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News Release: 00-16
GRAY DAVIS, Governor
Date: 12/04/00
WILLIAM KENEFICK, Acting Commissioner
California Leads Multi-State Private Pay Phone Investment Sweep
Thousands of Trusting Investors Get a Wrong Number
Los Angeles, December 4, 2000 — The California Department of Corporations today announced the first results of an ongoing 20-state sweep of Customer Owned Coin Operated Telephone (COCOT) investment schemes operating throughout the United States. Beginning October 23, 2000, the Department issued 143 Desist and Refrain Orders to 89 individuals and 54 entities in California and seven other states for the illegal and fraudulent offer and sale of securities, and for acting as securities broker-dealers without a license.
The schemes offered investors the opportunity to own private pay phones with promises of steady profits and low risk. Instead, the Department of Corporations charged, these companies failed to disclose that the risk of loss of invested funds in the offerings were substantial. Moreover, court orders had been issued against the companies by other states, and there were conflicts of interest on the part of officers and promoters involved in the securities offerings. In addition, some entities had filed for bankruptcy and withheld other negative information from the investors.
One of the biggest sellers of customer owned telephone investments, ETS Payphones, Inc. of Lithia Springs, Georgia, filed for Chapter 11 bankruptcy protection in Delaware on September 11, 2000, and has consented to an injunction by the Securities and Exchange Commission (SEC). The 20 states involved in the telephone project, operating through the North American Securities Administrators Association (NASAA), have consulted bankruptcy counsel and are seeking to protect the interests of investors in the bankruptcy action. Another seller of COCOT investments, Phoenix Telecom, LLC of Sunnyvale, Texas, was placed into receivership at the request of the SEC in Georgia in August 2000.
Investors were solicited by insurance agents and financial planners, through websites and cold calling. In a typical deal, investors paid as much as $7,000 for a private pay phone, that was worth much less, and then entered into a management or leasing agreement with the promoters to manage the phones for them and split the profits. Promoters claimed that profits were guaranteed whether the individual phones owned by the investor were profitable or not, which regulators claim is indicative of commingling of invested funds and fraud.
The Department of Corporations warns potential investors that private pay phones are only as good as the location, the equipment, and the support provided to the owners. Investors that are not familiar with telephone equipment and the telecommunications marketplace should consider these investments highly risky.
The recent offerings in Customer Owned Coin Operated Telephones are the latest in a series of high tech investments marketed to California investors. Other high-risk and questionable promotions touted include investments in 900 numbers, Internet products or services, wireless cable licenses, personal communication services, and other high tech products in offerings that downplay the risks and emphasize the potential profitability of new technology products.
The Department of Corporations is California's Investment and Financing Authority, reporting to the Business, Transportation and Housing Agency and the Governor. The Department is responsible for the regulation, enforcement and licensing of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending and residential mortgage lending. For further information or to obtain a complaint form, see the Department's Web site at www.corp.ca.gov.
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