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UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF FLORIDA
ORLANDO DIVISION
___________________________________________
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
-v- Case No. 6:12-CV-646-RBD-KRS
CHRISTEL S. SCUCCI,KAREN S. BEACH,CAMERON H. LINTON, ESQ.,PROTG ENTERPRISES, LLC, andCAPITAL EDGE ENTERPRISES, LLC,
Defendants._______________________________________ ____
MEMORANDUM IN SUPPORT OF PLAINTIFFS MOTION FOR ENTRY OFDEFAULT JUDGMENT OF PERMANENT INJUNCTION AND OTHER RELIEF
AGAINST DEFENDANTS PROTG ENTERPRISES, LLC,CAPITAL EDGE ENTERPRISES, LLC, AND KAREN S. BEACH
Kenneth J. GuidoAttorney for PlaintiffSecurities and Exchange Commission100 F. Street, NEWashington, DC 20549Tel: (202) 551-4880Fax: (202) [email protected]
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TABLE OF CONTENTS
PAGE
TABLE OF AUTHORITIES ......................................................................................................... iii
I. INTRODUCTION ...............................................................................................................2
II. HISTORY OF THE CASE AGAINST PROTG, CAPITAL EDGE, AND BEACH .....2
A. Protg and Capital Edge .........................................................................................2
B. Beach........................................................................................................................3
III. ARGUMENT .......................................................................................................................3
A. Legal Standards ........................................................................................................3B. Admitted Facts .........................................................................................................4
1. Sales of Hall of Fame Beverages, Inc. Stock .................................................52. Sales of Viper Networks, Inc. Stock ............................................................63. Sales of Chromocure, Inc. Stock..................................................................64. Sales of Hybrid Energy Holdings, Inc. Stock ..............................................75. Sales of Ingen Technologies, Inc. Stock ......................................................76. Sales of Undersea Recovery Corporation Stock ..........................................8
C. Protg, Capital Edge, and Beach Violated Section 5 of the Securities Act ...........8
D. Protg, Capital Edge, and Beach Should be Permanently Enjoined ....................10
E. The Proposed Injunctions are Sufficiently Specific...............................................12
F. Protg, Capital Edge, and Beach Should be Subject to a Penny Stock Bar .........15
G. Protg, Capital Edge, and Beach Should Pay Disgorgement and Interest ...........16
1. Amounts That Should be Disgorged ..........................................................18a. Protg ...........................................................................................18
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b. Capital Edge ...................................................................................202. Prejudgment Interest That Should Be Paid ................................................21
a. Protg ...........................................................................................21b. Capital Edge ...................................................................................21
H. Capital Edge and Beach Should be Held Jointly and Severally Liable .................21
I. Protg, Capital Edge, and Beach Should Each Pay Civil Money Penalties .........22
IV. CONCLUSION ..................................................................................................................25
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TABLE OF AUTHORITIES
CASES
Buchanan v. Bowman,
820 F.2d 359 (11th Cir. 1987) .........................................................................................3, 4Chathas v. Local 134 IBEW,
233 F.3d 508 (7th Cir. 2000) .............................................................................................14
Commodity Futures Trading Commn v. Levy,541 F.3d 1102 (11th Cir. 2008) .........................................................................................13
Dundee Cement Co. v. Howard Pipe & Concrete Products, Inc.,722 F.2d 1319 (7th Cir. 1983) .............................................................................................4
Industrial Risk Insurers v. M.A.N. Gutehoffnungschutte GmbH,141 F.3d 1434 (11th Cir. 1998) .........................................................................................17
McComb v. Jacksonville Paper Co.,336 U.S. 187 (1949) ...........................................................................................................13
Miller v. Paradise of Port Richey, Inc.,75 F. Supp. 2d 1342 (M.D. Fla. 1999) .................................................................................4
Nishimatsu Construction Co. v. Houston Natl Bank,515 F.2d 1200 (5th Cir. 1975) .............................................................................................3
Porter v. Warner Holding Co.,328 U.S. 395 (1946) ...........................................................................................................13
SEC v. Aerokinetic Energy Corp.,Case No. 8-08-CV-1409, 2010 U.S. Dist. LEXIS 132725 (M.D. Fla., Dec. 15, 2010) .....19
SEC v. BIH Corp.,No. 2:10cv577FtM29DNF, 2012 WL 4458356 (M.D. Fla., Sept. 26, 2012) ........4, 10
SEC v. Blatt,583 F.2d 1325 (5th Cir. 1978) ...........................................................................................17
SEC v. Breed,01 Civ. 7798, 2004 U.S. Dist. LEXIS 7336 (S.D.N.Y., Apr. 29, 2004) ............................19
SEC v. Calvo,378 F.3d 1211 (11th Cir. 2004) .................................................................................passim
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SEC v. Carriba Air, Inc.,681 F.2d 1318 (11th Cir. 1982) .........................................................................................11
SEC v. Carrillo,325 F.3d 1268 (11th Cir. 2003) .........................................................................................17
SEC v. Cavanaugh,1 F. Supp. 2d 337 (S.D.N.Y. 1998) .....................................................................................9
SEC v. Contl Tobacco Co.,463 F.2d 137 (5th Cir. 1972) ...............................................................................................9
SEC v. Converge Global, Inc.,Case No. 04-80841-CIV, 2006 U.S. Dist. LEXIS 17581 (S.D. Fla. Mar. 10, 2006) .........16
SEC v. ETS Payphones, Inc.,408 F.3d 727 (11th Cir. 2005) .....................................................................................16, 17
SEC v. First City Financial Corp.,890 F.2d 1215 (D.C. Cir. 1989) .........................................................................................17
SEC v. First Jersey Securities, Inc.,101 F.3d 1450 (2d Cir. 1996).......................................................................................16, 18
SEC v. Fischbach Corp.,133 F.3d 170, 175 (2d Cir. 1997).......................................................................................16
SEC v. Friendly Power Co., LLC,49 F. Supp. 2d 1363 (S.D. Fla. 1999) ..................................................................................9
SEC v. Goble,682 F.3d 934 (11th Cir. 2012) ...................................................................................passim
SEC v. Huff,758 F.Supp. 2d 1288 (S.D. Fla. 2010)affd, Case No. 11-10758, 2012 U.S. App. LEXIS 70 (11th Cir., Jan. 3, 2012) .........15, 22
SEC v. Hughes Capital Corp.,124 F.3d 449 (3d Cir. 1997)...............................................................................................22
SEC v. JT Wallenbrock & Assoc.,40 F.3d 1109 (9th Cir. 2006) .............................................................................................22
