Securities and Exchange Com'n v. Friendly Power, 98-2902-CIV.

• Citation: 49 F.Supp.2d 1363
• Decision Date: 12 May 1999
• Docket Number: No. 98-2902-CIV.,98-2902-CIV.
• Court: U.S. District Court — Southern District of Florida
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FRIENDLY POWER COMPANY LLC, Friendly Power Company, Inc., Friendly Power Franchise Company, Scott J. Levine, Sabrina Levine, and Dwight H. Stephens, Defendants, Rich Holdings, Inc., Rich Management, Inc., Cyber-Tech Marketing & Consulting, Inc., and Packard Energy Group, Inc., Relief Defendants.

49 F.Supp.2d 1363

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. FRIENDLY POWER COMPANY LLC, Friendly Power Company, Inc., Friendly Power Franchise Company, Scott J. Levine, Sabrina Levine, and Dwight H. Stephens, Defendants, Rich Holdings, Inc., Rich Management, Inc., Cyber-Tech Marketing & Consulting, Inc., and Packard Energy Group, Inc., Relief Defendants.

No. 98-2902-CIV.

United States District Court, S.D. Florida.

May 12, 1999.

COPYRIGHT MATERIAL OMITTED

Mitchell Herr, Miami, FL, for plaintiff.

David Garvin, Miami, FL, for defendants.

FINAL JUDGMENT

JAMES LAWRENCE KING, District Judge.

THIS CAUSE comes before the Court on the non-jury trial in the above-styled matter, held from April 6, 1999 through April 9, 1999. The Court has heard testimony and reviewed evidence on the issues of liability and relief, and makes the following findings of fact and conclusions of law.

I. Findings of Fact

1. The Court has subject matter jurisdiction over the above styled matter pursuant to Sections 20(b), 20(d), and 22(a) of the Securities Act of 1933 ("Securities Act"). See 15 U.S.C. §§ 77t(b), 77t(d), 77v(a) (West 1998).

2. Venue is proper in the Southern District of Florida both because some of the acts and/or transactions giving rise to the SEC's action occurred in this District and because Defendants reside within this District.

3. Plaintiff, the Securities and Exchange Commission ("SEC"), is the federal administrative agency charged by Congress with overseeing securities markets in the United States. In this capacity, the SEC may institute legal action against individuals or entities believed to be violating the Securities Act.

4. Defendants Scott J. Levine ("Scott") and Sabrina Levine ("Sabrina") (collectively, "Levines")¹ reside in Plantation, Florida. In 1996 and 1997, the Levines researched the potential of starting a new utility company in the recently deregulated utility industry in the state of California. In or about April 1997, one or both of the Levines formed Defendant Friendly Power Company LLC ("FPC-LLC"), which eventually became a utility company licensed to operate within the state of California. In the summer of 1997, one or both of the Levines formed Defendant Friendly Power Company, Inc. ("FPC-Inc."). For purposes of this Order, Defendants FPC-LLC and FPC-Inc. will be treated as the same entity. Also during the summer of 1997, one or both of the Levines formed Friendly Power Franchise Company ("FPC-Franchise"), the Articles of Incorporation of which was filed with the Colorado Secretary of State on August 8, 1997. Defendants FPC-LLC, FPC-Inc., and FPC-Franchise (collectively, "Friendly Power") are located in Miami Lakes, Florida.

5. As Chief Executive Officer ("CEO") of FPC-Inc., Defendant Scott sought to obtain electric power at a discount of the going rate charged by the power exchange. In March 1998, FPC-Inc. entered into an Automated Power Exchange Service and Participation Agreement with Automated Power Exchange, Inc. ("APX"). APX operates an electrical power exchange from which FPC-Inc. can buy electrical power at APX market prices. As CEO of FPC-Inc., Defendant Scott also was responsible for advertising the name and services of Friendly Power throughout the state of California in order to establish name recognition for the company.

6. FPC-Franchise entered into a contract with FPC-Inc. under which FPC-Franchise was granted the exclusive license to franchise operators to convert residential customers to Friendly Power. In exchange therefor, FPC-Franchise was to give FPC-Inc. ninety percent (90%) of all gross sales from the sales of franchises. Defendant Sabrina served as the President and sole owner of FPC-Franchise.

7. FPC-Franchise priced franchises for resale at two dollars ($2.00) per household converted in the franchise's exclusive geographical territory. Each franchise was assigned a protected geographical territory, determined by number of residential households, competition from other service providers, and various other demographics. Each franchise was required to achieve and maintain a five percent (5%) market share of electric power customers in its protected territory within five (5) years from the date of its Franchise Agreement. In all, FPC-Franchise executed thirty-five (35) Franchise Agreements, with franchises that were priced between $200,000 and $600,000. Ultimately, FPC-Franchise sold seventeen (17) franchises, and canceled four (4) franchises for non-compliance with the Franchise Offering Circular that had been filed with the state of California.

