STATE OF FLORIDA DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BANKING )

AND FINANCE, )

)

Petitioner, )

)

vs. ) Case No. 02-0526

) PHILIP E. MEHL, SR., and ) SUSAN E. MEHL, )

)

Respondents. )

)

RECOMMENDED ORDER

Robert E. Meale, Administrative Law Judge of the Division of Administrative Hearings, conducted the final hearing in West Palm Beach, Florida, on May 13 and 14, 2002.

APPEARANCES

For Petitioner: Douglas M. Holcomb

Assistant General Counsel Department of Banking and Finance

111 South Sapodilla Avenue, Suite 211 West Palm Beach, Florida 33401

For Respondents: Gary Brookmyer

Brookmyer, Hochman, Probst & Nadeau, P.A. 3300 PGA Boulevard, Suite 500

Palm Beach Gardens, Florida 33410

STATEMENT OF THE ISSUES

The issues are whether Respondents are guilty of selling or offering for sale securities in Florida that were not exempt under Section 517.051, Florida Statutes, were not sold in an

exempt transaction under Section 517.061, Florida Statutes, were not a federally covered security, or were not registered pursuant to Chapter 517, Florida Statutes, in violation of Section 517.07(1), Florida Statutes; or whether Respondents are guilty of acting as unregistered dealers, associated persons, or issuers and selling or offering for sale any securities from this state, in violation of Section 517.12(1), Florida Statutes. If so, an additional issue is what penalties should be imposed.

PRELIMINARY STATEMENT

By Amended Administrative Complaint, Petitioner alleges that Respondents were not registered as broker-dealers or brokers authorized to conduct securities business in Florida.

The Amended Administrative Complaint alleges that Mehl and Mehl, Inc., an inactive Florida corporation for which Respondent Philip Mehl was the president and director and Respondent Susan Mehl was the secretary, received commissions for the sale of the ETS payphone program. The Amended Administrative Complaint alleges that ETI Enterprise Telephone Industries, Inc., an active corporation for which Respondent Susan Mehl is the president, received commissions for the sale of the ETS payphone program.

The Amended Administrative Complaint alleges that M & M Financial Systems, Inc., an active corporation for which Respondent Philip Mehl is the president, received commissions

for the sale of the Eagle and MP3 programs. The Amended Administrative Complaint alleges that Respondent Philip Mehl and/or Respondent Susan Mehl ran advertisements in Stuart, Florida publications and conducted workshops. The Amended Administrative Complaint alleges that workshop attendees would later visit the Mehls' office, receive offers for sale, and purchase various investment products for which Respondents and/or Mehl & Mehl, Inc., and/or ETI, and/or M & M Financial Systems, Inc., earned commissions ranging from 7-16 percent.

Count I alleges that, from March 1997 through sometime in 2000, Respondent Philip Mehl sold investments in ETS payphones to various Florida investors for a total of $6,434,350. Count I alleges that an investor paid a specific amount to National Communications Marketing, Inc., or Communications Marketing Associates, Inc., for a payphone, which ETS leased from the investor for a fixed fee. Count I alleges that the investor had the option to require ETS to purchase the phone at the end of the lease term or upon 180 days' notice, leaving investors with little, if any, control over the investment, which ETS managed, maintained, and operated. Count I alleges 181 specific instances in which Respondent Philip Mehl sold investments in the ETS program.

Count I alleges that the ETS program was an investment contract that was not registered under Chapter 517, Florida

Statutes; that Section 517.07(1), Florida Statutes, provides that Chapter 517, Florida Statutes, prohibits any person from selling or offering to sell a security in Florida unless the security is exempt under Section 517.051, Florida Statutes, sold in an exempt transaction under Section 517.061, Florida Statutes, a federally covered security, or registered pursuant to Chapter 517, Florida Statutes; that Section 517.12(1), Florida Statutes, prohibits any dealer, associated person, or issuer of securities from selling or offering for sale any securities in or from offices in Florida, unless the person has been registered pursuant to Section 517.12(1), Florida Statutes; and that Respondent Philip Mehl has violated Sections 517.07 and 517.12, Florida Statutes.

Count II alleges that, from August 1999 through December 1999, Respondent Philip Mehl sold investments in the Eagle Cash Management Account System for Debt Recovery to various Florida investors for $2,915,855. Count II alleges that the Eagle program "was promoted" as a 36-month program that paid an investor two percent monthly after 60 days (24 percent annual percentage rate) and would return 100 percent of the deposit on the 36-month anniversary. Count II alleges 45 specific instances in which Respondent Philip Mehl sold investments in the Eagle program.

Count II alleges that the Eagle program was an investment contract that was not registered under Chapter 517, Florida Statutes; that Section 517.07(1), Florida Statutes, provides that Chapter 517, Florida Statutes, prohibits any person from selling or offering to sell a security in Florida unless the security is exempt under Section 517.051, Florida Statutes, sold in an exempt transaction under Section 517.061, Florida Statutes, a federally covered security, or registered pursuant to Chapter 517, Florida Statutes; that Section 517.12(1), Florida Statutes, prohibits any dealer, associated person, or issuer of securities from selling or offering for sale any securities in or from offices in Florida, unless the person has been registered pursuant to Section 517.12(1), Florida Statutes; and that Respondent Philip Mehl has violated Sections 517.07 and 517.12, Florida Statutes.

Count III alleges that, from January 2000 through May 2000, Respondent Philip Mehl sold investments in MP3 Entertainment.com to various Florida investors for $3,280,022. Count III alleges that the MP3 program was a nine-month promissory note program in which MP3 Entertainment.com issued a promissory note and guaranteed an 11 percent annual percentage rate. Count III alleges 52 specific instances in which Respondent Philip Mehl sold investments in the MP3 program.

Count III alleges that Section 517.021(19), Florida Statutes, defines a security to include a note; that the MP3 notes were not registered under Chapter 517, Florida Statutes, nor were they exempt from registration; that Section 517.07(1), Florida Statutes, provides that Chapter 517, Florida Statutes, prohibits any person from selling or offering to sell a security in Florida unless the security is exempt under Section 517.051, Florida Statutes, sold in an exempt transaction under Section 517.061, Florida Statutes, a federally covered security, or registered pursuant to Chapter 517, Florida Statutes; that Section 517.12(1), Florida Statutes, prohibits any dealer, associated person, or issuer of securities from selling or offering for sale any securities in or from offices in Florida, unless the person has been registered pursuant to Section 517.12(1), Florida Statutes; and that Respondent Philip Mehl has violated Sections 517.07 and 517.12, Florida Statutes.

Count IV alleges that, from 1998 through sometime in 2000, Respondent Susan Mehl sold investments in ETS payphones to various Florida investors for $11,315,450. Count IV alleges 310 specific instances in which Respondent Susan Mehl sold investments in the ETS program.

