Securities and Exchange Commission v. Edwards 1
C12 - Business Law
Case Analysis 3
Securities and Exchange Commission v. Edwards
Summarize the facts of the case
Charles Edwards ran the company ETS Payphones Inc. in multiple roles such as the Chief
Operating Officer, chair of the board and sole shareholder. ETS Payphones Inc. sold payphones to
the general public while partially acting through subsidiary, which also happens to be controlled by
Edwards. ETS offered customers a package with a total cost of US$7,000 including various
agreements such as a site lease, a five-year leaseback and management agreement and a
buyback agreement. The company promises that each purchaser will receive 14% of their annual
return monthly, which equates to $82 per month with an additional promise of a refund on the full
price of the purchase. The return is in accordance with the leaseback and management agreement.
The refund would be sent to the purchaser once the lease had ended or could also be returned up
to 180 after the initial request of the purchaser. The company made claims in their advertising
“[v]ery few business opportunities can offer the potential for ongoing revenue generation that is
available in today's pay telephone industry.”(Bagley, C. E. Managers and the Legal Environment:
Strategies for Business.) Even with their clever marketing claims and impressive refund offer, ETS
were not making the income they anticipated which put them in a difficult position, one that did not
allow them to have enough money to pay the refund they promised to the purchasers. In order to
meet this claim to purchasers, ETS had to resort to using the money received from new investors to
pay its outstanding obligations rather than having it contribute to profit. After facing such financial
problems, ETS was forced to file for bankruptcy
, Securities and Exchange Commission v. Edwards 2
in the year 2000. Following this, the Securities Exchange Commission alleged that ETS
and Edwards were in violation of selling securities among many different provisions
regarding the Acts of 1933 &1934. Edwards claims that his fixed rate of return offer should
not be considered as an investment contracts as no capital appreciation or revenue of the
company is given to purchasers nor is the return conditional upon other purchasers. All
purchasers are eligible to a return according to their contract.
Identify the parties and explain each party’s position;
The defendant, Charles Edwards, ran and operated ETS Payphones, Inc. has charges
brought against him from the plaintiff, the Securities and Exchange Commission for violations
regarding registration requirements as well as antifraud provisions under both the Securities
Act of 1933 and the Securities Exchange Act of 1934. Edwards was also found in violation of
Rule 10b-5. Edwards argues that the agreement that ETS provides to its purchasers are not
investments due to the fact that no capital appreciation or revenue of the company is given to
purchasers nor is the return conditional upon other purchasers. The purchasers are obligated
to receive a return according to the terms laid out within the agreement.
Outline the case’s procedural history including any appeals
The Securities and Exchange Commission sued Edwards, and by extension ETS, and was
followed by preliminary injunction during which the Federal District court made the decision to freeze
all of Edwards’ assets at the time. Edwards filed for an appeal and the appeal was taken up by the
11th Circuit Court of Appeals where the court established that there was inadequate jurisdictional
privilege of the Federal District Court to make this decision. The 11th Circuit Court of Appeals
contested that the Securities and Exchange Commission did not provide satisfactory enough proof
that the sale of the payphones constituted as an investment contract which lead to
C12 - Business Law
Case Analysis 3
Securities and Exchange Commission v. Edwards
Summarize the facts of the case
Charles Edwards ran the company ETS Payphones Inc. in multiple roles such as the Chief
Operating Officer, chair of the board and sole shareholder. ETS Payphones Inc. sold payphones to
the general public while partially acting through subsidiary, which also happens to be controlled by
Edwards. ETS offered customers a package with a total cost of US$7,000 including various
agreements such as a site lease, a five-year leaseback and management agreement and a
buyback agreement. The company promises that each purchaser will receive 14% of their annual
return monthly, which equates to $82 per month with an additional promise of a refund on the full
price of the purchase. The return is in accordance with the leaseback and management agreement.
The refund would be sent to the purchaser once the lease had ended or could also be returned up
to 180 after the initial request of the purchaser. The company made claims in their advertising
“[v]ery few business opportunities can offer the potential for ongoing revenue generation that is
available in today's pay telephone industry.”(Bagley, C. E. Managers and the Legal Environment:
Strategies for Business.) Even with their clever marketing claims and impressive refund offer, ETS
were not making the income they anticipated which put them in a difficult position, one that did not
allow them to have enough money to pay the refund they promised to the purchasers. In order to
meet this claim to purchasers, ETS had to resort to using the money received from new investors to
pay its outstanding obligations rather than having it contribute to profit. After facing such financial
problems, ETS was forced to file for bankruptcy
, Securities and Exchange Commission v. Edwards 2
in the year 2000. Following this, the Securities Exchange Commission alleged that ETS
and Edwards were in violation of selling securities among many different provisions
regarding the Acts of 1933 &1934. Edwards claims that his fixed rate of return offer should
not be considered as an investment contracts as no capital appreciation or revenue of the
company is given to purchasers nor is the return conditional upon other purchasers. All
purchasers are eligible to a return according to their contract.
Identify the parties and explain each party’s position;
The defendant, Charles Edwards, ran and operated ETS Payphones, Inc. has charges
brought against him from the plaintiff, the Securities and Exchange Commission for violations
regarding registration requirements as well as antifraud provisions under both the Securities
Act of 1933 and the Securities Exchange Act of 1934. Edwards was also found in violation of
Rule 10b-5. Edwards argues that the agreement that ETS provides to its purchasers are not
investments due to the fact that no capital appreciation or revenue of the company is given to
purchasers nor is the return conditional upon other purchasers. The purchasers are obligated
to receive a return according to the terms laid out within the agreement.
Outline the case’s procedural history including any appeals
The Securities and Exchange Commission sued Edwards, and by extension ETS, and was
followed by preliminary injunction during which the Federal District court made the decision to freeze
all of Edwards’ assets at the time. Edwards filed for an appeal and the appeal was taken up by the
11th Circuit Court of Appeals where the court established that there was inadequate jurisdictional
privilege of the Federal District Court to make this decision. The 11th Circuit Court of Appeals
contested that the Securities and Exchange Commission did not provide satisfactory enough proof
that the sale of the payphones constituted as an investment contract which lead to
