High Court Ruling Protects Investors

The Supreme Court ruled Tuesday that an investment promising a fixed rate of return can be a security under federal law and subject to Securities and Exchange Commission jurisdiction, handing the SEC a big victory in its efforts to protect investors.

The justices in a unanimous opinion overturned an appeals court ruling that the SEC lacked jurisdiction to sue the founder of ETS Payphones Inc. for alleged securities laws violations because an investment contract does not qualify as a “security” if investors are promised a fixed, rather than variable, return.

“This is important in that it closes down a vehicle that otherwise would have been picked up by promoters,” said Larry Soderquist, a Vanderbilt University School of Law professor and a former Wall Street attorney.

“This is the main securities law the Supreme Court is deciding this year,” he said. “We’ve all been waiting for it.”

Justice Sandra Day O’Connor said in the ruling that investments pitched at low risk -- such as those offering a guaranteed fixed return -- are particularly attractive to individuals more vulnerable to investment fraud, including the elderly and less-sophisticated investors.

The ruling was a defeat for ETS Payphones Chief Executive Charles Edwards.

The SEC filed civil charges in 2000 in Atlanta accusing Edwards of running a massive Ponzi scheme in which investors bought phones from an ETS subsidiary and then leased them back to ETS for fixed monthly payments of $82 per phone, for a return of about 14%, regardless of the phone’s profitability.

ETS allegedly took in about $300 million from more than 10,000 investors in 38 states. The company presented itself as profitable on its website and in sales literature, but the opposite was true, the SEC contended.

The company had an operating loss of more than $42 million in 1999 and more than $33 million in the first six months of 2000. It filed for bankruptcy protection in September 2000.