave the talking to his chief executive, a steely Scot called David Carruthers.

A 45-year-old New Yorker, Kaplan set up his first online gambling operation in 1995 in Aruba in the West Indies. Two years later he moved the business to Antigua and a year later to Costa Rica.

The reason for establishing itself offshore is that, broadly speaking, offering bets to American citizens over the telephone or the internet is illegal. Being offshore is the best way to tap the lucrative American market.

Kaplan should know all about the legality or otherwise of bookmaking in the United States — in the early 1990s he was convicted of bookmaking.

After a spell as a traditional bookie, Kaplan, who describes himself as an entrepreneur in filings at London’s Companies House, spotted that the internet might offer a better way of running an operation without interference from the American authorities, and set up in the Caribbean.

The business was largely aimed at Americans, offering bets on the big sports such as basketball, baseball and gridiron. Kaplan used the name Greg Champion to promote the business.

The company strenuously denies that the Champion identity was created to allow Kaplan to travel in and out of America easily.

When I called the Costa Rican head office of Betonsports and asked for Greg Champion, Carruthers eventually came on the line. “Greg Champion does not exist,” he said. “It was a pseudonym Mr Kaplan used for marketing. There’s nothing clandestine about it.”

When the company first tried to float, Kaplan was going to be executive chairman. When the float was resurrected this year, Kaplan was no longer on the board and there was little mention of him in the prospectus apart from a statement that he was the founder of the firm and works there as a marketing consultant. The public face of the business is Carruthers, a Ladbrokes veteran, who has been chief executive since July 2000.

Carruthers insisted that the downgrading of Kaplan’s role and City profile had nothing to do with concerns over his background and everything to do with the fact that Carruthers now runs the show.

And what a show it is. The business raked in a healthy $1.25 billion turnover last year, generating a gross profit of $90m. It is not hard to see why City investors might want a piece of the action, nor why Kaplan might want to keep a hand in. After flotation, Boulder, a fund connected to Kaplan, continues to hold almost half the shares in the group.

Robin Chhabra, leisure analyst at EVBG, broker to Betonsports, said that he and his colleagues did “treble or quadruple” the normal amount of due diligence on Betonsports to bring it to market. He said the likes of Fidelity would not have bought shares unless they were comfortable with the risks.

Fidelity and Morgan Stanley were not prepared to discuss their investment in Betonsports. Most people presume they bought Betonsports’s stock because they share Carruthers’s view that it is only a matter of time before America legalises gambling by phone and internet. He said such change was “inevitable”.

Chhabra acknowledged the concerns about Kaplan and the legal issues, but he believed that ultimately there was nothing to worry about. He said: “The market is comfortable with the risk. Another player in this market, Sportingbet, is quoted.”

But that does not clear Betonsports, and there are those who have the same concerns about Sportingbet’s American business as they do about Kaplan’s company. Sportingbet’s apologists argue that 40% of its turnover comes from non-American jurisdictions such as Europe.

Greg Feehley, leisure analyst at Altium Securities, said: “Its worldwide business gives it an absolute advantage when it comes to hedging risk.”

Ultimately, it is for those investors who are prepared to take on the risks to decide whether to take the ride. But after a month on the market, with the share price down 4%, valuing the company at £114m, it has not been an auspicious debut for Betonsports.