Southwest Sunsites, Inc

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IN THE MATTER OF SOUTHWEST SUNSITES, INC., ET AI, FINAL ORDER, OPINION, ETC. IN REGARD TO ALLEGED VIOLATIONS OF SEC. 5 OF THE FEDERAL TRADE COMMISSION ACT Docket 9134. Complaint, April 29, 1980-Final Order, Jan. , 1985 This order requires four companies and three individuals engaged in the advertising and sale of undeveloped land, among other things, to cease representing misleading-Iy or without proper substantiation that the purchase of any land is a sound financial investment; involves little or no monetary risk; and wil benefit the purchaser economically as a result of profitable resale, mineral rights, exploration or extraction. The firms are prohibited from representing that any land is currently usable as a homesite, farm or ranch, unless that land can be used immediately for the represented purpose without any substantial improvement or development by the purchaser; and barred from misrepresenting the availability or cost of obtaining electric power, potable water, telephone service or sewage disposal. The order further requires that the firms prepare and furnish consumers with a fact sheet containing detailed information regarding the availability and cost of water electric power, sewer disposal and telephone service, unless a federal property report accompanying sale transactions includes such information. The companies must also insert in advertisements, promotional material and sales presentations specified statements warning that investment in land is risky and prospective purchasers should consult a qualified professional before buying. Such warnings must also be included in contracts, as well as a clause giving purchasers seven days in which to cancel their transactions. Additionally, the firms are required to provide consumers with cancellation fi:)rms; honor all valid cancellation requests; and send prescribed notices to past purchasers advising them of the Commission order; explaining the land's actual value and suitability for use, and outlining the alternative options available to these consumers. The order further requires that the companies provide their sales representatives with a copy ofthe order; institute a surveilance program designed to reveal those that fail to comply with the terms of the order; and maintain certain records for a specified period of time. Appearances For the Commission: Gary D. Kennedy. For the respondent: Glenn A. Mitchell and David U Fierst, Stein Mitchell Mezines, Washington, D. COMPLAINT Pursuant to the provisions of the Federal Trade Commission Act as amended, and by virtue of the authority vested in it by said Act the Federal Trade Commission, having reason to believe that Southwest Sunsites, Inc., Green Valley Acres, Inc., and Green Valley Acres Complaint 105 F.TC.

Inc. II, corporations; Sydney Gross and Edwin Kritzler, individually and as offcers or former offcers of said corporations; Porter Realty, Inc., a corporation; and Irvin Porter, individually and as an offcer or former offcer of said corporation, hereinafter sometimes collectively referred to as respondents, have violated the provisions of said Act and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues its complaint stating its charges with respect thereto as follows: PARAGRAPH 1. Respondents Southwest Sunsites, Inc., Green Valley Acres, Inc., and Green Valley Acres, Inc. II, hereinafter sometimes referred to as ucorporate subdivider respondents " are corporations organized, existing and doing business under and by virtue ofthe laws of the State of Texas, with their offces and principal places of business located at 16000 Ventura Boulevard, Encino, California. Respondents Sydney Gross and Edwin Kritzler are officers or former officers of some or all ofthe corporate subdivider respondents. They formulate, direct and control, and for some time last past have formulated, directed and controlled, (2) the acts and practices of the corporate subdivider respondents, including the acts and practices hereinafter set forth. Their address is the same as that of the corporate subdivider respondents. Corporate subdivider respondents and respondents Gross and Kritzler are sometimes hereinafter referred to collectively as "subdivider respondents.

PAR. 2. Respondent Porter Realty, Inc., hereinafter sometimes referred to as tfcorporate broker respondent/' is a corporation organized, existing, and doing business under and by virtue ofthe laws of the State of Florida, with its offce and principal place of business located at 717 Ponce de Leon Boulevard, Coral Gables, Florida. Respondent Irvin Porter is an offcer or former offcer of the corporate broker respondent. He formulates, directs, and controls, and for some time last past has formulated, directed and controlled, the acts and practices of the corporate broker respondent, including the acts and practices hereinafter set forth. His address is the same as that of the corporate broker respondent. Corporate broker respondent and respondent Irvin Porter are sometimes hereinafter referred to collectively as "broker respondents.

PAR. 3. AI! respondents mentioned herein cooperate and act together in carrying out the acts and practices hereinafter set forth. PAR. 4. Subdivider respondents are now, and for some times last past have been, engaged in the business of acquiring undeveloped land, subdividing said land into five acre, ten acre and forty acre lots and advertising, offering for sale and selling said lots to the public directly and through the use of agents, brokers and others. Among the SOUTHWEST SUNSITES, INC., ET AL.

Complaint properties offered for sale and sold are Sunsites Ranch Unit I and Sunsites Ranch Unit II of Southwest Sunsites, Green Valley Acres and Green Valley Acres II, all located in Culberson or Jeff Davis Counties, Texas. The acreage of these properties, hereinafter sometimes referred to as "the subdivisions " is approximately forty thousand (40 000) acres.

PAR. 5. Subdivider respondents sell lots in the subdivisions to purchasers by use of standard form contracts whereby the purchaser agrees to pay monthly installments over terms rangihg up to ten years. According to the provisions of the contract, title to the lots is retained by the subdivider respondents until the final payment is made. The contract specifies that title is to pass to the purchaser within a reasonable time after the final payment is made. Purchasers pay interest to subdivider (3) respondents during the contract term on the unpaid balance owing on the contract.

PAR. 6. Broker respondents are now, and for some time last past have been, engaged in the business of selling lots in the subdivisions to the public through telephone solicitations and direct mailings. Broker respondents have sent and are now sending through the mail brochures, fact sheets, contracts and other sales literature to potential purchasers. Signed contracts and down payments are sent directly by purchasers to the subdivider respondents for acceptance. Broker respondents are paid by subdivider respondents a predetermined fee or commission over the course of the contract. PAR. 7. In the course and conduct of their aforesaid businesses respondents now cause, and for some time past have caused, their advertisements, promotional materials, contracts and various business papers to be transmitted through the U.S. mail and other interstate instrumentalities from their various places of business to agents, representatives, employees, customers and prospective cus tomers in various other States of the United States and in foreign countries. Subdivider respondents have maintained and operated places of business in the various States ofthe United States and bot! subdivider and broker respondents have made and are now makinf substantial sales to purchasers in various States ofthe United State: and in foreign countries. Respondents maintain, and at all time mentioned herein have maintained, a substantial course of trade undeveloped land in or affecting commerce, as "commerce" is define in the Federal Trade Commission Act, as amended. PAR, 8. In the further course and conduct of their aforesaid bue nesses, subdivider respondents disseminate and have disseminate commercials through television and radio broadcasts and, both pri, and subsequent to sales, subdivider respondents and broker respon ents disseminate and have disseminated promotional materi;: Complaint 105 FTC.

through the U.S. mail and in person to members of the public, and make and have made oral sales presentations by means of telephone calls, in-home solicitations, on-site presentations and free dinner parties.

PAR. 9. By and through the means described in Paragraph Eight respondents have represented and are representing, directly or by implication, that the lots which respondents are ofiering for sale are a good investment (4) at the price respondents are offering them for sale, and that there is little or no financial risk involved in the purchase of said lots at said prices.

PAR. 10. In truth and in fact, lots which respondents have ofiered and are offering for sale, at the prices respondents have offered and are offering them for sale, have not been and are not good investments involving little or no financial risk to purchasers. Therefore, the acts and practices alleged in Paragraph Nine are unfair or deceptive. PAR. 11. In the further course and conduct of their aforesaid businesses, respondents have offered and are ofiering lots for sale to prospective purchasers who have beliefs, regarding the potential investment and lack of financial risk, contrary to material facts not disclosed. Such facts are that said lots, at the price respondents are offering them, are a risky investment in that inter alia the future value of the lots is uncertain and the purchaser probably will be mable to sell his lot, or his interest in the lot under the contract, at Jr above the purchase price. Such facts, if known by certain purchas- , would be likely to affect materially their consideration of whether o purchase a lot from respondents. The failure to disclose such facts learly and conspicuously is an unfair or deceptive act or practice. PAR. 12. In the further course and conduct of their aforesaid busi- ,sses, by and through the means described in Paragraph Eight spondents have represented and are representing, directly or by ,plication, that the lots in the subdivisions are suitable for use by Tchasers as homesites, farms and ranches.

PAR. 13. In truth and in fact, all or most of the lots in the subdivins, in the size parcels in which they are sold, are not suitable for , by purchasers as homesites, farms or ranches because of inter , bUUTti ;::T ::Ul ::lil'-, , ll 1-1,. Complaint (a) the unavailability of, or high cost of obtaining, utilities, water financing, equipment, improvements and other amenities; (b) the failure of subdivider respondents to install promised improvements to the subdivisions; and (5) (c) certain practices of subdividcr respondents which substantially impair the ability of purchasers to live on or use their lots. Therefore, the acts and practices alleged in Paragraph Twelve are unfair or deceptive.

