SEC targets Chicago ThermoElastic tout Custable
by Brent Mudry
April 3, 2003
North America's top regulator has targeted Chicago-area tout and repeat securities violator Frank J. Custable Jr., for his promotion of seven penny stock companies, including veteran Howe Street promoter Kenneth (Ken) Liebscher's ThermoElastic Technologies Inc. The United States Securities and Exchange Commission civil prosecution coincides with the current unrelated criminal trial of Mr. Liebscher and his ThermoElastic associates in Miami, as part of Operation Bermuda Short.
The SEC notes that "federal criminal authorities," presumably the FBI, executed a search warrant and seized materials at the offices of Suburban Capital, one of Mr. Custable's companies, in connection with one of the schemes in the regulatory probe.
The SEC claims the overall scheme, which began in at least November, 2001, has generated at least $4.3-million in ill-gotten gains. (All figures are in U.S. dollars.) "Custable and the other defendants illegally dumped massive quantities of the improperly registered shares on the general public," states the SEC.
The SEC hopes to trace where these funds ended up. The regulator claims that since at least 2002, Mr. Custable has taken steps to direct his ill-gotten gains beyond the reach of U.S. law enforcement. In the summer of 2002, he set up an offshore entity in Nevis, allegedly to protect his assets from any potential criminal or civil judgment.
In June 2002, Mr. Custable and Suburban Capital transferred over $110,000 into an account at a Costa Rican bank for the eventual credit of Pine Services, or Suburban Capital. The proceeds are then transferred to an account at Banco Nacional de Costa Rica.
In a civil complaint filed March 27 in United States District Court for the Northern District of Illinois, the SEC claims Mr. Custable, his associates and fronts and his company Suburban Capital Corp. received many millions of shares, often representing 10 to 30 per cent of the companies' outstanding shares, in sham Form S-8 registrations, which are usually used to issue shares to legitimate employees and consultants.
The named defendants include Mr. Custable, Sara Wetzel, Suburban Capital, Francis Scott Widen, Wasatch Pharmaceutical Inc., David Giles, Gary Heesch, Pacel Corp., David Calkins, Gateway Distributors, Ltd., Richard Bailey and ThermoElastic Technologies, Inc. None of the allegations have yet been proven in court and none of the targets have yet filed former defences, or answers.
On March 28, the day after filing the complaint, the SEC won a temporary restraining order enjoining the defendants from future securities violations. The SEC seeks unspecified sums for disgorgement and civil penalties, a penny stock bar against Mr. Custable, Suburban, Ms. Wetzel, Messrs. Widen, Heesch, Calkins and Bailey, and an order barring Messrs. Heesch, Giles, Calkins and Bailey from ever serving as an officer or director of a public company.
Mr. Custable, who was a broker with various firms until February, 1992, has a past. "Custable has a significant disciplinary history in the securities industry," states the SEC.
In 1994, as part of an SEC action, Mr. Custable and F.C. Financial Corp., a company entity that he operated and controlled, were permanently enjoined from violating the antifraud provisions of the Securities Act and the Exchange Act and ordered to pay disgorgement of $325,000 and a civil penalty of $60,000. This case related to a fraudulent offering involving mortgage-backed promissory notes.
In 1994, as a result of this action, the State of Illinois entered an order permanently prohibiting Mr. Custable and F.C. Financial from offering or selling any securities in Illinois and fined him $10,000.
In a prior action in 1992, the National Association of Securities Dealers censured Mr. Custable, barred him from association with any member firm, and fined him $20,000 as a result of his execution of unauthorized trades in customers' accounts and guaranteeing a return on the investments he sold to customers. That same year, the State of Wisconsin entered a summary order of prohibition and revocation of exemptions against Mr. Custable for his failure to disclose his disciplinary history and other misrepresentations related to his sale of mortgage-related investments.
In 1991, the State of Indiana ordered him to cease and desist from committing violations of the Indiana Securities Act and ordered him to pay a $15,000 civil penalty and $11,000 in restitution for fraud and other misconduct related his sales of investments.
The SEC's latest Custable action comes at an embarrassing time for Mr. Liebscher and Toronto penny stock consultant Dennis Epstein, whose two-week Bermuda Short trial, involving their ThermoElastic dealings, is scheduled to close this Friday. On the eve of their trial, which started March 24, the pair got bad news, as all four of their co-defendants had pled guilty and agreed to fully co-operate with tough U.S. authorities, including testifying against the holdout pair.