SEC v. Kamardin,No. 8:07-cv-159, 2007 U.S. Dist. LEXIS 44260 (M.D. Fla. June 19, 2007) ....................18
SEC v. K.W. Brown & Co.,
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555 F. Supp. 2d 1275 (S.D. Fla. 2007) ........................................................................18, 22
SEC v. Lauer,No. 03-80612-CIV, 2008 U.S. Dist. LEXIS 73026 (S.D. Fla. Sept. 24, 2008)affd, Case No. 09-15138, 2012 U.S. App. LEXIS 7889 (11th Cir., Apr. 29, 2012) ...11, 23
SEC v. Lybrand,281 F. Supp. 2d 726 (S.D.N.Y. 2003)affd sub nom.SEC v. Kern, 425 F.3d 143 (2d Cir. 2005) .................................................23
SEC v. Manor Nursing Centers, Inc.,458 F.2d 1082 (2d Cir. 1972).............................................................................................16
SEC v. McCaskey,98 Civ. 6153, 2002 U.S. Dist. LEXIS 4915 (S.D.N.Y., Mar. 26, 2002) ...........................19
SEC v. McNamee,481 F.3d 451 (7th Cir. 2007) .............................................................................................15
SEC v. Merchant Capital, LLC,Case No. 11-14908, 2012 U.S. App. LEXIS 16359 (11th Cir. Aug. 7, 2012) ..................17
SEC v. Murphy,626 F.2d 633 (9th Cir. 1980) ...............................................................................................9
SEC v. Patel,61 F.3d 137 (2d Cir. 1995).................................................................................................15
SEC v. Perez,Case No. 09-CV-21977, 2011 U.S. Dist. LEXIS 132965 (S.D. Fla. Nov. 17, 2011) ........18
SEC v. Pitters,No. 09-20957-CIV, 2010 U.S. Dist. LEXIS 33127 (S.D. Fla. Mar. 5, 2010) ...................23
SEC v. Ralston Purina Co.,346 U.S. 119 (1953) .............................................................................................................9
SEC v. Rosen,Case No. 01-0369-CIV, 2002 U.S. Dist. LEXIS 28304 (S.D. Fla., Apr. 25, 2002)affd in part sub nom. SEC v. Calvo, 378 F.3d 1211 (11th Cir. 2004) ..............................23
SEC v. Solow,554 F. Supp. 2d 1356 (S.D. Fla. 2008)affd, No. 08-13014, U.S. App. LEXIS 978 (11th Cir. Jan. 21, 2009) ........................19, 23
SEC v. Unique Fin. Concepts, Inc.,196 F.3d 1195 (11th Cir. 1999) .........................................................................................11
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SEC v. Universal Express, Inc.,475 F. Supp. 2d 412 (S.D.N.Y. 2007)................................................................................15
SEC v. Universal Major Indus. Corp.,
546 F.2d 1044 (2d Cir. 1976)...............................................................................................9
SEC v. U.S. Pension Trust Corp.,No. 07-22570-CIV, 2010 U.S. Dist. LEXIS 102938 (S.D. Fla. Sept. 30, 2010)affd, No. 10-15095, 2011 U.S. App. LEXIS 21806 (11th Cir., Oct. 26, 2011) ........passim
SEC v. Utsick,No. 06-20975-CIV, 2009 U.S. Dist. LEXIS 42061 (S.D. Fla. May 19, 2009) ..................17
SEC v. Video Without Boundaries,Case No. 08-61517-CIV, 2010 U.S. Dist. LEXIS 141520 (S.D. Fla., Dec. 8, 2010) ........17
SEC v. Wang,944 F.2d 80 (2d Cir. 1991).................................................................................................16
SEC v. Warde,151 F.3d 42 (2d Cir. 1998)...........................................................................................17, 18
SEC v. Yun,148 F. Supp. 2d 1287 (M.D. Fla. 2001) .............................................................................18
United States v. Sarcona,457 Fed. Appx 806 (11th Cir. 2012) ..................................................................................14
FEDERAL STATUTES
Securities Act of 1933, 15 U.S.C. 77e et seq. .....................................................................2, 9, 13
Securities Act of 1933, 15 U.S.C. 77h ........................................................................................14
Securities Act of 1933, 15 U.S.C. 77t et seq...................................................................10, 15, 23
Securities Exchange Act of 1934, 15 U.S.C. 78u et. seq. .....................................................13, 15
FEDERAL RULES
Federal Rule of Civil Procedure 55(b)(2) ........................................................................................1
Federal Rule of Civil Procedure 65 .............................................................................12, 13, 14, 15
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SEC Rule 1003, 17 C.F.R. 201.1003 ..........................................................................................23
Securities Act of 1933 Rule 144, 17 C.F.R. 230.144....................................................................5
Securities Exchange Act of 1934 Rule 3a51-1, 17 C.F.R. 240.3a51-1.......................................15
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UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF FLORIDA
ORLANDO DIVISION
___________________________________________
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
-v- Case No. 6:12-CV-646-RBD-KRS
CHRISTEL S. SCUCCI,KAREN S. BEACH,CAMERON H. LINTON, ESQ.,PROTG ENTERPRISES, LLC, andCAPITAL EDGE ENTERPRISES, LLC,
Defendants._______________________________________ ____
MEMORANDUM IN SUPPORT OF PLAINTIFFS MOTION FOR ENTRY OFDEFAULT JUDGMENT OF PERMANENT INJUNCTION AND OTHER RELIEF
AGAINST DEFENDANTS PROTG ENTERPRISES, LLC,CAPITAL EDGE ENTERPRISES, LLC, AND KAREN S. BEACH
Plaintiff Securities and Exchange Commission (Commission or SEC), pursuant to
Federal Rule of Civil Procedure 55(b)(2), moves for entry of a default judgment of permanent
injunction and other relief against Defendants Protg Enterprises, LLC (Protg), Capital
Edge Enterprises, LLC (Capital Edge), and Karen S. Beach (Beach).
The Commission respectfully requests that its motion for entry of default judgments be
granted for the following reasons:
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I. INTRODUCTION
The Commission filed this action alleging that Protg, Capital Edge, Beach, Christel S.
Scucci (Scucci) and Cameron H. Linton, Esq. (Linton) engaged in an illegal scheme to
acquire and sell billions of shares of penny stock that were never registered for sale to the public
in violation of the registration provisions of the United States securities laws.
The procedural requirements for entry of a default judgment against Protg, Capital
Edge, and Beach have been met. The Complaint provides the legal and factual bases for their
liability under the federal securities laws and for the remedies sought by the Commission.
II. HISTORY OF THE CASE AGAINST PROTG, CAPITAL EDGE, ANDBEACH
On April 30, 2012, the Commission filed its Complaint. Docket No. 1. The Complaint
alleges that Protg, Capital Edge, Beach, Scucci and Linton violated Sections 5(a) and 5(c) of
the Securities Act of 1933 (the Securities Act) [15 U.S.C. 77e(a) and 77e(c)] by making
unregistered sales of securities for which no exemption applied. The Complaint seeks, among
other things, an order: (i) enjoining Protg, Capital Edge, and Beach from further violations of
Section 5 of the Securities Act; (ii) barring them from participating in an offering of penny stock;
(iii) directing them to disgorge their ill-gotten gains, including prejudgment interest; and (iv)
imposing civil money penalties on them.
A. Protg and Capital Edge
On May 2, 2012, the Commission served Protg and Capital Edge. Docket Nos. 20, 21.
On May 21, 2012, Defendant Scucci (a non-lawyer) filed an Answer to Civil Summons, in
which she stated, among other things, that she represented Protg and Capital Edge. Docket
No. 6, p. 2. On June 12, 2012, the Court ordered Protg and Capital Edge to obtain counsel and
have counsel file a notice of appearance by July 3, 2012, citing Local Rule 2.03(e). The Court
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also ordered Protg and Capital Edge to file an appropriate response to the Complaint within
twenty-one days after the date on which counsel appeared on their behalf. Docket No. 13.
