Penny Stock Fraud and Misrepresentation FINRA Arbitration and Litigation Attorney, Russell L. Forkey, Esq.
SEC v. Christel S. Scucci, et al., Case No. 6:12-646-ORL-37-KRS (M.D. Fla.)
SEC CHARGES ATTORNEY AND CLIENTS IN SCHEME TO UNLAWFULLY SELL BILLIONS OF PENNY-STOCK SHARES
Recently, the Securities and Exchange Commission charged a mother-and-daughter pair and their attorney with a scheme to unlawfully acquire and sell billions of shares of penny stock that were never registered for sale to the public.
The SEC charged Florida attorney Cameron H. Linton, Esq., his clients, Christel S. Scucci and her mother Karen S. Beach, and their companies, Protégé Enterprises, LLC, and Capital Edge Enterprises, LLC with a scheme to unlawfully sell large quantities of stock in violation of Section 5 of the Securities Act of 1933, which generally requires that securities transactions be registered with the SEC, unless exempt. According to the SEC, over an approximately 20-month period ending in October 2011, Scucci and her mother sold about 3.3 billion shares of purportedly unrestricted stock that they acquired through so-called debt conversion “wrap around” transactions, reaping proceeds of more than $1.5 million from the sales. The SEC alleges that Scucci and Beach were able to sell most of this stock only because 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, which is commonly referred to as a “restrictive legend.” The opinion concluded that their resale was exempt from the federal registration requirements.
According to the SEC’s complaint filed in federal court in Orlando, FL, the transactions involved notes issued by microcap companies representing debts supposedly owed to affiliates or others often closely associated with the companies. Under the wrap around agreements, the affiliates assigned the right to collect the debts from the issuers to Protégé or Capital Edge. 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 into shares of the issuers’ common stock at a deep discount 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, and regularly sold the stock into the public market, often for large profits, within days or weeks of acquiring it. None of the sales were registered with the SEC.
The complaint alleges that Protégé and Capital Edge paid Linton to write attorney opinion letters for them stating that the stock acquired under these wrap around agreements lawfully could be issued to them by the transfer agent without a restrictive legend and immediately sold to the public. According to the SEC, Linton lacked any basis for the opinions he issued, which were premised on the notion that through the wrap around agreements and debt conversion, Protégé and Capital Edge could rely on a safe harbor for resale of securities held for at least one year by “tacking” the 12-month period that the affiliates claimed to have held the original debt before transferring it to Protégé and Capital Edge. However, the complaint alleges that when Linton wrote the opinion letters, he lacked an understanding of the applicable legal principles and failed to substantiate the factual predicate for his opinions. Furthermore, the complaint alleges that in mid-2010, Linton became aware of an injunction issued in SEC v. K&L Enterprises, Inc., involving a similar scheme in which his letters were used to effectuate unregistered sales. But for Linton’s opinion letters, transfer agents would not have issued the stock to Protégé and Capital Edge so that they could quickly turn around and sell it into the public market.
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 is seeking to have the defendants return their ill-gotten gains, pay penalties, be subject to injunctions, and be barred from participating in future penny-stock offerings.