Mr. Liebscher and his associates were arrested Aug. 14 and 15 as part of Operation Bermuda Short, a joint FBI-RCMP undercover sting operation in which the Canadians allegedly agreed to bribe corrupt officials of a fictitious mutual fund. Co-defendants Howard E. Kerbel, a Toronto lawyer, and Barry Berman, a retired Toronto dentist, pled guilty on March 14. Two others: Vincent (Vinny) Barone, a New York broker, and promoter Melvin L. Levine, of Pompano Beach, Fla., pled guilty at the start of the trial.
The six were all players in ThermoElastic Technologies Inc., a promotion on the loosely regulated but heavily prosecuted OTC Bulletin Board. The ThermoElastic defendants face a combined 15 counts of wire fraud, mail fraud and securities fraud.
The SEC claims Mr. Custable's scheme involves illegally obtaining large positions in penny stock issuers and then using nominees to engage in unregistered offerings of the stock, while fraudulently concealing his interest in the stock. The regulator claims that to carry out his scheme, Mr. Custable has used Suburban Capital, which purports to provide financing and consulting services to small public companies, as well as Ms. Wetzel and Mr. Widen, who work for him at Suburban.
The SEC claims Mr. Custable also used various other individuals as straw men, or nominees, to secretly obtain stock, often fraudulently, for his benefit, which Suburban, Ms. Wetzel, Mr. Widen and other fronts promptly sold into the public market under his direction. without disclosing his interest in the stock. "The fraud involved includes sham commission Form S-8 registration statements, forged stock authorization forms, and at least one bogus attorney opinion letter arranged by Custable," states the SEC.
The SEC claims that in the case of stock that Mr. Custable's straw men obtained from defendants Wasatch, Gateway, Pacel and ThermoElastic, as well as from Sharecom Inc., the issuers either obtained little or no bona fide services in exchange for the stock, or improperly issued the stock in connection with a capital-raising transaction.
While ThermoElastic has its own troubles, Wasatch has had the misfortune of attracting other controversial players in the past. (Current defendant Mr. Giles is the chief financial officer and secretary of Wasatch.)
In civil complaint filed May 5, 2000, in U.S. District Court for the Southern District of New York, the SEC claims Mark Schultz, an Internet stock promoter, was paid more than $2.5-million for touting 15 OTC Bulletin Board companies, including Wasatch and American Nortel. The SEC claims Mr. Schultz, 49, a former resident of Jupiter, Fla., now believed to be in Spain, broke numerous securities laws and violations in a fraudulent Internet touting scheme between 1995 and 1999.
The SEC claims Wasatch paid Mr. Schultz $459,400 in shares, compensation he neglected to tell his readers about. The Internet tout was quite bullish on Wasatch, based in Boynton Beach, Fla., despite its own bleak history. In a Stocks for Tomorrow tout in April of 1997, Mr. Schultz claimed an expansion planned by Wasatch the next month would push its revenues to $250-million to $300-million, and boost its stock price to $5 to $6 in the short term and $8 to $10 later that year.
The SEC notes that Wasatch had discontinued its active operations in 1989 and it received no revenues and earned no profits in fiscal years 1994, 1995 and 1996. In the summer of 1997, Wasatch's stock slumped to below the $1 level.
In the amazing serendipity of the penny stock world, now collapsed Toronto brokerage Thomson Kernaghan later took a shine to Wasatch as well. The Bay Street brokerage made a significant proposed loan to Wasatch, which issued one million shares on July 5, 2000, as collateral. While the loan was never completed and the restricted shares were cancelled, the pair concluded another financing less than a year later. On April 11, 2001, Wasatch entered into a written agreement to grant Thomson Kernaghan up to two million shares.
Aside from Mr. Schultz's Internet touting, a little research would have revealed further malodorous affairs. Notorious penny stock figure Richard Gladstone and now defunct penny stock brokerage La Jolla Capital filed Form 144 filings to sell modest amounts of Wasatch shares in late 1998. Mr. Gladstone emerged last year as one of Vancouver brokerage Pacific International Securities' clients.
A review of Mr. Gladstone's regulatory record reveals that he has been a Florida-based fixture of the mob-linked boiler-room scene for more than a decade. Mr. Gladstone's latest and greatest claim to fame came on June 14, 2000, when he was indicted in a massive Mafia-related penny stock sting known as Operation Uptick. American authorities call the overall case, which involved a broad network of bribed penny stock brokers, the largest stock fraud case in U.S. history.
The Pacific International client was acquitted in 2001 after a four-week securities fraud trial in New York.
There is no suggestion that Thomson Kernaghan had any idea the Wasatch promotion had ever attracted any unsavoury characters. The Bay Street brokerage's attraction to this, and many other troubled penny stocks, remains quite remarkable, however.
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