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September 10, 2002

Man Ordered to Pay for Selling Fraudulent Investments to Older Iowans

Iowa Insurance Division
Securities Bureau

Warren County Man Ordered to Pay $332,000 for Selling Fraudulent Investments to Older Iowans

DES MOINES. Judge Gary Kimes of the Fifth Judicial District Court of Iowa ruled in favor of the State in a civil court case against Edwin Pace of Indianola. The defendant, an insurance agent, was on trial for selling fraudulent investments in customer-owned, coin-operated telephones, commonly referred to as "COCOTs".

Three other defendants, Robert Christensen of Atlantic, Daniel Johnson of Marshalltown, and Bruce Parks of Burlington also were named but entered settlement agreements with the State prior to trial.

The court found that Pace's sales practices were unfair and deceptive and targeted older Iowans. Testimony proved that Mr. Pace made untrue representations and failed to disclose key facts about the income potential of COCOTs to potential investors. Edwin Pace was ordered to reimburse $302,000 to Iowa investors, disgorge commissions of over $30,000 to the State, and pay civil penalties to the State as well as the State's attorneys fees. Pace also is prohibited from selling unregistered investment products in the future.

The charges against Mr. Pace included: The offer and sale of an unregistered security; the offer and sale of a security by an unregistered agent; the offer and sale of an unregistered business opportunity; Business Opportunity Securities Fraud--Misrepresentations and Omissions; Business Opportunities Fraud--Misrepresentations, Omissions, and Misleading Conduct; Consumer Fraud Act violations; and Fraud Against the Elderly.

"The ruling by Judge Kimes is definitely a victory for Iowa's elderly population," stated Craig Goettsch, Superintendent of Securities for the Iowa Insurance Division. "Agents need to hear the underlying message of this strong ruling. Deceptive sales practices against investors of any age will not be tolerated in our state."

The civil lawsuit was filed jointly against Pace and the three others last year by the Attorney General's Consumer Protection Division and the Securities Bureau of the Iowa Insurance Division. "We were very pleased to participate in this enforcement action that focused on protecting older Iowans," said Attorney General Tom Miller. "We hope that consumers take note of this case. Knowing the agent or broker in your community is no longer enough," Miller continued. "Be wary of investment offers that offer a guaranteed return. Before you invest money in any product, do the homework necessary to make sure the transaction is legitimate."

Pace was not licensed with the State of Iowa to sell securities investments. He used his status in the community as a licensed insurance agent to solicit investments from Iowans in a fraudulent payphone scheme. For at least two years during his period of sales, he represented himself as a "senior advisor" and worked as an agent representing several marketing companies. None of the investment options were registered with the State of Iowa for sales as a business opportunity. It was proven that Mr. Pace was aware of the significant legal issues across the country, but told prospective purchasers there were no concerns with selling the products in Iowa.

Pace sold investments in payphones, through a payphone provider, for $6,000 to $7,000 per investment. The majority of his clients were age 65 years and older. Investors were promised they would receive a 14% annual return on their COCOT investment and that they would receive a return of their original investment after five years for a total return of 114% on their money. The Court determined the investment to be a "Ponzi scheme" -- a scheme in which the money of later investors is used to pay returns to earlier investors. The Court also found Mr. Pace had information available to him indicating the "unavoidable financial trouble" of ETS Payphones, Inc., one of the payphone management companies involved in the investment scheme.

The investments were touted to prospective purchasers as an income-producing opportunity. The marketing materials used by Mr. Pace for each of the marketing and payphone management companies made repeated references to the immediate and significant income or profits to be generated. The materials also mention the liquidity and safety of the investment, the "recession-proof" nature of the investment, and the potential tax benefits.

On May 31, 2000, the Securities Bureau of the Iowa Insurance Division contacted Mr. Pace in a letter advising him that the Bureau had information that he was selling unregistered COCOTs. The letter further advised Mr. Pace of the Bureau's position that the program constituted a violation of Iowa's securities laws and of Iowa's business opportunity laws. As Cease and Desist Orders were issued against COCOT providers and bankruptcy proceedings and failing companies began surfacing, it became clear that investors would not receive the payments promised in their lease agreements.

The Attorney General's Office and the Iowa Securities Bureau of the Iowa Insurance Division jointly filed the lawsuit in September of last year. The matter came for trial before the Court on July 15, 2002. Assistant Attorneys General Chantelle Smith and Benjamin Bellus represented the State. Attorney Dennis Lawyer of Indianola represented Edwin Pace.

Nationwide, securities regulators say they have investigated a growing number of fraudulent investments sold by insurance agents. Lured by the promise of high commissions and easy access to potential investors, more insurance agents are becoming involved in the sale of unregistered securities and fraudulent investments.

Before investing, consumers should call the Iowa Securities Bureau to check if an investment is properly registered or whether the salesperson is licensed or registered to sell either securities or insurance in the state. Iowans can contact the Bureau at 515-281-4441 or via the Internet at

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