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Settlement Reached in NY Pay Phone Scam

December 16, 2004
A New York firm will pay $1.65 million to victims of a pay phone pyramid scheme, under an agreement with New York Attorney General Eliot Spitzer.

Financial Network Investment Corp. (FNIC) is one of the defendants in a lawsuit that was filed by Spitzer in June 2002. The scheme also involved Goldome Capital Management (GCM) of Depew, which targeted senior citizens with the sale of pay phones for $7,000 each.

"The cooperation of this financial services firm will provide much needed relief for dozens of senior citizens - many of whom had liquidated their retirement savings," Spitzer said. "This case demonstrates the need for investors to be wary of ‘guaranteed' returns on investments that sound too good to be true, even if the sales pitch is made by an established company."

State Supreme Court Justice Joseph G. Makowski of Erie County approved a consent order whereby FNIC will pay $1.65 million to 80 investors. The settlement represents an average recovery of over $20,000 per victim.

ETS Payphones, a Georgia company that manufactured the phones and orchestrated the scheme, paid GCM and its salespeople a commission to sell the phones. These same salespeople were also registered to sell securities for FNIC, a Torrance, California-based financial services company.

Victims were told that they could buy the phones, lease them back to ETS to operate, and receive a "guaranteed" 14 percent return on their investment. Furthermore, the investors were told that they could sell the phones back to the ETS for the original purchase price at any time after six months. Typically, investors were persuaded by the brokers to liquidate conservative investments, such as retirement annuities, to fund their purchases.

A federal investigation revealed the scheme to be a Ponzi scheme in which investors' monthly checks from ETS were coming out of new investors' principal payments and not ETS' profits. The scam began in November 1998 and came to an end when ETS declared bankruptcy in September 2000.

Spitzer acknowledged that FNIC's efforts will greatly benefit the victimized investors, most of whom are senior citizens, and noted that the company itself received no monies from its brokers' unauthorized sales of the ETS phones.

FNIC had no relationship with GCM or ETS, and the payphones were not FNIC products. Moreover, FNIC had told its brokers not to sell the ETS contracts, yet Spitzer alleged in legal papers that FNIC could have halted the scam if it had adequately supervised its brokers.

In December 2001, Spitzer obtained over $5 million for over 300 other ETS victims from National Planning Corp., FNIC's successor as the company through which the brokers who sold the phones were registered. Spitzer also noted that a number of defendants have settled the charges against them by agreeing to be barred them from the securities industry and by either paying cash towards restitution or agreeing to money judgments. The lawsuit is still going forward against the remaining defendants who sold ETS phones.

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