The SEC today charged a mother and daughter, and their attorney in an unregistered penny stock scheme, having allegedly tried to unlawfully acquire and sell billions of shares.  According to the SEC complaint, this scheme, involving the illegal use of "wrap around" agreements, ran from for nearly 2 years - January 2010 to October 2011. SEC Findings and Allegations. Christel Scucci and her mother Karen Beach, both Florida residents, used alter ego companies - Protégé Enterprises LLC and Capital Edge Enterprises LLC - to make more than $1.5 million from the sale of approximately 3.3 billion shares of purportedly unrestricted stock they acquired in so-called debt conversion "wrap around" transactions.  The pair were abetted in their scheme by FL-based attorney Cameron Linton, who issued baseless legal opinions stating that the stock could be issued without a a "restrictive legend" - i.e., a warning on the stock certificate limiting transfer or sale of the security.  Linton's opinion letters also stated that the shares could be resold because they were exempt from federal registration requirements.

"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." -- Stephen Cohen, Associate Director in SEC Enforcement.

How 'Wrap Around Agreements' Work. 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% - 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. Lawyer Linton allegedly was paid through Protégé and Capital Edge to write the attorney opinion letters for Mother and Daughter, 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.  The SEC contends there was no legal basis for this opinion. Linton's opinion letters were built around the premise 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 supposedly lacked an understanding of the applicable legal principles and failed to substantiate the factual predicate for his opinions.  [C-I Note: But they sure fooled a lot of people for a very long time.]   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 2 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. SEC Sanctions. The SEC seeks disgorgement, penalties, injunctions, and penny stock bars against the defendants, based on their violations of 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. SEC Staff Credits.   Investigated by: Daniel Rubenstein and Adam Eisner, supervised by Joshua Felker, Asst. Director in Enforcement.  Kenneth Guido will lead the litigation. For further details, go to [SEC PR 12-80, 5/1/12] and the [SEC Complaint].