IN THE UNITED STATES DISTRICT COURT
Plaintiff, the United States Securities and Exchange Commission (the "Commission"), files this Complaint against defendants Dennis B. Watts, individually and d/b/a Senior Benefit Plans, and James Nathan Grimes and would respectfully show the Court as follows:
1. Defendants, operating under the assumed name of Senior Benefit Plans ("SBP"), fraudulently offered and sold to at least eighty (80) senior citizens living on fixed incomes approximately $5 million dollars of unregistered securities. Through the use of newspaper advertisements, seminars, and their pre-existing relationships with some clients, defendants offered and sold securities they characterized as high return, no risk, and safe investments and targeted these offerings directly at the elderly. The defendants lured their elderly investors with representations that they offered safe and secure investments in pay telephone lease programs. These pay telephone lease programs, issued by Phoenix Telecom, L.L.C. ("Phoenix") and Alpha Telcom, Inc. and its subsidiary American Telecommunications Company, Inc. (collectively "Alpha"), were falsely represented to investors as being safe and risk free. In reality, both Phoenix and Alpha were operating huge nationwide "ponzi" schemes. For their efforts, defendants collectively received over $750,000 in undisclosed commissions from the sales of these securities to their elderly victims.
2. The Commission, in the interest of protecting the public from such fraudulent activities, brings this action seeking to permanently enjoin defendants from further violations of the federal securities laws, and seeking an accounting, disgorgement of defendants' ill-gotten gains, plus prejudgment interest thereon and civil monetary penalties as allowed by law.
3. The Court has jurisdiction over this action pursuant to Section 20(d) and 22(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. § 77t(d) and § 77v(a)], and Sections 21(d), 21(e) and 27 of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§ 78u(d), 78u(e) and 78(aa)]. Venue is proper because many of the transactions, acts, practices and courses of business described below occurred within the jurisdiction of the Northern District of Texas.
4. Dennis B. Watts ("Watts"), age 51, and a resident of Lubbock, Texas, maintains the SBP office in Lubbock. Watts controls the "Senior Benefit Plans" assumed name and operates his insurance and estate planning business under that name. He is currently a licensed insurance agent and was a registered securities representative with Woodbury Financial Services, Inc. from 1987 to 1988. Watts actively solicited investors, provided offering materials to investors, reviewed investor paperwork, and facilitated the sale of the Phoenix and Alpha investments. Watts asserted his Fifth Amendment privilege against self-incrimination in response to a Commission investigative subpoena compelling his testimony in this matter.
5. James Nathan Grimes ("Grimes"), age 51, and a resident of Lubbock, Texas, is a licensed insurance salesman who holds himself out as an SBP consultant. Grimes actively solicited investors, provided offering materials to investors, reviewed investor paperwork, and facilitated the sale of the Phoenix and Alpha investments. Grimes asserted his Fifth Amendment privilege against self-incrimination in response to a Commission investigative subpoena compelling his testimony in this matter
6. Phoenix Telecom, L.L.C. is a Georgia limited liability company that was headquartered in Atlanta, Georgia, until August 1999, when it moved its executive offices to Sunnyvale, Texas, a suburb of Dallas. Phoenix offered and sold approximately $75 million worth of pay telephone lease investments to thousands of investors across the country. On August 2, 2000, the Commission obtained a temporary restraining order, asset freeze, and the appointment of a receiver against Phoenix. On August 14, 2000, the District Court entered a preliminary injunction against Phoenix and its principals. Phoenix is also the subject of at least 9 state cease-and-desist orders from May 1999 to August 2000.
7. Alpha Telcom, Inc. is an Oregon corporation located in Portland. Alpha offered and sold approximately $100 million worth of pay telephone lease investments to over 7000 investors throughout the country. On August 27, 2001, the Commission obtained a temporary restraining order, asset freeze, and the appointment of a receiver against Alpha. On September 6, 2001, the District Court for the District of Oregon entered a preliminary injunction against Alpha and its principals. On February 8, 2002, the District Court entered a permanent injunction against Alpha. Alpha is also the subject of at least 8 state cease-and-desist orders.
8. American Telecommunications Company, Inc. ("ATC") is a Nevada corporation headquartered in Grants Pass, Oregon. The company, which was incorporated in October 1998, purportedly was in the business of selling pay telephones to investors and was essentially the marketing arm of Alpha. The company was known as ATC, Inc. and was a subsidiary of Alpha until July 2000. On August 27, 2001, the Commission obtained a temporary restraining order, asset freeze, and the appointment of a receiver against ATC. On September 6, 2001, the District Court for the District of Oregon entered a preliminary injunction against ATC and its principals. On February 8, 2002, the District Court entered a permanent injunction against ATC.