PAR. 14. In the further course and conduct of their aforesaid businesses, respondents have oflered and are offering lots for sale to prospective purchasers who have beliefs, regarding the suitability for use of said lots as a homesite, farm or ranch, contrary to material facts not disclosed. Such facts, if known by certain purchasers, would be likely to affect materially their consideration of whether to purchase a lot from respondents. The failure to disclose such facts clearly and conspicuously is an unfair or deceptive act or practice. PAR. 15. In the further course and conduct of their aforesaid businesses, respondents have induced and are continuing to induce purchasers of lots in the subdivisions to make payments due on their contracts, as wen as additional payments substantially in advance of their due dates as provided for in said contracts. Respondents induce such due payments and such advanced payments on subdivision lots which are oflittle or no value to purchasers as an investment, homesite, farm, or for any other reasonable use as described in Paragraphs Nine through Fourteen above. Such purchasers have made and are making such payments toward the purchase of lots in reliance upon the aforementioned oral and written unfair and deceptive statements representations and practices, and pursuant to continuing efforts by respondents to induce further payments by means of collection letters, prepayment discount offers, and numerous representations, including deceptive representations, concerning or relating to the subdivisions. Pursuant to respondents' continuing inducements as set forth herein, respondents have received and are receiving substantial sums of money and have failed to offer to refund or refused to refund such money to purchasers.

PAR. 16. The use by respondents ofthe practices described in Paragraph Fifteen and their continued retention of the monies collected as aforesaid, are unfair acts or practices. PAR. 17. The use by respondents of the aforementioned false, misleading, unfair and deceptive statements, representations, acts and practices, directly or by implication, and the failure of respondents to FF:DF:H1\L THADF: COMMISSION DECISIONS Initial Decision 105 F. disclose (6) the aforemen tioned material facts, has had, and now has the capacity and tendency to mislead members of the public into the erroneous and mistaken belief that said statements and representations were, and are, true and complete, and into the purchase of substantial quantities of respondents' lots by reason of said erroneous and mistaken belief PAR. 18. The acts and practices of respondents, as herein alleged were and are all to the prejudice and injury of the public and constituted, and now constitute, unfair or deceptive acts or practices in or affecting commerce in violation of Section 5 of the Federal Trade Commission Act. The acts and practices of respondents, as herein alleged, are continuing and will continue in the absence of the relief herein requested.

INITIAL DECISION BY THOMAS F. HOWDER, ADMINISTRATIVE LAW JUDGE JULY 29, 1982 PRELIMINARY STATEMENT The Commission s complaint in this matter was issued on April 29 1980, alleging three counts of unfair or deceptive acts or practices in the sale to the public of undeveloped parcels ofland in far West Texas. (2) Three corporations and two individuals were named as "subdivid- " respondents viz. Southwest Sunsites, Inc., Green Valley Acres Inc., and Green Valley Acres, Inc. II, together with Messrs. Sidney Gross and Edwin Kritzler who were alleged to "direct and control" these corporations.

The complaint also named Mr. Irvin Porter and Porter Realty, Inc. as "broker" respondents. Prior to the hearings, the "broker" respondents and complaint counsel entered into a consent agreement, and the charges as to these respondents were not litigatedl Count I charged respondents with falsely representing the land to be a good investment at the offerl'd price, having little or no financial risk (pars. 9-10). Secondly, it alleged that respondents failed to disclose certain material facts concerning the risky nature of investing in the land by purchasers holding contrary beliefs. The undisclosed facts were identified as inter alia the future value of the lots is uncertain and the purchaser probably will be unable to sell his lot or I Accordingly. the use of the word " po!JdeDts" in this decision wil normally refer only tu the subdivider respondents Initial Decision his interest in the lot under.- the contract, at or above the purchase price" (par. 111 Count II charged respondents with falsely representing the subdivided lots as suitable for use as homesites, farms and ranches. Factors listed as precluding such use were: (1) the unavailability or high cost of obtaining utilities, water, financing, equipment, improvements and other amenities; (2) the failure of respondents to install promised improvements; and (3) certain practices of respondents which substantially impair the ability of purchasers to live on or use their lots. Count II alleges further that respondents failed to "clearly and conspicuously" disclose material facts concerning their lots (pars. 12-14). Count III charged respondents with unlawfully inducing purchasers to make payments on their lots, which allegedly "are of little or no value to purchasers as an investment, homesite, farm, or for any other reasonable use. . ." Such payments are alleged to be made in reliance upon the representations and practices previously described and "pursuant to continuing efforts by respondents to induce further payments by means of collection letters, prepayment discount oilers, and numerous representations, including deceptive representations concerning (3) or relating to the subdivisions." Respondents were also charged with receiving substantial sums of money, and with failing to oller to refund or refusing to refund this money (par. 15). The acts and practices of respondents, as set forth in the three counts ofthe complaint were alleged to violate Section 5 ofthe Federal Trade Commission Act (par. 18).

Respondents answered, admitting the nature of their business and certain corporate data, but essentially denying all charges. Prehearing conferences were held in Washington, D.C. on July 7 1980, August 8, 1980 and January 16, 1981. Adjudicative hearings commenced in Dallas, Texas on April 13, 1981 and continued from time to time in that city and in Van Horn, Texas and in Albuquerque, New Mexico until completion of the case-in-chief and the defense in November, 1981. A brief rebuttle hearing was held in Washington C. in January, 1982.

The record was closed for the reception of evidence on February 9 1982, following the various record-correction activities of the parties. Extensive proposed findings were submitted, the final submission occurring on March 26, 1982.

Any motions not previously specifically ruled upon, either directly or by the necessary effect of the conclusions in this decision, are hereby denied.

This proceeding is before me upon the complaint, answer, testimony and other evidence, and the proposed findings of fact and conclusions oflaw filed by counsel. The proposed findings of/act, conclusions Initial Decision 105 F.T. and arguments ofthe parties have been considered, and those findings not adopted either in the form proposed or in substance are rejected as not supported by the evidence or as involving immaterial issues not necessary for this decision.

Certain abbreviations, such as the following, are used in this deci- SIOn:

CX - Commission s exhibit.

CPF - Complaint counsel's proposed finding. RX - Respondent' s exhibit.

RPF - Respondent's proposed finding.

The transcript of testimony is usually referred to with the last name ofthe witness and the page number or numbers upon which the testimony appears. (4) Having heard and observed the witnesses, and after having reviewed the entire record in this proceeding, I make the following findings:

FINDINGS OF FACT I. THE RESPONDENTS 1. Respondent Southwest Sunsites, Inc. ("SWS") is a corporation organized, existing and doing business under and by virtue ofthe laws of the State of Texas. Its offce and principal place of business is located at 16000 Ventura Boulevard, Encino, California. (complaint par. 1; answer, par. 1) 2. SWS was incorporated on February 26, 1973 under the name Southwest Land Sites, Inc. The name was changed to SWS on November 5 1973, by amendment to the articles of incorporation (CX 1B, D). 3. Respondents Green Valley Acres, Inc. ("G V A") and Green V alley Acres, Inc. II ("GV A II") are likewise Texas corporations, with their offces located at 16000 Ventura Boulevard, Encino, California. GV A was incorporated on March 11, 1976 and GV A II was incorporated on May 9, 1977 (complaint, par. 1; answer, par. J; CX 14B; ex 23B). 4. The business engaged in by SWS, GV A and GV A II is that of acquiring undeveloped land, subdividing this into smaller parcels of , 10, 20 or 40 acres, and selling these lots to the public (complaint par. 4; answer, par. 4; Gross 296-98).

5. Individual respondents Sydney Gross and Edwin Kritzler, of the same business address, are alleged to formulate, direct and control the activities of the above corporate respondent (complaint, par. 1; answer, par. 1).

,, SOUTHWEST SUN SITES, INC., ET AL.

Initial Decision Mr. Gross, aabove corporate respondents (Gross 302-03; CX 13L).2 real estate broker, financed the purchase ofthe subject properties by the corporate respondents (Gross 296, 307). (5) 7. Respondent Gross, d/b/a Sydney Gross Collection Agency, is the sales agent for SWS (Gross 296; Shonfield 1245). That entity shares the function of sales agent for GV A and GV A II with Blue Chip Realty, another Gross enterprise (Shonfield 1245). 8, Mr. Gross' primary duties for the corporate respondents are financial and policymaking (Gross 314-15). Respondent Edwin Kritzler, also a real estate broker, shares in policymaking responsibility, and in addition is generally responsible for the day-to-day operations of the three companies, reporting to Mr. Gross (Gross 314; Kritzler 462-68). Mr. Kritzler, a vice president of SWS, serves as the general manager for each ofthe three corporate respondents (Kritzler 467).

9. Together Mr. Gross and Mr. Kritzler selected the three properties purchased by the corporate respondents (Gross 312), They decided upon the resale prices to be charged, the promotional materials and TV commercials, as well as the contract forms (Gross 309-12). 10. Respondent Porter Realty, Inc. through agreement signed by it, president, respondent Irvin Porter, was retained by SWS in June 1974 to sell its land (CX 37). In addition, Porter also sold land in GV A anc GV A II (Kritzler 592-93). These arrangements ceased in March 1971 (Kritzler 637; Porter 2359; Elfont, 4167).