Counsel did not appear on behalf of Protg or Capital Edge and, on July 19, 2012, the
Court ordered that, if Protg and Capital Edge did not obtain counsel and have counsel file a
notice of appearance by August 1, 2012, the Commission was directed to apply to the Clerk for
entry of default by August 10, 2012. Docket No. 17. Protg and Capital Edge failed to meet
that deadline, and, on August 8, 2012, the Commission moved for entry of a Clerks default
against Protg and Capital Edge. Docket No. 18. On August 9, 2012, the Clerk entered default
against Protg and Capital Edge. Docket No. 23.B. Beach
On May 1, 2012, the Commission served Beach. Docket No. 22. Beachs responsive
pleading was due on May 22, 2012. Beach failed to respond to the Complaint. Accordingly, on
August 8, 2012, the Commission moved for entry of a Clerks default against Beach. Docket
No. 19. On August 9, 2012, the Clerk entered default against her. Docket No. 23.
Attached to the Commissions motion is a declaration stating that Beach is not a minor or
an incompetent person.1
III. ARGUMENT
A. Legal Standards
The factual allegations of a complaint are deemed admitted by the entry of a default.
Buchanan v. Bowman, 820 F.2d 359, 361 (11th Cir. 1987);Nishimatsu Construction Co. v.
Houston Natl Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). A defaulting defendants liability for
violations of the federal securities laws, and the propriety of the relief sought against it also are
1 Also, the Court is respectfully referred to the Commissions previously submitted Military Affidavit stating thatBeach is not in the military service of the United States or any of its Allies. Docket No. 19-2.
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deemed to be established by its default. Buchanan, 820 F.2d at 360;Dundee Cement Co. v.
Howard Pipe & Concrete Products, Inc., 722 F.2d 1319, 1323 (7th Cir. 1983);Miller v.
Paradise of Port Richey, Inc., 75 F. Supp. 2d 1342, 1346 (M.D. Fla. 1999). Here, the factual
allegations of the Complaint support the entry of a default judgment against Protg, Capital
Edge, and Beach. SEC v. BIH Corp., No. 2:10cv577FtM29DNF, 2012 WL 4458356, at *1
(M.D. Fla., Sept. 26, 2012) (deeming all allegations of a complaint true for purposes of a motion
for default judgment). The allegations establish the elements of their liability and the propriety
of the relief the Commission seeks in its motion.
B. Admitted FactsScucci formed Protg in January 2010, and Beach formed Capital Edge in May 2010.
Scucci and Beach were the sole managing members of their respective companies. Docket No.
1; Complaint, 31. Protg describes itself as in the business of marketing consulting and
investing. Id. 14. Capital Edge describes itself as in the business of marketing consulting. Id.
15.
Scucci and Beach caused Protg and Capital Edge to enter into wrap around agreements
involving several Penny Stock Issuers. Id. 31. Pursuant to the wrap around agreements, an
officer, employee, or other person, usually closely associated with the Penny Stock Issuer
(Affiliate), who was purportedly owed money by the Penny Stock Issuer for more than one
year, assigned the right to collect from the Penny Stock Issuer to a new third party, here either
Protg or Capital Edge. Id. 32. In addition, the wrap around agreements purported to amend
the initial debt agreements to authorize Protg or Capital Edge to convert the Penny Stock
Issuers debt into shares of the Penny Stock Issuers common stock at a deep discount (usually
50%) to the prevailing market price. Id. 33. Protg and Capital Edge almost always elected
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to receive shares of the Penny Stock Issuers stock pursuant to the convertibility option in the
wrap around agreement shortly after executing the agreement. Id. 34.
In order to obtain and sell the purportedly free trading shares, Scucci and Beach
obtained attorney opinion letters from Defendant Cameron H. Linton, Esq. and other attorneys.
Id. 1, 4, 36, 38-41, 51-52, 59, 65, 71, 77, 82. The opinion letters concluded that Protg and
Capital Edge could rely on the safe harbor of Securities Act Rule 144 [17 C.F.R. 230.144] to
claim that the newly-issued securities were exempt from the registration requirement of Section
5 of the Securities Act. Id. 38-40, 77, 82. The reasoning in the opinion letters was incorrect,
and there was no legal basis for Protg and Capital Edge to sell the stocks without registeringthem or complying with the requirements of Rule 144. Id. 4, 40, 54, 61, 67, 73, 79, 84.
Between March 2010 and April 2011, Protg and Capital Edge acquired approximately
3.3 billion shares of purportedly unrestricted stock pursuant to conversions under the wrap
around agreements. Id. 44. After receiving the purportedly unrestricted stock, Protg and
Capital Edge typically held the securities for only a few days or weeks before selling them into
the public markets. Id. 45. To sell the securities, Protg and Capital Edge used numerous
securities brokerage accounts controlled by Scucci and Beach. Id. 45. Protg and Capital
Edges cumulative proceeds from their sales of the stock acquired under the wrap around
agreements were more than $1.5 million. Id. 46.
1. Sales of Hall of Fame Beverages, Inc. Stock
During the period March 2010 through January 2011, Protg and Capital Edge entered
into six wrap around agreements involving Hall of Fame Beverages, Inc. (Hall of Fame). Id.
50. The wrap around agreements allowed Protg and Capital Edge to acquire purportedly
unrestricted Hall of Fame stock at a 50% discount to the prevailing market price. Id. 50. Upon
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signing the wrap around agreements, Protg and Capital Edge obtained approximately 2.68
billion shares of Hall of Fame stock by converting approximately $915,000 of Hall of Fame debt
into stock. Id. 50.
Protg and Capital Edge sold the purportedly unrestricted stock into the market,
generally within days or weeks of their issuance. Id. 53. Protgs proceeds from its sales of
Hall of Fame stock were approximately $1.17 million, and Capital Edges proceeds were
approximately $194,033. Id. 53. Protg and Capital Edges sales of Hall of Fame stock were
not registered and not exempt from the registration requirement and, therefore, violated Section 5
of the Securities Act. Id. 54-55.2. Sales of Viper Networks, Inc. Stock
On approximately March 3, 2010, Protg entered into a wrap around agreement
involving Viper Networks, Inc. (Viper Networks). Id. 58. The wrap around agreement
allowed Protg to acquire purportedly unrestricted Viper Networks stock at a 50% discount to
the prevailing market price. Id. 58. Immediately upon signing the wrap around agreement,
Protg converted $20,000 of the Viper Networks debt into approximately 3.2 million shares of
stock. Id. 58.
Protg sold the purportedly unrestricted stock into the market within approximately five
months of its issuance. Id. 60. Its proceeds from its sales of Viper Networks stock were
approximately $27,111. Id. 60. Protgs sales of Viper Networks stock were not registered
and not exempt from the registration requirement and, therefore, violated Section 5 of the
Securities Act. Id. 61-62.
3. Sales of Chromocure, Inc. Stock
On approximately March 9, 2010, Protg entered into a wrap around agreement
involving Chromocure, Inc. (Chromocure). Id. 64. The wrap around agreement allowed
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Protg to acquire purportedly unrestricted stock at a 50% discount to the prevailing market
price. Id. 64. Immediately upon signing the wrap around agreement, Protg converted
$50,000 of the Chromocure debt into approximately 500 million shares of stock. Id. 64.
Protg sold the purportedly unrestricted stock into the market within weeks of its
issuance. Id. 66. Its proceeds from its sales of Chromocure stock were approximately $79,295.
