U.S. Securities and Exchange Commission
Litigation Release No. 16813 \ November 30, 2000
Securities and Exchange Commission v. ETS Payphones, Inc. and Charles E. Edwards, Civil Action File No. 1:00-CV-2532-JTC (N.D.Ga.)
The Securities and Exchange Commission ("Commission") announced that on November 20, 2000, Judge Jack T. Camp of the United States District Court for the Northern District of Georgia entered a preliminary injunction against Charles E. Edwards ("Edwards") to prevent further violations of the antifraud and registration provisions of the federal securities laws. The court also imposed a freeze on Edwards' assets as a result of his conduct in the ETS securities offering. A preliminary injunction hearing was held in this matter on October 12, 2000, which Edwards contested. By a separate order of October 25, 2000, ETS Payphones, Inc. ("ETS") was preliminarily enjoined from violations of the antifraud and registration provisions of the federal securities laws. ETS consented to the preliminary injunction without admitting or denying the allegations of the Commission's complaint. The Commission did not seek a freeze of ETS's assets, because the company had previously filed for reorganization in the bankruptcy court.
In its ruling of November 20, 2000, the Court found that Edwards and ETS fraudulently sold unregistered securities in the form of investment contracts in the form of coin-operated telephones in units including a telephone, site lease, lease/back agreement and buy/back agreement. The Court found that ETS falsely advertised in sales brochures the "profitability" of payphones and encouraged investors to "watch the profits add up," while in reality ETS always lost money on its payphone operations. The Court concluded that because revenue from payphone operations never covered operating expenses, ETS had to attract an ever expanding number of investors to meet its obligations to the existing investors and that none of this information was disclosed to investors. The Court found that Edwards as founder of ETS personally profited from the operation receiving substantial compensation. The Court noted that Edwards owned real estate valued in excess of $7 million, and that ETS transferred more than $11.6 million in interest free loans to companies controlled by Edwards.
The complaint, filed on September 30, 2000, seeks permanent injunctions against ETS and Edwards to prevent future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also seeks an accounting, disgorgement and prejudgment interest as well as civil penalties from the defendants. The complaint alleges that the two parties engaged in fraud in the offer and sale of unregistered securities in the form of investment contracts, and alleges that the defendants promoted a massive fraudulent scheme through the use of insurance agents and over the Internet, in which ETS raised more than $300 million from more than 10,000 mostly elderly investors.