11. THE PROPERTIES 11. As noted, this case involves the sale of undeveloped land in thre subdivisions, viz. SWS, GV A and GV A II, which in the aggregal total approximately 40 000 acres, The location of these properties in Culberson and Jeff Davis Counties, Texas (complaint, par. 4; a swer, par. 4).

12. I, the Administrative Law Judge, personally toured and c served these lands, accompanied by counsel, on July 1 , 1981. Duri subsequent hearings held later in the year in Van Horn, Texas, I b a second opportunity to observe the general vicinity ofthe properti From time to time this initial decision may reflect the result of observations. (6) A. Southwest Sunsites 13, The Southwest Sunsites tract was acquired by respondent: 1973. This land is located approximately 10 to 20 miles east of 2 None ofthose family members is involved as a practical matter in the business activities of tho corpor (Gros- 303-4).

'Technically, SWS was purchased by SWS , Inc, following !I Joan for this purpose to it by respondent: ,,,J,id, breaks down to a cost of $20 to $33.50 per acre (CX 3; 0 Initial Decision 105 F. town of Van Horn, Texas, itselflocated approximately 120 miles east and somewhat to the south of El Paso. The property lies to the immediate north of Interstate Highway 10 (CX 86G-H; CX 87E-F). 14. By way of background, SWS originally contained about 20 000 acres (Bray 3770), generally being used as grazing land (Wolfe 4568). In 1968, it was sold by one, Hugh Wolfe, to Southwest Land Corp. which began to subdivide and sell the property (Wolfe 4551; Bray 3770). Approximately 2 000 acres ofthis property was sold in bulk to certain purchasers from Chicago (Wolfe 4552-53). 15. In 1973 Southwest Land Corp. declared bankruptcy, and the property was repossessed by Mr. Wolfe. Subsequently, in December 1973, the land was sold by Mr. Wolfe to respondents (Kritzler 474; Wolfe 4552; CX 3, 4A-C).

16. SWS, consisting of 17,467 acres, is located entirely in Culberson County, in an area known as Wild Horse Valley, immediately north Thisof Michigan Flats (Reed 2608, 2624; Compere 3227; RX 67 at 4).6 valley lies generally between the (7) Sierra Diablo Mountains and the Diablo Plateau on the west, and the Apache Mountains on the east RX 67 at 4, 33).

17. SWS is subdivided into approximately 1 800 parcels of 5, 10, md 40 acres.8 The larger lots are located in the eastern portion of ;WS, where the property enters the foothiJs of the Apache Mounains, with its rougher topography.

18. Before its purchase by respondents, the western portion ofSWS ad been subdivided into 5 acre parcels by Southwest Land Corporaon (Kritzler 4093). Subsequently, the eastern portion was platted by 'spondents under the name Sunsites Ranche (Lara 3883, 3885). (For lrposes of this case, the name distinction does not appear to be ,nificant, although the two properties used different contract docuents and have different sized parcels.

B. Green Valley Acres and Green Valley Acres II 9. Green Valley Acres was acquired by respondents in 1976. This these 2,000 acres, JonltmJ in the ceDt,'r ofSWS , were never platted (Wolfe 4552; Lara ::1Jt;4)- In August, 1981. sreacql1irerlbyMr- Wolfe at a cost of$loo an acre (Wolfe4552-53) pondr.!1t Kritzler test.ifj"d that Southwest Land Corporation isjn no WlIY affliated with the respondentSWS rise (Kritzle!" 647) Mr. Wolfe LesUfied that. SWS in reahty "took over" the mohact he had with Southwest through the bankruptcy court " with both parties honoring previous sales of parcels to theo public (Wolfe ilct Horse Valley is sometimes referred to;l5; Wild Hone FJ;lt or Flats (RX 67) e BayJor and Bein h Ylountains "Iso lie (,0 the west of to" SWS pmperly, and the Wylie Moutltattls Ije to the (See. t'.g. RX , figure 7) Kritzler furnished L!,,, fC,jJowing "ba!lpf!rk" breakdown: 6!J0 5 acres; 5()()-700 to acres; 100 20 acres; and acres (Kriuler4f!!) pureb"ser of record in this instar1cf' wa respondent Sydtu'y Gross. Respondent Kritzler executed tbe tas ''r'ltorney. itl.facr The purchase pric!! was $750 000, which hreaksdown to" cost of $40.48 perucre Compen; 3271 .721 SOUTHWEST SUNSITES, INC., Jol AL.

Initial Decision property is located from 18 to 25 miles south-of VanHorn'(Kritzler 488; CX 88; CX 89).

20. GV A, consisting of approximately 15 000 acres in Culberson and Jeff Davis Counties, is located in an area known as Lobo Valley (Kritzler 491; Reed 2608-09).1 This valley is bordered by the Chispa Mountains on the east and the Van Horn Mountains on the west. GV A is in the western portion of Lobo Valley, and the western border ofthe property extends into the foothils of the Van Horn Mountains (Reed 2608-09; Holtz 3036; RX 67 , figure ll). (8) 21. Prior to its purchase by respondents, GV A was used for grazing and some farming activity (Gross 309). Subsequently the property was subdivided into approximately 1 200 parcels of5, 10 20 and 40 acres.1 22. GV A II was acquired by respondents in 1977. 12 This property is located in close proximity to GV A, in Lobo Valley south of Van Horn (Kritzler 488).

23. GV A II consists of9 611 acres (Compere 3273). As in the case of the other properties, this property was similarly subdivided by respondents, into approximately 900 parcels. Because ofthe roughness in the terrain in the southern portion ofGV A II, surrounding Needle Peak (RX 37), the land there was subdivided into 40-acre parcels. According to Mr. Kritzler, the use of this land is intended to be for camping or hunting (Kritzler 4098-4100; Gilmore 3961). III. RESPONDENTS' MARKETING PRACTICES A. The Houston And Dallas Offices 24. Respondents opened sales offces in Houston in 1973, and in Dallas in 1975, to sell SWS land (Kritzler 475). Upon the acquisition of GV A in 1976, and GV A II in 1977, both sales offces were charged with sellng these properties as well (Gross 375)13 (9) 25. Mr. Ted Rose was hired as a salesman by respondent Gross upon the opening ofthe Houston office (Rose 677-78)14 Mr. Rose remained in that capacity for a period of some months, following which he became operations manager (Rose 679). In 1975, he was sent to Dallas to open up and manage that office (Rose 679-81). Mr. Victor Novaez eventually succeeded Mr. Rose as manager of the Houston offce (Kritzler 475-77; Novaez 858).-' Both office managers reported directly to respondent Kritzler, and Mr. Novaez testified that Mr. Kritzler '" Lobo Valley is sometimes referred to as Lobo Flat (RX 67) " Mr. KrilzJer furnished the following approximations: 200 five-acres.; !:OO ten-;lcres; 100 twenty-acres; and 100 forty-ilcres (Kritzler 489) Green Valley Acres, hH:-Wah the "purchaser" of record in this instance "With execution by Jl1r. Kritzler- The p\Jcha e price was $6(J2 550, which breab down to a cost of $60.64 per acre (Compere 3272- 73) J3 There is some testimony which indicates th;lt, ilt least in t.hp. Dallas offc, , sales efforts were concentrated on GV A and GV A II, following their appeilrance on the market (Rose 61:4) " As it happrmed, Mr Rose s father was ;I cousin of Mr. Gross s wife (Hose 677). 15 Mr J'ovilez begiln as a scalp.sman in the fill! of J976 , and b"came operations manager in the spring of 1977 replacing a Ir- James Layne (Novae.. 858-59) FEDERAL TRADE COi\MTSSION DECTSTONS Initial Decision 105 F. kept a close watch over the Houston offce, visiting it personally probably every three weeks or so " (Novaez 863; see Rose 688 and Novaez 862).

26. Both the Houston and Dallas offces remained open and active until 1978 (Kritzler 475; Rose 679 686; Novaez 858). While the number of salespersons tended to fluctuate, as many as eight or nine persons were engaged in sales activity during peak periods (Kritzler 476; Hammer 649; Rose 682; Novaez 884). The operations managers were authorized to hire, supervise and fire offce personnel, while respondents Gross and Kritzler maintained control over sales policies and contractual terms (Kritzler 476-77, 584; Rose 688-89; Novaez 861).

27. Respondents' Houston and Dallas sales personnel did not operate under written contracts of employment (Gross 376-77; see Hammer 651; Novaez 859-60; Rose 694). Previous sales or real estate experience were not prerequisites for employment (Rose 696; Hammer 650-51).6 Compensation was solely by commission (Hammer 651-52; Rose 687).1 (10) 28. There were no organized formal training sessions for newlyhired sales personnel. Neither were there any training manuals (Kritzler 587; Hammer 652-53; Rose 697; seeNovaez 864-65). Prior to being sent out alone, a newly hired salesman would be provided with sales materials, given instructions what to say, and accompanied by experienced salesmen on their visitations for a few days (Hammer 652-54).