Id. 66. Protgs sales of Chromocure stock were not registered and not exempt from the
registration requirement and, therefore, violated Section 5 of the Securities Act. Id. 67-68.
4. Sales of Hybrid Energy Holdings, Inc. Stock
On approximately June 25, 2010, Protg entered into a wrap around agreementinvolving Hybrid Energy Holdings, Inc. (Hybrid Energy). Id. 70. The wrap around
agreement allowed Protg to acquire purportedly unrestricted Hybrid Energy stock at a 50%
discount to the prevailing market price. Id. 70. Immediately upon signing the wrap around
agreement, Protg converted $25,000 of the Hybrid Energy debt into approximately 2.5 million
shares of stock. Id. 70.
Protg sold the purportedly unrestricted stock into the market within approximately 60
days of its issuance. Id. 72. Protgs proceeds from its sales of Hybrid Energy stock were
approximately $20,875. Id. 72. Protgs sales of Hybrid Energy stock were not registered
and not exempt from the registration requirement and, therefore, violated Section 5 of the
Securities Act. Id. 73-74.
5. Sales of Ingen Technologies, Inc. Stock
On approximately June 15, 2010, Capital Edge entered into a wrap around agreement
involving Ingen Technologies, Inc. (Ingen Technologies). Id. 76. The wrap around
agreement allowed Capital Edge to acquire purportedly unrestricted Ingen Technologies stock.
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Id. 76. Immediately upon signing the wrap around agreement, Capital Edge converted
approximately $34,615 of the Ingen Technologies debt into approximately 192.3 million shares
of stock. Id. 76.
Capital Edge sold the purportedly unrestricted stock into the market within 60 days of its
issuance. Id. 78. The proceeds from Capital Edges sales of Ingen Technologies stock were
approximately $45,133. Id. 78. Beachs and Capital Edges sales of Ingen Technologies stock
were not registered and not exempt from the registration requirement and, therefore, violated
Section 5 of the Securities Act. Id. 79-80.
6. Sales of Undersea Recovery Corporation StockOn approximately June 20, 2010, Capital Edge entered into a wrap around agreement
involving Legal Access Technologies, Inc., the predecessor to Undersea Recovery Corporation
(collectively, Undersea Recovery). Id. 81. The wrap around agreement allowed Capital
Edge to acquire purportedly unrestricted Undersea Recovery stock. Id. 81. Within a day of
signing the wrap around agreement, Capital Edge converted $10,000 of Undersea Recovery debt
into approximately 9.5 million shares of stock. Id. 81.
Capital Edge sold a large portion of the purportedly unrestricted stock into the market
within one year of its issuance. Id. 83. The proceeds from Capital Edges sales of Undersea
Recovery stock were approximately $10,374. Id. 83. Beach and Capital Edges sales of
Undersea Recovery stock were not registered and not exempt from the registration requirement
and, therefore, violated Section 5 of the Securities Act. Id. 84-85.
C. Protg, Capital Edge, and Beach Violated Section 5 of the Securities Act
Section 5(a) of the Securities Act prohibits the direct or indirect sale of securities through
the mail or interstate commerce unless a registration statement has been filed and is in effect, and
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Section 5(c) prohibits the offer or sale of securities through the mail or interstate commerce
unless a registration statement has been filed. [15 U.S.C. 77e(a) and 77e(c).]
The Commission may demonstrate aprima facie violation of Section 5 by showing that
Protg, Capital Edge, and Beach: (1) directly or indirectly, sold or offered to sell securities; (2)
through the use of interstate transportation or communication and the mails; (3) when no
registration statement was filed or in effect. SEC v. Calvo, 378 F.3d 1211, 1214-15 (11th Cir.
2004); citing SEC v. Contl Tobacco Co., 463 F.2d 137, 155-56 (5th Cir. 1972). Section 5 is a
strict liability provision, and the Commission need not prove that the defendants acted with
scienter. SEC v. Calvo, 378 F.3d at 1215; SEC v. Friendly Power Co., LLC, 49 F. Supp. 2d1363, 1367 (S.D. Fla. 1999) (Neither negligence nor scienter is an element of a prima facie case
under Section 5 of the Securities Act.); SEC v. Universal Major Indus. Corp., 546 F.2d 1044,
1046-47 (2d Cir. 1976).
Once the Commission establishes aprima facie violation, the defendants bear the burden
of proving that an exemption applies. SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953). In
light of the Securities Acts broad remedial purpose, courts narrowly construe exemptions from
the registration provisions against the claimant. See, e.g., SEC v. Murphy, 626 F.2d 633, 641
(9th Cir. 1980). Additionally, Section 5 liability extends not only to those who directly or
indirectly sell securities but also to those individuals who are necessary participants and
substantial factors in an unlawful transaction. SEC v. Calvo, 378 F.3d at 1215-1216; SEC v.
Cavanaugh, 1 F. Supp. 2d 337, 372 (S.D.N.Y. 1998).
Protgs, Capital Edges, and Beachs conduct satisfies each element of a violation of
Securities Act Sections 5(a) and (c). First, Protg and Capital Edge received and sold billions
of shares of stock that was issued by the Penny Stock Issuers Hall of Fame (Protg and Capital
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Edge), Viper (Protg), Chromocure (Protg), Hybrid Energy (Protg), Ingen Technologies
(Capital Edge), and Undersea Recovery (Capital Edge). Docket No. 1; Complaint, 1, 6, 7, 45,
46, 53, 60, 66, 72, 78, 83. Beach was a necessary participant and substantial factor in Capital
Edges unlawful stock sales. She formed Capital Edge (Id. 13, 31), was Capital Edges sole
managing member (Id. 13, 31), caused Capital Edge to enter into wrap around agreements
involving several Penny Stock Issuers (Id. 31), controlled the brokerage accounts through
which Capital Edge sold its stock (Id. 45), caused Capital Edges stock sales (Id. 53, 78, 83),
and transferred trading proceeds to a bank account in Capital Edges name that Beach controlled
(Id. 48). Second, Protg, Capital Edge, and Beach made use of interstate transportation orcommunication and the mails in selling the stock. Id. 11. Lastly, no registration statement was
filed or in effect with the Commission with respect to any of the stock Protg and Capital Edge
received (Id. 1, 6, 35, 47, 54, 61, 67, 73, 79, 84), and Protg, Capital Edge, and Beach cannot
show that an exemption to the registration requirement applies in this case. (Id. 47, 54, 61,
67, 73, 79, 84.) Accordingly, the Court should find that Protg, Capital Edge, and Beach Edge
violated Sections 5(a) and (c) of the Securities Act. SEC v. BIH Corp., 2012 WL 4458356, at *2
(M.D. Fla., Sept. 26, 2012) (granting a default judgment on a Section 5 claim).
D. Protg, Capital Edge, and Beach Should be Permanently Enjoined
The Securities Act provides:
Whenever it shall appear to the Commission that any person is engaged or aboutto engage in any acts or practices that constitute or will constitute a violation ofthe provisions of this subchapter, or of any rule or regulation prescribed underauthority thereof, the Commission may, in its discretion, bring an action in anydistrict court of the United States . . . to enjoin such acts or practices, and upon aproper showing, a permanent or temporary injunction or restraining order shall begranted without bond . . . .
