AK'S v. MARYLAND SECURITIES

• Decision Date: 27 April 2001
• Docket Number: No. 689,689
• Citation: 771 A.2d 487,138 Md. App. 314
• Parties: AK'S DAKS COMMUNICATIONS, INC. et al., v. MARYLAND SECURITIES DIVISION.
• Court: Court of Special Appeals of Maryland

771 A.2d 487

138 Md. App. 314

AK'S DAKS COMMUNICATIONS, INC. et al., v. MARYLAND SECURITIES DIVISION.

No. 689, Sept. Term, 2000.

Court of Special Appeals of Maryland.

April 27, 2001.

J.B. Grossman, LL.M. (Adorno & Zeder, Boca Raton, FL, Thomas D. Renda and Siskind, Grady, Rosen, Hoover & Levin of Baltimore, MD, on brief.) for appellants.

Lucy A. Cardwell, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen. and Timothy F. Cox, Asst. Atty. Gen. on the brief) Baltimore, MD., for appellee.

Argued before DEBORAH S. EYLER, KRAUSER, and WILLIAM W. WENNER, (Ret'd, Specially Assigned), JJ.

DEBORAH S. EYLER, J.

On April 4, 1995, the Maryland Securities Division ("the Division"), appellee, issued a summary cease and desist order and initiated formal proceedings against Express Communications, Inc., Pendleton Waugh, Patricia T. Phipps, Charlie Mae Lewis, Ak's Daks Communications, Inc., SMR Advisory Group, Albert Koenigsberg, Warren Blanck, Puma Communication, Inc., David Meredith, Communication Consultants, Jerry Calloway, Manning Communications Consultants, David Evans, and David Smith.¹ On October 3, 1996, the Division issued a show cause order against Ak's Dak's Communications, Inc., SMR Advisory Group, L.C., Albert Koenigsberg, and new respondent Jimmy Evans, charging them with violations of the original summary order to cease and desist.

The two cases were consolidated and a hearing was held before an Administrative Law Judge (the "ALJ") on November 18, 19, and 20, 1996, and January 27, 28, 29, 30, and 31, 1997. The ALJ issued findings and submitted them to the Maryland Securities Commissioner ("Commissioner").² The Commissioner held a hearing and thereafter determined that Ak's Daks Communications, Inc., SMR Advisory Group, L.C., Albert Koenigsberg, Jimmy Evans, Warren Blanck, Puma Communication, Inc., David Meredith, and Manning Communications Consultants, appellants, violated Maryland securities laws. He imposed a fine of $178,000.

Appellants filed an action for judicial review of the Commissioner's decision in the Circuit Court for Baltimore City. The circuit court (Berger, J.) affirmed the Commissioner's decision. The appellants now appeal to this Court, presenting the following questions for review, which we have rephrased:

I. Was the Commissioner legally correct in deciding that limited liability company interests sold to Maryland investors were investment contracts and, therefore, securities?

II. Was the evidence legally sufficient to support the Commissioner's decision that the appellants violated sections 11-301, 11-401, 11-402, and 11-501 of the Maryland Securities Act?

For the following reasons, we answer yes to both questions. Accordingly, we shall affirm the judgment of the circuit court.

FACTS AND PROCEEDINGS

The Appellants

Ak's Daks Communications, Inc. ("Ak's Daks") is a Florida corporation that was organized on April 9, 1992. Albert Koenigsberg is its president and sole shareholder. Ak's Daks entered into contracts with each of the 55 limited liability companies ("the LLC's") involved in this case (as discussed below) to serve as their administrative agent. Pursuant to the contracts, Ak's Daks was responsible for the administrative and record-keeping needs of each of the LLCs.

SMR Advisory Group ("SMR Advisory") is a Florida limited liability company that was organized on March 10, 1994, by Koenigsberg, Warren Blanck, and Bobbi Chubirka. SMR Advisory is a founding member of each of the LLCs. SMR Advisory is a telecommunications strategic planning, engineering, and construction enterprise that was formed to operate specialized mobile radio ("SMR") systems in the 220-222 MHZ spectrum. It contracted with Ak's Daks to construct and manage 220-222MHz radio dispatch systems for the LLCs.

Warren Blanck is president of Unicall Communications, a membership recruiting organization for various of the LLCs. Unicall was founded by SMR Advisory.

Puma Communications, Inc. ("Puma Communications") is a membership recruiting organization for various of the LLCs. It was founded by SMR Advisory and is a Florida corporation. David Meredith is the president, sole shareholder, and employee of Puma Communications. Meredith also is a member of SMR Advisory.

