DATELINE–Washington, D.C.

When a team of federal agents stormed the suburban Virginia home of Miguel and Abi Guzman early one Monday morning, the neighbors suspected the worst. Recently arrived from Miami, the couple was seldom seen outside of the house and appeared to keep irregular hours. But in a matter of days, it would be their neighbors on the Internet who would rally to the Guzmans’ defense.

According to the U.S. Treasury Department, which led the raid, the Guzmans benefited from a vast online network of business contacts and conducted millions of dollars in transactions without paying taxes or adhering to U.S. trade laws. Sources close to the investigation put the total number of persons involved in the “electronic black market” scheme in the thousands, with participants in all 50 U.S. states.

“These two individuals have defrauded the American people,” declared J. Lee Thomas, director of Treasury’s Financial Crimes Enforcement Network (FinCEN), “and they have broken the trust that is so essential to our national economy.” FinCEN’s agents, ordinarily assigned to money-laundering operations, began tracking the Guzmans’ operations in the fall of 1997, on a tip from the Internal Revenue Service. The IRS began investigating the Guzmans in 1995 for alleged tax evasion in a complex online bartering scheme. Because no actual money was involved and the shadowy transactions were so complex, the IRS eventually handed the case to FinCEN.

Denied bail at their May 10 arraignment in District Court in Washington, D.C., the Guzmans are awaiting trial for what could be the first major setback to the unruly, frontier culture of commerce on the Internet. Through their lawyers, the Guzmans contend that they are, in fact, the nation’s first “political prisoners” in a growing federal war against the Internet community. Their hope is to convince both the general public and their captors that they are guilty only of trading gifts with their “online neighbors.”

“The Guzmans are upstanding citizens who are being punished for building friendships over the Internet,” argued Naomi Bustamante, the attorney representing Abi Guzman. “If the Guzmans are not free to exchange gifts with their online friends, we are living in a Nazi nightmare.”

But what the Guzmans call “gifts,” the government calls unreported financial transactions. At the heart of the contentious and far-reaching dispute is a software system developed by Miguel Guzman that enables people to swap goods and services over the Internet. Guzman, who formerly worked as a system administrator for the University of Miami, first developed his program to simplify the process of scheduling the hundreds of classes taught on campus each semester. It was in 1995 that the clever programmer “ported” his analysis and scheduling tool to the Web.

Dubbed CuppaSugar, Guzman’s program allows for dozens of parties to participate in serial trades in which goods may change hands several times before any given transaction is completed. For example if a man in Long Beach wants 10 packages of buffalo jerky sold only in South Dakota, he can place his request through CuppaSugar and will eventually receive the jerky along with a request for another good or service of equal value, such as picking up a video rental and delivering it to someone in his town. By 1999, CuppaSugar was arranging over 50 such transactions per minute, with “gifts” exchanged ranging from new cars and dentistry to homemade cookies and dry cleaning. Participants who failed to reciprocate properly were blocked from using the system.

While CuppaSugar’s countless users laud the service as utopian, federal authorities consider it no different from the illegal economies operated by organized crime syndicates. “If enough people were drawn into the Guzmans’ network, public schools and federal highways would disappear,” warned Donald Hanover, the federal prosecutor handling the case against the Guzmans, “because there simply wouldn’t be any tax money to fund them.” He further insinuated that this economy of IOUs is rife with the possibility of extortion and is operated outside of the protection of police.

Internet industry analysts, however, are queasy about the government crackdown on Internet trade and consider the CuppaSugar network, like Napster, to be a prototype for the global, Internet-based economic structures of the future. “Just because ‘money’ isn’t involved doesn’t mean it can’t be monetized in some other way,” explains Lorne Weller, a partner with Internet Capital Group. “Nothing can stop the Internet from replacing society, and if that includes the economy, then so be it.”

DATELINE–San Francisco

“Look at that,” announces veteran dot-com partygoer Tiffany Wren, “the CFO just puked all over the ice sculpture.”

Elsewhere a loud pop precedes a burst of mock screams as another bottle of Veuve Cliquot champagne is uncorked, and the evening’s festivities, a launch party for a family entertainment portal, resume their steady, thumping pace. As Wren steers her all-female entourage of dapper party-crashers around a table of handsome marketing reps noshing on carpaccio and baby asparagus spears, the portal’s vice president takes the microphone to deliver a meandering tribute to the Internet.

“We are the dreamers and the builders,” blurts out the clearly intoxicated executive, before pausing for several beats to conclude. “We are the sans-culottes of the Digital Revolution.”

As the booming Internet industry enters its second year in the financial spotlight, parties such as this one have become a nightly affair in San Francisco, the mecca of e-commerce. The city’s bars, clubs, and even high-end retail stores have been hosting launch parties and IPO celebrations nonstop for nearly two years now. But according to journalists and industry insiders, the atmosphere at recent dot-com events has begun to turn increasingly surreal and even downright ugly.

“These events used to be part rave, part office party, and part political rally,” remarks a tech industry journalist who considers himself more a chronicler than a reporter. “But the ethos has undergone a transformation – it’s more of a wake than Woodstock now, a charade for shareholders more than a display of hubris.”

Indeed, just as publications such as the Industry Standard and the Wall Street Journal are beginning to devote column space to the dot-com circuit parties, revelers in the know say that the scene behind the scene is deader than drkoop.com.

“I used to go to these things Monday through Saturday,” asserts a stylish young man wearing dark sunglasses and large headphones, “but it got to be too much of a downer. I mean, some of these parties are downright creepy.”

Describing a different launch soiree at San Francisco’s tony W Hotel, a Robertson Stephenson analyst claims he saw staffers surreptitiously passing around recreational Ritalin “to improve the vibe.” Requesting that his name be withheld, he remarked, “With an uncertain or even gloomy future ahead for these me-too start-ups, many of these galas are scraping the bottom of the barrel just to simulate excitement.”