Count IV alleges that the ETS program was an investment contract that was not registered under Chapter 517, Florida Statutes; that Section 517.07(1), Florida Statutes, provides

that Chapter 517, Florida Statutes, prohibits any person from selling or offering to sell a security in Florida unless the security is exempt under Section 517.051, Florida Statutes, sold in an exempt transaction under Section 517.061, Florida Statutes, a federally covered security, or registered pursuant to Chapter 517, Florida Statutes; that Section 517.12(1), Florida Statutes, prohibits any dealer, associated person, or issuer of securities from selling or offering for sale any securities in or from offices in Florida, unless the person has been registered pursuant to Section 517.12(1), Florida Statutes; and that Respondent Susan Mehl has violated Sections 517.07 and 517.12, Florida Statutes.

Count V alleges that, from March 2000 through September 2000, Respondent Susan Mehl sold investments in the MP3 program to various Florida investors for $39,914. Count V alleges two specific instances in which Respondent Susan Mehl sold investments in the MP3 program.

Count V alleges that Section 517.021(19), Florida Statutes, defines a security to include a note; that the MP3 notes were not registered under Chapter 517, Florida Statutes, nor were they exempt from registration; that Section 517.07(1), Florida Statutes, provides Chapter 517, Florida Statutes, prohibits any person from selling or offering to sell a security in Florida unless the security is exempt under Section 517.051, Florida

Statutes, sold in an exempt transaction under Section 517.061, Florida Statutes, a federally covered security, or registered pursuant to Chapter 517, Florida Statutes; that Section 517.12(1), Florida Statutes, prohibits any dealer, associated person, or issuer of securities from selling or offering for sale any securities in or from offices in Florida, unless the person has been registered pursuant to Section 517.12(1), Florida Statutes; and that Respondent Susan Mehl has violated Sections 517.07 and 517.12, Florida Statutes.

The Amended Administrative Complaint seeks the imposition of administrative fines against each Respondent for each alleged violation and a cease and desist order against each Respondent.

By Petition Requesting Evidentiary Proceeding filed January 26, 2002, Respondents generally denied the material allegations. However, as to the Eagle program, they asserted:

Respondents would deny that they promoted this particular program in any particular fashion other than by virtue of passing onto individuals the same information that they had been provided by the program's sponsors concerning the program. Respondents allege that they passed on whatever information they had concerning the program without "promoting" the program in any other fashion. [Respondent Philip Mehl] merely acted as a conduit whereby information was provided to purchasers who then decided whether they wished to purchase the product from the sponsor of the particular program.

As to the MP3 program, Respondents asserted: "Philip Mehl acted as a conduit whereby he advised individuals as to certain products that they could purchase and these products were purchased from the sponsors of the programs and not from Philip Mehl."

In his Response to First Request for Admissions, Respondent Philip Mehl admitted that he and Mehl & Mehl, Inc., received commissions from the sale of the ETS program to Floridians; that M & M Financial Systems, Inc., received commissions from the sale of the Eagle program to Floridians; and that M & M Financial Systems, Inc., and Mr. Mehl received commissions from the sale of the MP3 program to Floridians. In her Response to First Request for Admissions, Respondent Susan Mehl admitted that Mehl & Mehl, Inc., received commissions from the sale of the Eagle program to Floridians and that M & M Financial Systems, Inc., received commissions from the sale of the MP3 program to Floridians.

In their proposed recommended order, Respondents proposed the following findings: Respondent Philip Mehl sold the ETS program 181 times between 1997 and 1999; Respondent Philip Mehl sold the Eagle program to four investors; and Respondent Philip Mehl sold the MP3 Entertainment.com program 52 times in 2000.

At the hearing, Petitioner called 17 witnesses and offered into evidence 21 exhibits: Petitioner Exhibits 1-5, 7-8, 12,

1. , 22-24, 26, and 28-31. Respondent called one witness and offered into evidence 12 exhibits: Respondent Exhibits 1-12.

   All exhibits were admitted except Petitioner Exhibits 14, 16-18, and 23, and Respondent Exhibits 3-4 and 6-12. The parties proffered all excluded exhibits.

   The court reporter filed the transcript on May 24, 2002.

   
   

   The parties filed their proposed recommended orders by June 14, 2002.

   FINDINGS OF FACT

   
   

   1. At all material times, neither Respondent Philip E. Mehl, Sr. (Mr. Mehl), nor Respondent Susan E. Mehl (Ms. Mehl) has been licensed or registered to sell securities. However, Mr. and Ms. Mehl, who are married to each other, were licensed to sell securities from 1993 through mid-1996. During this period of time, they were registered with three different brokers. Both Mr. and Ms. Mehl were registered with the same broker at the same time.

   2. The interests in, or obligations of, the products or investments that were the subject of programs sponsored by ETS Payphones, Inc. (ETS), Eagle Capital Management One U.S. Estate Group, LLC (Eagle), and MP3 Entertainment.com, Inc. (MP3) were never registered as securities pursuant to Chapter 517, Florida Statutes. All sales described below took place in Florida.

   3. The ETS payphone program evolved out of the ownership and operation of payphones by ETS, starting in 1992. Offering materials prepared by National Communications Marketing, Inc. (NCMI), offer to sell installed payphones to individuals for

      $7000. These materials provide each payphone purchaser three options: owner operation, in which the payphone owner maintains, services, and collects coins from the payphone; "turn-key maintenance," in which the payphone owner pays a monthly fee for a payphone management company to maintain, service, and collect coins from the payphone; and a lease, in which the payphone owner leases the payphone to a management company that will pay monthly rent of $82 for a five-year term-- at the end of which the payphone owner may assume the maintenance and operation responsibilities, attempt to renegotiate the lease, or sell the payphone for the original purchase price to the management company. The materials provide that self-directed individual retirement accounts, Keogh plans, simplified employee pension plans, and Section 401K plans may purchase payphones, but only under the third option, in which they lease them to a management company.

   4. Mr. Mehl learned of ETS and NCMI in 1996 through Michael Bugelman, who visited Mr. Mehl's office and explained the ETS payphone program. Mr. Bugelman described his business relationship with NCMI, which was one of four ETS affiliates

      formed by ETS or its chief executive officer, Charles B. Edwards. Mr. Mehl later met Mr. Edwards. From these men, Mr. Mehl learned that NCMI sold the payphones, ETS leased them from the purchasers, and Mr. Mehl could earn commissions if he procured purchasers of ETS payphones.

   5. Before agreeing to market ETS payphones, Mr. Mehl contacted numerous persons who had purchased payphones and determined that they were satisfied with the operation of the program. Mr. Mehl also visited the main plant in Georgia where over 200 persons were working in shipping and maintaining payphones. Eventually, Mr. Mehl decided to participate in the marketing of ETS payphones, and his first sales took place in mid-1997.

