IOWA DEPARTMENT OF INSPECTIONS AND APPEALS by RodneySooialo

VIEWS: 48 PAGES: 8

									                IOWA DEPARTMENT OF INSPECTIONS AND APPEALS
                  DIVISION OF ADMINISTRATIVE HEARINGS
                     LUCAS STATE OFFICE BUILDING
                         DES MOINES IA 50319



IN THE MATTER OF                        *   REISSUED AND CORRECTED COPY∗
                                        *
EDWIN PACE                              *     PROPOSED
                                        *     FINDINGS OF FACT
PLN: 119710                             *     CONCLUSIONS OF LAW
                                        *     AND ORDER
                                        *
DOCKET NO: 04DOCID078                   *


             STATEMENT OF THE CASE AND PROCEDURAL HISTORY

     A hearing was held in the above-captioned matter on August
4, 2004 at 9:35 a.m. The hearing was held in a conference room
at the offices of the Iowa Insurance Division, 330 E. Maple
Street, Des Moines. The Respondent, Edwin Pace, was present and
represented Attorney Dennis Lawyer. The Iowa Insurance Division
(the Division) was represented by Enforcement Attorneys James W.
Thornton and Ilene Gilson.

     The matter was initiated under a Notice of Hearing and
accompanying Statement of Charges issued May 26, 2004.        The
Statement of Charges alleged that the Respondent had demonstrated
incompetence, untrustworthiness, or financial irresponsibility in
the conduct of business in the state that brings him under the
terms of Iowa Code section 522B.11(1)(h) that renders him subject
to revocation or suspension of his Iowa insurance agent license.
The evidence cited by the Division as grounds for the allegation
was the conviction of the Respondent in the Iowa District Court
in and for Warren County of violations of Iowa Code sections
502.201, 502.301, 502.401, 523B.3, 523B.12, 714.16 and 714.16A,
as confirmed on appeal of the Respondent to the Iowa Supreme
Court.

     The hearing was originally scheduled for July 8, 2004, but
on July 1 a request for continuance was received from attorney
for Respondent that cited the agreement of Division counsel to
the request.    Continuance was issued July 12, 2004, setting
September 7, 2004 as the new hearing date.         The Division
subsequently contacted this Administrative Law Judge to inform
that they had not agreed to longer continuance than 30 days. A


∗
   Original dated the Decision as September 3, 2003, and failed to include the
information regarding appeal rights.      As a consequence this decision is
reissued in a corrected form with a new issuance date for the purpose of
preserving the Respondent's appeal rights.
Docket No: 04DOCID078
Page 2

corrective order was issued July 15 revising the continued date
to August 4, 2004.

                            FINDINGS OF FACT

1.   The Respondent is licensed as an insurance agent in the
State of Iowa.

2.   The Attorney General of the State of Iowa and the
Superintendent of Securities brought an action in the Iowa
District Court in and for Warren County (the District Court)
heard on July 15, 2002, alleging the Respondent violated the Iowa
Uniform Securities Act, the Iowa Business Opportunity Promotions
Act and the Consumer Fraud Act.     The Court returned a ruling
against the Respondent on those allegations on September 4, 2002,
finding that the Respondent had violated provisions of Iowa Code
sections 502.201, 502.301, 502.401, 523B.3, 523B.12, 714.16 and
714.16A (Exhibit A).

3.   The Respondent filed an appeal which was heard by the Iowa
Supreme Court in which the Respondent contended that the District
Court erred in finding that the option he sold was a security;
that he was not entitled to the lack-of-knowledge defense
available to “affiliates” under Iowa securities law; that there
was insufficient proof to support the finding that he violated
the Iowa consumer fraud law; and that his due process rights were
violated in that the State did not first file an order that he
cease and desist and that he was subject to an ex post facto law
by the subsequent designation of the lease-back plan as a
security.   The Supreme Court rejected these contentions in its
decision filed April 7, 2004 (Exhibit B), and fully upheld the
findings of the District Court and its decision.

