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Smooth Operator

In the mountain town of Frisco, Bobby Gene Kelley was known as a drinker of great persistence. Soon after receiving one too many citations for driving under the influence of alcohol, he purchased a Lincoln Towncar limousine. When he felt like having a drink, he would call his driver, who would then ferry him around to local watering holes where, recalls one local bartender, "Gene wasn't bashful with his money. Big tabs, always buying everyone drinks. Very generous."

If there was one thing that Kelley did better than partying, it was selling, which he also accomplished with great enthusiasm. "He could sell a refrigerator to an Eskimo," says Roberta Martin. "He could talk a leg off a table."

Martin experienced Kelley's sales techniques firsthand. In 1990, when he knocked on the Martins' door and suggested they get in on a new telephone company he was starting, it seemed like a fine investment; she wrote him a check for $4,000 from their retirement funds.

"He dressed neat and kept his hair cut nice," says Martin, who moved with her husband to Pueblo several years ago from Salida, where they had run a shoe-repair business for thirty years. "It sounded good."

Martin wasn't the only person writing Kelley big checks. During a two-year period, from 1989 through 1990, people all over Colorado--most of them elderly, many of them from rural towns--gave more than a half-million dollars to Kelley to finance his new phone company. He rounded up these investors in an unconventional way: Kelley, whose official job was selling supplemental Medicare insurance policies to retirees, peddled his own project at the same time. After he made his health-insurance pitch, he'd segue into a plug for his new telecommunications venture.

"We was wanting some insurance, hospital insurance, and so he came to our house," recalls Helen Peck, who still lives in Akron a decade after retiring from farming alfalfa there. "I don't know how we got to talking about phones, but what he said sounded good. He talked pretty nice and seemed pretty fair." Impressed, Peck gave Kelley $6,000.

In all, Kelley raised an estimated $590,000 from investors like Peck and Martin. His company, Peak Phone Service, Inc., founded in February 1990 in Frisco, seemed to take off quickly. By late last year Kelley owned or leased nearly 500 pay phones throughout the state, most of them in small mountain communities--from the Cliff Brice convenience store in Saguache to Downstairs at Eric's bar in Breckenridge, from the Hog's Breath Saloon in Pagosa Springs to Club Med at Copper Mountain, and a lot in between.

With his two sons joining him at Peak, Kelley enjoyed the lifestyle of a successful businessman, complete with limo and Jet Skis and other mountain toys.

But the success was short-lived. In July 1995 Kelley suddenly declared himself personally bankrupt. Then, this past April, Peak Phone filed for protection from its creditors under federal bankruptcy laws while the Kelleys tried to reorganize Peak's finances.

It didn't work: By fall the company had ceased to exist, leaving Helen Peck and Roberta Martin and dozens of other investors holding near-worthless IOUs from the Peak pay-phone empire. And the tumultuous pay-phone industry had spit out another company with big dreams of fast cash.

Sometimes Frank Semone's job is like running into a stiff head wind. As president of the thirty-member Colorado Payphone Association, one of his tasks is trying to supply legitimacy to the pay-phone industry. But even Semone admits pay phones can be a hustle and that the business attracts some wrong numbers. "Anytime you have an emerging industry, there are going to be people who don't play by the rules," he says.

To anyone who has slid a quarter into a pay phone, the idea that owning one could be part of a get-rich scheme seems far-fetched. But try thinking of pay phones as just another part of the multi-billion-dollar telecommunications business.

It has been only in the last decade that private parties could own pay phones. Today there are an estimated 1.9 million pay phones in the country; the vast majority of those, about 1.5 million, are still owned by what are known as local operating companies--corporations such as US West.

In Colorado, US West once controlled all the pay phones; today it still owns 27,000 of the state's estimated 34,000 pay phones. The remainder belong to approximately fifty private companies that jockey furiously for a small amount of new business and, more commonly, for the profitable locations that already exist. Recent deregulation rules, which could make it more difficult for US West to earn a profit on its pay phones, mean the number of private pay-phone operators will probably rise.