15 U.S.C. 77t(b).
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The SEC is entitled to an injunction if it can show a reasonable likelihood that the
defendant will violate the securities laws in the future. SEC v. Goble, 682 F.3d 934, 948 (11th
Cir. 2012); SEC v. Calvo, 378 F.3d at 1216; SEC v. Unique Fin. Concepts, Inc., 196 F.3d 1195,
1199 n.2 (11th Cir. 1999). The SEC does not have to show irreparable injury or a balance of
the equities in its favor. SEC v. Lauer, No. 03-80612-CIV, 2008 U.S. Dist. LEXIS 73026, at
*92 (S.D. Fla. Sept. 24, 2008), affd, Case No. 09-15138, 2012 U.S. App. LEXIS 7889 (11th
Cir., Apr. 29, 2012).
In determining the likelihood that a defendant will engage in future violations of the
securities laws, courts consider theegregiousness of the defendants actions, the isolated or recurrent nature of theinfraction, the degree of scienter involved, the sincerity of the defendantsassurances against future violations, the defendants recognition of the wrongfulnature of his conduct, and the likelihood that the defendants occupation willpresent opportunities for future violations.
SEC v. Goble, 682 F.3d at 948, quoting SEC v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir.
1982); see alsoSEC v. Calvo, 378 F.3d at 1216; SEC v. U.S. Pension Trust Corp., No. 07-22570-
CIV, 2010 U.S. Dist. LEXIS 102938, at *57-58 (S.D. Fla. Sept. 30, 2010), affd, No. 10-15095,
2011 U.S. App. LEXIS 21806 (11th Cir., Oct. 26, 2011). Although scienteris an important
factor in this analysis, it is not a prerequisite to injunctive relief. SEC v. Calvo, 378 F.3d at
1216.
In this case, the factors set forth above weigh in favor of the Court entering permanent
injunctions. Protg, Capital Edge, and Beach were necessary participants in an elaborate and
egregious illegal stock distribution scheme. Their conduct was far from isolated. In 2010,
Protg entered into numerous wrap around agreements with four different Penny Stock Issuers.
For more than a year, spanning 2010 and 2011, Protg sold billions of shares of penny stock in
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unregistered transactions through eight different broker-dealers. Exhibit 2 accompanying this
memorandum (Declaration of T. Wendy Kong, hereafter Kong Decl. at 3-6 and
Attachments A-D). Even though scienteris not a required element of a Section 5 violation,
Protgs use of multiple brokerage accounts suggests it was attempting to avoid detection by
selling relatively small amounts of stock through several firms as opposed to selling billions of
shares through a single broker-dealer.
In 2010 and 2011, Capital Edge entered into numerous wrap around agreements with
three different Penny Stock Issuers. For more than a year, Capital Edge, under Beachs
management (Id. 53), sold more than a billion shares of penny stock in unregistered transactionsthrough two different broker-dealers. Kong Decl. at 7-10 and Attachments E-G.
Given Protgs, Capital Edges, and Beachs repeated violations of law over an extended
time period, the Court cannot have any assurance they will avoid future misconduct. As a result,
Protgs, Capital Edges, and Beachs conduct warrants the Court entering permanent
injunctions that prohibit them from engaging in future violations of Securities Act Section 5(a)
and 5(c).
E. The Proposed Injunctions are Sufficiently Specific
The Commissions proposed injunctions against Protg, Capital Edge, and Beach are
sufficiently specific to satisfy Rule 65. Rule 65 requires that an injunction state the reasons that
it is issued, state its terms specifically, and describe in reasonable detailand not by referring to
the complaint or other documentsthe act or acts enjoined. Here, the injunctions satisfy this
requirement.
An injunction that only orders a party to comply with the terms of a statute might not
comply with the requirements of Rule 65 of the Federal Rules of Civil Procedure. SeeSEC v.
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Goble, 682 F.3d at 949-50. In Goble, the Court concluded that an injunction that simply used the
language of Section 10(b) of the Exchange Act provided little guidance on how the enjoined
party was to comply with the terms of the injunction. Id. at 951. The Eleventh Circuit, however,
also made clear that many statutes and rules may be specific enough so that an injunction
incorporating their language would not violate the specificity requirement of Rule 65. Id. at 950
([W]e also recognize that at times an injunction that orders a defendant to comply with a statute
may be appropriate; Supreme Court precedent dictates this.); See also McComb v. Jacksonville
Paper Co., 336 U.S. 187, 191-95 (1949). Specifically discussing injunctions in Commission
cases, the Goble court stated:Permitting injunctions of some breadth in the context of civil enforcementactions brought by the SEC is warranted. The Exchange Act grants the districtcourt broad discretion to enjoin violations of the Act. See 15 U.S.C. 78u(d)(1).And, where the public interest is involved, the courts equitable power has abroader and more flexible character. Commodity Futures Trading Commn,541 F.3d at 1114 (quoting Porter v. Warner Holding Co., 328 U.S. 395, 398, 66S. Ct. 1086, 1089 (1946)). Therefore, a broad, but properly drafted injunction,which largely uses the statutory or regulatory language may satisfy the specificityrequirement of Rule 65(d) so long as it clearly lets the defendant know what he isordered to do or not do.
SEC v. Goble, 682 F.3d at 952 (Emphasis added).
Here, the proposed injunctions satisfy the requirements ofGoble. First, they enjoin
Protg, Capital Edge, and Beach from violating Section 5 of the Securities Act of 1933
(Securities Act) [15 U.S.C. 77e] by, directly or indirectly, in the absence of any applicable
exemption:
(a) Unless a registration statement is in effect as to a security, making use ofany means or instruments of transportation or communication in interstatecommerce or of the mails to sell such security through the use or mediumof any prospectus or otherwise;
(b) Unless a registration statement is in effect as to a security, carrying orcausing to be carried through the mails or in interstate commerce, by any
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means or instruments of transportation, any such security for the purposeof sale or for delivery after sale; or
(c) Making use of any means or instruments of transportation orcommunication in interstate commerce or of the mails to offer to sell or
offer to buy through the use or medium of any prospectus or otherwise anysecurity, unless a registration statement has been filed with the Securitiesand Exchange Commission as to such security, or while the registrationstatement is the subject of a refusal order or stop order or (prior to theeffective date of the registration statement) any public proceeding orexamination under Section 8 of the Securities Act [15 U.S.C. 77h].
This language, enjoining Protg, Capital Edge, and Beach from violating Sections 5(a)
and (c) of the Securities Act, complies with Rule 65 and the dictates ofGoble. Like some of the
statutes discussed in Goble (Sections 15(c)(3) and 17(a) of the Exchange Act) the provisions ofSection 5 specifically describe the acts required of the person enjoined. Goble, 682 F.3d at
952. The language of Section 5, which the proposed default judgments track, specifically forbids
Protg, Capital Edge, and Beach from engaging in the direct or indirect unregistered offer or
sale of securities in interstate commerce, in the absence of any applicable exemption. Because
the proposed default judgments are narrowly tailored to enjoin the specific activity in which
Protg, Capital Edge, and Beach engaged, these defendants can see exactly what conduct the
injunction prohibits. SeeUnited States v. Sarcona, 457 Fed. Appx 806, 811-812 (11th Cir.
2012), citing Chathas v. Local 134 IBEW, 233 F.3d 508, 513 (7th Cir. 2000) (Posner, J.),
upholding an injunction because the defendants obligations were intelligible and capable of
enforcement. This Court previously entered identically-worded Section 5 injunctions against
two other defendants in this caseChristel S. Scucci and Cameron H. Linton. Docket Nos. 33
and 34.