4.   In its ruling the District Court found that between August
                      1
1997 through June 2000 the Respondent offered and sold contracts
for customer owned coin operated pay telephones (COCOTs) to
individuals in Iowa, with most over the age of 65, in the course
of his business as an insurance agent while characterizing his
business as that of a "senior advisor."     The court found that
these COCOTs were offered under three plans in which (1) the
customer would purchase the phones and be responsible for
placement but have the option to hire a management company to
manage the phones after placement for a monthly fee and otherwise
receive the earnings (2) the customer would purchase the phones
and hire a management company to both place and manage the phones
for a higher monthly fee and otherwise receive the earnings or
(3) the customer would purchase the phones and immediately lease
the phones to a management company in return for a fixed fee

1
   The District Court's decision indicates June of 2002 as the terminal date
of the Respondent's sales of COCOTs, but the 2002 date does not seem to mach
up with other dates established in the decision.
Docket No: 04DOCID078
Page 3

monthly payable to the customer at a rate approximating a 14%
return on investment.   The District Court further found that
while the three plans were offered by the Respondent, he
concentrated his sales efforts on and sold only the third plan
under which the purchasers leased the phones and received a
specified return.

5.   In its ruling the District Court found that the first and
second options represented business opportunities that were not
registered with the State of Iowa in violation of Iowa Code
section 523B.3, and that the third option was a security that was
not registered in the State of Iowa in violation of Iowa Code
section 502.201.   The District Court found on the Respondent's
admission that although he was licensed as a securities agent
from April 1987 to December 1989, June 1993 to January 1995,
August 1996 to March 1997, and April 1997 through December 1998,
none of the Respondent's sales of COCOTs took place while he was
licensed as a securities agent and he therefore violated Iowa
Code section 502.301 by offering a security while not properly
                    2
licensed as an agent .
6.   In connection with the offer or sale of a business
opportunity or a security the District Court found that the
Respondent had made misrepresentations in violation of sections
502.401(2) and 523B.12 by making statements to his clients that:
there was little or no risk associated with the investment; the
companies involved were financially stable; the program was legal
for sale in Iowa; the investors would own an asset; and the
investor's principle was guaranteed and insured.

7.   The District Court also found that the Respondent had
violated sections 502.401(2) and 523B.12 in connection with the
offer or sale of a business opportunity or a security by omitting
certain material facts.     The District Court found that the
Respondent failed to inform his clients that: the investment was
high risk; the returns on the investment promised by the
management companies were excessive and could not be expected for
all investors; the program was a Ponzi scheme with returns on
investment dependent upon continuing new investment by others;
the COCOT programs were not registered as either a security or a
business opportunity in Iowa; the Respondent was not registered
as a securities agent in the State of Iowa; and the Respondent
received a commission on each sale and was required to return any

2
   The finding recited here that all Respondent COCOT sales took place while
the Respondent was not licensed as a securities agent does seem to contradict
the District Court's finding that the Respondent's COCOT sales began in August
1997 when it appears that the Respondent did hold a securities agent license
between April 1997 and December 1998.    Nevertheless, the Respondent did not
raise the issue in his appeal to the Supreme Court and that at least the bulk
of the sales seem to have occurred after that last time the Respondent was
licensed as a securities agent.
Docket No: 04DOCID078
Page 4

commission    paid   upon   liquidation    of   the   investment    by   the
investor.

8.   The District Court also found that the Respondent violated
section 714.16(2)(a), a part of the Consumer Fraud Act, by
committing an unlawful practice (defined as unfair practice,
deception,   fraud,    false   pretence,   false   promise,   or
misrepresentation, or the concealment, suppression, or omission
of material facts), and also found that the Respondent committed
fraud against the elderly under section 714.16A(2) allowing the
assessment of additional civil penalty.

9.   In support of the finding of violation of the Consumer Fraud
Act, the District Court noted that the Respondent continued to
sell COCOTs despite knowledge of legal, financial and other
problems associated with COCOT programs.    As the Supreme Court
noted in its review of the fact, the Iowa Securities Bureau (the
Bureau), a subdivision of the Iowa Insurance Division, issued a
cease and desist order to Tri-Financial Group and its management
company Phoenix Telecom on September 24, 1999, one of the
entities through which the Respondent effected sales of COCOTs,
and although the Respondent denied he had notice of that order,
he ceased selling COCOTs through those entities after that date
but did sell COCOTs through other entities. The District Court
and the Supreme Court both noted, too, that the Respondent
received two direct notices from the Division questioning his
COCOT sales. The first of these was dated May 31, 2000, in which
the Bureau notified the Respondent that it had information that
he was selling COCOTs through BEE Communications and its
management company ETS Payphones, Inc., neither of which was
registered to sell securities in Iowa.      While the Respondent
ceased selling COCOTs through those entities after that date, the
Respondent continued to sell COCOTs through other entities. The
second letter to the Respondent by the Bureau dated July 10,
2000, was nearly identically worded but directed to COCOTs sold
through Alpha Telecom and ATC, Inc. to advise him of the Bureau's
position on those entities, but the Respondent continued to sell
COCOTs on behalf of those entities until ATC began to refuse
                                                         3
business based on outstanding legal issues in Iowa .          The
District Court recites that the State presented a number of
public orders entered by other states in regard to the sale of
COCOTs against the entities through which the Respondent was
selling COCOTs.