Semone, who has owned his own pay-phone business, Denver-based Western Paytel, for nearly a decade, says that the industry has become almost unrecognizable during that time. "When I started, all you had to do was put a computer chip into a phone, hang it on the wall and collect the money," he recalls.

 

"Today I'm speaking from our computer room. I can change the rate on any of our 700 phones in an instant. Every night our computers call every phone we own to collect information on how much money we took in and whether the phone is working. We usually know a phone is broken before the location owner does, and we can send a technician out immediately. We need to know these things, because a broken phone isn't earning any money."

The way pay phones earn money for their owners has changed dramatically, too. Pay phones cost about $2,000 each to buy and install, and they can be a constant headache to maintain. "A pay phone is an emotional thing to somebody who uses them a lot, and they need to work," Semone says. But with some attention to service and a little luck, the machines can also bring in cash very quickly.

The most obvious way is through coins. People shove quarters into pay phones for local calls (recent court decisions and deregulation efforts may soon boost the cost of a local call to 35 cents) and also pony up fistfuls of silver for what can be huge markups on long-distance calls. The small change adds up: A reliable phone in a good location can take in $300 a month.

The more lucrative way for pay phones to produce profits, though, is through long-distance calls charged to credit cards. Pay-phone companies, or intermediaries, buy long-distance time wholesale and then sell it retail. Until last year, when Colorado regulators moved in, pay-phone operators billed huge markups on interstate long-distance credit-card calls. Now the rates are capped, but pay-phone companies still enjoy a reasonable profit margin on calls within Colorado and a large one on calls between states.

Generally, recent legislation, legal decisions and deregulation efforts have benefited private pay-phone operators. For example, long-distance carriers such as AT&T, MCI and Sprint had long circumvented local pay-phone companies by issuing calling cards that accessed their lines through 800 numbers. Because the calls were toll-free, the pay-phone companies didn't collect any money.

But that will change. Beginning in 1997 the giant long-distance companies will have to pay private pay-phone operators an average of $46 per phone per month for what were once toll-free calls. The result will be an estimated $200 million bonanza for the pay-phone industry (and probably higher rates passed on to the customer). On the other side of the balance sheet, a recent Colorado court decision will soon reduce the cost of doing business with US West, which private pay-phone companies must pay for access to phone lines.

"If done right, owning pay phones is like owning an annuity," says one lawyer familiar with the business. "Oh, yeah, oh, yeah, it's profitable," adds Bill Bailey Jr., owner of the Texas-based Cherokee Communications, which has about 14,000 phones in a dozen states, including Colorado. Bailey ought to know. Two weeks ago he sold his company for an estimated $50 million.

Despite such success stories, margins can be thin, and the number of good pay-phone locations is limited. So the industry has become intensely competitive.

Having lots of pay phones in heavily traveled spots is the surest way to make a profit, and pay-phone companies are constantly battling to convince the owners of such sites to place their own equipment there. Most large pay-phone companies boast an aggressive sales force that scrambles to secure desirable locations. Using high commissions--up to 25 percent of a phone's revenue--and outright cash bonuses, salesmen wheedle, cajole and persuade the owner of, say, a popular Conoco store to install their company's telephones rather than a competitor's.

The intensity of the competition was demonstrated in a lawsuit filed early this year in Denver District Court, in which Peak Phone Service accused Cherokee of swiping its good pay-phone locations. The suit claimed one of Cherokee's salesmen had approached several Western Slope convenience stores and persuaded them to switch their pay phones from Peak to Cherokee by slandering Peak. The salesman did this, the suit alleged, "by making statements that Peak Phone Service was 'ripping off' its clients." The lawsuit eventually was dismissed.

The huge amount of money at stake in the pay-phone industry has inspired some owners to operate in the margins of the law. The most questionable practices seem to have occurred in the mass financing of start-up pay-phone companies, during which investors are purportedly sold phones (see sidebar) or pieces of solid companies. Frequently, the ones who get hustled are the elderly.

