Department of Corporations Halts Sales of Hotel Phone Investments
March 5, 2001
SACRAMENTO, CA -- California Commissioner of Corporations Demetrios A. Boutris today announced the completion of
an enforcement sweep targeting the illegal offer and sale of limited liability company investments in companies
purporting to provide telephone service to hotels. The department issued 270 orders to 135 insurance agents and
financial planners in 25 states, including California, ordering them to stop selling the illegal investment opportunities
and to halt unlicensed securities broker-dealer activity.
``This is the latest in a series of actions brought by the department against insurance agents, financial planners
and others who have been illegally and fraudulently selling investment products throughout the state of California
without proper authority,'' Commissioner Boutris stated. ``Notably, these sales people are cross marketing to insurance
and financial planning customers who look to them for financial advice without regard for protecting their investors.''
In the just completed sweep, investors were promised as much as 14%-20% annual return on investments in ten Nevada
limited liability companies which were supposedly in the business of providing telephone services to hotel rooms
and which were ordered to stop offering investments in California on December 13, 2000. Revenue was supposed to
be generated by fees charged to hotel guests for using their in-room phone. Investors were not told that commissions
of as much as 45% were being paid to the sales agents and that investments in the limited liability companies were
being transferred to affiliated companies, which were in financial trouble.
Hotel Connect Management Inc. acted as the management company for the ten Nevada limited liability companies, which
sought to raise $3 million each by selling ``membership interests'' for $10,000 per unit. Typically, limited liability
company investments provide the advantages to investors of the limited liability protection accorded to shareholders
in corporations coupled with the tax advantages of the pass through tax treatment of partnerships.
The management company, Hotel Connect Management Inc., was recently named in a Desist and Refrain Order by the
department and is an affiliate of Hotel Connect LLC, a California limited liability company that is currently subject
to a preliminary injunction in Sacramento Superior Court obtained by the Department of Corporations for the illegal
and fraudulent offer and sale of promissory note investments in California.
``The victims are typically small investors who are seeking to obtain a higher rate of return on their investments
than they can get at the bank. The sellers exaggerate the profit potential and underplay the risks of these products
and the investors are frequently retirees or seniors who thought they were making conservative investments and
who cannot afford to lose this money,'' said Boutris.
Since the beginning of 2000, the department has led nationwide sweeps involving the sale of investments in nine-month
promissory notes, viatical interests, annuities, brokered certificates of deposit, customer owned coin operated
telephones and automated teller machines. In each case, promoters and sellers have sought to rely on perceived
regulatory gaps in the increasingly complex financial product marketplace to sell risky and speculative investments.
``While limited liability companies are a legitimate investment choice for many investors, these investments are
only as good as the product or service that they are in business to provide,'' Commissioner Boutris warned. ``If
that product or service is overvalued or speculative, or if the financial condition of the company is shaky, these
investments are not appropriate for most investors. In fact, for small investors, they may be entirely inappropriate
and unsuitable. These investors were expecting high profits with low risk, but got left with little value backing
up their investments at the end of the day. The department's investigation of these kind of investments is continuing
and further actions will be forthcoming.''
The Department of Corporations is a licensing and regulatory agency reporting to Business, Transportation and Housing
Agency Secretary Maria Contreras-Sweet and Governor Gray Davis. The Department is responsible for the regulation
of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer
and commercial finance lending and residential mortgage lending. Additional information, or a complaint form, can
be obtained from the Department of Corporations' website at www.corp.ca.gov.
A fact sheet containing the names of entities and individuals against whom orders were issued can be located by
accessing this press release on the Department of Corporations' website at www.corp.ca.gov.
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Contact:
Department of Corporations
William Kenefick, 916/322-3553