United States Securities and Exchange Commission

Litigation Release No. 21492 / April 19, 2010

Securities and Exchange Commission v. Frank J. Custable, Jr., et al., Civil Action No. 03-cv-2182 (N.D. Ill.)

SEC Obtains Final Judgment Against Frank J. Custable, Jr. in Penny Stock Scheme

The Securities and Exchange Commission announced today that on April 14, 2010, Judge Joan B. Gottschall of the U.S. District Court for the Northern District of Illinois entered a final judgment against Frank J. Custable, Jr. Custable, a former resident of Glendale-Heights, Illinois, was the architect of a complex and wide-reaching fraudulent penny stock scheme that he orchestrated from November 2001 until the SEC commenced an emergency lawsuit in March 2003 and obtained a temporary restraining order shutting it down. The final judgment, to which Custable consented: (i) enjoins Custable 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) enjoins Custable from future violations of the securities reporting provisions contained at Section 13(d) of the Exchange Act and Rules 13d-1 and 13d-2 thereunder; (iii) permanently bars him from participating in an offering of penny stock; (iv) orders him to disgorge $4,444,113 of ill-gotten gains plus an additional $1,981,736 of prejudgment interest; and (iv) orders him to pay a civil penalty in the amount of $120,000.

The Commission's complaint alleged that Custable and others violated 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 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 additionally 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 of one of these penny stock companies. 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.

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, as well as certain individuals and entities employed or controlled by Custable. Custable has pled guilty to various federal charges arising out of his conduct in the scheme, and on June 9, 2009 was sentenced to a prison term of 21 years. Judgments have previously been entered in this case against 13 defendants and three relief defendants in connection with Custable's scheme.

For further information, see LR-18057 (March 31, 2003) and LR-21423 (February 23, 2010).


Last modified: 4/19/2010