, It was the testimony of respondent Edwin Kritzler that, under company policy, salesman were basically limited in their presentations to the written words contained in the brochure (CX 87), the fact sheet (CX 79), and the contract (CX 74) (Kritzler 4107). All sales personnel who testified maintained that they did not deviate from this policy (Hammer 652, 657, 660; Rose 695 , 698, 714-17; Novaez 861 864).

30. In respondents' Houston and Dallas operations, leads were typically generated through media advertisements, on TV, radio or in the newspaper, Interested prospects responded to an answering service (Rose 689; Novaez 871)18 Subsequently, these callers were contacted by phone by employees of respondents (apparently women in the phone room ), who undertook to answer preliminary questions. Arrangements would then be made for a personal visit by a salesman 'Ii Most ofreHpOt1dent ' Hales persoIJnel werenollj"ensed to selJ rea! eslate in Texas (Rose 696; Ifammer 650- 651) It appears, however, that a salesman s li"ense was not requiredin Texas during the rdev.mt time periorl (Hammer 673; Rose 696). In HflY event, Mr- Kritzler testified that he had a Texas broker s ii".mse (Kritzler 589-90) 7 Total commission amounted to 10% of the selling price- This included 70%-75% ofthe duwnpayment, with the remainder being paid the salesmen as " residuals, " so long as the purchaser continued payments on th" eon tract (Novaez 860) SOUTHWEST SUNSITES, INC., ET AI,.

Initial Decision (Rose 690; Novaez 873-74).9 31. If the salesman was successful in his efforts, a purchase agreement would be executed (CXs 74-78). While, as noted, the salesman was not authorized to alter the purchase prices set by Messrs. Gross and Kritzler, he was permitted a certain leeway in negotiating the down payment (Rose Tr. 689). All purchase agreements declare themselves not to be binding contracts prior to acceptance by respondents home offce (CXs 74A, 75A, 76A, 77 A, 78A). 2o (11) 32. Both the Houston and Dallas offces became inactive in 1978 although mailing addresses were stil maintained in those cities at the time oftrial (Kritzler 475-77; R. Ad. 354, 355). Mr. Novaez, in Houston, attributed the diminished market to "saturation, but testified that he stil answers a telephone for Green Valley (Novaez 884, 888). B. Respondents ' Home Sales 33. In or about the latter part of 1978, respondents commenced sellng parcels from their home offce in Encino, California (Gross 375-76). Two salesmen were used for this purpose, Mr. Brody and Mr. Frank, neither of whom were called as witnesses (Kritzler 565-66). These salesmen did not solicit new customers, but merely contacted previous purchasers for the purpose of selling them additional land (Kritzler 565).

34. According to Mr. Kritzler (Kritzler 566): They would call the customers that were on the books, tell them of recent events in reference to the property; and ifthere was a parcel of land that was next to theirs and they appeared interested, to sell them that piece of land. C. On-Site Sales 35. According to Mr. Kritzler, respondents do not have an on-site sales program, as such (Kritzler 474). However, since approximately 1975, respondents have employed an on-site representative whose duties have included sellng land when the occasion called for it (Kritzler 471-72). Mr. W.D. Smith was respondents' representative until 1978, when he was replaced with Mr. Gilmore (Gilmore 983). (12) 36. Mr. Smith testified that he sold "some" (Smith 941) and "very little land" (Smith 917), although he was authorized to sell all three properties at the standard 10% commission (Smith 913). 36a. Mr. Gilmore, who described himself as an "on-site salesman I" SaleSITen were assigned by Mr. ROR" on a rotational basis (Hammer 655-56) 2f exs 74 and 75, pertaining to SWS are entitled "I'urchaw Agreement" The forms pertaining to both Greeo VaHey prompt'rties are entitled "Agreement for Deed and Purchase of Real Estate. J Mr. Brody apparently passed on information concerning II newly-built cotton gin, and concerning a rubber producing "Guayule" plant (Kritzler 567-74) If Mr Brody W;1S unable to make telcpl10n., contact, the customer would be sent a "speci;1j memo " requesting a collect call to Mr. Brody (CX 115) Initial Decision 105 F. had previously worked as a salesman for Southwest Land Corporation (Gilmore 983-84). He testified that since the inception of his employment with respondents in November, 1978, he had only sold about eight pieces of the three properties (Gilmore 984-85). He also stated that no on-site sales had been made for about one year prior to his appearance as a witness in April 1981.

D. Sales Through Brokers 37. In addition to their own efforts, respondents have engaged the services of independent real estate brokers to sell their properties. Respondents provided these brokers with brochures, fact sheets and contr'lct forms (Gross 383-84). The purchase prices for the properties and the terms and conditions of sale were established by respondents (Kritzler 591-96).22 Brokers had no authority to alter these terms, and respondents retained the right to approve or disapprove all sales (Kritzler 593).

38. Following the formation of SWS, Inc., a broker named Mr. Brien was hired in Boston, Massachusetts (Kritzler 470). Mr. O'Brien performed in this capacity for approximately nine months or a year (Kritzler 470).

39. For a brief time respondents also employed broker services in EI Paso, Texas in the mid-1970' s (Kritzler 470). 40. But it is the events which occurred by virtue of respondents arrangements with Porter Realty of Coral Gables, Florida, which form the focus of the broker-sales aspect of this case. (13) 41. As heretofore noted, the listed respondents in the caption ofthis case include the names of Porter Realty, Inc., and its president Irvin W. Porter (supra p. 2). Because of the execution of a consent agreement the charges against them were not litigated in this proceeding. 1. Sales Through Porter Realty 42. Respondents dealings through Porter Realty commenced in June, 1974 and lasted until April of 1978 (CX 37 A; Kritzler 4117; Porter 2262, 2336).

43. Porter Realty was incorporated in Florida in 1972 (CX 33). Its principal base of operations was in Coral Gables, near Miami (Kritzler 585).23 During the time of its association with respondents, it sold only respondents' properties (Porter 2263).

44. Porter Realty used both in-house personnel and outside sub- 22 SeeCX 37A, parll- 2- This agreement between respondenl and Porter Realty with regard tu SWS sales is the only !;uch written agreement in evidence- Apparently agreements with Porter to sell other properties of respondents" as well as respondents' agreement with oth r brokers, were mad," urally (Kritzler 592-93) 23 Prior to its arrangcmenL with respondents, Porter Realty (and especially Mr Irvin W. Porter) had been involved in sellng oth r properties (Porter 2238 -39, 2241--5) At least one of these properties was lucated in the inity of Sanderson, Texas, which 3ccording to the map is located in thc southwcRtcrn part of the state (Porter , , SUUTl1WI';ST SUNSlTt;S, inc. , 1":'1 AL.

Initial Decision brokers to sell respondents' properties_ 24 Unlike respondents' -own local operations in Houston and Dallas, Porter did not employ media advertising (Porter 2325)- All, or virtually all, of its selling was done by telephone (Porter 2325)- 45- To obtain leads, customer lists would be purchased from anyone of the numerous land sales companies which had such lists available (Porter 2325)- The lists consistcd ofthe names of previous purchasers of land- These prospects would then be (14) contacted by telephone (Porter 23251- In this manner sales were made throughout the United States (Porter 23251- 46- The record shows that Porter Realty was very successful in selling respondents' properties- In fact, the company outsold all other sellers, even respondents' sales force which ranked number two in such sales (Kritzler 591)- It was Mr Kritzler s testimony that Porter accounted for approximately 55% to 60% of all sales, and up to 70% in 1977 (Kritzler 591 , 411 47- According to more specific information in the record, even these figures may be on the low side- Mr- Kritzler s estimate of the number of present purchasers of respondents' three properties totals 2 600 (Kritzler 481 , 490, 492 (SWS-1400; GV A-650; GV A II-550))- The number of purchasers reported by Mr. Porter totals 2150 (CX 38B). Ifthese figures are accurate, and my calculations correct, the resultant overall percentages of Porter sales of respondents' properties would be over 80%.

48. As noted, respondents terminated their business relationship with Porter Realty in April, 1978. Respondent Sydney Gross described this action as "mutual " and indicated that sales had been tapering off (Gross 381-82)- According to Mr. Porter it was sort of a 50/50 affair, with respondents desiring "to get out of the phone business (Porter 2336). Mr Porter further testified that respondents Gross and Kritzler felt that "there might be too much being relied on about oil or whatever" (Porter 2359).

