May 1, 2012
SEC Charges Mother, Daughter & Attorney in Penny Stock Fraud
The SEC charged a mother and daughter along with their attorney in a scheme to unlawfully acquire and sell billions of shares of penny stock in unregistered transactions. According to the SEC, Christel S. Scucci and her mother Karen S. Beach, who live in Florida, used alter ego companies (Protégé Enterprises LLC and Capital Edge Enterprises LLC) to make more than $1.5 million from selling approximately 3.3 billion shares of purportedly unrestricted stock that they acquired in so-called debt conversion "wrap around" transactions. They were able to sell most of this stock only because Florida-based attorney Cameron H. Linton issued baseless legal opinions for them stating that the stock could be issued without a warning on the stock certificate limiting the transfer or sale of the security. The opinion letters concluded that their resale was exempt from the registration requirements of the federal securities laws.
According to the SEC’s complaint filed in federal court in Orlando, Fla., this scheme involving the illegal use of wrap around agreements lasted from January 2010 to October 2011. Under the wrap around agreements, affiliates or others purportedly owed money by certain microcap issuers for more than one year assigned from the issuers to Protégé or Capital Edge the right to collect the debts. The wrap around agreements also purported to amend the initial debt agreements thereby allowing Protégé and Capital Edge to convert the money owed to them by the issuers into shares of the issuers’ common stock at a deep discount (usually 50 percent) to the prevailing market price. Protégé and Capital Edge almost always elected to receive stock from the issuers shortly after execution of the wrap around agreements. None of the transactions was registered with the SEC.
The SEC’s complaint alleges that Protégé, Capital Edge, Scucci and Beach violated Section 5 of the Securities Act. The complaint further alleges that Linton violated, or aided and abetted the violation of, Section 5 of the Securities Act. The SEC seeks disgorgement, penalties, injunctions, and penny stock bars against the defendants.
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