Securities And Exchange Commission v. Edwards

540 U.S. 389 (2004)

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Nature of the Case

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Facts

D was the chairman, chief executive officer, and sole shareholder of ETS Payphones, Inc. (ETS). ETS sold payphones to the public via independent distributors. The payphones were offered packaged with a site lease, a 5-year leaseback and management agreement, and a buyback agreement. The purchase price for the payphone packages was approximately $7,000. Purchasers received $82 per month, a 14% annual return. Purchasers were not involved in the day-to-day operation of the payphones they owned. ETS selected the site for the phone, installed the equipment, arranged for connection and long-distance service, collected coin revenues, and maintained and repaired the phones. ETS promised to refund the full purchase price of the package at the end of the lease or within 180 days of a purchaser's request. The phones did not generate enough revenue for ETS to make the payments required by the leaseback agreements, so the company depended on funds from new investors to meet its obligations. In September 2000, ETS filed for bankruptcy protection. The SEC brought this civil enforcement action the same month. It alleged violation of the registration requirements of §§5(a) and (c) of the Securities Act of 1933, 68 Stat. 684, 15 U. S. C. §§77e(a), (c), the antifraud provisions of both §17(a) of the Securities Act of 1933, 114 Stat. 2763A-452, 15 U. S. C. §77q(a), and §10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, as amended 114 Stat. 2763A-454, 15 U. S. C. §78j(b), and Rule 10b-5 thereunder, 17 CFR §240.10b-5 (2003). The District Court held the payphone sale-and-leaseback arrangement was an investment contract within the meaning of, and therefore was subject to, the federal securities laws. The Court of Appeals reversed. It held that an investment contract must offer either capital appreciation or a participation in the earnings of the enterprise, and excluded schemes that offered a fixed rate of return. It held that precedent required that the return on the investment be 'derived solely from the efforts of others' was not satisfied when the purchasers had a contractual entitlement to the return. The Supreme Court granted certiorari.