 

Gene Kelley was a natural-born salesman. He left his native Oklahoma to serve in the Navy and eventually ended up in Texas, selling insurance. At first he worked for an established insurance company, but he later broke away to start his own company.

Various court records show that Kelley has a history of financial difficulties (Kelley himself could not be reached for comment for this story), and in November 1987 he declared himself personally bankrupt. Kelley was discharged from his debts in May 1988; six months later he moved to Colorado.

People who have met Kelley describe him as folksy, with a rugged demeanor and a preference for Western wear. According to his former wife, Mary, Kelley "was always a good seller."

He picked up in Colorado where he'd left off in Texas, peddling supplemental health-insurance policies to retirees. In early 1989, Mary says, a friend of one of his sons told Kelley about the pay-telephone business.

"It just sounded appealing--you know, having machines out there working for you," recalls Gene's oldest son, Michael. Kelley soon began pouring the foundation for his own company while making his insurance-sales rounds.

Explains Michael, "We just went to every one of our policyholders and said we'd like to borrow some money if they were interested." More specifically, adds one acquaintance, "Gene needed money, and so he went out and raised several hundred thousand dollars from old ladies."

Addresses of the creditors left holding pieces of Peak when the company went bust show that Kelley was busy soliciting people not only in mountain communities but also along the eastern Plains, the Western Slope, and from Pueblo, Alamosa and Granby. The list of investors also hints at their ages. Many of the company's creditors are trying to recoup their money through family trusts, indicating that the original investors have passed away.

John Baker, a Granby lawyer, represents the Willian Olsen Testamentary Trust. He says his former client died a year ago at the age of eighty--but not before handing over $2,000 to Peak Phone in 1990.

"She was quite elderly when he got in touch with her," Baker recalls. "And I use the term 'investor' loosely. She was taken advantage of by this pay-phone company. If I were having a private conversation, I'd use stronger language. But we'll leave it at that."

Seventy-year-old Norbert Commes, a retired mine worker from Leadville, also invested in Peak Phone. "Mr. Kelley would come to Leadville every once in a while," Commes recalls. "He got involved with the senior citizens there, selling insurance and so forth. We have a dinner at the senior center every Tuesday and Friday, and he'd drop by and eat with us every now and again.

"He approached me one time and asked me if I wanted to invest with Peak Phone Service. I had a little money--of course, it was money I had saved my entire life. I stuck twenty grand with him. A few months later he came back and asked for more, and I gave him another $23,000. He was a real nice fellow."

Commes says he signed away his money for a five-year period and that during that time Kelley diligently paid the 12 percent interest he'd promised. "But after the five years was up and I asked him for my money, he said that would really put him in a bind," he recalls. "I kept calling his son in Frisco, and Michael Kelley eventually sent me $10,000. But the other $33,000 I couldn't get.

"It's been a long time," Commes concludes. "I can never get ahold of them."
Another Peak investor, Cecelia Foreman, worked most of her life in Leadville's Delaware Hotel, beginning as a maid in the 1930s. "Back then it was just a mercantile on the ground floor, with rooms on top," she says. She retired several years ago.

"In 1990," Foreman recalls, "the Kelleys came to my house and laid out a program that sounded pretty good. So I invested some money. I don't know how they got my name and address. They had an interest rate that sounded good and--I don't know--it just happened."

Like Commes and most of the other investors, Foreman gave Peak her money for five years. Again during that time, the Kelleys paid interest on Foreman's investment, which she remembers as coming to about $30 a month. In 1995, she says, "I needed some extra money, and since it was past five years, I asked for a lump sum back. And they just didn't have it. They avoided any phone calls after that. They still owe me about $3,000 plus interest."