9. ETS Payphones, Inc. is a Georgia corporation located in Atlanta. ETS was another unrelated entity offering pay telephone lease programs. In July 2000, ETS took over the pay telephone contracts of the Phoenix investors due to Phoenix's inability to pay investor returns. SBP did not sell any investments offered by ETS. A district court granted the Commission's request for a preliminary injunction against ETS on November 22, 2000. ETS has appealed the preliminary injunction.
A. The Phoenix Offering
10. From at least June 1997 to August 2000, Phoenix raised over $74 million from over 2000 mostly elderly investors throughout the United States by offering and selling unregistered securities in the form of investment contracts and promissory notes involving pay telephone leases. The investment was touted as safe and secure and investors were promised a fixed return higher than the returns available on bank certificates of deposit. Each investment unit, which included the purchase of a pay telephone, a lease-back agreement, and a buy-back agreement, sold for $7,000. Under the lease-back agreement, Phoenix leased the pay telephone back from the investor and agreed to pay the investor $82.25 per month for a period of five years, for a total payment of $4,935 for each unit. This equaled a return of approximately 14.1% per year. Investors under the lease program had no involvement in the operation of the pay telephone site. The return was not dependent upon the profitability of the investor's particular telephone. Phoenix offered to completely manage and maintain the telephone, including interior and exterior maintenance as well as coin retrieval. The buy-back agreement provided that the investor could, at his option, require Phoenix to repurchase the equipment either at the end of five years or earlier upon 180 days written notice. The investment was not registered with the Commission.
11. Phoenix offered and sold its pay telephone investments to the general public through arrangements with sales groups from across the country, like SBP, that were made up largely of licensed insurance agents. Most of the insurance agents selling Phoenix units were not licensed as securities sales representatives. These sales agents received a 15% commission on all sales made, thus receiving more in commissions than investors received in annual returns. In their marketing efforts, Phoenix and the sales groups used the mails and Internet sites. The pay telephone lease program was primarily marketed to the elderly.
12. Phoenix, through its offering documents and through its sales agents, represented to investors that the investment was safe, risk-free, and that the investment was insured for 100% of its value. Phoenix and its agents, including defendants, also claimed that the company was financially sound.
13. The Phoenix investment was anything but safe and risk-free. It was a total scam. There was no third party insurance for the investment. Phoenix itself was the only insurer of the phones. Although Phoenix did receive revenue from the payphones it leased, totaling approximately $6.7 million in 1999, the payments were not sufficient to cover the company's costs of operation. Phoenix's financial statement for December 31, 1999, reflects a negative net worth of $25,690,626 and a 1999 operating loss of $19,422,381. The company continued to operate by relying on funds from new investors, creating a classic "ponzi" scheme.
14. In July 2000, Phoenix failed to make its monthly lease payments to investors. On July 19, 2000, it entered into an agreement to sell some of its assets to ETS Management Services, L.L.C. ("ETS") and gave investors the option to lease their phones to ETS. Shortly after acquiring the Phoenix leases, ETS filed for bankruptcy and was sued by the Commission for fraud.
B. The Alpha Offering
15. From at least 1997 until August 2001, Alpha raised more than $100 million through the sale of investments in a similar pay telephone lease program. Through the Alpha program, investors purchased a pay telephone from ATC for $5,000 and Alpha would operate and manage the telephone for them. In return, the investors would receive monthly payments of at least $58.34, purportedly from the revenues generated from operating the pay telephone (the monthly payments of $58.34 equal a 14% annual return on the $5,000 investment). Investors would also have the option of selling the pay telephone back to Alpha at the investor's original purchase price after 36 months. The investment was not registered with the Commission.
16. Alpha offered various Service Agreements to investors in the payphone program, each one obligating Alpha to perform a different level of service to the investor. Because the investors did not have the experience or knowledge necessary to operate and maintain the payphones, all of the investors who purchased the Alpha investment through SBP selected the Service Agreement that required Alpha to perform virtually all services necessary to operate and maintain the telephones (referred to as "level four" service). Investors that selected level four service had no involvement in the operation of the pay telephone site. Alpha selected the location of the payphone, obtained all necessary certifications from regulatory bodies, managed and maintained the payphones, performed all coin retrieval, negotiated with vendors and paid all monthly telephone and utility bills. The level four Service Agreement provided that the investor received 30% of the net revenue from the phone, while Alpha received 70% as its "fee" for managing the phone.
17. Alpha, through its offering materials and sales agents, like SBP, represented that investors would receive a "guaranteed" annual return of 14%. Alpha also claimed that it was a profitable company and that the investment was safe.
18. Contrary to the defendants' representations regarding the payphone program and its profitability, Alpha was operating a ponzi scheme. Since at least June 1999, the revenue generated by Alpha from payphone operations was insufficient to cover the companies' payments to investors. It was not a profitable company. In fact, Alpha had consistently depended on the sales of new payphones to meet its payment and buy-back obligations to earlier investors, again creating a classic "ponzi" scheme.