   6. By Sales Representative Agreement dated January 1, 1998, between NCMI and Mr. Mehl or Mehl & Mehl, Inc. (the agreement identifies the sales representative as Mr. Mehl once and Mehl & Mehl, Inc., once), NCMI appointed Mr. Mehl or Mehl & Mehl, Inc., as its sales representative for customer-owned payphones. Among the sales representative's responsibilities was to "[d]evelop and implement a marketing program and plan for maximum sales . . .." In return, NCMI would pay a 10 percent commission with a bonus of a free payphone for sales of at least

      15 payphones in a single month. An undated addendum, signed only by Mr. Mehl, raises the commission to 12 percent. Another

      undated addendum, again signed only by Mr. Mehl, changes the commission to 10-16 percent, based on sales volume.

   7. Contemporaneous with the developments, Mr. Mehl was aware of a complaint from a purchaser concerning the sale of four payphones by David R. Fuller. A March 30, 1999, memorandum prepared by Marsha A. Perkins, financial investigator, criminal enforcement, West Central Florida Regional Office, Department of Banking and Finance, states that "[initial review of the offer [including the "offering material"] revealed that [the purchaser] purchased a leasing agreement from ETS Payphones to lease pay phones, which was not within the scope of F.S. 517." The memorandum notes that ETS refunded the purchaser her entire purchase price and that Mr. Fuller may have violated the Florida Deceptive and Unfair Trade Practices Act by representing an annual yield of 15 percent.

   8. At some point, Mr. Mehl formed the opinion that

      
      

      Mr. Bugelman was unreliable and decided that he wanted to sever their business relationship. Mr. Bugelman maintained a commission override on all of Mr. Mehl's commissions, so Mr. and Ms. Mehl formed ETI Enterprise Telephone Industries, Inc. (ETI). Although Mr. Mehl remained responsible for selling the payphone program, the addition of Ms. Mehl as a sales agent enabled them to eliminate Mr. Bugelman's commission override. From this

      point, NCMI and/or ETS paid ETI all commissions due on the sale of ETS payphones.

   9. Notwithstanding the assertions contained in his proposed recommended order, Mr. Mehl contends, as he stated in his answers to interrogatories, "I acted more in the nature of a broker. The purchase of payphones was from an unrelated third- party." (Ms. Mehl makes the same contention in her answers to interrogatories.)

   10. The Eagle program consists of the sale of membership units in the U.S. Estate Group, LLC. As explained in the Operating Agreement, the business of the limited liability company is "limited to the purchase and collection of defaulted consumer debt that lending institutions have written off, and such other activities as are incidental to [this b]usiness

       . . .."

       
       

   11. The Eagle Operating Agreement provides: "all profits and losses of [Eagle] and all income, deductions and credits shall be allocated to the Members in the percentages as set forth in Exhibit 'A.'" The Operating Agreement states that the Manager is to conduct the business of the company, unless removed by a 60 percent vote of the Members or unless a majority of Members vote to override a business decision of the Manager.

   12. The Eagle Operating Agreement provides that the company will pay each Member a monthly sum equal to two percent

       of the Member's investment until the Member receives an amount equal to his or her original investment. The Operating Agreement conditions these payments upon the presence of sufficient operating net cash flow. The Operating Agreement provides that 34 months after the commencement of the two- percent monthly payments, a Member may elect to require the company to repurchase the Member's original investment for the original price.1

   13. Mr. Mehl contends, as he stated in his response to interrogatories, that he "merely conveyed onto individuals the information [about the Eagle program] that was provided to me by the Eagle Program managers. . . . I contest that I was the 'seller' with regard to this alleged investment. I acted as

       . . . 'broker' in the transaction. I conveyed certain information to interested individuals and they made the decision whether or not they wished to purchase the investment from the Eagle Program itself." (Ms. Mehl makes the same contention in her answers to interrogatories.)

   14. The MP3 program consists of the sale of nine-month promissory notes issued by MP3 with an eleven-percent annual return. On certain conditions, including the payment of $4 per share over a specified period of time, the note is convertible to equity. The MP3 offering material adds that these "obligations are fully guaranteed by United Assurance Company

       Ltd. [w]ith $41 million in assets listed in the A.M. Best International Directory of Insurance Companies." On a candid note, the offering material notes:

       The company is a public company, listed on the NASD Bulletin Board . . ., formed in 1983, with a $2,000,000 tax loss carry forward, and no assets or liabilities from its former publishing business. Company is receiving $5,000,000 in assets from its new major shareholder. . . .

       
       

   15. Mr. Mehl holds licenses to sell health, life, annuities, and insurance contracts. He is a certified senior advisor and a certified estate planner. At all material times, he maintained an office in Stuart, Florida, staffed with nine support employees and adjoining a law office, whose attorneys were available to Mr. Mehl's clients.

   16. Publishing flyers in the local newspaper, Mr. Mehl solicited interested persons to attend monthly workshops or seminars that he would sponsor in the Stuart area. Persons obtained by Mr. Mehl would present investment options at the workshops or seminars. Two or three times, Mr. Edwards was the featured speaker. Although other speakers did not highlight any of the three programs that are the subject of this case, they discussed many investment topics. At some point, attendees would have an opportunity to sign up to meet Mr. Mehl at his office to discuss investment possibilities.

   17. Ten persons testified that they invested money based on Mr. Mehl's advice in one of the three subject programs.

   18. Sterling Tyndall has been retired for six years.

       
       

       Formerly an electrician, he had little investment experience, mostly in some mutual funds and major stocks like Intel and Oracle. A friend, Richard Granger, who had done business with Mr. Mehl, recommended that Mr. Tyndall discuss with Mr. Mehl investment options. Although he met Ms. Mehl inconsequentially while in the office, Mr. Tyndall's contact was with Mr. Mehl.

       When Mr. Tyndall asked for an investment that would provide him a good return, Mr. Mehl recommended ETS payphones. Mr. Mehl assured Mr. Tyndall that the principal would be guaranteed for five years and he would receive 14 percent annually on his investment. Mr. Mehl explained the three management options for the payphones, and Mr. Tyndall chose the lease option.

   19. Mr. Tyndall invested $28,000 in ETS payphones three years ago. Mr. Mehl was the sales agent on the sale. After receiving several monthly payments, he stopped receiving any money. His sole chance of recovering any more of his investment lies with the trustee in bankruptcy.

   20. Mr. Tyndall also invested $99,000 in the Eagle membership units, apparently in a single transaction. Acting as the sales agent in this transaction, Mr. Mehl assured

       Mr. Tyndall that the investment was risk-free, and Mr. Tyndall

       would receive a guaranteed annual return of 24 percent. After receiving two payments, Mr. Tyndall received notification from the Commonwealth of Pennsylvania that it had attached the accounts and hoped to be able to return two-thirds of his original investment.