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In short, the injunctions against future violations of Section 5 clearly let Protg, Capital
Edge, and Beach know what they are ordered not to do. Therefore, the injunctions satisfy the
requirements of Rule 65 and the reasoning ofGoble.
F. Protg, Capital Edge, and Beach Should be Subject to a Penny Stock Bar
The Commission seeks penny stock bars against Protg, Capital Edge, and Beach.
Under the Securities Act and the Exchange Act, the Court may impose such a bar on any person
who violated the securities laws while participating in an offering of penny stock. [15 U.S.C.
77t(g); 78u(d)(6)]. Among the factors to be considered are the defendants repeat offender status
and the likelihood that misconduct will recur. SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995);
SEC v. Universal Express, Inc., 475 F. Supp. 2d 412, 429 (S.D.N.Y. 2007). Penny stocks
include any equity security with a price of less than $5.00, unless exempted by Rule 3a51-1 [17
C.F.R. 240.3a51-1]. SEC v. McNamee, 481 F.3d 451, 453 (7th Cir. 2007); SEC v. Huff, 758
F.Supp. 2d 1288, 1357 (S.D. Fla. 2010), affd, Case No. 11-10758, 2012 U.S. App. LEXIS 70
(11th Cir., Jan. 3, 2012).
The phrase participating in an offering of penny stock is defined by statute:
For the purposes of this paragraph, the term person participating in an offering ofpenny stock includes any person acting as any promoter, finder, consultant,agent, or other person who engages in activities with a broker, dealer, or issuer forpurposes of the issuance or trading in any penny stock, or inducing or attemptingto induce the purchase or sale of any penny stock.
Exchange Act 21(d)(6)(B) [15 U.S.C. 78u(d)(6)(B)].
Protg, Capital Edge, and Beach participated in the penny stock offerings of Hall of
Fame (Protg and Capital Edge/Beach), Viper (Protg), Hybrid Energy (Protg), Chromocure
(Protg), Ingen Technologies (Capital Edge/Beach), and Undersea Recovery (Capital
Edge/Beach). Over an extended time period, they repeatedly sold shares of the stock of these
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Penny Stock Issuers to public investors in the United States. At the time of these sales, each was
a penny stock that traded at less than $5 per share. Docket No. 1; Complaint, 1, 7; Kong
Decl. at 5, 9 and Attachments A-G. The Court should impose a penny stock bar to prevent
them from dumping additional unregistered shares of penny stocks on the investing public. For
the same reasons that support the issuance of a permanent injunction, it is likely that Protgs,
Capital Edges, and Beachs misconduct will recur. These defendants pose a clear and present
danger to investors in any future penny stock offering and should be permanently barred from
any such offering. SEC v. Converge Global, Inc., Case No. 04-80841-CIV, 2006 U.S. Dist.
LEXIS 17581, at *15 (S.D. Fla. Mar. 10, 2006) (the Court finds a permanent penny stock baragainst [defendant] to be appropriate).
G. Protg, Capital Edge, and Beach Should Pay Disgorgement and Interest
The Commission seeks disgorgement and prejudgment interest against Protg, Capital
Edge, and Beach. The crafting of a remedy for violations of the [securities laws] lies within the
district courts broad equitable discretion. SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir.
1997); SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996); SEC v. Wang,
944 F.2d 80, 85 (2d Cir. 1991). Disgorgement is an equitable remedy that deprives the
wrongdoer of his ill-gotten gain. SEC v. ETS Payphones, Inc., 408 F.3d 727, 734 n.6, 735 (11th
Cir. 2005). As the Second Circuit held,
[t]he effective enforcement of the federal securities laws requires that the SEC beable to make violations unprofitable. The deterrent effect of an SEC enforcementaction would be greatly undermined if securities law violators were not requiredto disgorge illicit profits.
SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972); see alsoSEC v. U.S.
Pension Trust Corp., 2010 U.S. Dist. LEXIS 102938, at *59.
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The Courts power to order disgorgement extends to the amount by which the defendant
benefited from his/her wrongdoing. SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978). The
SECs burden for showing the amount of assets subject to disgorgement . . . is light: a
reasonable approximation of a defendants ill-gotten gains [is required] . . . . Exactitude is not a
requirement. SEC v. ETS Payphones, Inc., 408 F.3d at 735, quoting SEC v. Calvo, 378 F.3d at
1217; see alsoSEC v. Merchant Capital, LLC, Case No. 11-14908, 2012 U.S. App. LEXIS
16359, at *6-7 (11th Cir. Aug. 7, 2012), quoting SEC v. Calvo, 378 F.3d at 1217 ([t]he SEC is
entitled to disgorgement upon producing a reasonable approximation of a defendants ill-gotten
gains); SEC v. U.S. Pension Trust Corp., 2010 U.S. Dist. LEXIS 102938, at *59-60.Once the Commission presents evidence reasonably approximating the amount of a
Defendants ill-gotten gains, then the burden of proof shifts to the defendant. SEC v. U.S.
Pension Trust Corp., 2010 U.S. Dist. LEXIS 102938, at *60; SEC v. Video Without Boundaries,
Case No. 08-61517-CIV, 2010 U.S. Dist. LEXIS 141520, at *7 (S.D. Fla., Dec. 8, 2010); SEC v.
Utsick, No. 06-20975-CIV, 2009 U.S. Dist. LEXIS 42061, at *34 (S.D. Fla. May 19, 2009).
[A]ny risk of uncertainty should fall on the wrongdoer whose illegal conduct created
that uncertainty. SEC v. Calvo, 378 F.3d at 1217, quoting SEC v. Warde, 151 F.3d 42, 50 (2d
Cir. 1998); see alsoSEC v. First City Financial Corp., 890 F.2d 1215, 1231-32 (D.C. Cir. 1989).
In addition to disgorgement of Protgs, Capital Edges, and Beachs stock sale
proceeds, the Commission seeks prejudgment interest on their illegal profits. Whether to award
prejudgment interest and, if so, at what rate, is within the Courts discretion. SEC v. Carrillo,
325 F.3d 1268, 1273 (11th Cir. 2003);Industrial Risk Insurers v. M.A.N. Gutehoffnungschutte
GmbH, 141 F.3d 1434, 1447 (11th Cir. 1998). Courts impose prejudgment interest to prevent
those found liable under the securities laws from enjoying any benefit accrued from the use of
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the ill-gotten gain. SEC v. Perez, Case No. 09-CV-21977, 2011 U.S. Dist. LEXIS 132965, at
*15 (S.D. Fla. Nov. 17, 2011); SEC v. Warde, 151 F.3d at 50; SEC v. Yun, 148 F. Supp. 2d 1287,
1293 (M.D. Fla. 2001).
As for the rate of prejudgment interest, most courts have adopted the [IRS]
underpayment rate without controversy. SEC v. Yun, 148 F. Supp. 2d at 1293; SEC v. K.W.
Brown & Co., 555 F. Supp. 2d 1275, 1313 (S.D. Fla. 2007); SEC v. First Jersey Securities, Inc.,
101 F.3d 1450, 1476 (2d Cir. 1996). That rate reflects what it would have cost to borrow the
money from the government and therefore reasonably approximates one of the benefits the
defendant derived from its fraud. SEC v. Kamardin, No. 8:07-cv-159, 2007 U.S. Dist. LEXIS44260, at *6 (M.D. Fla. June 19, 2007), quoting SEC v. First Jersey Securities, Inc., 101 F.3d at
1476.
