U.S. Securities and Exchange Commission v. Spartan Securities Group, LTD., et al.

CASE SUMMARY

The U.S. Securities and Exchange Commission (SEC) alleges that market-makers Spartan, and transfer agent Island, were involved in filing Form 211 applications with the Financial Industry Regulatory Authority (FINRA) to publicly list 19 issuers’ common stock to be traded and available to investors. The SEC eventually discovered that the issuers had been involved in fraud, and now faults Spartan and Island for failing to discover the misconduct. The Commission also claims the companies failed to investigate certain SEC “red flags” raised by FINRA. However, SEC has repeatedly emphasized the limited nature of the obligation of market-makers and rejected any view that they have a special due diligence requirement to look beyond the statements made to them by issuers of securities.

Neither Spartan nor Island nor any of their employees were involved in the creation or operation of the named issuers listed in the complaint, and they have amply complied with their statutory obligations, gathered all required information, and compiled reams of documents supporting the applications above and beyond the lawful requirements. NCLA argues that SEC is attempting to hold the defendants liable under an arbitrary expansion of the requirements of applicable rules set out by Congress and the Commission itself. SEC’s Division of Enforcement would hold the market-makers responsible, even when both regulators from FINRA and the SEC’s own examiners have analyzed the same information and declared it to be valid and genuine.

On July 30, 2021, a federal jury in the Middle District of Florida delivered a favorable verdict in the case. NCLA commends the jurors who fully exonerated NCLA’s clients David Lopez, former Chief Compliance Officer for Spartan Securities Group, Ltd. and Island Capital Management, before Judge Virginia Hernandez Covington. The jury also ruled in favor of our other clients, Spartan Securities Group and Carl Dilley (on 12 out of 13 charges), and Micah Eldred and Island Stock Transfer (on 11 counts out of 12), rejecting multiple allegations of fraud, aiding and abetting, as well as regulatory violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The drubbing SEC took at the hands of these brave defendants shows the U.S. Securities and Exchange Commission had massively overcharged them for behavior that was not unlawful.

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CASE STATUS: Active

CASE START DATE: August 21, 2020

DECIDING COURT: The U.S. District Court for the Middle District of Florida

ORIGINAL COURT: The U.S. District Court for the Middle District of Florida

CASE DOCUMENTS

September 3, 2021 | Defendants’ Renewed Motion for Judgment as a Matter of Law
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August 9, 2021 | Judgement in a Civil Case
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July 30, 2021 | Clerk’s Minutes of Jury Deliberation and Verdict
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September 14, 2020 | Defendants’ Response in Opposition to Plaintiff’s Motion for Partial Summary Judgment
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August 21, 2020 | Defendants’ Motion for Summary Judgment
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PRESS RELEASES

July 30, 2021 | NCLA Celebrates Jury Verdict Exonerating Our Clients from a Dozen Inaccurate SEC Charges

Washington, DC (July 30, 2021) – Today, a federal jury in the Middle District of Florida delivered a favorable verdict in U.S. Securities and Exchange Commission v. Spartan Securities Group, LTD., et al. The New Civil Liberties Alliance, a nonpartisan, nonprofit civil liberties group, commends the jurors who fully exonerated NCLA’s clients David Lopez, former Chief Compliance Officer for Spartan Securities Group, Ltd. and Island Capital Management, before Judge Virginia Hernandez Covington. The jury also ruled in favor of our other clients, Spartan Securities Group and Carl Dilley (on 12 out of 13 charges), and Micah Eldred and Island Stock Transfer (on 11 counts out of 12), rejecting multiple allegations of fraud, aiding and abetting, as well as regulatory violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The drubbing SEC took at the hands of these brave defendants shows the U.S. Securities and Exchange Commission (SEC) had massively overcharged them for behavior that was not unlawful.

SEC targeted Spartan, a market maker, and Island, a transfer agent, for third-party misconduct that SEC itself had failed to uncover. From 2005 through 2015, Spartan applied to publish quotations of securities as a market maker for approximately 1500 issuers. Spartan was required to file a Form 211 application with the Financial Industry Regulatory Authority (FINRA) to demonstrate compliance with both FINRA and SEC rules. SEC eventually discovered that 19 out of 1500 issuers were involved in fraud, and the agency unwarrantedly pinned all the blame on Spartan and Island for failing to discover the misconduct that SEC itself long could not detect.

