Lease/Back, Buy/Back Agreements

Lease/Back and Buy/Back Agreements Constitute Securities

By Mark J. Astarita, Esq.


The Securities and Exchange Commission (“Commission”) announced that on August 2, 2000, it filed a civil lawsuit with an application for a temporary restraining order against Phoenix Telecom, L.L.C. (“Phoenix”) and Jerold Benjamin Clawson (“Clawson”) and other emergency relief against all of the defendants.

The Commission’s complaint alleges that the defendants promoted a fraudulent scheme through the use of insurance agents and over the Internet, in which Phoenix raised more than $74 million from more than 2,000 mostly elderly investors.

The complaint asserts that the scheme is based upon purported investments in customer-owned, coin-operated telephones offered and sold in units, involving a telephone, site lease, lease/back agreement and buy/back agreement, that constitute securities.

In addition, the lease/back agreements contain a provision that, under certain circumstances, would allow Phoenix to substitute shares of common stock for the securities. No registration statement was filed with the Commission in connection with these securities.

The complaint also asserts that although Phoenix is the source of lease payments on the telephones and is the insurer of the investment, investors were not told that Phoenix was losing money, had a negative net worth, and was dependent on revenue from new investors to sustain its operations.

It further contends that a prior securities law injunction and related criminal prosecution against an officer was not disclosed and that Phoenix failed to meet its monthly lease obligations to investors for the month of July 2000.

The complaint seeks preliminary injunctions against defendants Phoenix and Clawson and permanent injunctions against all defendants to prevent future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint also seeks an accounting, disgorgement and prejudgment interest as well as civil penalties from the defendants.

SEC v. Phoenix Telecom, L.L.C., et al, Civil Action File No. 1:00-CV-1970-JTC (N.D.Ga.)

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.


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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.