Kelley and his sons started Peak Phone with about two dozen phones. Within a couple of years the number had grown to 200, and then 480. The fact that Peak operated for five years and that during that time Kelley made regular interest payments to his investors may indicate he was in the pay-phone business with serious intentions.

 

Yet people familiar with Kelley point out that pay phones are a cash business carrying all the temptations of easily available money. Once the funds began rolling in, they say, Kelley preferred spending it on himself to maintaining his young business. "Gene took money out of Peak to the detriment of the company," says one lawyer.

Kelley's former wife agrees that Gene spent freely with his pay-phone income, buying a snowmobile, Jet Skis and a motor home while also maintaining a house in Denver. His personal problems--particularly with alcohol--may have contributed to Peak's financial difficulties as well: "Overspending, overdrinking, overpartying," as Mary puts it.

Court documents and interviews with people familiar with Kelley suggest that, while he was enjoying the perks of owning his own phone company, Peak Phone was sliding into trouble almost from the beginning. "It grew too fast," says one person who knew the company well. "They were always ninety days late with their payments. Not thirty days--ninety days. And they had to rob Peter to pay Paul and then rob Paul to pay themselves."

The Kelleys also began neglecting their phones--the equivalent of a florist not watering his plants. "Pay phones are like cash cows," says one lawyer involved in Peak's subsequent bankruptcy. "But you have to feed the cow to keep it going."

Peak's phones would remain broken for weeks. At its height, the company employed only a single full-time service technician to maintain phones over the length and breadth of the state. That resulted in both lost revenue and the enmity of store owners who had to weather customers' wrath. The Kelleys further angered those owners by not paying the commissions they'd promised when the pay phones were installed.

"Peak Phone Service has not paid the Blanca RV Park quarterly since contract was entered into and the equipment and structure placed on the property," begins an August 1995 letter from Major Oringdulph, the park's owner, to Kelley. "Also, the phone has been out of order for almost half the time it has been on the property."

"This letter is to formally acknowledge your reluctant commission payment of $145.74, the balance of 1994 on the pay phone located at the E-Z Mart, 420 South Broadway, in Cortez," reads another letter to Kelley from J. Burton Black, owner of the store. "Integrity is of the utmost importance to me," Black continues. "Therefore, you are requested a second and final time to remove this pay phone immediately."

The unhappy job of collecting money from Peak's pay phones often fell to Tom Carpenter, who also maintained the machines. "My philosophy was always to collect, duck and run," he recalls. "It got so I could get into a store, empty the phone and get out again without them ever seeing me."

By 1995 many people with Peak pay phones in their stores had tired of the company's inattention and were trying to get out of their ten-year leases. "People were just getting frustrated," recalls Dan Corwin, owner of Pair A Dice Vending in Frisco. Seeing an opportunity, Corwin decided to get into the pay-phone business himself and began approaching Peak's Summit County customers about replacing Kelley's phones with his.

Peak was also being squeezed by changes within the industry. In early 1996 AT&T and MCI were heavily pushing their calling plans (1-800 Call ATT and 1-800-Collect). Although all pay-phone companies were affected, those such as Peak that were overextended were hit particularly hard. Michael Kelley says Peak's business dropped 70 percent during what was supposed to be its busiest time of the year.

When Kelley felt pressured for cash, according to court documents, he would approach his elderly investors and either encourage them to wait longer before they asked for their original money back or request an additional investment. Despite Kelley's skill at talking people out of their money, though, Peak was fast falling behind on its bills. One of the biggest creditors was US West.

Although new regulations may change its place in the pay-phone field, for now the giant telecommunications company is an indispensable player in the industry. Independent pay-phone operators have to go through US West for their phone lines, and the company collects money for every minute a caller spends in a phone booth.

Almost since its inception, says one insider, Peak Phone had been behind on its US West bills. But by mid-1996 the Denver-based corporation was running out of patience.

 

So this past April, US West shut off the phone lines to about three dozen of Peak's phones. Rattled by the move, on April 25 Gene and Michael Kelley sought protection for Peak Phone Service under Chapter 11 bankruptcy laws.

