March 13, 2001 -
Banking Commissioner Issues Warning
on Private Pay Telephone Business Opportunity Investments
State Banking Commissioner John P. Burke today warned Connecticut investors about risky or fraudulent business opportunity investments in private pay telephone schemes that have cost investors nationwide - many of whom are elderly - over $70 million.
According to Burke, investors are typically sold, through a middleman, coin operated payphones for between $5,000 and $7,000 each. As part of the sale, the company agrees to lease back and service the phones, usually for a fee. Investors are promised low risk, steady income with annual returns of up to 15%. But in fact, securities regulators have found the interest payments, if they are made at all, are often only enough to keep previous investors on board.
The Securities Division of the Department of Banking has been actively working with officials from other states to combat such fraudulent opportunities in a national effort.
Two weeks ago, Burke issued a stop order against Communications Marketing Associates, Inc. (CMA), based in Boca Raton, Florida, denying effectiveness to a business opportunity registration to sell "Payphone Equipment Turnkey Packages" in Connecticut. The agency deemed the company's application materially incomplete, stating it contained at least 16 deficiencies, including a failure to file necessary financial statements and provide other information that would allow prospective investors to make informed decisions about the venture.
Furthermore, a disclosure document filed by CMA concerning ETS Payphones, Inc., a Georgia-based company that was going to provide the equipment lease program associated with the venture, did not indicate that ETS was the subject of an administrative proceeding initiated by state regulators. The ETS program appeared to be nothing more than a Ponzi scheme, intended to support the lavish lifestyle of top company executives.
A federal district court opinion stated ETS was continually seeking new investors because "revenue from payphone operations never covered operating expenses." During the first half of 2000, ETS' losses exceeded $33 million and the company is now in bankruptcy reorganization.
In addition, Burke said that Securities Division scrutiny of a similar program proposed by Cord Communications, Inc., of Cartersville, Georgia, lead to its registration failing to be declared effective. In Connecticut, it is illegal to offer or sell a business opportunity unless it is registered, or a bonafide exemption has been granted.
The incidence of scams associated with pay telephones is a recurring one, Burke said. Last year, the banking department issued a cease and desist order and imposed a $10,000 fine against Ameritel Payphone Distributors Inc. based in North Miami, Florida for allegedly offering and selling unregistered payphone systems to Connecticut investors. The Federal Trade Commission also sanctioned Ameritel for unfair or deceptive practices in connection with the payphone business venture.
Burke said any investor interested in purchasing a business opportunity should first contact his agency to check whether a potential business opportunity is registered. The department's Securities Division can be reached by calling (860) 240-8230, by writing to 260 Constitution Plaza, Hartford, CT 06103-1800 or by visiting the Internet. Burke added, "Even if a business opportunity promoter complies with every applicable law, however, there is no guarantee that an investor will make money."
Investors should determine if a potential investment meets their personal investment goals and their risk tolerance, Burke said. He strongly recommended that potential investors thoroughly review a business opportunity's disclosure document and contract before buying. Sections that deal with business risks; the business experience of the company and directors; possible history of lawsuits, including those alleging fraud; fees to be paid and conditions under which fees and deposits will be returned; balance sheets for three previous years; and substantiation of earnings should be carefully examined.
"Finally, be especially wary of oral representations made by the promoter that can't be substantiated in the written materials," concluded Burke. "That's a pretty good signal to walk away from the deal."
The Securities Division has prepared a free publication, "Understanding Business Opportunity Investments," that offers investors a comprehensive checklist of items they should consider before risking their money. Investors may request printed copies or they may read the publication on the Internet.