SEC took an aggressive and novel view of its rules and tried to enforce agency guidance as though it were the law. It attempted to hold NCLA’s clients liable under an arbitrary expansion of the requirements of applicable rules set out by Congress and the Commission itself.

But the jury confirmed that neither Spartan nor Island nor any of their employees were involved in the creation or operation of the named issuers listed in the complaint. NCLA’s clients amply complied with their statutory obligations, gathered all required information, and compiled reams of documents supporting their compliance above and beyond the lawful requirements. Kudos to the jury for unanimously rejecting SEC’s effort to change regulatory requirements through enforcement proceedings in federal court.

NCLA believes that the sole remaining count against our clients is legally unsupported and will be successfully overturned upon filing a post-verdict motion.

Today’s verdict should be a signal to SEC that ordinary people will not stand for its abuses.

NCLA released the following statements:

“Jury trials are the ultimate check on the abuse of government authority, and the jury resoundingly rejected the SEC’s attempt to expand its own power, abuse the agency “guidance” process, and create new rules through enforcement. Litigants rarely get their day in court before they simply can’t afford to stand on their innocence and fight back. SEC accused Spartan, and its employees, of 14 different violations of the law, and tried to bankrupt them and permanently bar them from the industry. The jury unanimously rejected almost all of those extreme accusations. This verdict should send a message to SEC—and every agency—NCLA will not let them abuse their power and try to ruin the lives of innocent and hardworking Americans.”
— Caleb Kruckenberg, NCLA Litigation Counsel

“Our clients have spent the better part of a decade under investigation, threat of enforcement, and ultimately this lawsuit. Through those years it became abundantly clear that the SEC had no interest in the facts or the truth. Over the past three weeks, our clients finally got the opportunity to tell their stories to an impartial jury. Today’s verdict is a telling rebuke of the Commission’s abusive and indiscriminate enforcement processes.”

— Kara Rollins, NCLA Litigation Counsel

For more information about this case visit here.

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

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July 13, 2021 | Jury Trial Begins in Case Challenging SEC’s Arbitrary Expansion of Rules for Securities Companies

Washington, DC (July 13, 2021) – The jury trial has begun in U.S. Securities and Exchange Commission v. Spartan Securities Group, LTD., et al. in the District Court for the Middle District of Florida before Judge Virginia Hernandez Covington. The New Civil Liberties Alliance, a nonpartisan, nonprofit civil liberties group, will argue that SEC is rewriting the rules and seeking to unlawfully enforce agency guidance against NCLA clients Spartan Securities Group, LTD., Island Capital Management LLC, Carl E. Dilley, Micah J. Eldred, and David D. Lopez.

From 2005 through 2015, Spartan applied to publish quotations of securities as a market maker for approximately 1500 issuers. To apply to publish quotations, Spartan was required to file a Form 211 application with the Financial Industry Regulatory Authority (FINRA) to demonstrate compliance with both FINRA and SEC rules. Spartan, a market maker, and Island, a transfer agent, participated in the Form 211 application process to publicly list 19 issuers’ common stock to be traded and available to investors. SEC eventually discovered that these 19 issuers were involved in fraud, and the agency now faults Spartan and Island for failing to discover the misconduct that SEC itself long failed to uncover.

Defendants will attest that they neither knew nor suspected that any of the information provided by the issuers or their intermediaries related to the 19 issuers was materially inaccurate or misleading. SEC’s underlying suggestion that Spartan should have refused to do business with these companies or been concerned over the possibility of planned reverse mergers contradicts the Commission’s longstanding recognition that such companies and transactions are legitimate.

SEC’s theory of liability rests on an expansion of the applicable rules via guidance. It proposes to hold transfer agents strictly liable for merely recording others’ sales of securities, even when the transfer agent played no role in arranging the sale and would face liability for refusing the transfer. This action by the SEC would effectively prohibit every transfer agent’s normal practice. SEC also seeks to hold market makers who help small to mid-sized public companies access investor capital to a heightened role as an industry “gatekeeper” that is fully responsible for any representations made by issuers, even though SEC rules impose no such obligations.

