Mother, daughter accused of penny stock fraud

Michael P. Tremoglie May 1, 2012, 9:14am

WASHINGTON (Legal Newsline) - The Securities and Exchange Commission charged a mother and daughter and their attorney Monday with a scheme to illegally buy and sell billions of penny stock shares in unregistered transactions.

The SEC alleges that Florida residents Christel S. Scucci and her mother Karen S. Beach used sham companies (Protege 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.

This was accomplished, according to the SEC, simply because Florida attorney Cameron H. Linton issued sham legal opinions for the two stating that the stock could be issued without restrictive legends and that their re-sales were 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 requirements of the federal securities laws," said Stephen L. Cohen, an Associate Director in the SEC's Division of Enforcement.

"This should alert transfer agents, securities attorneys and other industry gatekeepers to closely scrutinize efforts to lift restrictive legends by 'tacking' onto delinquent debt through wrap around agreements."

According to the SEC's complaint, the alleged fraud used illegal wrap around agreements which lasted from January 2010 to October 2011. The terms of the wrap around agreements said that affiliates or others who were purportedly owed money by certain "microcap issuers for more than one year" assigned debt collection rights from the issuers to Protege or Capital Edge.

The terms also purportedly amended the initial debt, permitting Protege and Capital Edge to convert the money owed to them into discounted shares of the issuers' common stock. The SEC said that Protege 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 said, "Protege and Capital Edge then paid Linton to write attorney opinion letters for them stating that their sales of the stock acquired under these wrap around agreements lawfully could be issued to them without a restrictive legend and immediately sold to the public. Protege and Capital Edge regularly sold the stock into the public market, often for large profits, merely days or weeks after they acquired the shares through the wrap around conversions."

But the SEC says that Linton's legal opinion letters lacked any basis. The SEC's complaint alleges that Protege, 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.

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