The Kelleys hoped to use the filing as a very temporary cover from their creditors, and court documents indicate they were certain that Peak would be free and clear from bankruptcy court in almost no time. In fact, the Kelleys had negotiated a repayment plan with US West and by June appeared to be headed out of court. But then came a mysterious phone call from an unnamed woman alerting authorities to Gene Kelley's creative financial maneuvers.

Just before declaring himself personally bankrupt in July 1995, Kelley had tried to separate Peak from his own troubles. He shifted all his ownership in the phone company to his son, Michael. As Lori Kelley, Gene's daughter and attorney, explained at one court hearing, "He transferred his stock because [Peak Phone] was going to go under. They wanted to get refinancing, [but] no one wants to refinance a corporation when the majority shareholder has all kinds of tax liens against him."

The anonymous call was made to Matthew Skeen, a Denver attorney for the trustee of Gene Kelley's personal bankruptcy case. It was made, he reported, by a woman "with a slight Southern accent."

The woman informed Skeen that the Kelleys were about to sell Peak. Even though Gene supposedly no longer had a stake in the pay-phone company, she added, he was going to pocket $300,000 from the sale and "split the country." (Kelley denied everything, but as it turned out, he was negotiating with a Kentucky company to sell Peak in May. The deal subsequently fell through.) Skeen immediately notified the lawyers in Peak's Chapter 11 bankruptcy and demanded that the company not be discharged from court.

By early July it was clear to US West that, despite the repayment schedule the Kelleys had agreed to, Peak would not be able to pay the money it owed. By then US West had had enough of Kelley. On July 17 the telecommunications corporation flipped a switch, and every one of Peak's pay-phone lines went dead.

On September 18, two giants of the pay-phone industry, Cherokee Communications and Arizona's Pacific Communications, bid for the rights to the 280-odd phones that remained of Peak Phone Service. (Peak had used some of its equipment as collateral for debts, and that was disbursed during the bankruptcy. About fifty phones are listed as "missing"; they're still collecting coins somewhere, but Peak's records were so shoddy that nobody knows where.)

Pacific won, offering just over half a million dollars for Peak's site leases and equipment. Since then, the Arizona company has been trying to win back store owners who, thanks to the Kelleys' neglect, are fed up with the pay-phone business. "Whoever ends up with Peak has some major ass-kissing to do," explains Tom Carpenter, Peak's former maintenance man.

Even though Peak has been sold, lawyers involved in the case say it's unlikely that small investors such as Norbert Commes, Helen Peck and Roberta Martin will retrieve anywhere near the amount of money they invested. The big creditors, such as US West and the Colorado Department of Revenue, will be paid off first.

"I think we'll be lucky to get anything out of this," says John Baker, the lawyer for Willian Olsen's estate.

Even Gene Kelley's children haven't escaped unscathed. Younger son David bailed out of the business early this year. Michael now sells cell phones and pagers in Dillon. Daughter Lori fared worse.

In the early stages of Peak's bankruptcy, Kelley relied on Lori, who'd recently graduated from law school, to handle the Chapter 11 case. But it soon became clear she was in over her head, and she is now facing sanctions from federal bankruptcy judge Sidney Brooks because of errors she made during the course of the case. Among other mistakes, she initially contended Peak owed money to fewer than a dozen people, when in fact the company had hundreds of creditors.

Lori also apparently ran into personal difficulties while working for her father. In one document she recently filed in defense of her handling of the Peak case, she claimed that a respected Denver bankruptcy lawyer the Kelley family eventually hired to help made passes at her. She also reported that the wife of another local bankruptcy attorney working on the case accused her of having an affair with her husband.

"The whole story seems more like a soap opera than a bankruptcy proceeding," Lori Kelley said in that October filing.

It may not be over yet. According to his former wife, Gene Kelley hasn't given up on the pay-phone industry. He recently began working for another phone company in Oklahoma.

 

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