8. Defendant Rich Management, a telemarketing firm, purchased a franchise through a general partnership on credit, and sold units in the partnership to pay for the franchise and make a profit for itself. Defendant Packard Energy Group, Inc., another telemarketing operation, made telephone calls to find investors to buy partnership units in various franchises. These franchises, in which investors were sought by the telemarketing operations, were formed to attempt to get residential customers to convert to Friendly Power; FPC-Inc. did not itself go after any residential customers. In seeking their buyers, the telemarketing operations represented to potential investors that they had to participate in the day-to-day business affairs of the franchise as active investors. Paper Processing, Inc. was responsible for checking the telemarketers' paperwork and calling all investors to ensure that the telemarketers had complied with certain standards.

9. Forty percent (40%) of the investors' funds were to go to Friendly Power, as payment for the purchase price of the franchises. An additional forty percent (40%) of the investors' funds were to go to the telemarketing operations as payment for their services. The remaining twenty percent (20%) of the investors' funds were to be held for future working capital when the franchise broke escrow. Once the franchise broke escrow, the investors would be entitled to fifty percent (50%) of Friendly Power's net profits on sales to residential customers in the franchise territory. Under the initial distribution of investors' funds, however, Defendants notified the investors that they likely would not see a profit for quite some time after their initial investment. In the meantime, Friendly Power could use the investors' funds as capital for its business of providing electrical power to commercial customers in the state of California.

10. Each Friendly Power franchise was to made up of between 50 and 94 partners. Each investor signed a Participation Agreement, which mandated that they be involved in the day-to-day operations of the franchise and actively participate in one or more of the management committees responsible for overseeing and conducting the franchise.

11 Friendly Power began providing electricity to its customers on May 1, 1998. By July 17, 1998, only the San Francisco partnership's franchise had broken escrow. By this time, Friendly Power had received $2.4 million from 308 investors.

12. On July 17, 1998, the SEC caused all of Friendly Power's assets to be frozen, such that Friendly Power no longer could buy power. With its funds frozen and its credit terminated, Friendly Power notified the California Energy Commission on August 8, 1998 that it would no longer be able to provide power to its customers, and they were all changed back to their previous utility provider.

13. On July 17, 1998, the SEC filed its original Complaint against the Defendants, which it later dismissed without prejudice. The SEC re-filed its Complaint on November 24, 1998, of which only Count I — alleging that Friendly Power and the Levines offered unregistered securities for sale to the public in violation of Sections 5(a) and 5(c) of the Securities Act—against the Levines is at issue for purposes of this Final Judgment. The SEC seeks (a) entry of permanent injunctions against the Levines for violations of Sections 5 of the Securities Act, (b) disgorgement from the Levines of their unjust enrichment, and (c) civil money penalties pursuant to Section 20(d) of the Securities Act.

II. Conclusions of Law

A. SEC's Prima Facie Case for Establishing the Levines' Violation of the Securities Act

1. Absent an exemption, Section 5 of the Securities Act prohibits any person from selling, or offering to sell, a security in interstate commerce unless a registration statement has been filed with the SEC. See 15 U.S.C. §§ 77e(a), 77e(c) (West 1998).

2. In order to establish a prima facie case for violation of Section 5, the SEC must show that (1) securities were offered or sold for which no registration statement was filed or in effect; (2) the offering or sale was made through the means or instruments of transportation or communication in interstate commerce or the mails; and (3) defendants, directly or indirectly, offered or sold the securities. See SEC v. Continental Tobacco Co., 463 F.2d 137, 155 (5th Cir.1972).² Neither negligence nor scienter is an element of a prima facie case under Section 5 of the Securities Act. See SEC v. Tuchinsky, 1992 WL 226302, at *2 (S.D.Fla. June 29 1992) ("[T]he Securities Act imposes strict liability on offerors and sellers of unregistered securities, who are held accountable regardless of whether there was any degree of fault, negligent or intentional."). Furthermore, neither a good faith belief that the offers or sales in question were legal, nor reliance on the advice of counsel, provides a complete defense to a charge of violating Section 5 of the Securities Act. See, e.g., SEC v. Holschuh, 694 F.2d 130, 137 n. 10 (7th Cir.1982); SEC v. Savoy Indus., Inc., 665 F.2d 1310, 1314-15 n. 28 (D.C.Cir.1981).

3. The Court now will turn to its analysis of whether the SEC has established the aforementioned three elements, thereby making its prima facie case that the Levines violated Section 5 of the Securities Act.

B. Investments as Securities Offered or Sold with No...