In this case, SEC cannot prove a violation of their rules because market makers, like Spartan, need only establish a “reasonable basis” for their decision to publish quotations in an over-the-counter market. The Defendants amply complied with their obligations, gathering all required information, and supporting it with reams of documents above and beyond the lawful requirements. Island, as a transfer agent, followed standard industry practice and timely recorded transfers when it was required to do so by SEC regulations.

NCLA released the following statement:

“Rather than lobby the Commission to change the rules governing the market for small to mid-sized issuers of stock, the Division of Enforcement is trying to rule through this bruising and meritless lawsuit. NCLA’s clients followed all of the rules, even the unwritten ones. But that’s not good enough for an agency that looks at an entire section of the economy with distrust. The jury will see through this effort and exonerate our clients.”
Caleb Kruckenberg, Litigation Counsel, NCLA

For more information visit the case page here.

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

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August 21, 2020 | NCLA Files for Summary Judgment in Case Where SEC Is Seeking to Enforce Guidance Instead of Law

Washington, DC (August 21, 2020) –Today the New Civil Liberties Alliance, a nonpartisan, nonprofit civil rights group, filed a motion asking the U.S. District Court for the Middle District of Florida to issue summary judgment in favor of NCLA’s clients in U.S. Securities and Exchange Commission v. Spartan Securities Group, LTD., et al. NCLA argues that the SEC is rewriting the rules and seeking to unlawfully enforce agency guidance against defendants Spartan Securities Group, LTD., Island Capital Management LLC, Carl E. Dilley, Micah J. Eldred, and David D. Lopez.

The SEC alleges that market-makers Spartan, and transfer agent Island, were involved in filing Form 211 applications with the Financial Industry Regulatory Authority (FINRA) to publicly list 19 issuers’ common stock to be traded and available to investors. The SEC eventually discovered that the issuers had been involved in fraud, and now faults Spartan and Island for failing to discover the misconduct. The Commission also claims the companies failed to investigate certain SEC “red flags” raised by FINRA. However, SEC has repeatedly emphasized the limited nature of the obligation of market-makers and rejected any view that they have a special due diligence requirement to look beyond the statements made to them by issuers of securities.

Neither Spartan nor Island nor any of their employees were involved in the creation or operation of the named issuers listed in the complaint, and they have amply complied with their statutory obligations, gathered all required information, and compiled reams of documents supporting the applications above and beyond the lawful requirements. NCLA argues that SEC is attempting to hold the defendants liable under an arbitrary expansion of the requirements of applicable rules set out by Congress and the Commission itself. SEC’s Division of Enforcement would hold the market-makers responsible, even when both regulators from FINRA and the SEC’s own examiners have analyzed the same information and declared it to be valid and genuine.

The Enforcement Division also seeks to fundamentally alter the scope of a transfer agent’s liability under Section 5 of the Securities Act. It proposes to hold transfer agents, like Island, strictly liable for merely recording others’ transfers of securities, no matter that the transfer agent played no role whatsoever in arranging the transfer. Never mind that the transfer agent faces liability should it refuse the transfer. This theory was rightly rejected by the only court to have ever faced it, as it would mean that every transfer agent is always liable for any underlying misconduct—known or unknown. Following legal precedent, NCLA asks the Court to flatly reject SEC’s unlawful attempt to regulate by enforcement and guidance.

NCLA released the following statements:

“Enforcement attorneys working for agencies routinely try to push regulatory requirements far beyond the limits set out by Congress and even the agencies themselves. They do so to try to extort quick settlements from the targets of their abuse, knowing full well that most small companies can never afford to mount a meaningful legal defense. Those thuggish tactics won’t work here. NCLA’s clients have taken a stand against the SEC’s unlawful attempt to rule by enforcement, and they welcome being fully exonerated by a jury of their peers.”

— Caleb Kruckenberg, Litigation Counsel, NCLA

“For the better part of a decade, the SEC has tried to regulate market-makers and transfer agents by fiat and unpromulgated guidance. To the extent that the Commission has managed to extract settlements from regulated entities on its legally suspect theories, it has succeeded. But successful enforcement by settlement and lawful enforcement in a court of law are not the same thing. The Court should stop the SEC’s wild expansion of its enforcement authority beyond statutory limits.”

— Kara Rollins, Litigation Counsel, NCLA

ABOUT NCLA

NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

Download the full document

OPINION