   21. Mr. Granger has been retired 16 years after a career with General Motors as Senior Buyer in charge of the Fisher Body Division. Mr. Granger has no investment experience and learned of Mr. Mehl through a flyer in the Stuart News. During the seminar that he attended, Mr. Granger made an appointment to meet Mr. Mehl at his office. During that meeting, Mr. Mehl sold him three annuity contracts. About one year later, Mr. Granger visited Mr. Mehl again; the annuities that had originally paid eight percent annually were now paying only 4.25 percent annually. Mr. Mehl suggested that Mr. Granger cash in his annuities and invest in a higher-returning investment--ETS payphones.

   22. Mr. Granger originally bought two or three ETS payphones. Later, he purchased ten more ETS payphones. His total investment was $84,000. Mr. Mehl was the sales agent. Although Ms. Mehl and Mr. Granger became friends, she did not participate in the sales. Mr. Granger received payments for about six months, but has received no more income or return of principal on this investment.

   23. Mr. Granger also invested in MP3 notes, on Mr. Mehl's recommendation. Mr. Mehl told Mr. Granger that this was an "insured" investment, and he would earn 11 percent over nine months, if he accepted a single payment at the end of the term, or 10 percent over nine months, if he preferred monthly payments. Mr. Granger invested $60,000 with Mr. Mehl as the sales agent. Mr. Granger has lost his entire investment in MP3.

   24. Robert A. Cook is a freelance contractor engaged in structural and architectural design work. He has no investment experience. When looking for insurance, Mr. Mehl was recommended to Mr. Cook. At some point, Mr. Cook learned that Mr. Mehl was also a financial advisor. In a discussion,

       Mr. Mehl recommended that Mr. Cook diversify his investments to include ETS payphones. Assuring Mr. Cook that the ETS payphone investment was secure, Mr. Mehl said that it was a five-year guaranteed contract at a certain interest rate. Mr. Mehl praised the investment highly. Mr. Cook understood that, if something happened to "his" payphone, ETS would assign him another, and he could deduct his expenses in visiting "his" payphone.

   25. Mr. Cook invested over $120,000 in ETS payphones.

       
       

       Mr. Mehl served as the sales agent. He was not told of the three management options or that a separate company would lease the phones. At some point, Mr. Cook met Mr. Edwards at a

       seminar and was impressed with Mr. Edwards down-to-earth quality. Mr. Edwards even mentioned how they had returned the money of one purchaser who had suffered some financial problems. When Mr. Cook first encountered interrupted payments, he trusted Mr. Mehl's assurances that Mr. Cook would get his payments.

       Mr. Cook lost nearly all of his investment.

       
       

   26. Naomi Schounard is a retired teacher without much investment experience. She first met Mr. Mehl when he served as her Sunday school teacher. Three years prior to her ETS investment, Ms. Schounard visited Mr. Mehl at his office and received good advice on stocks.

   27. When Ms. Schounard heard about the ETS payphones, she asked Mr. Mehl if they were not securities. He responded that problems with the state concerning the ETS program had been taken care of. He told her that the ETS payphones carried only a "little bit" of risk and that she would get her money back in five years. Ms. Schounard kept wondering about the impact of cell phones and why all the payphones she saw were rundown. Mr. Mehl replied that one-third of all persons did not have a phone. He assured her that Mr. Edwards was a good friend and a "fine Christian gentleman," on whom she could depend. Mr. Mehl added, "I wouldn't think of offering to sell something to those wonderful people at the church that I knew wasn't a good investment."

   28. Eventually, Ms. Schounard invested $38,000 in ETS payphones with Mr. Mehl as the sales agent. No one told her about the three management options. She lost her entire investment except for six monthly checks that she received from January through June 2000. As late as July 2000, Mr. Mehl tried to sell Ms. Schounard more ETS payphones.

   29. Ms. Schounard also invested in MP3 notes. Commenting on how hesitant she had been in making the ETS investment,

       Mr. Mehl told Ms. Schounard that he had another investment that is guaranteed by an offshore insurance company also licensed in California. Mr. Mehl asked her if she had anything to cash in to buy these notes. Ms. Schounard replied that she had a single premium life insurance policy. Mr. Mehl told her that that was a bad investment, so she cashed in two of three or four policies. She and her husband invested a total of $116,350, including $25,000 from the cashed-in life policies and the rest from their individual retirement accounts. Mr. Mehl was the sales agent on this investment, and Mr. and Ms. Schounard lost every penny of the money they spent on MP3 notes.

   30. Ms. Mehl did not participate in Ms. Schounard's transactions. However, Ms. Schounard heard Ms. Mehl assure an elderly woman in the office lobby about her ETS payphone investment, "Don't worry. Everything will be great. Wait until you get your first check."

   31. Mary Louise Smick is a retired customer service representative for a utility company. She has no investment experience. Ms. Smick first met Mr. Mehl in late 1998 through her income-tax preparer, who had advised Ms. Smick that she was paying too much income tax. When she met Mr. Mehl, he told her that he had researched ETS for two years before presenting it to clients.

   32. Ms. Smick invested $110,600 in ETS payphones with Mr. Mehl as the sales agent through purchases of $7000 in May 1999, $77,000 in August 1999, and $26,600 in March 2000.

       Mr. Mehl assured her that the investment had no risk and was liquid. No one told Ms. Smick about the management options. She lost her total investment except for payments of $11,414. Ms. Mehl did not take part in any transaction with Ms. Smick.

   33. Ms. Smick also invested $86,000 in Eagle and MP3. Her Eagle investment appears to have been a single transaction. Again, Mr. Mehl assured her that he had researched Eagle for two years and she could not lose money in Eagle membership interests. Mr. Mehl told Ms. Smick that the MP3 notes were ideal for her desire for short term return on $20,000 that she wanted to invest; he guaranteed her that she would have her money back plus interest in nine months. Ms. Smick lost her entire investment. She has since been forced to sell her apartment.

   34. Arthur Hayes is retired from Allstate Insurance Company and has no previous investment experience, except for rolling over a profit-sharing account and retirement pay into an AG Edwards account. Mr. Hayes first met Mr. Mehl two years ago after seeing an advertisement for a trust for $365. Mr. Hayes visited Mr. Mehl's son, Shawn, who suggested that Mr. Hayes speak with Mr. Mehl.

   35. When he visited Mr. Mehl, Mr. Hayes learned from Mr. Mehl that ETS payphones were paying 14 percent annually. Mr. Mehl told Mr. Hayes that Mr. Mehl had $500,000 in ETS payphones, and the investment was very safe and secure.

       Mr. Hayes knew that one of his neighbors had been collecting for 12-18 months on an ETS payphone purchase through Mr. Mehl. With Mr. Mehl as the sales agent, Mr. Hayes invested $280,000 in ETS payphones in early June 2000. Mr. Hayes had no dealings with Ms. Mehl. No one discussed the three management options.

