The Maryland Securities Division is investigating whether a Florida investment marketing company is illegally selling unregistered securities in the state or has committed securities fraud in connection with a plan to raise millions of dollars to fund a network of wireless communications systems.
The plan has been heavily promoted in Baltimore through advertising on WBAL Radio, including spots narrated by Ron Smith, the station's popular afternoon talk show host.
WBAL pulled the ads off the air last week after learning of the investigation. Micro Communications USA Inc. of Boca Raton, Fla., through an advertising agency, had paid the station more than $20,000 for the spots, station Vice President and General Manager Jeffrey Beauchamp said.
Since May, the firm had been advertising for consumers willing to invest $7,700, $14,900 or more in "partnership interests" of tiny companies slated to build low-frequency specialized mobile radio systems. Those systems are a low-tech dispatching service for taxicabs, delivery trucks and other fleet vehicles in cities such as Sacramento, Calif., Pittsburgh and Houston.
State securities officials declined to comment publicly on the probe, but sources close to the case confirmed that an investigation is under way.
"The regulatory attorney for the partnership is dealing with [Maryland securities officials]," said Beth Harris, a North Palm Beach, Fla., attorney whose firm is the lead counsel for the network of partnerships financed by Micro Communications.
The promoter's WBAL commercials quote Vice President Al Gore, who the ads say has described telecommunications as "the most important and lucrative market place of the 21st century."
"Discover how a minimum [$7,700] participation in the explosive telecommunications industry could return to you 30, 40, $50,000 or more plus a yearly income for the rest of your life," the latest ad said.
Kevin O'Connell, a Baltimore securities lawyer who reviewed Micro Communications' partnership sales documents at The Sun's request, said the promotion violates federal securities laws, which require investment promoters to register their offerings with the U.S. Securities and Exchange Commission.
The law requires registration if consumers are invited to invest in a common enterprise with the expectation that they will make profits based on the efforts of other people, Mr. O'Connell said.
The sales documents say the partnerships are not covered by the securities laws because the promotion is organized as a series of general partnerships. A general partnership allows each partner to take a hand in running the business, unless they agree otherwise, and makes every partner individually responsible for all of the venture's debts.
Mrs. Harris said the investors in partnerships organized by Micro Communications USA vote on hiring an operating firm to run their companies. She said that level of involvement is enough to make the companies partnerships, and that investments in bona-fide partnerships do not have to be reviewed by regulators before being offered to the public.
Mr. O'Connell, who teaches securities law at the University of Maryland Law School, said similar arguments have been rejected by courts up to the U.S. Supreme Court.
"That's not meaningful participation," he said. "They're investment contracts [a form of investment that is covered by securities laws]. We know that. It doesn't matter what they call them. What skewers them is that they can't imagine any of the investors will have a meaningful role in management."
If the promoter is found to have sold unregistered securities, the company would be liable under Maryland law for a $5,000 fine for every violation. Under federal law, every investor in unregistered securities is entitled to a refund.
WBAL officials said that Mr. Smith's commercials did not represent an endorsement by the host or by the station, and that Mr. Smith does not own any part of the venture.
Mr. Smith is required to read advertisements as part of his job, for which he is paid a fee set by a union contract.
WBAL pulled the ads once the station learned of the investigation.
"We are law-abiding citizens; we run a clean business," Mr. Beauchamp said.
Mr. Beauchamp said the station does not have a policy to screen ads, but instead looks into situations where circumstances suggest a possible problem or sponsors request a specific endorsement.
"If there is some glaring question, it would be checked out," Mr. Beauchamp said. "I've heard that spot often and it never dawned on me, or else we never would have carried it on our station."
Mr. Smith, a former stockbroker, said the ads most likely evaded serious review by station management because of the volume of advertiser requests for staff-announced commercials. "I understand. It looks ridiculous in retrospect," he said.
In two separate conversations with a reporter, Ruth Knight, a Micro Communications saleswoman, painted a rosy picture for the ventures, much of which was contradicted even by written disclosures provided by Micro Communications itself.
For example, she said in both discussions that the value of the partnerships' federal licenses to build and operate low-frequency specialized mobile radio systems had risen more than 1,000 times since earlier this year.
"This is the ground-floor opportunity," said Ms. Knight. "This is just getting under way. You stand to make a beautiful little bundle with the projections we've shown."
Asked why the investments had not been registered with state and federal regulators, she responded, "Almost all of your high-tech companies start off that way. And if we went through the SEC you would be paying three times as much."
Written disclosures soliciting investments in the Sacramento SMR system project said that a $14,900 investment will be worth nearly $50,000 in five years, in addition to what Ms. Knight said would be $10,600 in dividends. She said the value could go even higher if Bell telephone operating companies acquire the partnerships, and said that interests in a similar system in Los Angeles are already worth about $34,000.
A Bell Atlantic Corp. spokesman said the company has no interest in the SMR technology the partnerships propose to develop.
Micro Communications' written disclosures paint a different picture. They reveal that the organizers of the partnerships are paying a 43 percent commission on money invested to the "partnership recruiter," apparently Micro Communications USA.
The prices of the partnership interests, rather than the fast-appreciating fundamental investment portrayed by the saleswoman, were "arbitrarily set and should not be considered as representing the value of the units offered," the company's documents say.
The disclosures point out that the promoter itself makes the only known market for the partnership interests. That means the price an investor can get for selling an interest is nearly certain to depend only on what the promoter itself is willing to pay.
In addition, Roamer One Inc., a California firm that manages SMR systems, is to receive up to 40 percent of system revenues once the SMR networks come on-line, according to a recorded message on a Roamer One toll-free number.
Roamer One executives said they are not involved in Micro Communications' efforts to raise investment capital, and that the Florida firm used Roamer One's name in sales materials without permission.