Numerous local residents, many of them elderly, lost hundreds of thousands of dollars investing in what a now-bankrupt Georgia pay telephone company touted as an easy-profit deal.
A Cabarrus County lawsuit filed against a Kannapolis financial services firm that represented the company calls the investment deal nothing more than a scam designed to bilk unsuspecting investors.
Some of them lost their entire life savings, a local financial adviser said. And he said the top executive at the company that took their money may have preyed upon their religious beliefs to get them to invest.
The federal Securities and Exchange Commission, which had been investigating ETS Payphones of Lithia Springs, Ga., before the company filed Chapter 11 bankruptcy on Sept. 11, says the company violated federal anti-fraud law.
A federal judge ruled that ETS, which was not registered with the state or the Securities and Exchange Commission, had fraudulently sold investors on a scheme that promised profits, while in fact the company’s pay phones always lost money.
The court concluded that because the revenues never covered expenses, the company had to attract an ever-larger number of investors to meet its obligations to existing investors.
The Securities and Exchange Commission, which brought the federal complaint against ETS, said the company amassed $300 million from more than 10,000 mostly elderly investors using insurance agents and the Internet.
The judge ordered a preliminary injunction to stop ETS from doing business and froze the assets of Charles Edwards, chairman of ETS.
In the lawsuit filed in Cabarrus County, executors of the estate of Molly Sutton say that before dying last May, the 87-year-old Concord woman invested $280,000 in ETS, buying 40 pay phones at $7,000 apiece.
The suit says Foil & Associates, the Kannapolis firm that represented ETS, was negligent in not recognizing the “unrealistic nature” of the ETS claims and that the company didn’t disclose all its liabilities.
Marie Foil, who owns Foil & Associates, said she never personally recommended ETS to investors.
“I didn’t sell the phones,” she said. “Some people that worked at my company sold the phones, so I can’t tell you anything about it.”
ETS promised investors returns in one of three ways: They could buy and service the phones themselves; buy the phones and pay a monthly fee to have them serviced; or lease the phones to a management company for $82 a month.
Company literature said that for a “limited time” investors could get in on a “virtually recession-proof” business providing a potentially constant cash flow.
ETS assured investors they could recover their entire investment with a 180-day notice. When Sutton died, the executors of her estate asked the company to make good on that promise. ETS filed for bankruptcy soon afterward and never paid.
According to court papers, Foil & Associates hosted a seminar for potential ETS investors at the Kannapolis Country Club. The featured speaker was ETS chief Edwards.
After that meeting Sutton and other area residents got into the pay phone business. Todd Swicegood, a financial adviser with Raymond James Financial Services in Salisbury, said around 30 of his clients heard about ETS and asked his opinion.
He advised them against it.
“I felt pretty confident it was a Ponzi scheme,” Swicegood said. “This has the look and smell of a scam and it always has. It’s one of those deals where if it sounds too good to be true, it almost always is.”
A Ponzi scheme is one in which money paid by later investors is used to pay earlier investors. In this case, the lawsuit claims, the company used the new infusions of cash to pay investors who wanted out, but eventually ran out of money.
ETS offered brokers a more-than-20-percent commission on each telephone sold, which Swicegood calls “highway robbery” that far exceeds the 5 percent commission recommended by the National Association of Securities Dealers.
Additionally, the lawsuit says, ETS promised investors a 15 percent return on investments.
The attraction was just too great for some, Swicegood said. In spite of his advice against investing, at least two people who asked his opinion sunk their money into the company. They lost a combined amount approaching $100,000, he said.
“I know of some people who lost their entire life savings,” Swicegood said.
He said that some of the people who came to him wanted to trust Edwards, the pay phone company chief, because they were religious people and he came across as a deeply religious man.
“The sales practice involved purporting that these were really religious people,” he said. “(Investors) thought they had found a really good investment with really religious people.”
Not everybody lost money. In the federal case initiated by the Securities and Exchange Commission, the court found that Edwards owned real estate valued at more than $7 million, and that ETS had transferred interest-free loans totaling more than $11.6 million to companies controlled by Edwards.
Swicegood said he didn’t know how many people in this area invested in ETS Payphones.
It was “a massive amount,” he said. “They did a phenomenal marketing job.”
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