49. In the view of Mr Kritzler, the reason for the termination was the steadily increasing instances of representations by Porter sales personnel concerning oil exploration activity on respondents' GV A and GV A II properties (Kritzler 596-97, 4126). While earlier complaints about Porter representations had involved whether purchasers would be able to resell their properties at a profit toward the end of 1977 and the beginning of 1978 the oil situation did arise" (15) "Mr- Porter testified nwt the greatest number of persons employed at any one time to sell the properties were approximately 12 in.house and 5 or 6 sub-brokers (Porter 2255). ' 11", lists purchased by Porter Realty would be given unly tu in-house persunnel It was Jell up to the . ub-brokers to obtain their own leads- For this reason, and for using their own telephones and facilities, sub-hrokers were entitled to a higher commission on sales (Porter 2321i, 2251-52; CXs 437--2) "Callswere not placed to every state, however- Mr Porterexpbined that there were a "hflndful" of states where such method ofsoliciLation was not permitted (l'orter2325) FEDERAL TRADE COMMISSION DF:CISIONS Initial Decision 105 F.T.C. Kritzler 598). According to Mr. Kritzler, the percentage of Porter sales involving oil representations rose during that time from 10% to perhaps 60% (Kritzler 598).

50. Of particular objection to Mr. Kritzler was the use by Porter salesmen of an "oil map" (CX 129A-C). While Mr. Porter testified that Mr. Kritzler was aware of its use by Porter Realty, Mr. Kritzler testified that he did not become aware of this use until "the late fall of 1977 " and that respondents had not previously authorized its use (Porter 2314; Kritzler 4124-25). Mr. Kritzler stated that he "(cJalled Porter immediately and told him not to use the map, that it was outside of his jurisdiction to do that" (Kritzler 4125). When in early 1978, Mr. Kritzler learned of its continued use, he testified that he (Kritzleragain "told him to absolutely discontinue using the map" 4126). When the use of the map continued, and further instances of oil representations occurred, respondents, according to Mr. Kritzler terminated the association with Porter Realty (Kritzler 4126). 2. Sales Through Diversified Realty 51. Respondents also employed the services of another Miami area broker, Diversified Realty Investment Corporation (Gross 377-78). Diversified was not listed as a respondent in this case, and its principal oflicer, Mr. Louis Beck was not called as a witness (Gross 391-92; Kritzler 609).

52. Diversified accounted for the third largest total sales of respondents' properties, following Porter Realty and respondents' own sales force (Kritzler 591).

53. As in the case of Porter Realty, respondent Kritzler became aware of problems arising from Diversified's sales representations (Kritzler 609). Generally speaking, their problems were of the same nature as those associated with Porter, viz. quick-profit-resale and oil (Kritzler 610). In approximately early 1978, Mr. Kritzler came to learn that Diversified too was using an oil map (Kritzler 610-12). (16) 54. As Mr. Kritzler put it: "In the beginning they (number of oil complaints) were smaller and then they grew to a proportion which caused us to dismiss them as a broker " (Kritzler 610). 55. CX 221 is a letter dated February 24, 1978, from Mr. Gross to Mr. Beck terminating their relationship in view ofMr. Beck's "recent diffculties with the Federal Grand Jury, regarding your association with another land company." Mr. Gross testified that this was a reason for termination, and that a possible additional reason might have been one or two" complaints regarding Diversified which Mr. Kritzler handled (Gross 391).

'Diversified' s employment with respondents probably commenced in the Y'''"- 1976, when GVA carnC on the ' (r._"c 'IR1\ Th t r"mn "v nn"rpnt.lv . )rI ( VA and GVA II Dr01Jertv . not S\VS (Gru5 :nH) SOUTHWEST SUNSITES, INC., ET AL.

Initial Decision 3. Sales In South Pacific 56. A broker named Mr. Holgin was engaged by respondents in 1978 to sell GV A II property in the South Pacific (Kritzler 586, 612; Gross 382). This relationship was apparently ended in 1980 (Kritzler 586- 87). Mr. Holgin s activities included sales to citizens of Tuvalu, a small island nation in the South Pacific (Gross 390). Mr. Kritzler testified that subsequently a group of Tuvalu purchasers visited their Texas properties, accompanying a Mr. Lauti, the Prime Minister, who apparently was himself a purchaser (Kritzler 621 , 4145-47). IV. COUNT I 57. As earlier noted, Count I ofthe complaint charged respondents with falsely representing the SWS, GV A and GV A II properties as being a good investment at the offered price, with little or no financial risk involved.

A. The Representations Concerning Investment And Financial Risk 1. TV and Radio Advertising 58. As previously found (Finding 30), respondents employed TV and radio advertising in their Houston and Dallas operations. TV advertising was also done at various times in (17) Boston, Atlanta and Midland, Texas (R. Adm. 4 , 5, 6, 7, 11 , 21). 59. CXs 42 through 71 were admittedly utilized by respondents as scripts for the preparation of TV and radio advertising for SWS, GV A and GV A II (R. Adm. 17). The two commercials whose script appears on CX 72B were aired on KHTV in Houston in April-June 1978 approximately 80 and 110 times, respectively (R. Adm. 13, 14, 15, 16). CX 395 is a TV commercial script also aired in Houston, in 1977 (Kritzler 579-81).

60. I have examined these materials and can find no reference in them, with one or iwo possible exceptions, to investment or accompanying financial risk. While the point is emphasized that the offered price is affordable, the messages are all oriented toward the uses which may be made ofthe land by purchasers, not resale profitability. Over and over again the theme is repeated: viz. fertile valley; sunshine; clean air; quiet environment; mountain scenery; abundant water; farming; ranching; hunting; camping; retirement; satisfaction in owning land. While "combating inflation" is prominent in several of the scripts, it appears nearly, if not always, to be in the context of using the property to produce one s food, thereby reducing expenses (See CXs 51, 52, 58, 59, 60) "The abbrp.viation u R. Adm, " used in th;i; porlion of the initial rlcciRion refers to rcsponrlCI1Ls' re ponses to comp13int counsel's requests for admissions The e responses are dated Odober 14 and DecIomher 11, 1980 Initial Decision 105 F. 61. On the other hand, CX 43, in offering inflation protection advice, contains the statement "Land is always your best buy" This representation is set forth in a context which includes references to an individual's independence, the fertility ofthe land, and the availability of water.

62. Only one of the scripts mentions the word "investment CX 58 (it was crossed out in CX 43, above, and the word "buy" substituted). It refers to "five acres offertile farm and investment property." This is represented as "the answer to inflation and the drugery of city life. The script goes on to state (CX 58):

Your five-acre site is awaiting ybu near the pleasant West Texas (18) community of Van Horn. . . where the soil is fertile and water plentiful. This fertile land will grow fruits vegetables, meat and poultry. . . f()r your own table as well as sale to others. So stop worrying about inflation and the hectic city life. Think about it! Your own five acres of fertile land.

Another script speaks of "just holding (the land) for the future, " as an alternative to using the propcrty for hunting and farming (CX 67). This material features a "celebrity, James Drury, the Virginian. Mr. Drury or his name also appear in other scripts, which often contain references to the hunting available on or in the vicinity of respondents properties (CXs 61- , 72).

2. The Brochures, Fact Sheets And Contracts 63. According to respondents, their sales policy from the beginning was to furnish prospective purchasers only such information as was contained in the brochure (CX 87), fact sheet (CX 79) and the contract (CX 74; Kritzler 4097, 4107). Respondents sales representatives testified to like effect (Rose 695, 698, 714-15; Hammer 652, 657 , 660; Novaez 861).

64. In examining these documents, it does not appear that either the various fact sheets (CXs 79-85) or the contracts (CXs 74-78) contain any reference to or representation concerning investment or risk. 65. On the other hand, there are certain references to "investment" in the brochures (CXs 86-89).

66. CX 86A-N was the brochure used by Southwest Land Corporation prior to its going out of business in 1973 (see Findings 14, 15 supra; Kritzler 644). When sales of SWS (19) began, respondents continued to utilize the brochure for a period of perhaps 60 to 90 days (Kritzler 644). During this interim period respondents assertedly pre- Other individuuls feui.ured in the scripts are a Dewey Compton, described as" " prominent" and "respected" "grrmomist (Kritzler 4096: CXs 44-52, 58-60); a Murray Cox (CXs 42 , 53-5); a Haruld Gunn (CXs 5&-- , 72); and o.VU1T"VW.c.:'I QU1'\Qll.lQ, l1 .lT f\L. Ini bal Decision pared their own brochure, CX 87A'L which thereupon replaced- 86A-N (Kritzler 645)- 67- On CX 86B, the following statement appears: This is Van Horn, Texas. Home of Southwest Sunsites. The new prime investment spot in the Southwest.

68- On the replacement document, CX 87B, the second sentence of that language was revised to read: "The prime land spot in the South- 69- Also on the same page of the old brochure, CX 86B, is thewest."statement "Its the ideal spot for investors-" This language remained unchanged in the new brochure (CX 87B)- 70- On CX 86E, the old brochure, appears the statement "For the investor, Van Horn offers potential as rich as the land itself." The same statement is in the later SWS brochure (CX 87D). 71. On CX 86I, in answer to the question "What can you do with your five-acre sunsite?", it is stated:

The land uses are almost limitless. Obviously, five-acre or larger tract offers you infinitely more possibilities both as an investor or a prospective resident, than the smaller lots generally offered by developers. The value of acreage in the Southwest is leaping every year. Last year alone, this land increased in value by over 20%. Its future growth potential is even greater.