1. Amounts That Should be Disgorged
(a) Protg
To calculate Protgs ill-gotten gains, the Commission multiplied the number of
unregistered shares Protg sold by the price per share. To arrive at this number, the
Commission obtained the account statements for Protgs brokerage accounts at Ameriprise
Financial; E*Trade Financial; Oppenheimer & Co.; Fidelity Brokerage Services, LLC;
brokersXpress, LLC; Charles Schwab & Co., Inc.; Interactive Brokers, LLC; and Securian
Financial Services, Inc. The Commission also obtained, from these broker-dealers (or the firms
through which the broker-dealers cleared securities transactions), underlying trade data reflecting
Protgs sales of unregistered stock issued by Hall of Fame, Viper Networks, Chromocure, and
Hybrid Energy. The broker-dealers provided this data on Microsoft Excel spreadsheets. Kong
Decl. at 4. The trade data provided by the broker-dealers reflects Protgs sales of: (1) Hall
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of Fame stock during the period March 8, 2010, through October 20, 2011; (2) Viper Networks
stock during the period March 11, 2010, through July 14, 2010; (3) Chromocure stock during the
period March 16, 2010, through April 7, 2010; and (4) Hybrid Energy stock during the period
June 30, 2010, through August 18, 2010. Kong Decl. at 4-5 and Attachments A (Hall of Fame
sales), B (Viper sales), C (Chromocure sales) and D (Hybrid Energy sales) thereto.
The trade data provided by the broker-dealers reveal that Protg sold:
(1) 1,635,600,000 shares of Hall of Fame stock for $1,176,509.25; (2) 3,200,000 shares of Viper
Networks stock for $27,111.13; (3) 500,000 shares of Chromocure stock for $79,295.50; and (4)
2,500,000 shares of Hybrid Energy stock for $20,875.89.
2
Protgs total proceeds from itssales of these four stocks were $1,303,791.77. Kong Decl. at 6 and Attachments A-D.
Because Protg obtained these proceeds as a result of its unregistered stock sales in
violation of Section 5 of the Securities Act, it should be required to disgorge its entire proceeds
of $1,303,791.77, plus prejudgment interest thereon. Protg transferred some of the proceeds
from its sales of the stocks to some of the affiliates identified in the wrap around agreements,
and to some of the Penny Stock Issuers. Docket No. 1; Complaint, 49.3 However, Protg has
not provided the Commission an adequate basis to deduct these payments from its disgorgement
2 The Commission did not deduct brokerage commissions from its disgorgement calculations, although it is withinthe Courts discretion to deduct from the disgorgement amount any direct transaction costs, such as brokeragecommissions that plainly reduce the wrongdoers actual profit. See SEC v. McCaskey, 98 Civ. 6153, 2002 U.S.Dist. LEXIS 4915, at *14 (S.D.N.Y., Mar. 26, 2002);but see SEC v. Breed, 01 Civ. 7798, 2004 U.S. Dist. LEXIS7336, at *12 n.5 (S.D.N.Y., Apr. 29, 2004) (court, in its discretion, did not deduct the defaulted defendants
brokerage commissions from the disgorgement amount). Courts in the Eleventh Circuit have likewise concludedthat deducting expenses is discretionary. SEC v. Solow, 554 F. Supp. 2d 1356, 1365, n. 5 (S.D. Fla. 2008),affd,No. 08-13014, U.S. App. LEXIS 978 (11th Cir. Jan. 21, 2009) (Even courts that have offset the disgorgementamount by expenses incurred including commissions acknowledged that the decision of whether to offsetcommissions and other expenses paid lies within the district courts discretion.);see also SEC v. AerokineticEnergy Corp., Case No. 8-08-CV-1409, 2010 U.S. Dist. LEXIS 132725, *11 (M.D. Fla., Dec. 15, 2010). Based onavailable information, the commissions Protg paid were roughly 5.1% of its gross trading proceeds.
3 This information is reflected in Protgs bank records that the Commission subpoenaed in its investigation.
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calculation. Instead, it has defaulted in this action, rather than responding to the Commissions
allegations.
(b) Capital Edge
To calculate Capital Edges ill-gotten gains, the Commission multiplied the number of
unregistered shares Capital Edge sold by the price per share. To arrive at this number, the
Commission obtained the account statements for Capital Edges brokerage accounts at D.
Weckstein & Co., Inc. and Securian Financial Services, Inc. The Commission also obtained,
from these broker-dealers (or the firms through which the broker-dealers cleared securities
transactions) underlying trade data reflecting Capital Edges sales of unregistered stock issued byHall of Fame, Ingen Technologies, and Undersea Recovery. The brokerage firms provided this
data on Microsoft Excel spreadsheets. Kong Decl. at 8. The trade data provided by the broker-
dealers reflects Capital Edges sales of: (1) Hall of Fame stock during the period June 22, 2010,
through December 5, 2011; (2) Ingen Technologies stock during the period July 28, 2010,
through August 13, 2010, and (3) Undersea Recovery stock during the period July 28, 2010,
through June 15, 2011. Kong Decl. at 8-9 and Attachments E (Hall of Fame sales), F (Ingen
Technologies sales), and G (Undersea Recovery sales). The trade data provided by the broker-
dealers reflects that Capital Edge sold: (1) 809,000,000 shares of Hall of Fame stock for
$194,033.24; (2) 192,307,692 shares of Ingen Technologies stock for $45,133.06; and (3)
3,695,023 shares of Undersea Recovery stock for $10,374.59. 4 Capital Edges total proceeds
from its sales of these three stocks were $249,540.89. Kong Decl. at 9-10 and Attachments E-
G.
4 As with Protgs sales, the Commission did not deduct Capital Edges brokerage commissions from itscalculations of Capital Edges trading proceeds. Based on available information, the commissions Capital Edge paidwere roughly 5.2% of its gross trading proceeds.
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Because Capital Edge obtained these proceeds as a result of its unregistered stock sales in
violation of Section 5 of the Securities Act, it should be required to disgorge its entire proceeds
of $249,540.89, plus prejudgment interest thereon. Capital Edge transferred some of its proceeds
from the sales of the stocks to some of the affiliates identified in the wrap around agreements,
and to some of the Penny Stock Issuers. Docket No. 1; Complaint, 49.5 However, Capital
Edge has not provided the Commission an adequate basis to deduct these payments from its
disgorgement calculation. Instead, it has defaulted in this action, rather than responding to the
Commissions allegations.
2. Prejudgment Interest That Should Be Paid(a) Protg
The prejudgment interest on Protgs sales of $1,303,791.77, calculated from April 1,
2010, through August 31, 2012applying the IRS underpayment rateis $115,351.39. Kong
Decl. at 12, 14 and Attachment I. Therefore, Protg should be ordered to pay disgorgement
of $1,303,791.77 plus prejudgment interest of $115,351.39, for a total of $1,419,143.16.
(b) Capital Edge
The prejudgment interest on Capital Edges sales of $249,540.89, calculated from July 1,
2010, through August 31, 2012, is $19,395.84. Kong Decl. at 13-14 and Attachment J. Thus
Capital Edge should be ordered to pay disgorgement of $249,540.89 plus prejudgment interest of
$19,395.84, for a total of $268,936.73.
