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A blast from the penny stock past

United States Securities and Exchange Commission
Litigation Release No. 21423 / February 23, 2010
Securities and Exchange Commission v. Frank J. Custable, Jr., et al., Civil Action No. 03-CV-2182 (N.D. Ill.)
SEC Obtains Final Judgments Against 12 Defendants in Penny Stock Scheme

The Securities and Exchange Commission announced that the court has entered final judgments against nine defendants and three relief defendants in connection with a penny stock scheme orchestrated by Frank J. Custable, Jr. Filed on March 28, 2003 as an emergency TRO action, the Commission's complaint alleged that, for the period from at least Nov. 2001 until the commencement of the Commission's action, Frank J. Custable Jr. and others engaged in a scheme to violate the registration, antifraud and reporting violations of the federal securities laws through the use of unregistered and fraudulent penny stock offerings. The complaint alleged that Custable accomplished this by obtaining and dumping massive quantities of improperly registered shares of stock of at least seven different penny stock companies on the general public, generating proceeds to Custable of at least $4.3 million. The complaint further alleged that Custable fraudulently concealed his ownership interest in the seven penny stocks by having various entities and persons he controlled engage in a host of securities transactions on his behalf. The complaint alleged that Custable obtained stock through fraudulent Form S-8 registrations (normally intended to allow distribution of securities to employees and consultants), fraudulent manipulations of Rule 144(k) holding requirements for resales of restricted stock, and through a scheme to counterfeit nearly half of the outstanding stock in Innovations Holdings, Inc., then known as "Blagman Media International, Inc." In addition to charging Custable and certain of his employees, the Commission also charged certain of the penny stock companies and their officers with securities fraud and registration violations. Custable has pled guilty to various federal charges arising conduct in the scheme, and on June 9, 2009 was sentenced to a prison term of 21 years.

On January 28, 2010, Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois issued final judgments, by default, against: (i) Suburban Capital Corporation, the entity through which Custable perpetrate his scheme; (ii) Blagman Media International, Inc. (now doing business as "Marketing Concepts International, Inc."), one of the penny stock company defendants with whom Custable perpetrate his scheme; (iii) Wasatch Pharmaceutical, Inc., another penny stock company defendant; (iv) ThermoElastic Technologies, Inc. (now doing business as Wannigan Capital Corp."), a third penny stock company defendant; (v) and three relief defendants to which Custable transferred ill-gotten stock and sale proceeds - Active Investments, Inc., Pine Services, Ltda., and Sothis III, LDC. The final judgments permanently enjoin Suburban Capital, Wasatch and ThermoElastic from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and enjoin Blagman Media from violations of Section 5(a) and 5(c) of the Securities Act. The Court also barred Suburban Capital from engage in any future penny stock offering. The Court ordered Suburban Capital to disgorge ill-gotten gains amounting to $3,447,617, plus prejudgment interest thereon in the amount of $1,667,026.67, for a total monetary judgment of $5,114,644.47. The Court ordered Blagman Media to disgorge $803,500, plus prejudgment interest of $388,516.39, for a total of $1,192,016.39. The Court ordered Wasatch to disgorge $779,065, plus prejudgment interest of $376,701.31, for a total of $1,155,766.31. The court ordered disgorgement and prejudgment interest totaling $506,774.32 against Active Investments, $224,275.08 against Pine Services, and $33,300.79 against Sothis II.

On February 12, 2010, the court entered final judgments, by consent, against defendants Sara Wetzel (an employee of Custable) and David Giles (the former Chief Operating Officer of Wasatch), permanently enjoining them from violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and barring them from participating an any future penny stock offering. The judgment against Giles also bars him from serving as an officer or director of a public company. The judgment against Wetzel requires her to pay disgorgement of $56,500, prejudgment interest of $27,739, and a civil penalty of $120,000. Wetzel and Giles consented to the entry of these judgments without admitting or denying the allegations in the complaint. Wetzel and Giles also pled guilty in the related criminal actions for their roles in Custable's scheme, each receiving 5 years probation.

Previously, on October 8, 2009, the court entered final judgments, by consent, against defendants Robert Blagman (the former CEO of Blagman Media), Pacel Corporation, Marshall Holdings International, Inc, and its former CEO, Richard Bailey. Those judgments permanently enjoin each of the defendants from violations of Section 5(a) and (c) of the Securities Act, and additionally permanently enjoin defendants Pacel, Bailey and Marshall Holdings from violations Section 17(a) of the Securities Act, and Section 10(b) and Rule 10b-5 of the Exchange Act. The judgment against Bailey also bars him, for a period of five years, from acting as an officer or director of a publicly held company. The judgment against Blagman orders him to pay disgorgement in the amount of $250,000, prejudgment interest of $83,934, plus a civil penalty in the amount of $50,000. The judgment against Pacel requires it to pay disgorgement in the amount of $200,000, plus prejudgment interest of $96,459. Blagman, Bailey, Marshall Holdings and Pacel all consented to the entry of these final judgments against them without admitting or denying the allegations in the complaint.

For further information, see LR-18057 (March 31, 2003).


http://www.sec.gov/litigation/litreleases/2010/lr21423.htm