72. This language was revised in the new brochure, CX 87J, to read: The land uses are almost limitless. Obviously, a five-acre or larger tract offers you infinitely more possibilities both as an investor, or a prospective (20) resident, than the smaller lots generally offered by developers. The value of acreage in the Southwest is leaping every year. Its future growth potential is unlimited. Mr. Kritzler testified that the changes-the deletion of reference to a 20% increase in value, and ofthe statement concerning even greater future growth potential-were made because "we were not sellng an appreciation of the land. We were sellng use " (Kritzler 4103). 73. As for CXs 88 and 89, the brochures prepared for GV A and GV A , which originated in 1976 and 1977, respectively, further changes were made (Kritzler 4103-D6). There is no reference in these brochures to investment" or "investor." According to Mr. Kritzler, these steps were taken because of the questioning by various regulatory agencies, state and federal, of the use of such terminology in connection with the sale of land (Kritzler 4105). 74. Apart from the foregoing, each ofthe brochures (CXs 86N, 87L 88K, 89L) contains quotations of historical American figures concerning the monetary benefits which derive from land ownership generalinitial-Dccis.ion- 105 F. ly. Respondents' proposed findings describe these quotations as aphorisms" (RPF 40), and Mr. Kritzler belittled reliance upon them properties (Kritzler 4144).as a basis for purchasing respondents' 3. Other Sales Aids 75. Both respondents' own salesmen, as well as its hired brokers sometimes employed various pictures and articles in connection with their sales presentations to prospective purchasers. 76. I have examined these materials and can find little or no probative evidence that the land was represented as a good investment carrying little or no risk.

77. According to former salesman Hammer, CX 170B-Z20 is a "picture book" which was used by respondents' salesmen in home visitations. It contains !Ivarious and sundry pictures and articles relating to the area and to the property itself' (Hammer 662). The purpose of the " picture book" was, according to Mr. Hammer (Hammer 663): (21) Here, again, to help-for those that may be unfamiliar with the area, as to what they could expect when they got there. It was to how the land would look to them. It was raw land and some people just..you can t explain well enough for them to comprehend what raw land is. So we hoped that with these pictures we could make it a little clearer to them, what they could expect to find.

78. Apart from the pictures, there are a number of articles and statements in the book generally extollng the land (CX 1706V, X and , 17, 18 , 20).

79. As earlier described, it was respondents' practice, following sales of property, to keep purchasers informed of newsworthy items generally affecting their purchase, or of specific interest in the Van Horn area (Gross 353-54). I have examined these materials, and cannot conclude from them that purchasers were thereby informed that they had made a risk-free investment.

80. These communications, often in the form of newsletters, include the following: CXs 90, 91, 92, 93, 94, 95, 96, 98, 99, 100, 102, 103, 109 110 111 112, 113 116 117 119, 120A- , 127, 128, 131, 187, 170T, 237 239, 242 and 491.

4. Representations To Purchasers 81. The former members of respondents' sales force who appeared in this proceeding uniformly testified that they had adhered to the policy of limiting the dissemination of material information to the documents furnished them by respondents for that purpose (Hammer 657 660; Rose 698, 713-19; Novaez 866-71). Mr. Novaez, respondents former Houston manager, testified that he never responded to a customer s question about investment, and would tell him to go to the .:VU1fIVVr,.:L .:U1".:11.r.: , 11""-., ro1 t"Lr. Initial Decision property personally and investigate, before answering the question for himself(Novaez 878-79). Mr. Smith, the on-site manager, testified that he "never told anybody they was going to get rich or be able to sell it for a profit" (Smith 940).

82. The testimony of complaint counsel's consumer witnesses does not reflect a pattern, at least on the part of respondents' employee sales force of good, risk-free investment representations (Baldridge 834; Buck 1498-1577; Sowell 2501- 19). (22J 83. We turn now to analyzing more specifically the testimony of purchasers contained in this record.

84. There is nothing in the testimony of Norma Baldridge which goes to Count I of the complaint (Baldridge 804-36; See especially 833-34).

85. In her testimony, Paula Bear indicated that respondents' salesman represented the property as a good investment because of oil considerations and Texas A&M projects (Bear 1117-18). According to Mrs. Bear, she was informed that within 2 or 3 years the land would triple in value (Bear 1118). She later amended this testimony to "double or triple" (Bear 1168). However, an examination of her testimony reveals that it was so contradictory and her memory so faulty that it cannot be credited. The salesman s visit occurred in 1973, nearly 8 years prior to her appearance as a witness (Bear 1116). She admittedly was present for only about half of the sales presentation, and she admitted not knowing what the salesman said to her husband in her absence or what documents were furnished (Bear 1120, 1150). She agreed with respondents' counsel that she really didn t pay much attention to the transaction at the time (Bear 1161). Many other particulars can be recited, but it is quite apparent that Paula Bear testimony is not reliable and probative enough upon which to base an accurate finding of fact.

86. Witness Clement Switaj testified that he was informed by a Porter Realty representative that he could profit from reselling his land, and that this could be done in a short period of time (Switaj 1276 1279- 87). However, on cross-examination it was brought out that this witness understood that in making this investment he was incurring a risk, and that he nevertheless invested despite such risk (Switaj 1332-32).

87. Witness Richard Morley was allegedly informed by a Porter representative that the property was a short-term investment involving a 2 or 3 year period (Morley 1340-2). He testified that he believed he would make a "little money" based upon a possible resale of his land to Texaco, or ifthis fell through, make some money from "a little farming" during his retirement (Morley 1341 , 1350-51). The witness, however, revealed himself to be aware that the Porter salesman FEDERAL TRADE COMMISSIQN DECISIONS Initial Decision 105 F. alleged "deal" with Texaco could fall through, and that negotiations to buy or sell land do not necessarily work out (Morley 1379, 1382-84). He also realized there was an uncertainty as to resale prices (Morley 1383).

88. Witness .James Limpptestified that he purchased GV A property from Diversified Realty on the primary representations (23) that oil might be found on the property and that Diversified would attempt to resell his land for him (Limpp 1391, 1394-95). Mr. Limpp expressed an interest only in a short term investment (Limpp 1399-1400, 1402). On cross examination the witness admitted that he knew there was risk in exploring for oil and further admitted that he knew there could be no guarantee as to any resale of his property by Diversified (Limpp 1422, 1433).

89. Witness Daniel Grygleskitestified that his purchases of respondents' property were designed to be short term investments only, with quick resale (Grygleski 1446, 1453, 1456, 1474). It is clear from the record that he knew there was financial risk involved- He described his purchase as "a shot in the dark" and "gambling" (Grygleski 1473 1488). On cross examination he acknowledged there was uncertainty with respect to resale of the land, and the price at which this could be done (Grygleski 1477-78).

90- Witness Catherine Bucktestified she did not purchase her property as an investment but as a place to live (Buck 1502). The only reference to investment in her testimony concerns statements regarding the purchase of property for her 19-year old son. Allegedly he was told by respondents' salesman that purchasing property from respondents would be a Hvery good investment " in that in a few years double its value" (Buck 1503). On cross examination the witness agreed with counsel's characterization that if the land were held long enough he "might be able to resell it in the future for a profit" (Buck 1563). The witness further asserted that there was no certainty in her mind as to when the property could be resold (Buck 1564). 91. Witness Pasquale Allienello testified that he purchased respondents' property not to live there but solely as an investment with an eye to making a profit (Allienello 1624, 1626). Based upon what the salesman told him he thought that the property was a "good investment" (Allienello 1627). It is not entirely clear whether or not Mr. Allienello believed his purchase to be without financial risk inasmuch as his testimony is couched in terms of "profitability, possibilities, and " potential" (Allienello 1624, 1651) 92. The testimony of witness .John Daviscannot be credited because ofthe haziness of, or the total lack ofrecoJlection of; his memory. This point is amply illustrated in the record (see 1674, 1680-81 , 1696- 17m 17HL ':1.)UlnVV ':1 ':Ul ':lli:o2 , 1l 1.-,. l 1 .L,. Initial Decision 93. Witness Ronald Goldste who was- contracted by a representative of Diversified Realty by phone, testified that the propety was represented to him as a "fine" or "very fine (24) investment, in view of oil and gas exploration in the area and of the land' s potential for farming (Goldstein 1719, 1720- , 1760-62). The witness recognized, however, that there are risks involved in purchasing land, with associated uncertainty as to when the land could be resold and at what price (Goldstein 1958, 1976-77).