       Mr. Hayes lost his entire investment.

       
       

   36. At Mr. Mehl's suggestion, Mr. Hayes purchased $328,000 in MP3 notes. Mr. Mehl assured him that the notes were bonded and he would receive nine percent, if he wanted monthly payments, or 10 percent, if he would accept a single payment at the end of a year. Mr. Mehl did not reveal that the surety, if any, was offshore. Mr. Haynes lost his entire investment, as to which Mr. Mehl was the sales agent.

   37. George Kitchen is a retired ophthalmic lens designer.

       
       

       His investment experience is limited to mutual funds, such as those offered by Fidelity Investment. Mr. Kitchen first met Mr. Mehl in 1998 when Mr. Kitchen attended a seminar for which he had seen an advertisement in the newspaper. The subject of the seminar was investing and trusts.

   38. Mr. Mehl later recommended to Mr. Kitchen the ETS payphones. Mr. Mehl assured him that the investment was liquid, risk-free, and interest-bearing. With Mr. Mehl as the sales agent, Mr. Kitchen and his wife invested a total of $233,000. Although he recalls that Ms. Mehl had him sign some papers,

       Mr. Kitchen cannot recall whether the papers were connected to the ETS purchase. Mr. Mehl explained the three management options. Mr. Kitchen and his wife lost their entire investment.

   39. In what appears to have been a single transaction, Mr. Kitchen also invested in Eagle through Mr. Mehl as the sales agent. Mr. Mehl described the investment as an opportunity to earn 24 percent interest annually. Mr. Kitchen invested

       $100,000 in Eagle membership interests, but hopes to receive 86 percent of this investment back through the efforts of Pennsylvania officials. With Mr. Mehl as the sales agent,

       Mr. Kitchen also invested $30,000 in MP3 notes. Mr. Mehl told Mr. Kitchen that these notes would pay nine percent annually and were ironclad because they were insured.

   40. Lengi Dominissini is a retired plasterer without investment experience. He first met Mr. Mehl at a seminar to protect money from a nursing home. During the seminar,

       Mr. Dominissini made an appointment to meet Mr. Mehl at his office. Mr. Mehl and Ms. Mehl described the ETS payphone program to Mr. Dominissini during several office visits.

       Mr. Mehl assured Mr. Dominissini that the investment was "rock solid." On the last visit, when Mr. Dominissini purchased

       $56,000 of ETS payphones, his wife walked out of the office in disgust. To make the purchase, Mr. Dominissini paid a $17,000 penalty on an early withdrawal, based on Mr. Mehl's advice that his five percent annual return was insufficient. With Mr. Mehl as the sales agent, Mr. Dominissini received three monthly checks before losing the remainder of his investment.

   41. Mr. Mehl also served as the sales agent when Mr. Dominissini purchased $86,000 in MP3 notes. Mr. Mehl assured Mr. Dominissini that this investment was safe. Mr. Dominissini lost his entire investment in MP3 notes.

   42. Martha Fritz is a housewife with no investment experience. She first met Mr. Mehl in 1997 when she saw one of his advertisements as a financial advisor. She attended one of Mr. Mehl's financial seminars. She later went to his office for financial advice and to obtain a living trust. As the sales agent, Mr. Mehl sold Ms. Fritz $72,000 in ETS payphones. She

       based her investment decision on her trust of Mr. Mehl and his assurance that he had invested in the ETS payphones for a couple of years. Mr. Mehl mentioned the three management options.

       Ms. Fritz lost her entire investment.

       
       

   43. Raymond Joseph Sweeney is a retired manager of New York Telephone, who had invested previously only in his company's stock. Mr. Sweeney met Mr. Mehl two and one-half years ago through word-of-mouth. He sought Mr. Mehl's advice for the investment of retirement funds at a return that would better current returns in the stock market. Mr. Mehl suggested ETS payphones, assuring Mr. Sweeney that he would receive 14 percent annually, risk-free, and ETS would collect the coins from his payphones. With Mr. Mehl as the sales agent,

       Mr. Sweeney invested $114,000 and lost all of it except for

       
       

       $41,000.

       
       

   44. Again with Mr. Mehl as the sales agent, Mr. Sweeney and his wife, each using his or her individual retirement account and both using a joint account, purchased $103,203.38 in Eagle membership interests. Mr. Mehl told Mr. Sweeney that he could get 24-25 percent annual interest. Instead, Mr. and Ms. Sweeney lost their entire investment in these three Eagle transactions.

   45. An employee of Petitioner posing as a potential investor spoke with Ms. Mehl about ETS payphones. She told him

       that the ETS payphone purchases could be determined to be securities, but they were not. She said that ideal locations would be in places like the South Bronx, where residents could not afford home telephones. She told the employee that he needed to make an appointment for a one to one and one-half hour presentation on the ETS program, and she mailed him ETS payphone offering materials.

   46. Mr. Mehl's 181 sales of ETS payphones constituted 181 sales of unregistered securities and 181 sales of securities by an unregistered associated person or dealer.

   47. The ETS payphone sales by NCMI with simultaneous leases from the purchasers to ETS constitute investment contracts because the payphone purchasers are investing money in a common enterprise induced by the expectation of profit solely from the efforts of other persons.

   48. As for the common enterprise, the ETS payphone program bears all the indicia of a Ponzi scheme, in which early investors are paid not with earned income, but with the investments made by later investors, often acting in reliance upon the positive returns experienced by the early investors.

       By definition, such a scheme requires the pooling of investors' funds, despite any contrary indications in the offering materials.

   49. Even if not a Ponzi scheme, the ETS payphone program constitutes a common enterprise because the economic return of the investors in based on the managerial efforts of the promoters. Each payphone purchaser chose the lease option from among the three management options or one of the Respondents chose the lease option for the payphone purchaser. Regardless of the documentation, when the ETS payphone program went down, all purchasers went down at the same time.

   50. Nor does the ETS payphone lease leave purchasers with significant control over "their" payphones. The lease provides that ETS has the "right and sole authority" to move payphones to a new location if the original location proves unprofitable or subject to vandalism. The lease adds that the payphones remain under the "sole and absolute control" of ETS with the lessor having only a right to inspect the payphones.

   51. The present record does not support the characterization of the sale-and-lease transactions as a financing arrangement. No evidence suggests that ETS relied on the investments of ETS payphone purchasers in order to conduct normal business. Instead, the record, including the offering materials, is replete with evidence that the motivating force for these purchases was the payphone purchasers' search for superior, safe returns on their investments. The record amply demonstrates that the role of ETS was to provide managerial

       expertise to assist the purchasers in realizing their investment objectives, and the role of the purchasers was not to provide financing for ETS to expand its payphone business. Thus, the sale-and-lease transaction was an investment contract, not a financing arrangement.

   52. Mr. Mehl's six sales of Eagle membership interests constituted six sales of unregistered securities and six sales of securities by an unregistered associated person.

   53. The Eagle membership interests constitute investment contracts because the purchasers are investing money in a common enterprise induced by the expectation of profit solely from the efforts of other persons.

   54. Unlike the situation with the ETS payphone purchases, in which the focus is on the common enterprise, the focus in the Eagle membership interests is on whether the purchasers are relying solely on the efforts of other persons.

   55. In the Eagle operating agreement, the Manager exerts the efforts, in buying accounts receivable, on which the Members rely for their profits. Although it is true that Members may override decisions of the Manager and replace the Manager, these rights are illusory as a practical matter. The purchasers in this case, for instance, had no clear idea what they were buying. They sensed vaguely (and incorrectly) that they held some form of debt, not equity. The Eagle purchasers had no idea

       that the form of their purchase was not a promissory note, but a membership interest in a form of entity that did not even exist in Florida 25 years ago. It follows that the Eagle purchasers had no idea that they had any rights in the management of Eagle and no idea how to exercise such rights.

   56. In sum, the Eagle purchasers had no effective rights in the management of Eagle, but relied completely on the Manager to provide a return on their investment, and, when he failed to do so, the Eagle purchasers in this case had no idea what to do but to wait for Pennsylvania to try to return a portion of their investments.

   57. Mr. Mehl's 52 sales of MP3 notes constituted 52 sales of unregistered securities and 52 sales of securities by an unregistered associated person.

   58. The MP3 notes constitute a security because they are option contracts that are convertible to equity at a fixed price within a specified period of time. The notes also constitute a security because they are investment contracts.

   59. Ms. Mehl participated substantially in the sale of ETS payphones to an unnamed elderly woman and Mr. Dominissini and participated substantially in the offer to sell ETS payphones to one of Petitioner's employees. These sales and offer to sell constitute three sales or offers to sell an unregistered

       security and three sales or offers to sell a security by an unregistered associated person.

   60. Additionally, Petitioner proved that Ms. Mehl was the sales agent on 285 purchases involving ETS payphones. Petitioner established this sales activity by the 285 COCOT [Coin-Operated, Customer-Owned Telephones] Purchase Agreements

       signed by Ms. Mehl (Petitioner Exhibit 12) and other evidence in the record.

       CONCLUSIONS OF LAW

       
       

   61. The Division of Administrative Hearings has jurisdiction over the subject matter. Section 120.57(1), Florida Statutes. (All references to Sections are to Florida Statutes.)

   62. This case involves numerous instances of persons selling unregistered securities and unregistered dealers or associated persons selling securities.

   63. Addressing the person selling unregistered securities, Section 517.07(1) provides:

       It is unlawful and a violation of this chapter for any person to sell or offer to sell a security within this state unless the security is exempt under s. 517.051, is sold in a transaction exempt under s. 517.061, is a federal covered security, or is registered pursuant to this chapter.

       
       

   64. Addressing a dealer or associated person selling securities, Section 517.12(1) provides:

       No dealer, associated person, or issuer of securities shall sell or offer for sale any securities in or from offices in this state, or sell securities to persons in this state from offices outside this state, by mail or otherwise, unless the person has been registered with the department pursuant to the provisions of this section. The department shall not register any person as an associated person of a dealer unless the dealer with which the applicant seeks registration is lawfully registered with the department pursuant to this chapter.

       
       

   65. For "each violation" of Chapter 517, Florida Statutes, Section 517.221(3) provides that Petitioner may impose a $5000 administrative fine. Section 517.221(1) also authorizes Petitioner to issue a cease and desist order.

   66. To impose administrative fines, even against unlicensed or unregistered persons, Petitioner must prove the material allegations by clear and convincing evidence. Department of Banking and Finance v. Osborne Stern and Company, Inc., 670 So. 2d 932 (Fla. 1996). However, Section 517.171 imposes the burden of proof upon Respondents, if they are claiming the benefit of an exemption from registration. The evidence in this case fails to establish the availability of any registration exemptions for Respondents, as dealers or associated persons; the investments that are determined below to be securities; or the transactions by which the purchasers acquired the investments.

   67. Another issue common to Section 517.07(1) and Section 517.12(1) is that neither statute requires "scienter," or the guilty knowledge associated with securities fraud cases. State v. Houghtaling, 181 So. 2d 636 (Fla. 1966). This means that the state of mind of Respondents is irrelevant for purposes of determining whether they sold unregistered securities, in violation of Section 517.07(1), or whether they failed to register as dealers or associated persons prior to selling securities, in violation of Section 517.12(1).

   68. The last issue common to Section 517.07(1) and Section 517.12(1) is the meaning of "security." Section 517.021(19) defines "security" as:

       "Security" includes any of the following:

       
       

       1. A note.

       2. A stock.

       3. A treasury stock.

       4. A bond.

       5. A debenture.

       6. An evidence of indebtedness.

       7. A certificate of deposit.

       8. A certificate of deposit for a security.

       9. A certificate of interest or participation.

       10. A whiskey warehouse receipt or other commodity warehouse receipt.

       11. A certificate of interest in a profit- sharing agreement or the right to participate therein.

       12. A certificate of interest in an oil, gas, petroleum, mineral, or mining title or lease or the right to participate therein.

       13. A collateral trust certificate.

       14. A reorganization certificate.

       15. A preorganization subscription.

       16. Any transferable share.

       17. An investment contract.

       18. A beneficial interest in title to property, profits, or earnings.

       19. An interest in or under a profit-sharing or participation agreement or scheme.

       20. Any option contract which entitles the holder to purchase or sell a given amount of the underlying security at a fixed price within a specified period of time.

       21. Any other instrument commonly known as a security, including an interim or temporary bond, debenture, note, or certificate.

       22. Any receipt for a security, or for subscription to a security, or any right to subscribe to or purchase any security.

           
           

   69. A major part of the case concerns whether the sale of ETS payphones by NCMI and simultaneous leases from the purchasers to ETS constitutes a sale of securities. Petitioner's financial investigator opined in March 1999 that,

       based on "initial review," the ETS payphone transactions did not constitute securities, and she was not alone in reaching this conclusion. As already noted, however, Respondents' state of mind is irrelevant to liability, and Ms. Perkins tentative opinion is of less importance as legal authority than it is as, based on the conclusions set forth below, a missed early opportunity to stop ETS payphone sales in Florida.

   70. The question is whether the ETS payphone transactions constitute "investment contracts," under Section 517.021(19)(q). The landmark case defining "investment contracts" is Securities

       and Exchange Commission v. W.J. Howey Co., 328 U.S. 293,

       66 S. Ct. 1100, 90 L. Ed. 1244 (1946). Under Howey, an

       
       

       investment contract constitutes any contract, transaction, or scheme in which a person: 1) invests money; 2) in a common enterprise; and 3) expects profiting solely from the efforts of other persons. Thirty years later, in United Housing Foundation, Inc., v. Forman, 421 U.S. 837, 95 S. Ct. 2051,

       44 L. Ed.2d 2621 (1975), the Supreme Court eased the third requirement by restating it as expecting profits "from the entrepreneurial or managerial efforts of others." 421 U.S. at 852, 95 S. Ct. at 2060.

   71. This case focuses on the second and third prongs of the Howey and Forman definition of an investment contract. Obviously, the purchasers in this case satisfy the first prong because they invested money.

   72. The "common enterprise" prong has spawned different schools of thought among many lower federal courts and the state courts. These courts have considered "horizontal commonality," which is the stricter test and requires a pooling of all the investors' funds so that they are treated alike, and "vertical commonality," which is the more liberal test and requires only that the investors' economic return be based on the essential managerial efforts of other persons. In Farag v. National

       Databank Subscriptions, Inc., 448 So. 2d 1098 (Fla. 2d DCA 1984), the court rejected a defense based on horizontal

       commonality and seemed to adopt an approach consistent with vertical commonality, at least where the promoter obtains a "number of investors." As long as more than one or two investors are involved, Florida courts have not distinguished from investment contracts those programs in which promoters segregate each investor's funds.

   73. The ETS payphone program clearly satisfies the vertical commonality test. However ETS and NCMI may have appeared to have structured the ETS payphone program in terms of the maintenance of each investor's funds, the Ponzi feature of early investors being paid with the funds of later investors betrays the true arrangement, which satisfies the horizontal commonality test.

   74. The "expectation of profits from the entrepreneurial or managerial efforts of other persons" is also of importance in the ETS payphone program because of the form of the transactions, which involve the sale of payphones to inexperienced and unknowledgeable purchasers and the lease back of the payphones to an affiliate of the seller.

   75. In Albanese v. Florida National Bank of Orlando, 823 F.2d 408 (11th Cir. 1987)(per curiam), the promoter offered to sell ice machines without management contracts or leasebacks. As in this case, the purchasers, who were inexperienced in the ice-machine business, chose to rely on the promoter to install

       the machines, service them, and collect the money from them. As in this case, the purchasers, even if electing management contracts or leases, had rights to oversee the management of their machines. The court noted that the lease option left the purchasers with "no significant degree of control," as is true with the payphone purchasers who have leased "their" payphones to ETS. Ultimately, even if the promoter's agreements had left the investors with significant control over the ice machines, the court noted that such control was "illusory" because the investors were inexperienced in the ice-machine business and there were no competitors offering the full range of services offered by the promoter. The court thus concluded that the investors had satisfied the third prong of the investment- contract test in Howey and Forman.

   76. This case presents a similar investment program to that covered in the Albanese case. Even for those payphone purchasers offered the three management options, the only realistic one was the lease option, as reflected by the fact that no purchaser selected either of the other two options. In fact, each payphone purchaser relied exclusively on ETS to make his or her payphone profitable.

   77. The same conclusions as to the second and third prongs of the investment-contract test under Howey and Forman was reached in Securities and Exchange Commission v. ETS Payphones,

       Inc., 123 F. Supp. 2d 1349 (N.D. Ga. 2000). In this case, the Securities and Exchange Commission obtained a preliminary injunction and asset freeze against ETS and Mr. Edwards. The case involved sales by ETS and leases back to ETS, but was otherwise the program described in this case. Noting that ETS always lost money on its payphone operations, including $32 million from November 1998 to March 1999 and $33 million in the first six months of 2000, the court found that ETS had to attract an ever-expanding number of new investors to meet its obligations to existing investors--all the while, paying

       Mr. Edwards and his unnamed affiliated company large sums of money and lending additional, even larger sums of money to companies controlled by Mr. Edwards. The court noted that ETS filed for bankruptcy on September 11, 2000.

   78. Applying the common enterprise test, the ETS court, expressing dissatisfaction with the notions of "vertical commonality" and "horizontal commonality," reasoned that the remedial, anti-fraud purposes of the securities laws militate in favor of a "broader definition" of commonality that includes even individual investors who rely on the promoter's expertise. In any event, the court concluded that the ETS payphone purchases satisfied the common enterprise test.

   79. Relying on Albanese, the ETS court also concluded that the ETS payphone purchasers satisfied the test of reliance upon

       the managerial efforts of other persons, even if the requirement were that the profits were to be derived "solely" from the third party's efforts. In so concluding, the court noted the "insubstantial" and "illusory" control that the payphone purchasers maintained over the payphones.

   80. Having proved that the ETS payphone program involved the sale of securities, Petitioner must prove that Respondents sold or offered to sell ETS payphones. Section 517.021(14) defines "sell or offer to sell" as "any attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, or an investment or interest in an investment, for value."

   81. Respondents' claims that they were brokers on ETS payphones confirm, rather than rebut, the evidence that they sold the ETS payphones. As Mr. Mehl admits, he sold ETS payphones 181 times. Aided by Ms. Mehl's admission that she served as a broker on ETS payphone sales, the record establishes that Ms. Mehl participated meaningfully in the sale of ETS payphones two times (when she reassured the elderly woman about her investment and in Mr. Dominissini's purchase), offered to sell ETS payphones one time to Petitioner's employee, and sold ETS payphones 285 other times.

   82. The next question is whether the Eagle membership interests are securities. This issue does not raise a serious

       question concerning the first two prongs of the investment- contract test under Howey and Forman: clearly the Eagle membership purchasers invested money, and, according to the Operating Agreement, all investors' funds were pooled, as they were all treated the same when it came to the allocation of funds.

   83. The closer issue is whether the Eagle membership purchasers relied solely or even essentially on the efforts of the Manager. The Operating Agreement provides the Members with substantial rights to override the decisions of the Manager and even replace him. However, in Williamson v. Tucker, 645 F.2d

       404 (5th Cir. 1981), the court held that an interest in a general partnership, in which, by definition, all partners have significant management rights, can be a security, if the investors are so inexperienced and unknowledgeable in business affairs as to be incapable of exercising their partnership powers. Similarly, the courts in Albanese and Securities and Exchange Commission v. Friendly Power Co. LLC, 49 F. Supp.2d 1363 (S.D. Fl. 1999), examined the investor agreements, but also examined the actual operation of the investment schemes, as when the Albanese court found the ice-machine owner's control "insubstantial" and "illusory."

   84. In this case, the Eagle membership purchasers are a retired electrician with little investment experience who lost

       nearly $99,000, a retired utility customer service representative with no investment experience who lost so much that she had to sell her apartment, a retired ophthalmic lens designer with limited investment experience who lost $100,000, and a retired manager with New York Telephone with little investment experience who, with his wife, lost a little over

       $100,000. The record establishes that these purchasers did not know what they were buying, did not know what rights they had as members of a limited liability company, and would not have known how to exercise these rights, if they had known of them.

   85. Petitioner proved that Mr. Mehl sold the Eagle memberships on six occasions, including three separate transactions involving Mr. Sweeney and his wife. Notwithstanding Ms. Mehl's admission that she served as a broker on Eagle transactions, the record does not identify or otherwise establish these transactions.

   86. The next question is whether the MP3 notes are securities. They are securities under Section 517.021(19)(t) and (v) because they are option contracts setting fixed prices for equity conversion over a specified period of time. In Bookhardt v. State, 710 So. 2d 700 (Fla. 5th DCA 1998), the court held that unsecured promissory notes were securities. Under the above analysis, these notes would also constitute investment contracts.

   87. Petitioner proved that Mr. Mehl sold MP3 notes on 52 occasions. Petitioner failed to prove that Ms. Mehl sold any MP3 notes.

   88. Under Section 517.12(1), Petitioner must prove that Respondents, as dealers, associated persons, or issuers, sold or offered to sell securities in Florida. The preceding analysis establishes the ETS payphones, Eagle membership interests, and MP3 notes as securities and the extent to which Respondents sold or offered to sell these securities in Florida. Respondents are not issuers, so the remaining questions are whether they are dealers or associated persons.

   89. Section 517.021(6)(a)1 defines a dealer as:

       
       

       Any person, other than an associated person registered under this chapter, who engages, either for all or part of her or his time, directly or indirectly, as broker or principal in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.

       
       

   90. Rule 3E-200.001(7)(a), Florida Administrative Code, defines an "associated person" as:

       any person who for compensation refers, solicits, offers, or negotiates for the purchase or sale of securities and/or of investment advisory services. A person whose activities fall within this definition is required to register with the Department as an associated person pursuant to Sections 517.12(1) or (4), F.S.

   91. As Respondents conceded in their answers to interrogatories, they served as "brokers" in these transactions (not MP3 as for Ms. Mehl). They indirectly offered, sold, or otherwise dealt the securities in this case. Petitioner thus proved that Respondents were dealers. Likewise, Petitioner proved that Respondents were associated persons, who--for compensation--referred, solicited, offered, or negotiated the sale of securities.

   92. The violations of Section 517.07(1) and Section 517.12(1) are separate and distinct from each other. While the facts to establish these violations overlap, each provision requires proof of an important element not required to establish the violation of the other provision. As relevant to this case, the gist of the violation of Section 517.07(1) is the presence of an unregistered security; the gist of the violation of Section 517.12(1) is the presence of an unregistered dealer or associated person. These are separate and vital components of the investor-protection plan formed by the securities registration laws.

   93. For this reason, Petitioner has proved that Mr. Mehl's dealings in ETS payphones constitute 181 violations of Section 517.07(1) and 181 violations of Section 517.12(1), that

       Mr. Mehl's dealings in Eagle membership interests constitute six violations of Section 517.07(1) and six violations of Section

       517.12(1), and that Mr. Mehl's dealings in MP3 notes constitute

       
       

       52 violations of Section 517.07(1) and 52 violations of Section 517.12(1). For this reason, Petitioner has proved that

       Ms. Mehl's dealings in ETS payphones constitute 288 violations of Section 517.07(1) and 288 violations of Section 517.12(1).

   94. The statutory fine of $5000 per violation, multiplied times 478 separate violations, generates an administrative fine of $2,390,000 against Mr. Mehl. The administrative fine for 576 violations by Ms. Mehl is $2,880,000.

   95. These fines are fair for the enormity of the harm caused by Respondents in this case. Even if acting only negligently, Respondents have left many persons in irreversible financial ruin for the remaining years of their lives. The unsuitability of the purchasers' assumption of high levels of risk inherent in the inflated returns promised by ETS, Eagle, and MP3 is underscored by the purchasers' financial and business inexperience, modest means, inability to work to offset these large financial losses late in their financially productive lives, and need for many of them--at Mr. Mehl's urging--to convert, sometimes with substantial penalties, safe and sound investments, such as life insurance policies, annuity contracts, or retirement accounts, into ETS payphones, Eagle membership interests, and MP3 notes. If Respondents did not act with knowledge, their incompetence is breathtaking.

   96. The evidence only touches on the nonfinancial injuries suffered by many victims. Not uncharacteristic of Ponzi schemes, some victims were guided to their financial ruin by well-meaning neighbors and friends. At least one victim must live with the pain of having ignored the anguished exhortations of his wife not to invest the savings of their lifetimes. Many victims must reconcile themselves to the belated insight that their vast financial loss is partly due to the their willingness to pursue fast cash and ignore their common sense and natural skepticism over unrealistically high returns.

RECOMMENDATION

It is

RECOMMENDED that the Department of Banking and Finance enter a final order directing Respondents to cease and desist from further violations of Sections 517.07(1) and 517.12(1), Florida Statutes; imposing an administrative fine of $2,390,000 against Mr. Mehl; and imposing an administrative fine of

$2,880,000 against Ms. Mehl.

DONE AND ENTERED this 16th day of July, 2002, in Tallahassee, Leon County, Florida.

ROBERT E. MEALE

Administrative Law Judge

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850) 488-9675 SUNCOM 278-9675

Fax Filing (850) 921-6847 www.doah.state.fl.us

Filed with the Clerk of the Division of Administrative Hearings this 16th day of July, 2002.

ENDNOTE

1/ Although the Administrative Law Judge sustained Respondents' objection to the admission of the Eagle Operating Agreement, the terms and provisions of the Eagle Notes were established through the testimony of various fact witnesses. Petitioner's expert witness briefly described additional provisions, but the Operating Agreement itself contained provisions somewhat more favorable to Respondents with respect to the third prong of the investment-contract test discussed in the Conclusions of Law.

COPIES FURNISHED:

Honorable Robert F. Milligan Office of the Comptroller Department of Banking and Finance The Capitol, Plaza Level 09 Tallahassee, Florida 32399-0350

Robert Beitler, General Counsel Department of Banking and Finance Fletcher Building, Suite 526

101 East Gaines Street Tallahassee, Florida 32399-0350

Douglas M. Holcomb Assistant General Counsel

Department of Banking and Finance

111 South Sapodilla Avenue, Suite 211 West Palm Beach, Florida 33401

Gary Brookmyer

Brookmyer, Hochman, Probst & Nadeau, P.A. 3300 PGA Boulevard, Suite 500

Palm Beach Gardens, Florida 33410

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this recommended order. Any exceptions to this recommended order must be filed with the agency that will issue the final order in this case.

1

Docket for Case No: 02-000526

Orders for Case No: 02-000526