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CSI News Archives - Year 2001
State securities regulators take action against payphone

March 15, 2001
Contact: Lucas Hamilton

State securities regulators take action against payphone schemes Losses estimated at $76 million

Securities regulators in 26 states including Montana participated in a crackdown on individuals and companies that promised high returns from risky or fraudulent investments in pay telephones. They have identified nearly 4,500 people, most of them elderly, who lost an estimated $76 million investing in so-called coin-operated customer-owned telephones. As more states analyze complaints and open investigations, regulators expect losses to rise dramatically.

"We're seeing the tip of what's likely to be a very large iceberg," said Morrison, Montana's Securities Commissioner. "We expect to see losses totaling hundreds of million of dollars."

In a typical pay telephone scheme a company, through a middleman, sells payphones to investors for between $5,000 and $7,000, Morrison said. As part of the sale, the company agrees to lease back and service the phones, usually for a fee. Investors are promised annual returns of up to 15 percent. Interest payments, if they are made at all, are often just enough to keep previous investors on board, he said.

For example, Georgia-based ETS Payphones, founded in 1994, sold nearly 50,000 payphones nationwide. According to a federal district court opinion, ETS continually sought new investors because "revenue from payphone operations never covered operating expenses." During the first six months of 2000, ETS' losses exceeded $33 million.

Montana's Securities Commissioner issued a cease and desist order in October 1999 against Phoenix Telecom of Georgia and Texas and Tri-Financial Group of Michigan. Montanans, including many retired individuals, invested approximately $901,000 in the payphone scheme. Local salespeople sold the program as a "no-risk, sure thing" and told investors that their money would be safe and liquid.

"Simply put, the programs appear to have been nothing but Ponzi schemes, recruiting new money to make interest payments to investors," Morrison said.

Morrison urged investors to ask the following questions before purchasing any investment:

Does the investment meet your personal investment goals? Whether you are investing for long-term growth, investment income or other reasons, an investment should match your own investment goals;
Is it too good to be true? Use common sense and get a professional, third party opinion when presented with investment opportunities that seem to offer unusually high returns in comparison to other investment options. Pie-in-the-sky promises often signal investment fraud;

Has the seller given you written information that fully explains the investment? The documentation should contain enough clear and accurate information to allow you or your adviser to evaluate and verify the particulars of the investment.

Are the seller and investment licensed and registered in your state? Call your state securities regulator at (800) 332-6148 to find out. If they are not, they may be operating illegally.


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