Jerry Kopel

House Bill 1311 by Rep. Lynn Hefley (R) may be the "sleeper" of the 64th General Assembly. It could possibly cause raging debate in the business and consumer community over the next decade if it passes this year. And if it doesn't pass this year, it'll probably be back next year.

HB 1311 exempts from Colorado's security law any sale/leaseback investment plan where equipment sold "is leased back, solely in exchange for a contractually fixed and guaranteed rate of return without any possibility of participation in risk, capital appreciation, or earnings."

Before your eyes glaze over and you move on to the next page, you should be aware what Ken lane, spokesman for Colorado Attorney General Ken Salazar, calls this bill:

"A recipe for unscrupulous promoters to circumvent the securities laws....Colorado's Securities Commissioner, the Attorney General's office, and private citizens would be unable to stop fraudulent investment scams under the Colorado's Securities Act that fit in this vague definition."

The reason it is dangerous, according to Lane, is that a "guarantee" regardless of the ability to make good on the guarantee is no guarantee. Lane cites "a well-known public payphone sale/leaseback scam (that) has cost 47 Colorado investors $2.1 million since 1999" and nationally such "scams have resulted in investor losses totaling $500 million."

Lane warns "HB 1311 could have the unintended consequence of making Colorado the new capital for all these types of schemes". That comment brings back unfond memories of Colorado's role in the penny stock fraud of the 1980's.

As reported in the Denver Post on May 10, 1990 "In the heady stock markets of the 1980s, Denver penny stocks, gold deals and other investments attracted some of the nation's most notorious swindlers. Much of their success at making millions from unsuspecting investors was blamed on emasculated state securities regulation."

The emasculation was the product of a bill successfully pushed by the Colorado Bar Association. It left "enforcement of federal and state fraud laws to an understaffed U.S. Securities and Exchange Commission", whenever the schemes crossed state lines.

From 1982 on, attempts to restore control by the securities commissioner over these scams were defeated in the legislature. What turned the "thinking" around wasn't an awakening of conscience. It was the decision by national investment firms to stop providing funds for new Colorado enterprises because we were considered the garbage pit of the nation. In 1990, Colorado's "big-wheels" decided to stop the abuse.

Gov. Roy Romer, who signed the 1990 securities act said "for ten years we had one of the worst reputations in the nation." The 1990 law restored licensing of brokers and firms, disciplining of violators, a required registration for new issues, and caused most of the funds raised from the public to be put into escrow until a business plan had been written, and ended the "crossing state line" exemption.

Which brings us back to HB 1311. Language in the bill, according to Lane, comes from an "11th Circuit Court of Appeals case in 2002" that held the sale/leaseback "did not fall under the federal definition of a security." Attorney General Salazar and Securities Commissioner Fred Joseph, according to Lane, urge the decision be appealed to the U.S. Supreme Court.

Which makes sense, since it creates a division in state and federal rulings. Lane claims all 50 states and the federal government call the sale/leaseback a security. The 11th Circuit only governs three states, Florida, Alabama, and Georgia. The rest of the country can continue to call it a security, unless Colorado jumps ship.

On Feb. 21, 2003, states Lane, a Denver District Court judge specifically rejected the 11th Circuit's opinion, relying on solid Colorado and U.S. Supreme Court rulings, producing a $372,000 judgment against a sale/leaseback operation.

Having tried unsuccessfully for several years in the 1980's to restore Securities Division power over penny stock fraud, listening to testimony from vulnerable elderly who lost everything under the bar association promoted law, I hope to never watch a similar scheme take hold.

(Jerry Kopel served 22 years in the Colorado House.)

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