3
   The Supreme Court found in its review of the facts that the Respondent
ceased selling COCOTs after receipt of the July 10 letter, but the District
Court made the specific finding that the Respondent's sales continued as set
out above. As it is reasonable to consider that the District Court was the
forum at which factual contentions were entered and the Iowa Supreme Court
based its ruling upon that record, the District Court's conclusion was relied
upon for factual findings here. See Decision of the District Court, Exhibit
A, p. 5.
Docket No: 04DOCID078
Page 5

10. Early in 2000, Phoenix Telecom closed its doors and its
leases were assumed by ETS.    In September 2000, ETS filed for
bankruptcy and took the position that it owned the payphones, not
the COCOT customers, and the bankruptcy court ruled in its favor
on that point.   Alpha Telecom had also filed bankruptcy at the
time of the District Court hearing.      The District Court gave
credence to the testimony of a financial expert offered by the
state who testified that ETS could not continue functioning as a
going concern as its returns on investment were not the result of
profits but were dependent upon a stream of continued investors.
The District Court also found that although the Respondent had
represented that he considered ETS to be a financially strong
company based upon his analysis of that company's balance sheet,
the 1999 ETS unaudited balance sheet indicated a negative
stockholder equity of over four million dollars, and the
Respondent did not share this balance sheet with his customers.

11. As a result of its finding, the District Court ordered the
Respondent to: pay restitution in the amount of $302,000;
disgorge to the State of Iowa all commissions received from the
sale of COCOTs; be permanently enjoined from violating Iowa Code
Chapters 502, 523B and 714.16; pay a civil penalty of $4000 total
for four violations of Iowa Code section 714.16(7); pay a civil
penalty of $1000 total for four violations of Iowa Code section
714.16A; and pay the costs of the court action, costs of
investigation and reasonable attorneys' fees pursuant to Iowa
Code section 714.16(11).

12. The Respondent has not made any payments to the Division as
commanded by the District Court (Exhibit C).

                        CONCLUSIONS OF LAW

1.   The Commissioner may place on probation, suspend, revoke or
refuse to issue or renew an insurance agent license, or may levy
a civil penalty as provided in sections 522B.17 for reason that
the agent used fraudulent, coercive, or dishonest practices, or
demonstrated   incompetence,  untrustworthiness,   or  financial
irresponsibility in the conduct of business. Iowa Code sections
522B.11(1)(h).

2.   The Division maintains that the Respondent, by virtue of his
conviction of violations of securities and business opportunities
laws and provisions of the Consumer Fraud Act in the District
Court, has demonstrated dishonesty or untrustworthiness in the
conduct of business in the state rendering him subject to the
sanctions set forth in 522B.11(1).    The Division asks that his
license to do business as an insurance agent in the State of Iowa
be revoked.     The Respondent does not deny the Division's
allegations but implicitly argues that there are extenuating
circumstances that should be taken into account to allow him to
keep at least a portion of his license.
Docket No: 04DOCID078
Page 6