Jimmy Evans is a member and employee of SMR Advisory.

The LLCs & Their Formation

Each LLC was formed to offer SMR dispatch services from a particular location. The SMR dispatch services consist of a two-way radio system that allows one person to speak at a time. Forty-two of the LLCs are located on the west coast of the United States and are intended participants in the proposed Western Regional Network. If created, that network would provide uninterrupted SMR service to clients throughout the western range of the LLCs. Thirteen of the LLCs are located on the east coast.

The 220-222 MHZ SMR systems have limited capacity for general use in communications. This is because the technology necessary to permit a SMR system to operate as a two-way communications device has not yet been developed. Also, the narrow band width of the 220-222 MHZ frequency restricts the amount of information that can be transmitted and radio signals in the 220-222 MHZ range cannot penetrate buildings as effectively as 800 MHZ systems.

The LLCs all were organized by SMR Advisory and either one member of the public, an affiliate, or a holder of a 220 MHZ license from the Federal Communications Commission ("FCC"). For the LLCs in which Maryland residents invested, the other founding member either was an employee or owner of SMR Advisory, or was otherwise related to SMR Advisory or Koenigsberg. SMR Advisory received an 8% equity ownership interest in the "Class B" LLC interests. The holder of the FCC license received a 20% interest in the LLC and was required to transfer his license to the LLC. These original members entered into agreements to start the build-out of the SMR facility and then sought out other members "to provide additional capital and whatever other participation each additional LLC member deemed appropriate." The additional members were "Class A" members; upon completion of the build-out of the 220 MHZ operating system, the Class A members became Class B members, and the Class A interests ceased to exist. New members from the public also became Class B members.

Each LLC has, on average, 38 investors and each LLC has raised approximately $275,000 from those investors. Twenty-one Maryland residents invested a total of more than $161,000 in various of the LLCs. Nationwide, over 1100 people invested in the LLCs. Investor funds from all of the LLCs were pooled in a single bank account.

Offering Materials

Investors were solicited through a variety of means, including radio commercials. Membership recruiters also solicited investors who previously had invested in wireless communications. Members were not sought on the basis of their technical or business expertise in the field, even though operating the 220-222 MHZ SMRs requires a technical understanding of the mobile radio field.

Membership recruiters promised potential investors a profitable outcome, telling one potential investor that a $7,500 investment could produce revenues of $50,000 to $60,000 in five years. The membership recruiters did not inform potential investors of the characteristics of the market, the site, or the projected earnings for the particular LLC involved. The recruiters arranged for Ak's Daks or SMR Advisory to send promotional material to the potential investors.

The offering materials prepared by Ak's Daks stated that Koenigsberg had 15 years of experience in FCC license and filing programs. It did not reveal that his experience was gained with a company whose president was convicted of federal crimes. The material also highlighted SMR Advisory as a major player in the wireless communications field. Potential investors were advised that SMR Advisory was to be the administrator of the offering and would provide various services, including: formation of the LLC, negotiation with 220/222 MHZ license holders, coordination and execution of legal documents, provision of monthly newsletters to members and quarterly performance statements to clients, and compliance with FCC rules and regulations. The materials stated that SMR Advisory had operating company profit margins in excess of 28 percent.

The offering materials included a forecasted financial statement for the Western Regional Network. It projected that the LLCs on the west coast would have a combined net income of $10,181,100 in 1999 and a total net income for a five year period of $28,965,700. These figures average out to a net income of $18,148 on a $3,500 investment over a five year period. The offering materials also projected over $4,939,000 in interconnect revenues and over $1,600,000 in revenue from data transmission services for the Western Regional Network. The interconnect revenue projections contained in the materials were fifteen times the projections made by the appellants' expert witness, Stephan Virostek, and were based upon estimations of rates and percentage of subscribers for interconnect services that were well-above industry averages.

The offering material included a document depicting the Western Regional Network as an interlocking network of SMR stations from north of Los Angeles to Seattle. The material described this as "a project underway to develop the largest seamless narrowband wireless network in the United States." The offering material did not mention the existence of the "forty mile rule," an FCC regulation that restricts common ownership of SMR systems in the same community. This regulation would thwart the appellants' plans for the Western Regional Network. The representations concerning this network and of the potential for high profit were important factors in some Maryland residents' decisions to invest.

The offering material also failed to inform investors of the characteristics of the...