C. SBP's Phoenix and Alpha Sales Activities
19. From November 1999 until approximately May 2001, Watts and Grimes, operating under the SBP assumed name, offered and sold the Phoenix and Alpha pay telephone lease programs, motivated by the 15% commission on each sale.
20. Defendants each sold investors the Phoenix and Alpha investments, consisting of the purchase of one or more pay telephones, a site lease, lease-back agreement, and buy-back agreement.
21. There are at least 40 known SBP clients who purchased at least $3 million of the Phoenix investment and approximately 40 SBP clients who purchased at least $2 million of Alpha.
22. Watts and Grimes each represented to investors that the investments were very safe, "risk-free" and would provide an annual return of approximately 14%, that SBP had thoroughly investigated the companies and that both Phoenix and Alpha were financially sound businesses.
23. Watts and Grimes had no basis to make these representations. Phoenix and Alpha had only provided them with un-audited financial statements, and even these financial statements indicated that both were suffering from severe financial problems. Watts and Grimes had knowledge that several states had issued cease and desist orders against the companies, never contacted any of those states regarding the orders and failed to disclose the existence of these orders to their elderly clients. Further, ignoring the significant event of the collapse of the Phoenix scam, Watts and Grimes continued to offer and sell the Alpha investment even though the Alpha offering was almost identical to the Phoenix offering. Alpha investors who invested after the Phoenix scam collapsed were not informed that the previous pay telephone investment offered by SBP was a massive ponzi scheme or that it had failed. Lastly, Watts and Grimes failed to inform investors that each would receive a 15% commission from the sale of the payphone investment.
D. Defendants Targeted Senior Citizens
24. Watts began operating under the SBP assumed name in May 1991, specializing in offering and selling insurance products and annuities to elderly clients. Since at least early 1999, Watts offered estate planning and wealth preservation services to its clients. Grimes acted as a "consultant" to SBP. Watts employed at least one other sales agent to assist in marketing "SBP's" products.
25. Watts advertised SBP's services on the Internet site www.seniorbenefitplans.com and in local newspapers. These advertisements specifically targeted elderly investors. Watts and Grimes, under the SBP assumed name, also hosted estate-planning seminars for elderly clients. In addition, Watts and Grimes solicited their existing customers with the Phoenix and Alpha offerings, capitalizing on the trust developed during their longstanding business relationships with their elderly clients. The SBP salesmen specifically identified themselves as "senior financial specialists" who were experts in Medicare supplemental insurance, estate planning, and wealth preservation.
26. The vast majority of the individuals successfully solicited by the defendants were elderly, including many who are over seventy years old. These investors depended on fixed income from annuities, certificates of deposit and money market accounts to pay their daily living expenses and could not afford to lose their principal. The defendants not only knew of the conservative investment objectives of their clients, they actively exploited these objectives through offering the Phoenix and Alpha investments. The defendants, in many instances, made promises that the investors could not lose their principal under any condition, that the investments would generate monthly returns, and that the Phoenix and Alpha returns were superior to their existing investments.
27. Many of these investors suffered devastating hardships as a result of losing much of their life savings in this investment. Although there were over eighty (80) victims, the following are representative of the types of investors solicited and victimized by defendants.
28. Mable Ellis, now deceased, was 88 years old, legally blind, and had recently suffered a stroke when defendants convinced her to purchase 93 Phoenix pay telephone leases, for a total investment of $650,000. Ms. Ellis passed away shortly after SBP obtained power of attorney over her financial affairs. Her estate filed a civil action against Watts and Grimes alleging that they reduced her $1.5 million in savings to less than $300,000 in less than one year. Watts and Grimes knew of her conservative investment objectives and that she relied on the income generated by her savings to afford around-the-clock nursing care, which allowed her to remain in her life-long home.
29. Another typical investor is an 83-year-old widow from Floydada, Texas. She originally purchased Medicare supplemental insurance and annuities from SBP. She suffered from pneumonia in December 1999 and had open-heart surgery in October 2000. In June 2000, Grimes convinced her to liquidate an annuity and invest the $147,000 in proceeds in Phoenix. This investment represented almost all of her life savings. Grimes knew of her past medical conditions and that she relied on the income from her savings to afford the Medicare supplemental insurance.
E. Defendant Grimes' Bankruptcy
30. On March 7, 2002, defendant Grimes, joined by Connie Jeannene Grimes, filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code. Section 364(b)(4) of the Bankruptcy Code expressly exempts from the provisions of the automatic stay actions by governmental units like the Commission seeking injunctive relief, the fixing of the amount of disgorgement and the imposition of a civil monetary penalty. By filing this Complaint, the Commission does not intend to violate the stay provision of the Bankruptcy Code, but seeks all other relief to which it will show itself entitled.