3.   Over objection by the Division, the Respondent testified
that he continued to sell COCOTs despite the Bureau's warning
letters because he believed those letters only pertained to those
specific COCOTs, and expressed his understanding that there
remain COCOTs that are legal to be sold in the State of Iowa.
The Respondent also attempted to explain the lengths he went to
in order to confirm that COCOTs were a good investment were legal
for sale in the state. There were several obvious gaps, though,
in his account of those efforts. The Respondent recounted that
he had spoken by telephone with persons in the Office of the
Attorney General and the Securities Bureau, as well as with
similar officials in other states, but he could not recall names
or exactly when. Also, the questions he recounted that he asked
seemed to miss the mark. The Respondent indicated that he asked
these persons in authority "if there were any problems" with the
entities he was checking on before engaging in business with
them. He could not say that he asked if the COCOTs needed to be
registered in Iowa. Given that the Respondent had held a license
as a securities agent in the State of Iowa in the past, it is not
unreasonable to expect more from him than such a lack of
specificity in his questions to state officials.     Neither does
his professed reliance on the legal opinions of attorneys
retained by those entities for the legality of the sale of COCOTs
reflect well on his judgment. And while the Respondent testified
that he examined the business records of those entities before
engaging in sales of COCOTs, he had to admit that he never sought
a professional opinion on the soundness of those business
entities or the COCOTs themselves.    He also seems to have been
unshaken by the 1999 unaudited ETS balance sheet that indicated a
negative stockholder equity of four million dollar.

4.   In a further attempt to demonstrate his sincere belief that
the COCOT investments were sound and legitimate investments, his
attorney offered that his mother was his first client. It is not
known, however, whether his mother continued to own her
investment to the point of failure of those companies and so is
one of those customers to whom he is ordered to pay restitution.
Beyond that, even if the Respondent was sincere in his beliefs in
the soundness of COCOT investments that does not prevent a
finding of incompetence or irresponsibility in the conduct of
business if those beliefs were not soundly based. The Respondent
was clearly warned of Bureau questions about the legality of
COCOT sales and he continued to sell such investments when it is
not unreasonable to consider that a person concerned about the
financial well-being of his customers would have given more
pause. In particular a person dealing with the financial well-
being of elderly clients in his advertised capacity as a "senior
advisor." Clearly the Respondent also had a number of options to
pursue to confirm the claims and assurance of legality or
soundness of the COCOTs from officials of those companies
offering the COCOT that he did not pursue. This also does not
Docket No: 04DOCID078
Page 7

speak well to his judgment. With everything considered, it must
be concluded that the Respondent gives little reason to disregard
the petition of the Division in this matter.

5.   It is reasonable to conclude from the evidence presented
that the findings of the District Court that the Respondent
violated provisions of Iowa Code sections 502.201, 502.301,
502.401, 523B.3, 523B.12, 714.16 and 714.16A and the factual
findings of the District Court in support of the findings of
violations give grounds to find that the Respondent demonstrated
incompetence, untrustworthiness, or financial irresponsibility in
the conduct of business.   It is further reasonable to conclude
that these finding bring the Respondent within the provisions of
Iowa Code sections 522B.11(1)(h) under which his Iowa insurance
agent license is subject to suspension or revocation.       It is
further reasonable to conclude that entry of such an order would
be in the public interest.

                                    ORDER

     IT IS THEREFORE ORDERED THAT:

1.   The Iowa insurance agent license held by Edwin Pace is
revoked.

2.   Edwin Pace shall not be eligible again for licensure as an
insurance agent in the State of Iowa until his obligations
imposed by the Decision of the Iowa District Court For Warren
County entered September 4, 2002, are fully satisfied.

                 th
Entered this 8        day of September, 2004.



/s/ Martin H. Francis
MARTIN H. FRANCIS
ADMINISTRATIVE LAW JUDGE

     This Proposed Findings of Fact, Conclusions of Law, and
Order, shall become final without further proceeding within
thirty days of the date of issuance unless there is an appeal to,
or review on the motion of, the Commissioner of Insurance
pursuant to the provisions of Iowa Administrative Code section
191-3.



copy to:

Edwin Pace                                  CERTIFIED AND FIRST
Docket No: 04DOCID078
Page 8

207 S. J. Street, P.O. Box 815    CLASS MAIL
Indianola, Iowa 50125

Dennis M. Lawyer                 FIRST CLASS MAIL
Lawyer Law Firm
P.O. Box 232
Norwalk, Iowa 50211

Ilene L. R. Gilson, Enf. Att.    LOCAL MAIL
Iowa Securities Bureau
340 E. Maple Street
Des Moines, Iowa 50319-0066

James W. Thornton                LOCAL MAIL
Iowa Insurance Division
330 E. Maple Street
Des Moines, Iowa 50319

								
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