94. Witness John Lrlmbert testified that he purchased a parcel of respondents' property at the age of 19 upon the representation to him by respondents' sales representative Mr. Novaez, that it would be a good investment with the price sure to rise in the immediate future and that the property could be resold (Lambert 1284- , 1297). Some months following this sale the witness received a phone call from California" and he was solicited to purchase more property upon the representation that the price ofthe land was going up (Lambert 1288). 95. Witness Steven Lueckel testified that he was contacted by a Porter Realty representative concerning undeveloped investment property with quick turnover profit potential (LueckeI1823). He was informed about proposed legislation concerning a product known as guayule from which rubber could be produced and which could be grown in certain areas of the southwest. Mr. Lueckel was allegedly told that rubber companies would repurchase the lands in the development, and that upon this occurrence the witness could expect to double his money or make higher profits in a matter of a few months (Lueckel 1823- , 1827, 1829, 1831- , 1834, 1868-69). On cross examination the witness agreed that he was not given any guarantees that these events would come about and that in fact he knew there were no guarantees (Lueckel 1865-66).

96. Witness Ronald Robinson testified that he purchased his parcel of land as an investment primarily, but secondly for the possible retirement of his father (Robinson 1915, 1933-34). Concerning investment potential, he testified that respondents' salesman stated (Robinson 1914):

Well, he said that it wasn t something that would just be, you know, jumping up in price, you know, quickly over the next. year or maybe two years. But over the next three four, five years, within that period of time it would be worth more than-much more than what it is-than what. I was buying it for. The witness did not assert that he believed his investment would be risk free, but did testify that he believed the salesman s (25) representations (Robinson 1934). Mr. Robinson did agree, however, in connection with certain property he owned in Alaska, that there was no FEDERAL TRADE COi\MISSION DECISIONS Initial Decision !O5 F.TC. certainty as to when he would be able to sell that land or for what price (Robinson 1927).

97. The witness John Sweets testified he was told by Porter Realty salesman that purchasing respondents' properties would be a good short term investment with a quick turnover at a good profit (Sweets 1948-53). The witness, aged 72 and retired, testified that this is what interested him in making his purchasing decisions, and that he was also impressed by the exploration for oil in the area (Sweets 1946-7 1959). On cross exmaination however, he gave the following candid testimony (Sweets 1972-75):

Q. And you know that there is no such thing as a sure thing; correct? A. That's right.

Q. You still know it now; and you knew it lthat there is no such thing as a sure things when you bought your first land in Texas, didn t you? A. That's right.

Q. You knew it when you bought your second land in Texas, right? A. That's right.

Q. No way of knowing how long it'll take before you earn lanyl profit, and no way of knuwing even if you will turn a profit; correct'? A. Absolutely not.

Q. And there s no way of knowing how much of a profi you will make if you make a profit; correct? A. If you are talking in absolute terms, I suppose that would be correct. l26J Q. You ve known all along that there s no :mch thing as certainty on these purchases? A. That' s evident.

Q. In fact, when you made your first purchase in Texas, your attitude going into it was you d buy it, hold it for two years and see what happens. Either you d make a profit or you d cut your losses; isn t that correct? A. Hight.

Q. And if you didn t make a profit, you would just default on your land and give up (on itJ-this would be one investment that didn t work out? A. That's right.

Q. And that's the attitude you went into it with, wasn t it? A. That' s right.

Q. And you had the same attitude with your second Florida-your second Texas purchase; is that right? A. Right.

98. The witness Sweets described his experiences in purchasing respondents properties as a "gamble" (Sweets 1977). 99. Witness Ernest Smith testified that he purchased respondents property solely on an investment basis, interested only in resale profit. According to the witness, he was told by the Porter representative that she would resell the 10-acre parcel within two years at a good nrofit, (Smith ?nRd-hfi ?0701 Tn f::('t hp('::Nop of thp uritnt:"';:o: ' lno:i., SOUTHWEST SUNSITES, INC., ET AL. ;\1 Initial Decision ence, in two years Porter Realty did resell five acres of Mr. Smith' purchase for a (27) substantial profit. Upon the default of this purchaser, respondent Mr. Kritzler accorded Mr. Smith a full refund (Smith 2094; RX 8E). It is diflcult to assess the import ofthis witness testimony inasmuch as his purchase of respondents' property was expressly only in a "hope" of realizing a profit (Smith 2066) and because of the fact that he was an experienced purchaser of undeveloped land for investment purposes, and a person who had declined to purchase on numerous occasions (Smith 210l-D2). 100. Witness Howard Schlachter testified that he purchased his property for investment purposes based upon representations of the Diversified Realty salesman that within two years the property could be resold at a profit (Schlachter 2111, 2114, 2117). Initially he testified that he could not recall any specific representations concerning specific dollar amounts of profit. He subsequently placed this figure as doubling the amount of his investment. Although the witness asserted at one point that his memory was "perfect" (Schlachter 2128), the record shows many instances of deficient recollection (Schlachter 2111- 2115, 2118, 2122, 2124, 2130-31, 2136-37). In any event, on cross examination the witness conceded that there is financial risk associated with any investment, including his purchase from respondents (Schlachter 2135a- , 2138-39).

101. The testimony of witness Otis Rawlins does not support the allegations of Count I of the complaint. Mr. Rawlins, a professional real estate man for approximately 42 years (Rawlins 2146), purchased his property in Texas for use as a possible future homesite as well as for potential resale (Rawlins 2149- , 2165). Indeed, the record shows that the property was subsequently resold by Porter Realty to a third party for nearly twice what Mr. Rawlins originally paid for it (Rawlins 2166). On cross examination Mr. Rawlins made clear his belief that resale at a profit had not been guaranteed by Porter, and that the discovery of oil on the property was not a certainty (Rawlins 2181--2).

102. Witness Donald Stein testified that he purchased his parcel on the representation of Porter Realty that this was a good short-term investment and that the property could be resold at double the money invested (Stein 2202-D5, 2221-22). The (28) witness testified that he relied upon these representations on making his purchase. On crossexamination, he acknowledged that all short-term investments do not work out (Stein 2118-21).

103. The witness Dr. Robert Danskin testified that he made two purchases of respondents' property upon representations by Porter :1' Mr Smitl, purchased 10 acres ofSWS in J976 for $6 990. In 1978, fivl' acres of this was sold for somewhat in excess of $6 000 (Smith 2098) Initial Decision 105 F. Realty that the land was a good buy and that the Van Horn area would grow and develop commercially in a number of respects (Danskin 2421- , 2126, 2129, 2459). The witness stated that he purchased this Iand for capital appreciation and resale (Danskin 2426). The record shows that the witness, a dentist, is an experienced investor with holdings in an orange grove, rental property, stocks, bonds gems, gold, antique firearms, farmland, oil and gas drillng imd vacant land (Danskin 2444-6). The witness recognized in his testimony that he did not know of any investment that is perfect; that there is always some risk in an investment, and that he recognized when he p!-rchased the properties in issue that there was risk involved (Danskin 2477).

104. The witness John Swanson testified that he purchased respondents' properties upon Porter Realty representations that it was open development property with good potential for resale (Swanson 2463). In addition, the witness was informed concerning oil activity in the area (Swanson 2468 see al802469- 2475, 2477). Concerning oil the witness stated he believed "that possibly there might be some extension of this activity where these mineral rights might result in some value to me" (Swanson 2471) On cross examination, he acknowledged that he knew of the risk and uncertainty in making his purchases (Swanson 2485-86).

105. Witness Hugh Sowell testified that the main reason for his purchase ofSWS property was the endorsement ofMr. Dewey Compton in his appearances in respondents' TV commercials. The principal purpose for his purchase appears to be its use as a possible retirement home, although at one point in his testimony he did mention the possibility of investment (Sowell 2516). Mr. Sowell further testified that the SWS salesman represented "that your property would never go down, it had only one way to go, it would be up" (Sowell 2507-08). There is nothing in his testimony which establishes whether this witness believed that any financial risks were involved (Sowell 2501- 20).

106. According to witness George Munch the land was represented to him by Porter Realty as a great opportunity to make a little money and a good profit and that he could at least double his money in possibly a year (Munch 2524 see also 2553-57). According to the salesman, the inherent value of the land (29) for use in gardening included the availability of water, the economic development in the Van Horn area, including the possibility of a nuclear plant being built, and the fact that there was oil in the vicinity, convinced Mr. Munch "that it was a very good deal " whereas "at first it all sounded too good to be true" (Munch 2526). Mr. Munch was cross examined at SOUTHWEST SUN SITES, INC., ET AL. :'3 Initial Decision with his purchase. The witness' responses to this series of questions were to the effect that there are risks generally in business and other investments; and that while there was no guarantee of profits, and while he had a "little doubt" about the matter, that based upon his experiences in selling his Florida properties for double the prices he paid, that he believed the salesman from Porter would be able to resell his land for double the amount paid, so that he was "reasonably sure that he would make a real good profit" (Munch 2543-57). 107. None of the consumer witnesses who testified on respondents behalf indicated that they were told the land was a good investment or that it was without risk. (Wharton 3565-3618; Muller 3619-3639; Sanchez 3683-3713; Perkins 4019-4043; Smallwood 4045-4087; G. Taylor 4587-4605; W. Taylor 4606-621; Townsend 4622-4634). 5. The Situation Concerning Oil 108. There is no showing in the record that respondents' employees made representations concerning oil. In fact, the showing is to the contrary, Seethe testimony of respondents' in-house sales representative witnesses, Rose 678-721; Hammer 648-73; Novaez 857-902; W. Smith 904-77; Gilmore 983- 1028. See also the testimony ofpurchaser witnesses, Baldridge 804-36; Buck 1498-1577; Lambert 1779-1815; Robinson 1904-44; Sowell 2501-19; Muller 3623; Smallwood 4048 4081; G. Taylor 4594; Townsend 4625.