Violation of Section 10(b) of the Exchange Act and Rule 10b-5
31. Plaintiff Commission repeats and incorporates paragraphs 1 through 30 of this Complaint by reference as if set forth verbatim.
32. Watts and Grimes, directly or indirectly, singly or in concert with others, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails have: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons.
33. As a part of and in furtherance of their scheme, Watts and Grimes, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence, and oral presentations, which contained untrue statements of material facts and misrepresentations of material facts, and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those set forth in Paragraphs 1 through 30 above.
34. Watts and Grimes made the above-referenced misrepresentations and omissions knowingly or with severe recklessness regarding the truth.
35. By reason of the foregoing, Watts and Grimes have violated and, unless enjoined, will continue to violate the provisions of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
Violations of Section 17(a) of the Securities Act
36. Plaintiff Commission repeats and incorporates paragraphs 1 through 30 of this Complaint by reference as if set forth verbatim.
37. Watts and Grimes, directly or indirectly, singly, in concert with others, in the offer and sale of securities, by use of the means and instruments of transportation and communication in interstate commerce and by use of the mails, have: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of untrue statements of material fact or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in transactions, practices or courses of business which operate or would operate as a fraud or deceit.
38. As part of and in furtherance of this scheme, Watts and Grimes, directly and indirectly, prepared, disseminated or used contracts, written offering documents, promotional materials, investor and other correspondence, and oral presentations, which contained untrue statements of material fact and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, including, but not limited to, those statements and omissions set forth in paragraph 1 through 30 above.
39. Watts and Grimes made the above-referenced misrepresentations and omissions knowingly or with severe recklessness with regard for the truth. Defendants were also negligent in their actions regarding the representations and omissions alleged herein.
40. By reason of the foregoing, Watts and Grimes have violated, and unless enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
Violations of Section 5(a) and 5(c) of the Securities Act
41. Plaintiff Commission repeats and incorporates paragraphs 1 through 30 of this Complaint by reference as if set forth verbatim.
42. Defendants Watts and Grimes, directly or indirectly, singly and in concert with others, have been offering to sell, selling and delivering after sale, certain securities, and have been, directly and indirectly: (a) making use of the means and instruments of transportation and communication in interstate commerce and of the mails to sell securities, through the use of written contracts, offering documents and otherwise; (b) carrying and causing to be carried through the mails and in interstate commerce by the means and instruments of transportation, such securities for the purpose of sale and for delivery after sale; and (c) making use of the means or instruments of transportation and communication in interstate commerce and of the mails to offer to sell such securities.
43. As described in paragraphs 1 through 30, the Phoenix and Alpha pay telephone programs were offered and sold to the public through a general solicitation of investors. No registration statements were ever filed with the Commission or otherwise in effect with respect to these securities.
44. By reason of the foregoing, Watts and Grimes have violated and, unless enjoined, will continue to violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
Violations of Section 15(a)(1) Of The Exchange Act
45. Plaintiff Commission repeats and realleges paragraphs 1 through 30 of this Complaint and incorporated herein by reference as if set forth verbatim.
46. At the times alleged in this Complaint, Watts and Grimes have been in the business of effecting transactions in securities for the accounts of others.
47. Watts and Grimes made use of the mails and of the means and instrumentalities of interstate commerce to effect transactions in and to induce or attempt to induce the purchase of securities.
48. At the times alleged in this Complaint Watts and Grimes were not registered with the Commission as a broker or dealer, as required by Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)].
49. By reason of the foregoing, Watts and Grimes have violated and, unless enjoined, will continue to violate Section 15(a)(1) of the Exchange Act [15 U.S.C. §78o(a)(1)].
50. The Commission seeks the following relief:
51. An order of the Court permanently enjoining the defendants, their agents, servants, employees, attorneys and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, [15 U.S.C. §§ 77e(a), 77e(c) and 77q(a)], and Sections 10(b) and 15(a)(1) of the Exchange Act, [15 U.S.C. § 78j(b) and § 78o(a)(1)], and of Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
52. An order of the Court directing defendant Watts to disgorge an amount equal to the funds and benefits he obtained illegally as a result of the violations alleged, plus prejudgment interest on that amount.
53. An order of the Court fixing the amount of disgorgement defendant Grimes should disgorge and setting that amount equal to the funds and benefits he obtained illegally as a result of the violations alleged, plus prejudgment interest on that amount.
54. An order of the Court directing defendants to file with the Court and serve upon the Commission an accounting, under oath, detailing all commissions and other benefits received based upon their sales of the Phoenix and Alpha investments.
55. An order of the Court directing defendants to pay civil monetary penalties in an amount determined as appropriate by the Court pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] for their violations of the federal securities laws as alleged herein.
56. All further relief as the Court may deem just and proper.
Dated this 21st day of May 2002.
HAROLD R. LOFTIN, JR.