The Securities and Exchange Commission Fails on 13 of 14 Counts Against NCLA Clients

After a near decade-long Ahab-like pursuit alleging NCLA clients Spartan Securities Group, Island Stock Transfer, principals Carl Dilley, Micah Eldred, and Dave Lopez were knowingly involved in a massive fraud involving creating fake “shell” companies, SEC lost its entire case against Mr. Lopez, and all but one relatively minor civil charge against Spartan, Island, Mr. Dilley, and Mr. Eldred. SEC’s approach was to throw as much spaghetti against the wall as possible in the hopes that something would stick. The trial held in Tampa, Florida, and presided over by Judge Virginia Hernandez Covington took three weeks and was interrupted by Covid-19 scares. The verdict can be found here.

Lead counsel Caleb Kruckenberg of NCLA met SEC’s overheated, unsupported allegations of knowing collusion with fraudsters with a calm explanation that SEC was blaming the defendants for its own errors and defalcations. SEC has massive advantages in litigation of this kind. Unlike any private litigant, SEC only must prove material misstatements by a “preponderance of the evidence” and not the clear and convincing standard required of other civil litigants. The very administrative process afforded SEC gives it other advantages. For instance, all the correspondence and records of Spartan and Island were available and searched by SEC before the case was ever filed. All the defendants were deposed by SEC before the case was ever filed. What civil litigant gets that kind of advantage? Not only does SEC get multiple deposition shots at the defendants over many years so that it can adjust its strategy, it has all the important documents not only in the defendants’ databases but also in the databases of other regulated entities that might be involved. Incredibly, SEC does not have to have the jury state which statement was false and material. It simply can place before the jury a series of alleged misstatements and if the jury finds any one of them incorrect and material SEC can win a civil case. Don’t try this at home if you are a civil litigant.

Despite this embarrassment of litigation riches, SEC failed again and again to make its case. Its lead witnesses were convicted fraudsters Alvin Mirman and Sheldon Rose. Because of Covid, the court had reluctantly allowed many witnesses to appear by Zoom even if they were within subpoena power of the Tampa courthouse. Mr. Mirman appeared remotely. Mr. Rose in person. In addition, to these felons, the jury was treated to the spectacle of one after another of convicted fraudsters and other assorted admitted liars involved in various schemes appearing in SEC’s case against three men who had spotless records before these allegations were made. None of them connected any defendant to a knowing fraudulent company and none claimed any defendant had made ill-gotten gains from the transactions. The defendants each took the stand in vivid contrast to the assorted weirdos SEC was forced to call to make its case. Other witnesses, like a former employee of Spartan appearing remotely from Washington State and even a regulator from FINRA confirmed careful record keeping and attention to detail of the defendants.

The case largely revolved around Form 211’s which are used by market makers like Spartan to get a company listed on the over-the-counter or other stock exchange. These documents, in this case, largely contained publicly available information from SEC’s own website. SEC doggedly maintained that defendants should have known the material on its own site were false (because Mirman and Rose had made false statements to the SEC)! SEC’s expert witness, without evidence but with the supreme confidence of a government witness, opined that defendants knew of Mirman and Rose’s fraud. This was a stance rejected by the jury and unsupported by the documentary record as well.

One of the important elements of this case for NCLA was SEC’s attempt to make its own guidance documents carry the force of law. The court’s jury instructions firmly informed the jury that SEC’s guidance documents on “red flags” were not law. This is an important element to inform a jury of in litigation against the administrative state which will invariably attempt to make its ukases carry the force of statutory law. In addition, an important victory was obtained early on by Mr. Kruckenberg and Ms. Rollins of NCLA when they successfully asserted and prevailed in obtaining a jury trial. The administrative agencies normally hate juries like vampires fear sunlight and argue they are unavailable in civil administrative enforcement and this case was no exception.

I think one comment on this jury is warranted. It was extremely attentive throughout the proceedings. The procedures in the Middle District of Florida require the court to ask the jurors if they have any questions and they often did. When the Judge herself wanted to pause the trial over Covid, the jury unanimously pressed her to go on which allowed the case to end timely.  Initially eight, but eventually six citizens had their lives interrupted for 3 weeks in a Tampa summer to do their duty and the importance of that duty to everybody’s rights as Americans should not be undersold.

Finally, a case like this, which defended against overcharging by administrative agencies and against unfounded assertions of power, like guidance having the force of law, is rarely maintained against SEC because few private litigants have the resources to fight back. Once SEC makes an accusation, the defendants’ entire business and other sources of income disappear; no verdict needed. Here, with every advantage that can be bestowed on the Administrative State (save freedom from jury trials) nearly the entire SEC case collapsed when forced to trial. There are many more defendants like this out there who simply must consent to outrageous allegations because they have no ability to fight. And what is SEC’s take on this debacle? ‘Twas a famous victory!

August 6, 2021