## Facts

- Edwin Pace marketed payphone (COCOT) investments in Iowa from 1997 through June 2000, primarily to elderly investors.
- Pace had long experience as an insurance agent and previously held (but no longer held) a securities license; he marketed himself as a “senior advisor.”
- Investors were offered three ownership arrangements; the dispute centered on the sale-leaseback plan.
- Under the sale-leaseback plan, investors bought payphones and immediately leased them back to a management company for a long-term, fixed monthly return.
- The management company selected locations, handled all operations, and made the monthly lease payments; investors did not meaningfully manage the phones.
- The State presented evidence that Pace described the investment as “very safe,” promised “high returns,” and represented the management companies as financially strong.
- The State also presented evidence that Pace failed to disclose material risks, including that lease payments depended on new investor money and were unsustainable.

## Issues

1. Whether the payphone sale-leaseback program was a “security” (investment contract) under Iowa securities law.
2. Whether Pace could use a statutory lack-of-knowledge defense available to certain “affiliates.”
3. Whether Pace’s sales practices violated the Iowa Consumer Fraud Act, Iowa Code § 714.16.
4. Whether the remedies imposed violated due process or the constitutional ban on ex post facto laws.

## Decision

- The Iowa Supreme Court affirmed the district court’s judgment in full.
- The sale-leaseback payphone program was an investment contract and therefore a security under Iowa law.
- Pace could not invoke the lack-of-knowledge affiliate defense based on his role as a promoter and direct seller and the defense’s limited scope.
- Pace’s representations and omissions constituted deceptive and unfair practices under the Consumer Fraud Act.
- The court rejected due process and ex post facto challenges because the statutes provided fair notice and were applied to conduct already covered at the time.
- Injunctive relief, monetary remedies (including restitutionary relief), and civil penalties were upheld.

## Legal Principles

- A transaction involving tangible goods may be treated as a security when, viewed as a whole, it functions as an investment contract: money invested in a common enterprise with an expectation of profits derived primarily from the efforts of others.
- Courts look to the economic reality of an integrated program, not labels such as “equipment sale,” where investors’ returns depend on a promoter’s or manager’s operational control.
- Statutory defenses for limited categories of affiliated persons are construed narrowly and do not extend to promoters who directly market and sell the investment.
- Under Iowa Code § 714.16, affirmative misrepresentations and material omissions about safety, returns, and risk in selling consumer merchandise or services can constitute unlawful deceptive or unfair practices.
- Civil enforcement remedies, including injunctions, restitutionary relief, and penalties, may be imposed when statutory coverage and notice are clear and the application is not retroactive punishment.

## Conclusion

The Iowa Supreme Court held that the payphone sale-leaseback arrangement was a security because investors expected profits mainly from management companies’ efforts, affirmed consumer-fraud liability based on misleading assurances and nondisclosure of material risks, and upheld the resulting injunction, monetary remedies, and civil penalties against the seller.


State ex rel. Miller v. Pace, 677 N.W.2d 761 (Iowa 2004)