United States Securities and Exchange Commission
Litigation Release No. 21884 / March 14, 2011
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 Three CEOs in Penny Stock Scheme
The Securities and Exchange Commission announced today that on March 14, 2011, the United States District Court for the Northern District of Illinois entered final judgments against Gary Heesch, David Calkins, Brad Nordling, and Francis Scott Widen in connection with their participation in a complex and wide-reaching penny stock scheme orchestrated by Chicago-area resident Frank J. Custable, Jr. from November 2001 until March 2003, when the SEC brought an emergency enforcement action and obtained a TRO shutting it down. Judgments in this case have previously been entered against 14 defendants and three relief defendants. Heesch, Calkins, Nordling and Widen were the last four named defendants remaining in the SEC's lawsuit.
The Commission's complaint alleged that Custable and at least 17 others violated various registration, antifraud and reporting provisions 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 or unregistered shares of stock of at least seven different penny stock companies on the general public, generating net proceeds to Custable of at least $4.3 million. The complaint alleged that Custable obtained stock through fraudulent Form S-8 registrations (normally intended to provide for the issuance of stock as compensation to employees and consultants), fraudulent manipulations of Rule 144(k) holding requirements for resales of restricted stock. The complaint alleged that the penny stock companies received substantial financing from Custable in exchange for providing these massive blocks of unregistered or improperly registered stock that Custable dumped on the market through various nominee accounts held in the names of persons or entities he employed or controlled.
Heesch, Calkins and Nordling were CEOs of three of the penny stock companies involved in the fraudulent scheme. The complaint alleged that each of them engaged in fraudulent conduct in furtherance of the scheme, including knowingly or recklessly entering into sham consulting agreements, signing fraudulent Form S-8 registration statements, and providing false declarations concerning past compensation purportedly owed by their companies in order to justify the issuance of large blocks of stock and to manipulate the Rule 144(k) holding requirements for the issuances so that the transfer agents for these issuers would remove restrictive legends on the shares, allowing Custable to then freely trade them. Widen was an employee of Custable during the scheme. The complaint alleged that he violated the registration provisions of the federal securities laws by signing bogus consulting agreements and opening nominee accounts for Custable, enabling Custable to conceal his involvement in the scheme.
The judgments against Heesch, Calkins and Nordling, which were entered with their consent and without their admitting or denying the Commission's allegations: (i) permanently enjoin them from future violations of the antifraud and registration provisions contained in Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and at Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; (ii) bar them from ever serving as an officer or director of a public company; and (iii) prohibit them from ever again participating in an offering of penny stock. The judgment against Nordling further orders him to pay disgorgement of ill-gotten gains in the amount of $44,000, plus an additional $25,570 of prejudgment interest. The Court found Calkins liable for disgorgement in the amount of $150,000, plus prejudgment interest of $94,360, but waived payment of these amounts and did not impose a civil penalty based on his sworn Statement of Financial Condition. Based on Heesch's sworn Statements of Financial Condition, the Court did not impose a civil penalty against him either. The judgment against Widen, also entered with his consent and without his admitting or denying the SEC's allegations, permanently enjoins him from future violations of the registrations provisions contained in Sections 5(a) and 5(c) of the Securities Act, bars him from participating in any penny stock offering, and orders him to pay a first tier civil penalty of $6,500.
In a related criminal proceeding, 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.
Calkins and Nordling pled guilty to securities fraud; both were sentenced to 5 years probation.
For further information, see LR-18057 (March 31, 2003), LR-21423 (February 23, 2010), and LR-21492 (April 19, 2010).