187 F.Supp.2d 1250 (D.Or. 2002), C. A. CV 01-1283, S.E.C. v. Alpha Telcom, Inc.
|Docket Nº:||C. A. CV 01-1283|
|Citation:||187 F.Supp.2d 1250|
|Party Name:||S.E.C. v. Alpha Telcom, Inc.|
|Case Date:||February 07, 2002|
|Court:||United States District Courts, 9th Circuit, District of Oregon|
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
Karen Matteson, Securities and Exchange Commission, Los Angeles, CA, for Plaintiff.
Christian A. Hatfield, Robert C. Weaver, Jr., Garvey Schubert & Barer, Portland, OR, for Defendant Paul S. Rubera.
David R. Zaro, Allen Matkins Leck Gamble & Mallory LLP, Los Angeles, CA, for Receiver.
PANNER, District Judge.
Plaintiff Securities and Exchange Commission (SEC) brings this action against Paul S. Rubera (Rubera), alleging he violated the securities registration provisions and antifraud provisions of the Securities Act of 1933, and the antifraud provisions of the Securities and Exchange Act of 1934. Following a bench trial on the merits of this case, I now issue my findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure 52(a). 1
FINDINGS OF FACT
Rubera is the sole owner of Alpha Telcom, Inc. (Alpha). Alpha started in 1986 as a company that sold, installed and maintained telephones and business systems in Grants Pass, Oregon. Sometime in 1997, Rubera was approached by Charles Tummino about a business idea. Tummino's idea was to sell payphones to individuals who would then enter into a service agreement with Alpha to install, service, and maintain the payphones.
Rubera consulted with Alpha's attorney Dan Lacy about the idea. In particular, Rubera wanted to know whether the arrangement would constitute a security. Lacy issued an opinion letter concluding the arrangement was not a security. Lacy also sought an outside legal opinion from Florida attorney Jim Leone who specialized in securities. Leone also concluded the business idea would not constitute the sale of a security. Rubera was given the green light from his attorneys to go forward with the deal. With that advice, Alpha began selling pay telephones, along
with service contracts, to individual investors (the "payphone program").
B. The Payphone Program
To invest in the payphone program, investors would enter into two agreements: (1) a $5,000 2 per phone purchase agreement; and (2) a service agreement with Alpha to manage the phone. The two agreements were presented and promoted simultaneously. Although investors were given the choice of using a company other than Alpha to manage the phone, approximately ninety percent of investors picked Alpha to service their phones.
Alpha offered four levels of service contracts. Most investors did not have the experience or knowledge necessary to operate and maintain the phones, so they selected the Level Four Service Agreement that required Alpha to perform all necessary services. Investors who selected the Level Four agreement had no involvement in the operation of the payphone. Alpha selected the location of the phone, installed the phone, obtained all certifications from regulatory bodies, maintained and cleaned the phone, paid all monthly telephone and utility bills, and collected the revenue.
With the Level Four service agreement, investors were allowed to sell the phones back at the original price after thirty-six months (or with a penalty before thirty-six months). This is referred to as the "buyback" provision. Beginning sometime after May 2000, investors were also given the option of purchasing buyback insurance. The insurance would cover the investor's purchase price if for some reason the company became unable to repurchase the phones.
The Level Four service agreement also provided that investors were to receive thirty percent of the net revenue from the phone, while Alpha was to receive seventy percent as a monthly fee. However, if revenues from the phone did not generate a base amount of $58.34 in any given month (which amounts to a fourteen percent return on a $5,000 investment), Alpha agreed to waive a portion of its seventy percent fee to maintain that monthly base payment. If Alpha waived its entire fee and the base amount still was not met, Alpha made up the difference. Indeed, Alpha created a computer program that automatically paid each investor the base amount each month, regardless of whether the investor's particular phone generated enough revenue to pay that amount.
C. Growth of the Business
Initially, Tummino was in charge of marketing and sales for the payphone program. Tummino hired and oversaw a small sales force of independent contractors to solicit buyers for the program. Tummino created the marketing materials used by sales agents, and he also prepared the sales agreement and Alpha service agreement that the agents presented to buyers. These materials were reviewed and approved by Lacy, and Rubera had little understanding or knowledge about the materials.
In October 1998, American Telecommunications Company, Inc. (ATC) was created. 3 Tummino operated ATC as the marketing and sales arm of the payphone program, while Alpha's focus was on obtaining phone sites, installation, service and management of the phones.
Tummino retired in late 1998. Before doing so, he introduced Rubera and Lacy to Ross Rambach and Mark Kennison. Rambach and Kennison owned a company called Strategic Partnership Alliance, LLC (SPA), which was in the business of selling programs like that offered by ATC and Alpha. Both Rambach and Kennison had a history of disciplinary actions taken against them by federal and state securities regulators. Rubera was unaware of that history.
Based on Tummino's recommendation, SPA was hired in early 1999 as an independent marketing and sales firm for ATC. Thereafter, SPA was responsible for hiring, training and supervising the sales agents who were marketing the payphone program. SPA also modified the sales materials that were initially prepared by Tummino. Although all modifications to the sales materials were supposed to be approved by Alpha and ATC's counsel before use, SPA did not always follow that direction. After SPA came on board, ATC remained as a processing center for the payphone program while Alpha continued to perform the service and maintenance of the pay phones.
By all accounts, Alpha was a poorly run business. Inventory and accounting systems were inferior and key personnel were inexperienced or incompetent. In 2000 and 2001, the company experienced cash flow problems, and Alpha borrowed money from ATC to pay its expenses.
Despite Alpha's inefficiencies, the business was rapidly growing. By early Fall 2000, Alpha could not keep up with the demand for acquiring new phone sites. Rambach suggested to Alpha that it hire an outside company to acquire new sites so Alpha could focus on installation, service, and maintenance. Rambach recommended a company called ATMN/EMI to acquire the new phone sites. Rubera took Rambach's advice and hired ATMN/EMI. Rubera did not know that Rambach and Kennison were principals of ATMN/EMI.
ATMN/EMI did acquire new phone sites for Alpha. However, within a few months Alpha discovered that many of the sites were worthless. They obtained sites in burned out buildings or in locations not suitable for pay telephones. In some instances, the locations did not even exist. Alpha terminated its relationship with ATMN/EMI in December 2000 when it discovered these problems.
At the same time ATMN/EMI was procuring worthless sites, SPA salespersons were encouraging existing investors to cash-in on their buy-back options, then in turn reselling new phones to these existing investors. The incentive was particularly appealing to investors who purchased their phones before buyback insurance was available. The investors would...
To continue readingFREE SIGN UP