Mother and Daughter Fined for Illegal Transactions

Jack Humphrey, Regulatory journalist
May 02, 2012 /

In its continued battle against unregistered sale of stocks, the US Securities and Exchange Commission has busted a mother and her daughter along with their attorney for unlawfully acquiring and selling billions of shares of penny stock in unregistered transactions.

Christel S. Scucci and her mother Karen S. Beach, from Florida, allegedly 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 after Florida-based attorney Cameron H. Linton issued “baseless” legal opinions allowing the stock to be issued even 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 letters concluded that their resale was exempt from the registration requirements of the federal securities laws.

“This case shines a spotlight on unlawful profiting from transactions designed to circumvent the registration requirement of the federal securities laws,” said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement.

“This action should also alert transfer agents, securities attorneys and other industry gatekeepers to closely scrutinize efforts to lift restrictive legends through so-called wrap around agreements.”

According to the SEC’s complaint filed in federal court in Orlando, Fla., under this scheme, lasting from January 2010 to October 2011, 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 were registered with the SEC.

The SEC 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’s complaint, Linton’s legal opinion letters lacked any basis. The premise of Linton’s opinion letters was 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 12 months by “tacking” period that the affiliates claimed to have held the original debt before transferring it to Protégé and Capital Edge.

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, in mid-2010, Linton became aware of an injunction issued in a separate SEC enforcement action (SEC v. K&L International Enterprises) in which two of his letters were used in a similar scheme. Without Linton’s opinion letters, Protégé and Capital Edge could not have acquired most of the stock without a restrictive legend and quickly turn around and sell it publicly.

The SEC’s case was investigated by Daniel Rubenstein and Adam Eisner under the supervision of C. Joshua Felker, an Assistant Director in the Division of Enforcement. Kenneth Guido will lead the SEC’s litigation.

 

Share your opinion