H. Capital Edge and Beach Should be Held Jointly and Severally Liable
Capital Edge and Beach should be held jointly and severally liable for disgorgement and
prejudgment interest. [W]here two or more individuals collaborate or have a close relationship
5 This information is reflected in Capital Edges bank records that the Commission subpoenaed in its investigation.
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in engaging in the violations of the securities laws, they [may be] held jointly and severally liable
for the disgorgement of illegally obtained proceeds. SEC v. Huff, 758 F. Supp. at 1362, quoting
SEC v. JT Wallenbrock & Assoc., 440 F.3d 1109, 1117 (9th Cir. 2006); accordSEC v. U.S.
Pension Trust Corp., 2010 U.S. Dist. LEXIS 102938, at *61, quoting SEC v. Hughes Capital
Corp., 124 F.3d 449, 455 (3d Cir. 1997) ([t]he burden is on the tortfeasor to establish that the
liability is capable of apportionment, and the district court has broad discretion in subjecting the
offending parties on a joint-and-several basis to the disgorgement order); SEC v. K.W. Brown &
Co., 555 F. Supp. 2d at 1313 ([w]hen two or more individuals or entities collaborate or have
close relationships in engaging in the securities laws violations, they may be held jointly andseverally liable for the entire amount of the fraud).
Because Beach formed Capital Edge (Docket No. 1; Complaint, 13, 31), was Capital
Edges sole managing member (Id. 13, 31), caused Capital Edge to enter into wrap around
agreements involving several Penny Stock Issuers ((Id. 31), controlled the brokerage accounts
through which Capital Edge sold its stock (Id. 45), caused Capital Edges stock sales (Id. 53,
78, 83), and transferred trading proceeds to a bank account titled to Capital Edge that she
controlled (Id. 48), she should be held jointly and severally liable with Capital Edge for the
entire disgorgement of $249,540.89 plus prejudgment interest of $19,395.84, for a total of
$268,936.73.
I. Protg, Capital Edge, and Beach Should Each Pay Civil Money PenaltiesThe Commission seeks civil money penalties against Protg, Capital Edge, and Beach.
Such penalties serve the dual functions of punishment and deterrence. SEC v. K.W. Brown Co.,
555 F. Supp. 2d at 1314 (based upon the public policy objective of deterrence, the SEC submits
and the Court agrees that a substantial penalty is necessary and appropriate to financially punish
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the Defendants); SEC v. Lauer, 2008 U.S. Dist. LEXIS 73026, at *96 ([t]he purpose of a civil
penalty is to punish the individual violator as well as deter future violations); SEC v. Lybrand,
281 F. Supp. 2d 726, 729-30 (S.D.N.Y. 2003), affd sub nom.SEC v. Kern, 425 F.3d 143 (2d Cir.
2005).
Courts consider the following factors in determining the amount of penalty to impose:
(1) the egregiousness of the violations at issue, (2) defendants scienter, (3) therepeated nature of the violations, (4) defendants failure to admit to theirwrongdoing, (5) whether defendants conduct created substantial losses or the riskof substantial losses to other persons, (6) defendants lack of cooperation andhonesty with authorities, if any, and (7) whether the penalty that would otherwisebe appropriate should be reduced due to defendants demonstrated current and
future financial condition.SEC v. U.S. Pension Trust Corp., 2010 U.S. Dist. LEXIS 102938, at *64; SEC v. Pitters, No. 09-
20957-CIV, 2010 U.S. Dist. LEXIS 33127, at *10-11 (S.D. Fla. Mar. 5, 2010); SEC v. Solow,
554 F. Supp. 2d at 1365-66.
Section 20(d) of the Securities Act [15 U.S.C. 77t(d)] provides for three tiers of
penalties. SEC v. Rosen, Case No. 01-0369-CIV, 2002 U.S. Dist. LEXIS 28304, at * 36 (S.D.
Fla., Apr. 25, 2002), affd in part sub nom. SEC v. Calvo, 378 F.3d 1211 (11th Cir. 2004).
Penalties from the lowest tier (Tier 1) are usually appropriate for violations not
requiring proof of fraud, such as those alleged against Protg, Capital Edge, and Beach. The
maximum Tier 1 penalty per violation by an individual defendant, such as Beach, during the
period relevant is either the gross pecuniary gain or $7,500 per violation. The maximum Tier 1
penalty for any other defendant, including corporations, is either defendants gross pecuniary
gain or $75,000 per violation. 17 C.F.R. 201.1003.
The Commission requests that Beach and Capital Edge each be ordered to pay penalties
of $30,000, and Protg be ordered to pay a penalty of $52,500.
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The Commissions recommended penalty amount for Beach treats each of the four wrap
around agreements [Hall of Fame (2) , Ingen Technologies, and Undersea Recovery] in which
she was involved as separate violations. Beachs four violations multiplied by the maximum
Tier 1 penalty amount for an individual ($7,500) is equal to the proposed penalty of $30,000.
The Commissions recommended penalty amount for Capital Edge also treats each of the
four wrap around agreements [Hall of Fame (2), Ingen Technologies, and Undersea Recovery] in
which it was involved as separate violations. Capital Edges four violations multiplied by the
maximum Tier 1 penalty amount for an individual ($7,500) is equal to the proposed penalty of
$30,000. Because Capital Edge was merely the alter ego of Beach, the Commission is seekingless than the maximum penalty per violation ($75,000) that could be imposed on a corporation.
The Commissions recommended penalty amount for Protg also treats each of
Protgs seven wrap around agreements [Hall of Fame (4), Viper Networks, Chromocure, and
Hybrid Energy] as separate violations. Protgs seven violations multiplied by the maximum
Tier 1 penalty amount for an individual ($7,500) is equal to the proposed penalty of $52,500.
Because Protg was merely the alter ego of co-defendant Christel Scucci, the Commission is
seeking less than the statutory maximum penalty per violation ($75,000) that could be imposed
on a corporation.
As shown above, Protg gained more than $1.3 million as a result of its unregistered
stock sales in violation of Section 5 of the Securities Act. Similarly, Beach and Capital Edge
gained more than $249,000 as a result of Capital Edges unregistered stock sales in violation of
Section 5 of the Securities Act. Thus, the $52,500 and $30,000 penalties are well below the
maximum penalty that could be imposed under Tier 1, calculated by reference to pecuniary
gains. The amounts, however, are substantial. The penalties are significant punishment for
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Beach, Capital Edge and Protgs wrongdoing, and sufficiently large to deter others from future
violations.
IV. CONCLUSION
For the foregoing reasons, the Commission respectfully requests that the Court grant the
Commissions Motion for Entry of a Default Judgment of Permanent Injunction and Other Relief
against Defendants Protg Enterprises, LLC, Capital Edge Enterprises, LLC, and Karen S.
Beach, permanently enjoining them from future violations of the federal securities laws and for
other and further relief as noted above. For the Courts convenience, proposed default judgments
for each defaulting defendant have been filed with the motion.Dated: October 15, 2012 Respectfully submitted,
/s/ Kenneth J. GuidoKenneth J. GuidoAttorney for PlaintiffSecurities and Exchange Commission100 F. Street, NEWashington, DC 20549Tel: (202) 551-4880Fax: (202) [email protected]
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mailto:[email protected]:[email protected]:[email protected]