Few at tonight’s affair believe they will make millions from their stake in the consumer-oriented Web site that plans to make money delivering entertainment on demand to children and their parents. In fact, many of the employees in attendance were informed only a few hours earlier that four months from now the company’s coffers won’t contain enough cash to cover payroll. Admits the CEO, “If investor diffidence doesn’t kill us, the high price we paid for our AOL content deal will.”

And yet the casual observer would believe this is a company that thinks it can’t possibly lose. Smart-looking, bespectacled young producers are tossing back frozen tequila drinks topped off with cherry Pop Rocks that the bartenders are calling “interactive margaritas.” A young software developer propositions attractive women with a lewd sock puppet routine. A Chinese chef dressed in a rented samurai costume kills live tuna on a stage and tosses sashimi slices to adventurous bons vivants.

“Most of the people here have no connection to the company sponsoring the party,” confides Wren, the professional partygoer who owns and operates a Web site devoted to promoting and reviewing the e-party scene. “Their PR firm paid to have this event ‘leaked’ on sfgirl.com because it’s more important to look successful than to be successful. I’d bet 70 percent of the crowd are people who came looking for the free food and booze.”

DATELINE–San Francisco

The sun is just starting to peek through the morning fog when the first group of tourists arrives at the designated meeting place at Bryant and Mariposa streets in San Francisco’s Mission District. As those gathered trade cameras for inspection and discuss the weather, a few wander off to the nearby Circadia coffee shop to fetch hot drinks.

At 8:30 a.m., the group’s tour leader, Dr. Gil “Bugsy” Feyerabend, arrives in tan shorts and a sweat shirt emblazoned with the UC Berkeley logo. After a round of introductions, the group of 16 sightseers and a solo guide begins to prance down Mariposa Street. Just minutes into their romp, they’ll come upon the first landmark of their tour – the historic Artaud Project live-work lofts.

Gesturing at the majestic brick building with his Oakley sunglasses in hand, Feyerabend tells the story of the cutting-edge artists who first occupied the building in 1971 when it was an abandoned tool and die factory. It was that occupation, argues the guide and visiting architecture professor at the University of California at Berkeley, that ultimately led to the creation of live-work zoning laws in San Francisco.

“This is where it all got started folks,” Feyerabend remarks. “This is ground zero for the live-work explosion.” As the entourage begins snapping the first photos of the tour, the urban architecture docent picks up a pebble from outside Noh Space, one of several performance galleries inside the Artaud building, and tosses it gently against a second-floor window.

“Get your cameras ready people,” grins Feyerabend, “‘cause you’re about to see a real live live-work artist.” Moments later, a sleepy-eyed woman in her late 40s props open the window, leans out, and yells, “All right, Bugsy, what’s it going to be today?”

The salt-and-pepper-haired artist, identified by Feyerabend only as Marta, recalls for the crowd below her first months in the unfinished warehouse space. As the crowd yells its collective thanks, one of the tour participants asks if she might take her photograph. “Sure thing,” hollers Marta, who winks and gives the photographer the finger.

Less than a block away, the tour converges on a series of recent live-work buildings looming tall and square beside a squat Vietnamese restaurant named Hung Yen. As the tour wends its way across a total of four newly opened loft towers, Feyerabend fills in the details of their construction, relating arcana such as how the development obtained its parking variances and even the kind of concrete used in most live-work housing.

While a few of the tourists stop to run their hands across the surface of the walls of one live-work unit, Feyerabend gets the rest to calculate the returns on an average live-work unit construction project. “About 250 percent more than for a non-live-work housing unit,” concludes the architecture scholar as he warns one of his flock, “Watch out for that doggy do!”

Despite the early hour and the relatively dour surroundings of this mixed industrial-residential area, most of the tour members appear to be having a blast. For Mary Agnes Bettleheim, a 43-year-old single mother and real estate agent from the nearby city of Tiburon, the tour is a rare treat.

“I usually work weekends,” says Bettleheim, who also helps coach her daughter’s softball team, “but I scheduled this tour three months ago. I just love Bugsy and this whole urban live-work thing.”

As the motley crew continues its jaunt down Harrison Street, past an indoor rock-climbing gym and a host of three new live-work loft buildings, tour participants pepper Feyerabend with questions about the infamous architecture movement that was to San Francisco in the ’90s what Victorian building trends were to the city in the teens.

“When the demand for housing spiked in the 1990s, ‘live-work’ ceased to be a term that described a space used for both living and working,” Feyerabend explains to a graduate student from Mills College who left her Moraga apartment at 6:15 a.m. to arrive in time for the tour. “It became code for a new way of living alone within open floor plans, under high ceilings, in contact with raw materials such as corrugated steel, concrete, and finished plywood.”

Pointing toward a taco truck perched nearby on a sidewalk, one of the tour members remarks that the aluminum-encased vehicle and the upscale living quarters recently built across the street from the truck are “variations on the same tune.” Replies Feyerabend approvingly, “You ain’t just whistling Dixie.”

Upon arriving at another massive live-work condominium on 21st and Harrison streets, Feyerabend howls, “So who’s ready for some action?” Waving at a security camera perched atop the entrance to the building, the tour guide approaches the door and is buzzed inside. With his audience in tow, the guide bolts up a narrow set of stairs and into the live-work unit of an intellectual property lawyer named Janice. Here the group will enjoy sparkling mineral water and organic fruit tortes, courtesy of the tour operator, before heading off to another round of buildings.

Says a perspiring Bettleheim, “My next-door neighbor is always chatting up the murals in the Mission because of some tour she took five years ago. Wait till she hears about this.”