109. From 1974, when Porter Realty first began sellng respondents property until mid-1977, there were no references to oil in the sales presentations by Porter Realty s sales representatives which came to respondents' attention. Beginning in late 1977 , according to respondents, it was learned that employees of Porter Realty and Diversified Realty had begun to make statements concerning the possibility that oil might be discovered in or near GV A II (Kritzler 598, 4122; Elfont 4183). Such representations were less often made about GV A (Kritzler 642). The record does not evidence that oil (30) representations were made about SWS (Kritzler 642; Elfont 4168). 1I0. As we shall see, there were four alleged representations concerning oil: companies are exploring for oil in the area ofthe properties; oil is being produced in northern Culberson County; there is a possibility that oil could be discovered on or near GV A and GV A II; and a map showing land ownership and oil production was given to some customers.

Ill. Some witnesses testified they were told that oil exploration was underway on or near GV A and GV A II (Swanson 2474; Goldstein 31 Re pondunts acknowledge that oil repre entations increased during the last few months before respondents terminated their relationi\hip with the brokers (F.fant 4185; Kritzler 4121). They claim, however, that although the percentage increased rapidly, the number of such n presentations did not. Respondents point out that the total number ursales was rapidly decreasing in late 1977 and early 1978 (Elfont 4170) FEDERAL TRADE-COMMISSION DECISIONS Initial Decision 105 F. 1719, 1760; Grygleski 1473). Others were told that such exploration might begin in the future (Limpp 1421).

1I2. According to the record, this representation was factually correct; there is evidence which shows that exploration did occur on the properties themselves and in the immediate vicinity (see Gilmore 998 3978; Sanchez 3711; W.D. Smith 928, 955, 973; Wolfe 4570; Reed 2631; Watkins 2724, 2740, 2742, 2745; Conoly 1095; Case 4519- 4538; RXs , 65 , 75).

1I3. Some customers were informed of the oil production in northern Culberson County (Swanson 2475, 2477; Danskin 2425; Elfont 4183).

1I4. According to the record, these statements were accurate (Watkins 2717- , 2723, 2725; CXs 101 , 135, 166N). 1I5. Several purchasers testified that they were told that no oil had yet been discovered or produced on respondents' properties themselves (Swanson 2475; Stein 2220; Limpp 1422; Grygleski 1492; AIlienello 1653; Sweets 1986; Switaj 1280).

1I6. The witness who claimed to have been told there was a potential for discovery of oil on the property testified that they were informed that such discovery was only a possibility, (31) which could not be predicted with any degree of certainty (Limpp 1422; Grygleski 1473, 1492; Goldstein 1776; Sweets 1977; Rawlins 2181; Stein 2203 2220-21). No witness testified that he was told that oil had already been discovered on his property.

II 7. The record shows that GV A and GV A II are surrounded by a major oil-producing area to the northeast (Watkins 2717, 2723), a smaller producing area to the east (Watkins 2736), and an area of major exploration by Texaco to the south, southwest, and west (Watkins 2724, 2729-36). The properties may possibly lie within the West Texas Overthrust Belt, a geographic formation which many experts believe contains oil (Watkins 2753-54). Texaco owns and leases substantial amounts ofland and mineral rights in the immediate vicinity of the properties (Watkins 2745; CX 129).

lib- The record contains evidence of oil exploration in and near the properties. Such exploration does not occur unless there is some perceived potential for discovering oil (RX 75 at 13-16). The results of a survey by Geotronics, Inc., which actually included magnetotelluric stations on GV A, were priced at $97 530 (RX 65). Results ofthe survey were purchased by several different customers (RX 75 at 16-17). 1I9. Records of the General Land Offce of the State of Texas show 144 current leases of mineral rights within a 60 mile by 60 mile area centered in Van Horn (RX 76)- Most such leases are for a section of land (640 acres) (RX 76m), though others are for tracts ranging in size SOUTHWEST SUNSITES, lng, ET AL.

Initial Decision 120. The identities of some of the lessees are: Sun Oil Co.; Atlantic Richfield Co.; Kim-Brant Oil Co.; Castile Minerals Corp. ; Texaco, Inc. Border Exploration Co.; Rudman Resources, Inc.; Canada Northwest Oils, Inc.; and Keith Collns Petroleum Corp. 121. As mentioned, certain oil maps were provided by Porter Realty to some customers of GV A (CX 129). The first page of the map, CX 129c 32 shows an outline of GV A superimposed on a property-ownership map. The second page, CX 129b, shows land ownership between GV A and Van Horn. The map shows that the mineral rights on 18 sections of land south of and surrounding (32) Van Horn are owned by Texaco. The first two pages are prominently labeled "West Part of Culberson Co., Texas.

122. The final page of the map, conspicuously labeled "East Part of Culberson Co., Texas " shows land ownership about 50 miles from GVA (CXs 129a; 166N; Watkins 2717-18). Texaco, Continental Oil Union Oil, and Exxon are shown as owning land or mineral rights in this area. An employee of Texaco confirmed the accuracy ofthe maps at least as they related to mineral rights owned by Texaco (Watkins 2749).

123. Notwithstanding the above activity, it was respondents' stated policy not to employ representations concerning oil in their sales approach. As Mr. Kritzler testified (Kritzler 4121): Q. What was the policy of the company with respect to sales personnel or brokers making mention of oil in connection with a sales presentation? A. We called and reprimanded them, and told them that if the complaints continued that we wanted the salesman fired (Kritzler 4121) Q. Did you, Mr. Gross, or any of the Corporate Respondents, ever authorize the use of that map ICX 1291' No.

Q. When you fi:mnd out according to the customer that he was given that map, what did you do? A. Called Porter immediately and told him not to use the map, that it was outside of his jurisdiction to do that (Kritzler 4125). Q. Did you take any action (when you subsequently learned that the map was continued in use by Porter Realty Company)? (33J A. Yes. We told them to absolutely discontinue using the map. I believe that he said he would fire the salesman responsible for doing it, or salesmen for doing it. And that must have been January or February 1978.

Q. What happened after that? A. Well, after that it came to our knowledge that he was continuing to use it, am that they were continuing to refer to oil in the area, and we terminated him. The record shows that the pages ofthe" map WPre out of order when offered into evidence. The proper sequen, . "V 1?Q,. ex 129b, ex 129a (Port.er 2352-57). The record also shows a map in the proper order (( ..

Initi,,l- isian Ids F. Q. And when you found out that Diversified Realty was using the map did you take any action? A. We told them to absolutely discontinue using it.. We terminated them (Kritzler 412&-27).

124. The evidence further shows that respondents' employee Mr. Jeffrey Elfont was assigned to telephone each customer ofDiv:ersified Realty and Porter Realty from early 1977 until the brokers were terminated in February and March 1978, respectively (Elfont 4169). After some customers first began referring to oil in late 1977, Elfont questioned each customer whether any statements concerning oil had been made (Elfont 4183, 4194). If a representation had been made about oil, Mr. Elfont made a detailed disclosure to the customer: From the information that I had received from Mr. Kritzler and Mr. Gross, the nearest oil in production was, I believe, 50 or 60 miles away and that one of the major oil companies owned some land in the vicinity of Green Valley Development and to that point, that was all the information that I had, that there was no current explora (34)tion on the property, nor had there been in the past. Q. Is that what you informed the customer? A. Yes.

Q. What would be your response to these customers? A. My response would be absolutely not. We have not, the Company Green Valley Acres has not heard of any development of oij, the development itself; and we don expect that to happen.

Q. You don t expect what to happen? A. Any oil development in the area (EJfont 4184-85). 125. Mr. Kritzler further testified (Kritzler 4122): Q. When a call would be reported to you by Mr. Elfont that oil has been mentioned in the sales presentation, what would you do? A. I would call the customer and talk to them, and tell them that as far as I knew :here was no oil exploration near the property, and that they should not expect to Jenefit by that, that would be like winning the sweepstakes, chances would be very mall that any benefit would come to them (Kritzler 4122; see also Kritzler 597). 126. In addition, according to Mr. Kritzler, ifit turned out that the "tomer had purchased the property for its oil-producing potential Ie sales contract would be cancelled, and a full refund provided :ritzler 638-0, 4122-23; Elfont 4186; Porter 2323-24). (35) 127. There is an instance in the record of one of consumer witnesses plaining respondents' reaction to an oil-related representation. A Jresentative of Porter Realty allegedly gave the following informan to Mr. Swanson: