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

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF FLORIDA

TAMPA DIVISION

UNITED STATES SECURITIES

& EXCHANGE COMMISSION,

Plaintiff,

v. Case No. 8:19-cv-448-T-33CPT

SPARTAN SECURITIES

GROUP, LTD, ISLAND CAPITAL

MANAGEMENT, CARL DILLEY,

MICAH ELDRED, and DAVID LOPEZ,

Defendants.

______________________________/

ORDER

This matter comes before the Court pursuant to

Defendants Carl E. Dilley, Micah J. Eldred, Island Capital

Management, David D. Lopez, and Spartan Securities Group,

LTD’s Motion for Summary Judgment, (Doc. # 102) and Plaintiff

Securities and Exchange Commission’s Motion for Partial

Summary Judgment. (Doc. # 103). For the reasons discussed

below, both Motions are denied.

I. Background

The Securities and Exchange Commission (SEC) initiated

this action against Spartan, Island, Dilley, Eldred, and

Lopez (collectively, “Defendants”). (Doc. # 1). The SEC

accuses Defendants of engaging in two separate microcap fraud

schemes from approximately December 2009 through August 2014,

in violation of the Securities Act of 1933 (Securities Act)

and the Securities Exchange Act of 1934 (Exchange Act). (Id.).

As a one-stop shop for microcap securities, the SEC alleges

that Defendants helped make public the shares of nineteen

undisclosed blank check companies. (Id. at ¶¶ 2-6).

a. Defendants

Spartan is an inactive broker-dealer located in

Clearwater, Florida. (Doc. # 102-2 at 14:12-14, 21:1-20).

Island is a transfer agent that operates out of the same

building. (Id. at 21:1-20, 38:20-25). Both companies are

owned by the same parent holding company, Connect X Capital

Markets, LLC. (Id. at 17:13-22).

From December 2009 through August 2014, Dilley, Eldred,

and Lopez were principals of Spartan. (Id. at 24:15-25:6).

Additionally, Dilley served as Island’s president (Doc. #

102-10 at 23:12-24:2), Eldred as its CEO (Doc. # 1 at ¶ 16;

Doc. # 46 at ¶ 16), and Lopez as its chief compliance officer.

(Doc. # 102-18 at ¶ 2). Lopez also served as Spartan’s chief

compliance officer. (Doc. # 102-2 at 23:9-11).

b. Overview of the alleged microcap schemes

Alvin Mirman and Sheldon Rose pled guilty in 2016 to

conspiracy to commit securities fraud based on their

involvement with fourteen blank check companies (the

“Mirman/Rose companies”). (Doc. # 104-5; Doc. # 104-6). A

blank check company is a company that either has no specific

business plan or purpose or has indicated its business plan

is to engage in a merger. 17 C.F.R. § 230.419(a)(2). Mirman

and Rose both admitted to working with conspirators to recruit

a straw CEO for each of these fourteen companies. (Doc. #

104-5 at 10; Doc. # 104-6 at 10). According to Mirman, the

conspirators would create the name of the company, obtain

state incorporation documents, and file for a tax

identification number in the name of each company, all using

the name of the straw CEO as the listed owner. (Doc. # 104-5

at 11). The conspirators would also cause the straw CEO to

open a bank account in the name of the company using the straw

CEO as a listed signatory. (Id.). In reality, the bank account

was controlled by the conspirators and was not accessed by

the straw CEO. (Id.).

For each of the Mirman/Rose companies, the conspirators

would register the company with the SEC using the Form S-1

process. (Id.). During this process, the conspirators

represented to the SEC that each company had a legitimate

business plan. But “[t]hese representations were all false

and misleading and were intended to deceive the SEC and the

public in order to obtain effective registration of the

company.” (Id. at 12). Each company was in fact a blank check

(or shell) company with no legitimate business purpose or

operations. (Id.).

At some point after each company was registered, the

conspirators would seek buyers for the company and negotiate

a bulk sale of the shares. (Id. at 13). Most often, these

sales were in the form of reverse mergers, by which all shares

of the issuer were sold together for a single cash price.

(Id.).

These resales themselves were disclosed to the SEC. (Id.

at 13). But as part of the resale, restricted securities were

also covertly transferred. (Id.). Prior to each resale, the

conspirators secretly obtained control of all of

the purportedly unrestricted shares of the company.

The conspirators would negotiate a sale price that

included control of the corporate shell as well as

the unrestricted stock. The conspirators then

conveyed control of the company to a person or

entity designated by the buyer, along with the

restricted class of shares (that could not be

publicly traded). This aspect of the sale to the

buyer was disclosed to the SEC and the public, and

usually took the form of a “reverse merger.” The

conspirators would also convey the unrestricted

shares (that could be publicly traded) to the

buyer, typically to a separate person or entity

designated by the buyer. This aspect of the sale

would not be disclosed to the SEC or the public. In

this way, the buyer of the shell company secretly

acquired the unrestricted shares, and could sell

the shares without disclosure to the SEC or the

public that the buyer also controlled the company.

(Id.). After each company’s shares were sold in bulk, the

conspirators shared in the profits of the scheme. (Id.).

The SEC brought a separate enforcement action against

Diane Harrison and Michael Daniels, a married couple, for

manufacturing and selling five other blank check companies

(the “Harrison/Daniels companies”). SEC v. Diane J. Harrison

et al., No. 8:18-cv-1003-T-23TGW (Doc. # 1) (M.D. Fla. Apr.

25, 2018). Harrison and Daniels did not admit to the SEC’s

allegations, but did consent to an injunction. Harrison, No.

8:18-cv-1003-T-23TGW (Doc. ## 139-3; 139-4) (M.D. Fla. Nov.

21, 2019).

The SEC also filed a related cease-and-desist order, by

consent, against Andrew Fan for his involvement with the

Daniels/Harrison companies. In the Matter of Andy Z. Fan

Respondent, Release No. 10487, 2018 WL 1960465 (Apr. 25,

2018). In the order, the SEC states that Fan provided the

capital upfront for three of the Harrison/Daniels companies

to file a Form S-1 registration statement and a Form 211

application to be publicly quoted. Id. at *3. Afterwards, Fan

obtained essentially all the companies’ securities through

designees, then effectuated reverse mergers without

disclosing his role in capitalizing the companies, or his

ownership of essentially all securities through nominees. Id.

at *1-*4. The SEC entered a penny stock ban against Fan and

ordered him to pay a penalty for his role in creating and

selling the Daniels/Harrison companies. Id. at *7.

c. Defendants’ participation in alleged schemes

Before a broker-dealer can publicly quote the price of

and make a market for a microcap security, the broker-dealer

must satisfy Rule 15c2-11 of the Exchange Act, which requires

a Form 211 application be submitted to the Financial Industry

Regulatory Authority (FINRA). 17 C.F.R. § 240.15c2-11.

Defendants do not dispute that Spartan filed the Form

211 applications for the fourteen Mirman/Rose companies and

the five Harrison/Daniels companies, by which the issuers’

shares became publicly quoted. (Doc. # 102-18 at ¶¶ 6-7; Doc.

# 104-5 at 12-13; Doc. # 104-6 at 11-12). Defendants explain

that, as a broker-dealer, Spartan regularly applied to

publish quotations for companies. (Doc. # 102-18 at ¶ 5).

From 2005 to 2015, Spartan applied to publish quotations for

approximately 1,500 issuers. (Id.). The ultimate decision to

publish a quotation was made by either Dilley or Eldred. (Id.

at ¶ 12). Spartan frequently declined to publish quotations

for issuers, rejecting up to half of all requests it received.

(Id. at ¶¶ 5-7). Yet it is undisputed that Spartan agreed to

file the Forms 211 for the nineteen Mirman/Rose and

Harrison/Daniels companies, and agreed to publish those

nineteen companies’ stock quotations. (Id.).

Spartan also does not dispute that Mirman and Rose were

involved in the Form 211 process. (Doc. # 113 at ¶¶ 17-18).

Mirman and Rose held themselves out to Spartan as

intermediaries for some of the shell companies. (Doc. # 102-

17 at ¶ 4; Doc. # 102-56 at 43:5-20; 56:14-58:7). In that

role, Mirman and Rose emailed Spartan requesting Forms 211

and providing information on the issuers (such as business

plans and shareholder information) for Spartan to use while

filling out the forms. (Doc. # 104-9 at 239:16-240:22; Doc.

# 105-8). Harrison was also involved with the Form 211

process, as she approached Eldred to file these forms. (Doc.

## 107-18; 107-19).

Defendants state that once Spartan agreed to file Forms

211 for each of the nineteen companies, it conducted due

diligence by gathering all twenty documents required by Rule

15c2-11. (Doc. # 102-18 at ¶¶ 13-14). Spartan also gathered

additional information not required by the rule. (Id.).

Once Spartan had all the requisite information, it

filled out an issuer’s Form 211 and presented the documents

to FINRA. (Id.). Dilley signed at least fourteen Forms 211

(Id. at ¶ 9), and Eldred signed three. (Doc. # 107-9 at 7;

Doc. # 108-2 at 7; Doc. # 108-8 at 12). According to Mirman,

“[t]hese [Form 211] applications, and follow-up documentation

submitted to FINRA in support of the applications, contained

material false representations and omissions concerning the

companies, including the circumstances surrounding the

submission of the application and the role of the straw CEO

in relation to the company.” (Doc. # 104-5 at 12-13).

For some issuers, after receiving the Form 211, FINRA

sent Spartan deficiency letters requesting more information.

(Doc. # 102-18 at ¶¶ 40-46). Spartan often forwarded the

letters to Mirman or Rose, who responded with shareholder

information they stated was from the issuer. (Doc. ## 105-8;

105-9; 105-10; Doc. # 102-56 at 56:14-58:7; Doc. # 113-3 at

¶ 4). Spartan used this information to compose its responses

to the deficiency letters. (Doc. # 113-3 at ¶¶ 3-5; ## 104-

12; 104-13; 104-14; 104-15; 104-16; 104-17; 104-18; 104-19;

104-20; 104-21; 104-22; 104-23; 104-24; 104-25). Eldred

approved the response to at least one FINRA deficiency letter.

(Doc. # 108-8; 108-9; 108-10). As the chief compliance

officer, Lopez reviewed the deficiency letters for at least

three Forms 211. (Doc. ## 108-17; 108-18; 108-19; 108-20).

After obtaining Form 211 clearance, either Spartan or

Island prepared applications with the Depository Trust

Company (DTC), by which the securities became DTC eligible

for electronic clearance, and thus more valuable. (Doc. #

105-14 at 1; Doc. ## 115-6; 115-7; 115-8; 115-9; 115-10; 115-

11; 115-12). This application often included attestation

letters providing information about the issuer. (Doc. # 102-

18 at ¶¶ 53-54). It is undisputed Rose communicated with

Spartan about DTC eligibility and the DTC process. (Doc. #

105-14; Doc. # 105-13 at 2).

After each company was Form 211 approved and DTC

eligible, it put in a transfer request to Island to sell the

shares. Once Island received a transfer request, it gathered

the necessary documents verifying the stockholder’s ownership

of the stock, a stock certificate directing the transfer, and

instructions signed by the stockholder directing the

transfer. (Doc. # 102-18 at ¶ 50). Island’s policies and

procedures also provided that Island “shall” obtain a “list

of insiders/control persons” from new clients. (Doc. # 108-

23 at 23-24). Island never received nor produced any list of

insiders or control persons for the Mirman and Rose companies.

(Doc. # 113 at ¶ 19; Doc. # 108-16 at 92:9-16).

After Island gathered the aforementioned documents,

Island recorded the transfers, removed the restrictive

legends from the shares, and effectuated the bulk issuance

and transfer of securities. (Doc. # 102-18 at ¶¶ 55-56).

At the time of the alleged fraud, Spartan principal and

Island CEO Eldred had known Harrison and her husband Daniels

for around ten years, and Eldred’s wife had earlier been a

sole officer of an issuer that Harrison helped register and

sell. (Doc. # 107-12 at 22:25-23:7; Doc. # 1 at ¶ 103; Doc.

# 46 at ¶ 103). Eldred and Harrison emailed about the Form

211 process, (Doc. ## 107-18; 107-19), potential FINRA issues

if Eldred’s wife created another public company (Doc. # 107-

15), whether Eldred knew a lawyer who needed a shell (Doc. #

107-14), and some of Fan’s shell companies. (Doc. # 107-10).

Eldred also communicated with Fan about using one of his

companies as a “public OTCBB shell” for Eldred’s personal

holding company. (Doc. ## 107-24; 107-25).

Additionally, as President of Island and registered

principal of Spartan, Dilley emailed with Mirman and Rose

about the Forms 211 (Doc. # 104-9 at 239:16-240:22; Doc. #

105-8; 107-4), DTC eligibility (Doc. # 105-13 at 2),

collecting payments from buyers (Doc. # 105-19), potential

buyers, (Doc. # 105-13 at 2), and lost certificates. (Doc. #

106-4). Dilley also agreed for Island to act as an escrow

agent in a company’s sale, although the sale never occurred.

(Doc. # 105-17; Doc. # 113-9 at 157:4-17).

Furthermore, both Mirman and Rose asked Dilley for

attestation letters to reassure potential buyers that shares

were unrestricted, which Dilley provided. (Doc. ## 105-27;

106-2). Island (through Dilley) attested to potential buyers

that “Island [] has not placed any stops or restrictions on

the company shareholders free trading positions.” (Doc. ##

105-27; 106-2). At the end of the process, Dilley signed the

stock certificates selling the issuer’s shares. (Doc. ## 105-

23; 105-24; 105-25; 105-26).

Based on the aforementioned conduct, the SEC filed a 62-

page, 191-paragraph complaint on February 20, 2019. (Doc. #

1). In its complaint, the SEC alleges: (i) Spartan violated

Section 15(c)(2) and Rule 15c2-11 of the Exchange Act (Count

1), and Dilley, Eldred, and Lopez aided and abetted those

violations (Count 2); (ii) Spartan, Island, Dilley, and

Eldred violated — and aided and abetted violations of —

Section 17(a) of the Securities Act (Counts 3-4, 8-10); (iii)

Spartan, Island, Dilley, and Eldred violated — and aided and

abetted violations of — Section 10(b) and Rule 10b-5 of the

Exchange Act (Counts 5-7, 11-13); and (iv) Spartan, Island,

and Dilley violated Sections 5(a) and 5(c) of the Securities

Act (Count 14).

Both sides now move for summary judgment. (Doc. ## 102;

103). Both parties have responded (Doc. ## 113; 115) and

replied. (Doc. ## 118; 119). The Motions are ripe for review.

II. Legal Standard

Summary Judgment is appropriate “if the movant shows

that there is no genuine dispute as to any material fact and

the movant is entitled to judgment as a matter of law.” Fed.

R. Civ. P. 56(a). A factual dispute alone is not enough to

defeat a properly pled motion for summary judgment; only the

existence of a genuine issue of material fact will preclude

a grant of summary judgment. Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 247-48 (1986).

An issue is genuine if the evidence is such that a

reasonable jury could return a verdict for the non-moving

party. Mize v. Jefferson City Bd. of Educ., 93 F.3d 739, 742

(11th Cir. 1996) (citing Hairston v. Gainesville Sun Publ’g

Co., 9 F.3d 913, 918 (11th Cir. 1993)). A fact is material if

it may affect the outcome of the suit under the governing

law. Allen v. Tyson Foods, Inc., 121 F.3d 642, 646 (11th Cir.

1997). The moving party bears the initial burden of showing

the court, by reference to materials on file, that there are

no genuine issues of material fact that should be decided at

trial. Hickson Corp. v. N. Crossarm Co., Inc., 357 F.3d 1256,

1260 (11th Cir. 2004) (citing Celotex Corp. v. Catrett, 477

U.S. 317, 323 (1986)). “When a moving party has discharged

its burden, the non-moving party must then ‘go beyond the

pleadings,’ and by its own affidavits, or by ‘depositions,

answers to interrogatories, and admissions on file,’

designate specific facts showing that there is a genuine issue

for trial.” Jeffery v. Sarasota White Sox, Inc., 64 F.3d 590,

593-94 (11th Cir. 1995) (citing Celotex, 477 U.S. at 324).

“Summary judgment may be inappropriate even where the

parties agree on the basic facts, but disagree about the

factual inferences that should be drawn from these facts.”

Warrior Tombigbee Transp. Co., Inc. v. M/V Nan Fung, 695 F.2d

1294, 1296 (11th Cir. 1983). If there is a conflict between

the parties’ allegations or evidence, the non-moving party’s

evidence is presumed to be true and all reasonable inferences

must be drawn in the non-moving party’s favor. Shotz v. City

of Plantation, Fla., 344 F.3d 1161, 1164 (11th Cir. 2003). If

a reasonable fact finder evaluating the evidence could draw

more than one inference from the facts, and if that inference

introduces a genuine issue of material fact, the court should

not grant summary judgment. Samples ex rel. Samples v. City

of Atlanta, 846 F.2d 1328, 1330 (11th Cir. 1988) (citing

Augusta Iron & Steel Works, Inc. v. Emp’rs Ins. of Wausau,

835 F.2d 855, 856 (11th Cir. 1988)).

Finally, the filing of cross-motions for summary

judgment does not give rise to any presumption that no genuine

issues of material fact exist. Rather, “[c]ross-motions must

be considered separately, as each movant bears the burden of

establishing that no genuine issue of material fact exists

and that it is entitled to judgment as a matter of law.” Shaw

Constructors v. ICF Kaiser Eng’rs, Inc., 395 F.3d 533, 538–

39 (5th Cir. 2004); see also United States v. Oakley, 744

F.2d 1553, 1555 (11th Cir. 1984) (“Cross-motions for summary

judgment will not, in themselves, warrant the court in

granting summary judgment unless one of the parties is

entitled to judgment as a matter of law on facts that are not

genuinely disputed . . . .” (quotation omitted)).

III. Analysis

Defendants move for summary judgment on all fourteen

counts. (Doc. # 102). The SEC moves for summary judgment as

to Counts 1 and 2 of the complaint, alleging violations of

15(c)(2) and Rule 15c2-11 of the Exchange Act, and Count 14,

alleging violations of Sections 5(a) and 5(c) of the

Securities Act. (Doc. # 103). The Court will address each

Motion separately.

a. Defendants’ Motion

i. Statute of limitations

As a preliminary matter, Defendants argue that most of

the SEC’s claims are time-barred because they are based on

conduct that occurred outside the five-year statute of

limitations set forth in 28 U.S.C. § 2462. (Doc. # 102 at

19).

The Court addressed this issue at the motion to dismiss

stage. (Doc. # 44). “An injunction . . . is not a penalty

within the meaning of [Section] 2462.” SEC v. Graham, 823

F.3d 1357, 1361 (11th Cir. 2016); see also United States v.

Banks, 115 F.3d 916, 919 (11th Cir. 1997) (holding a

government action to enjoin future conduct was a claim for

equitable relief not subject to Section 2462). Therefore, the

Court previously held that Section 2462 does not apply to the

SEC’s requests for equitable relief. (Doc. # 44 at 21).

Furthermore, the Court held that the SEC’s requests for

disgorgement and civil penalties, which are covered by

Section 2462, are based on a single course of conduct

extending through February 2014 for the Mirman/Rose companies

and July 2014 for the Harrison/Daniels companies. (Id. at 21-

22). “Under the continuing violations doctrine, the statute

of limitations is tolled for a claim that otherwise would be

time-barred where the violation giving rise to the claim

continues to occur within the limitations period.” Nat’l

Parks & Conservation Ass’n, Inc. v. Tenn. Valley Auth., 502

F.3d 1316, 1322 (11th Cir. 2007). As this Court previously

found, “because some of the SEC’s claims are based on scheme

liability extending into a period within the statute of

limitations, the SEC’s relief is not barred by Section 2462.”

(Doc. # 44 at 22). This conclusion need not be disturbed.

ii. Counts 1 and 2

Defendants seek summary judgment for Count 1, alleging

that Spartan violated Section 15(c)(2) and Rule 15c2-11 of

the Exchange Act, and Count 2, alleging that Dilley, Eldred,

and Lopez aided and abetted those violations.

1. Primary liability for Spartan

Section 15(c)(2)(A) prohibits broker-dealers from

inducing or attempting to induce the purchase or sale of any

security by means of “any fraudulent, deceptive, or

manipulative act or practice,” or making any “fictitious

quotation.” 1934 Act § 15(c)(2)(A). Pursuant to this section,

the SEC adopted Rule 15c2-11, which requires broker-dealers

to gather and review certain documents before it publishes a

security quotation. 17 C.F.R. § 240.15c2-11. Rule 15c2-11(a)

states in relevant part:

[I]t shall be unlawful for a broker or dealer to

publish any quotation for a security or, directly

or indirectly, to submit any such quotation for

publication, in any quotation medium (as defined in

this section) unless such broker or dealer has in

its records the documents and information required

by this paragraph (for purposes of this section,

“paragraph (a) information”), and, based upon a

review of the paragraph (a) information together

with any other documents and information required

by paragraph (b) of this section, has a reasonable

basis under the circumstances for believing that

the paragraph (a) information is accurate in all

material respects, and that the sources of the

paragraph (a) information are reliable.

17 C.F.R. § 240.15c2-11(a).

Paragraph (b) requires broker-dealers to review, among

other documents “any other material information (including

adverse information) regarding the issuer which comes to the

broker’s or dealer’s knowledge or possession before the

publication or submission of the quotation.” 17 C.F.R. §

240.15c2-11(b).

Defendants argue that Spartan fulfilled all obligations

under the rule by gathering the twenty documents required by

Paragraph (a) and adequately considering all red flags. (Doc.

# 102 at 25-26, 30). However, compliance with Rule 15c2-11 is

not based solely on whether Defendants gathered the necessary

“reams of documents.” (Id. at 5). The SEC creates a material

dispute that Spartan possessed adverse information regarding

the Mirman/Rose and Harrison/Daniels companies, or at least

lacked a reasonable basis to believe its information was

accurate.

The SEC points out two inaccuracies in Spartan’s FINRA

filings for the Harrison/Daniels companies. For one issuer,

Harrison emailed Eldred about filing the Form 211. (Doc. ##

107-18; 107-19). However, on the Form 211 Spartan represented

that Eldred was contacted by the president of the company.

(Doc. # 107-17 at 8). The president testified that he had

never contacted Eldred or Spartan. (Doc. # 107-20 at 33:12-

34:2).

Furthermore, FINRA requested proof of payment by the

shareholders for one issuer. Eldred approved Spartan’s

response that stated:

The individuals who purchased the shares of our

stock are either friends or family members of our

President, Diane J. Harrison, or of our

Secretary/Treasurer, Anna Williams. Diane J.

Harrison and Anna Williams were the only two

solicitors. There were 28 persons solicited in all.

Of those solicited, none did not choose to

purchase.

(Doc. # 108-8 at 26-27). But emails show that Spartan was

aware Daniels and Harrison had paid for all shares, and that

“[n]one of the shareholders paid for their own shares.” (Doc.

# 108-9).

The SEC also points out three inaccuracies in Spartan’s

FINRA filings for the Mirman/Rose companies. For one company,

FINRA sent a deficiency letter to Spartan specifically asking

for a “detailed explanation of the Issuer’s relationship with

Al Mirman.” (Doc. # 104-18 at 10). Spartan responded that

Mirman was a social friend of the issuer, and Mirman

recommended Spartan as a market maker, but otherwise, “Mirman

has no relationship with [the issuer].” (Id. at 13). But

Spartan was aware that Mirman was holding himself out as the

issuer’s intermediary and had solicited Dilley to file the

issuer’s Form 211 in the first place. (Doc. # 107-4).

For another company, Mirman and Rose contacted Dilley to

file the Envoy Form 211, but Dilley and Spartan represented

to FINRA that it was the sole officer who had contacted

Spartan/Dilley. (Doc. # 105-9; Doc. # 104-14 at 8). In fact,

in at least seven Form 211 filings, Spartan represented to

FINRA that the issuer’s sole officer initiated contact with

Spartan or Dilley and requested Spartan complete the Form

211. (Doc. # 104-13 at 7; Doc. # 104-15 at 10; Doc. # 104-16

at 9; Doc. # 104-17 at 8; Doc. # 104-19 at 10; Doc. # 104-23

at 7; Doc. # 104-24 at 8). However, all but one of the officers

testified that they never communicated with Spartan or

Dilley. (Doc. # 104-26 at 77:7-18; Doc. # 104-27 at 48:13-

21; Doc. # 104-28 at 51:18-22; Doc. # 105-3 at 55:13-56:11;

Doc. # 105-4 at 39:9-25; Doc. # 105-5 at 52:14-53:20; Doc.

# 105-6 at 48:10-49:5; Doc. # 105-7 at 84:17-90:5). Some even

testified that they never contacted a broker-dealer at all.

(Doc. # 104-27 at 47:6-9).

Similarly, Spartan responded to several FINRA deficiency

letters by submitting charts (based on information provided

by Mirman and Rose) that detailed shareholder relationships.

(Doc. ## 104-12; 104-13; 104-14; 104-15; 104-16; 104-17; 104-

18; 104-19; 104-20; 104-21; 104-22; 104-23; 104-24; 104-25).

The shareholder chart indicated the sole officer had

solicited shareholders as a friend. (Id.). However, all but

one of the sole officers testified they did not solicit any

shareholders and knew virtually none of them. (Doc. # 104-26

at 77:19-78:6; Doc. # 104-27 at 48:13-50:1; Doc. # 104-28 at

43:4-20; Doc. # 105-3 at 49:5-15; Doc. # 105-4 at 37:24-

38:12; Doc. # 105-5 at 53:23-55:15; Doc. # 105-6 at 49:10-

19; Doc. # 105-7 at 90:21-93:21; Doc. # 105-11 at 38:23-25;

Doc. # 105-12 at 66:5-19).

It is undisputed that Spartan had some knowledge of

Mirman and Rose’s involvement with these companies. Mirman

and Rose held themselves out to Spartan as intermediaries for

some issuers. (Doc. # 102-17 at ¶ 4; Doc. # 102-56 at 43:5-

20; 56:14-58:7). As intermediaries, Mirman and Rose emailed

Spartan about the Forms 211 (Doc. # 104-9 at 239:16-240:22;

Doc. # 105-8), emailed shareholder information to Spartan in

order for Spartan to respond to FINRA deficiency letters (Doc.

## 105-9; 105-10), and communicated with Spartan about DTC

eligibility (Doc. # 105-14).

From this evidence, a reasonable jury could conclude

that Spartan possessed adverse information indicating the

Paragraph (a) documents were not authentic, or at least lacked

a reasonable basis to believe they were accurate.

Accordingly, summary judgment in favor of Spartan is

inappropriate.

2. Aiding and abetting liability

To establish aiding and abetting liability, the SEC must

show: (1) a primary violation by another party; (2) a general

awareness by the aider and abettor that his role was part of

an overall activity that is improper; and (3) the aider and

abettor provided “substantial assistance” to the violator.

SEC v. Big Apple Consulting USA, Inc., 783 F.3d 786, 800 (11th

Cir. 2015). “Severe recklessness can satisfy the scienter

requirement in an aiding and abetting case.” Id.

Dilley declared that he neither knew nor suspected that

any of the information provided by the issuers was inaccurate

or misleading. (Doc. # 102-17 at ¶ 3). But Dilley frequently

communicated with Mirman and Rose about several aspects of

the securities. Dilley communicated with Mirman and Rose

about the Forms 211 (Doc. # 104-9 at 239:16-240:22; Doc. #

105-8; Doc. # 107-4), DTC eligibility (Doc. # 105-13 at 2),

collecting payments from buyers (Doc. # 105-19), potential

buyers, (Doc. # 105-13 at 2), how to handle a lost certificate

(Doc. # 106-4), and attestation letters to reassure potential

buyers that shares were unrestricted. (Doc. ## 105-27; 106-

2).

It is also undisputed that for the relevant issuers,

Spartan’s decision to seek approval to publish a quotation

was made by either Dilley or Eldred. (Doc. # 102-18 at ¶ 5).

And Dilley signed the Forms 211 for at least seven companies.

(Id. at ¶ 9).

A reasonable jury could conclude from this information

that Dilley was generally aware of Mirman and Rose’s

involvement with the companies. Therefore, a reasonable jury

could find that Dilley’s approval of the Forms 211 was

severely reckless and his participation in the Forms 211

process constituted substantial assistance to the overall

fraud.

Like Dilley, Eldred also testified that he neither knew

nor suspected that any of the information provided by the

issuers was inaccurate or misleading. (Doc. # 102-2 at 135:20-

136:24). However, Eldred and Harrison specifically discussed

shell companies on a few occasions. In one email, Eldred asked

Harrison if “[the head of FINRA’s Form 211 group] would have

an issue with [Eldred’s wife] if she creates another public

company?” (Doc. # 107-15). In another email, Daniels asked

Eldred if he knew whether a lawyer “may need a shell for” a

reverse merger. (Doc. # 107-14). Eldred put Daniels in contact

with that lawyer, who responded, “We always have clients

looking for shells.” (Id.). Eldred also communicated with Fan

about using one of Fan’s companies as a “public OTCBB shell”

for his personal holding company. (Doc. ## 107-24; 107-25).

Again, it is undisputed that Spartan’s decision to

publish a quotation was made by either Dilley or Eldred. (Doc.

# 102-18 at ¶ 12). Harrison approached Eldred to file Forms

211 (Doc. ## 107-18; 107-19), Eldred signed three Forms 211

(Doc. ## 107-9; 108-2; 108-8), and Eldred approved the

response to at least one FINRA deficiency letter. (Doc. ##

108-8; 108-9; 108-10).

From this evidence, a reasonable jury could conclude

that Eldred was generally aware of the Harrison/Daniels shell

scheme. Therefore, a reasonable jury could conclude that

Eldred’s approval of Form 211 applications and deficiency

letters was severely reckless and substantially assisted the

Harrison/Daniels fraud.

As the chief compliance officer, Lopez reviewed at least

three FINRA Form 211 deficiency letters for the Mirman/Rose

companies. (Doc. ## 108-17; 108-18; 108-19; 108-20). Lopez

approved the responses for these three issuers within an hour

of receipt. (Doc. ## 108-17; 108-18; 108-19; 108-20). A jury

could reasonably find that by approving deficiency letters

without taking the time to adequately familiarize himself

with the companies, despite numerous red flags raised by

FINRA, Lopez acted with severe recklessness and substantially

assisted the overall fraud.

Summary judgment is thus denied for all Defendants as to

Count 1 and 2.

iii. Counts 3-13

Defendants also move for summary judgment on all of the

SEC’s fraud accusations. Counts 3-4 and 8-10 allege that

Spartan, Island, Dilley, and Eldred violated, and aided and

abetted violations of, Section 17(a) of the Securities Act.

Counts 5-7 and 11-13 allege that Spartan, Island, Dilley, and

Eldred violated, and aided and abetted violations of, Section

10(b) and Rule 10b-5 of the Exchange Act. Defendants make

substantially the same arguments for all of the SEC’s fraud

claims, therefore the Court addresses them simultaneously.

To state a claim under Rule 10b-5(b), the SEC must

allege: “(1) material misrepresentations or materially

misleading omissions, (2) in connection with the purchase or

sale of securities, (3) made with scienter.” SEC v. Merch.

Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007). “A defendant

engages in a fraudulent scheme in violation of [Rule 10b-

5(a)] when he (1) commits a deceptive or manipulative act;

(2) in furtherance of a scheme to defraud; and (3) with

scienter.” SEC v. Greene, No. 13–CV–61762–ROSENBAUM/HUNT,

2014 WL 11706448, at *1 (S.D. Fla. Jan. 27, 2014). “The scope

of liability under Section 10(b) and Rule 10b-5 is the same.”

Merch. Capital, 483 F.3d at 766 n.17.

Claims under Section 17(a) “require[] substantially

similar proof” as claims under Rule 10b-5. SEC v. Monterosso,

756 F.3d 1326, 1334 (11th Cir. 2014). Specifically, to

establish a violation of Section 17(a)(1), the SEC must

allege: “(1) material misrepresentations or materially

misleading omissions, (2) in the offer or sale of securities,

(3) made with scienter.” Merch. Capital, 483 F.3d at 766. In

contrast, claims under Section 17(a)(3) do not require a

showing of scienter. Instead, the SEC must allege: “(1)

material misrepresentations or materially misleading

omissions, (2) in the offer or sale of securities, (3) made

with negligence.” Id. Finally, “the ‘in connection with the

purchase or sale of’ and ‘in the offer or sale of’ elements

of Rule 10b–5 and [Section] 17(a) can be interchangeable.”

SEC v. Radius Capital Corp., 653 F. App’x 744, 749 (11th Cir.

2016).

Defendants argue that the SEC’s 17(a) claims are merely

a “repackaging” of the 10b-5 claims. However, the Supreme

Court has held that the same conduct may violate both Rule

10b-5 and Section 17(a). See Lorenzo v. Sec. & Exch. Comm’n,

139 S. Ct. 1094, 1096 (2019) (finding that by sending emails

known to contain material untruths, the defendant both

“‘employ[ed]’ a ‘device,’ ‘scheme,’ and ‘artifice to

defraud’” within the meaning of subsection (a) of Rule 10(b)

and Section 17(a)(1) and, by the same conduct, “engage[d] in

a[n] act, practice, or course of business’ that ‘operate[d]

. . . as a fraud or deceit’ under subsection (c) of [Rule

10(b)]”). The SEC has created a material dispute of fact that

Defendants’ actions violated both fraud provisions.

1. Misstatements

As for the first element, Defendants argue they never

made “any direct misrepresentations.” (Doc. # 102 at 38).

Defendants only made “qualified statements about information

obtained from issuers,” thus they argue they cannot be liable

under Janus Capital Group, Inc. v. First Derivative Traders,

564 U.S. 135, 142 (2011). (Id. at 38, 43).

Courts applying Janus have found that signers of

statements may be held liable for them. See SEC v. Brown, 878

F. Supp. 2d 109, 116 (D.D.C. 2012) (“Both before and after

the decision in Janus, courts have consistently held that the

signer of a corporate filing is its ‘maker.’”). This remains

true even when the statement is purportedly based on third-

party information. See In re Nevsun Res. Ltd., No. 12 CIV.

1845 PGG, 2013 WL 6017402, at *11 (S.D.N.Y. Sept. 27, 2013)

(“[A]lthough Defendants purported to rely on [an engineering

firm’s] report for certain of their statements, . . .

Defendants adopted those statements, filed them with the SEC,

and thereafter repeated them to investors. That is sufficient

for the Court to find that Defendants ‘made’ the statements

under Janus.”). Therefore, Defendants are the makers of the

statements made to FINRA during the Forms 211 process or DTC

eligibility process, despite purportedly relying on Mirman,

Rose, and the issuers for the information.

Defendants also argue that they had no affirmative duty

to disclose Mirman and Rose’s status as intermediaries. (Doc.

# 102 at 35). However, the Eleventh Circuit has held that

when selling securities, the “duty to disclose is a general

one, and arises whenever a disclosed statement would be

misleading in the absence of the disclosure of additional

material facts needed to make it not misleading.” United

States v. Bachynsky, 415 F. App’x 167, 172 (11th Cir. 2011)

(internal citations and quotations omitted). The SEC presents

several statements that a jury could reasonably find

misleading.

As examined in Section III(a)(ii)(1), Spartan made

several misrepresentations to FINRA. For example, Spartan

represented to FINRA that “Mirman has no relationship with

[the issuer],” when in fact Mirman was the issuer’s

intermediary. Spartan also represented to FINRA that the

issuer’s sole officer initiated contact with Spartan or

Dilley. But most officers testified that they never

communicated with Spartan or Dilley. Similarly, Spartan

responded to several FINRA deficiency letters with

shareholder charts indicating the sole officer had solicited

shareholders as a friend. Yet, as discussed in detail in

Section III(a)(ii)(1), all but one of the sole officers

testified they did not solicit any shareholders and knew

virtually none of them.

Spartan also responded to a deficiency letter stating

that “[t]he individuals” who purchased all of the issuers’

shares were “either friends or family” of Harrison or the

issuer’s treasurer. (Doc. # 108-8 at 26-27). But Spartan had

already learned that Daniels and Harrison had paid for all

shares, and that “[n]one of the shareholders paid for their

own shares.” (Doc. # 108-9).

As for Island, Island and Spartan both stated, in

connection with a DTC application, that at least two of the

companies were “not a shell.” (Doc. ## 115-14; 115-15).

Island also submitted twelve DTC transfer agent attestation

forms stating it would exercise diligence and provide DTC

with complete and accurate information about securities.

(Doc. ## 115-6; 115-7; 115-8; 115-9; 115-10; 115-11; 115-12).

However, Island never received nor produced any list of

insiders or control persons for the Mirman/Rose companies

(Doc. # 113 at ¶ 19; Doc. # 108-16 at 92:9-16) despite its

official policy providing that Island would obtain a “list of

insiders/control persons” from new clients. (Doc. # 108-23 at

24).

Lastly, Eldred signed two Forms 211 stating each issuer

was pursuing local business operations with no plans for

mergers or changes in control. (Doc. ## 107-9; 108-2). One of

these forms also stated that there were no past or present

undisclosed control persons. (Doc. # 107-9). However,

according to one of the sole officers, “the plan for [both]

companies at the outset was the same - take them public, and

then merge them into one of Fan’s companies so that Fan would

have public companies in the United States. There was never

any plan to continue running the businesses of those [two]

companies.” (Doc. # 107-11 at ¶¶ 6-7).

A reasonable jury could conclude that these statements

were either misrepresentations or misleading.

2. In connection with

Defendants argue that none of the misrepresentations

meet the “in connection” requirement because they were not

disseminated to the public. (Doc # 102 at 37-44).

“[T]he ‘in connection with’ requirement is satisfied

where the fraud ‘touch[es]’ the transaction in some way,

including situations where ‘the purchase or sale of a security

and the [preceding] proscribed conduct are part of the same

fraudulent scheme.’” Radius Capital, 653 F. App’x at 751

(quoting Rudolph v. Arthur Andersen & Co., 800 F.2d 1040,

1046 (11th Cir. 1986)). Although the Form 211 documents and

DTC attestation forms were not filed with the public, the

information led to the fraudulent companies’ abilities to be

eligible for public quotation. Thus, the statements were made

in connection with the offer and sale of securities. SEC v.

Jones & Co., 312 F. Supp. 2d 1375, 1382 (D. Colo. 2004).

3. Materiality

Defendants next argue that none of the statements were

material, because Island’s attestations “did not provide any

substantive information or representations about the issuer’s

activities, business, or registration of shares, and were not

seen by members of the public.” (Doc. # 102 at 37, 44-43).

Likewise, Defendants argue that the information contained in

the Form 211 cover letters was “provided simply to anticipate

questions FINRA often posed.” (Id. at 40, 44). “The investing

public could hardly have considered the representations in

the cover letter to be material for any purchase or sale of

securities.” (Id. at 40).

Other courts have held that misrepresentations regarding

an undisclosed control person and shareholder solicitation

are material in the context of the Form 211 process. SEC v.

Farmer, No. 4:14-CV-2345, 2015 WL 5838867, at *9 (S.D. Tex.

Oct. 7, 2015). Although the statements were made in private,

a misstatement can be material “if a reasonable investor would

have considered the defendant’s alleged misrepresentations

important, even if the statement is not made directly to the

investor.” SEC v. Czarnik, No. 10 CIV. 745 PKC, 2010 WL

4860678, at *5 (S.D.N.Y. Nov. 29, 2010).

Here, a jury could reasonably conclude that an investor

would want to know about an undisclosed control person, the

possibility of a company being a shell, and the true due

diligence of a transfer agent. See Farmer, 2015 WL 5838867,

at *13 (“[A] reasonable investor in a microcap security would

surely want to know about the existence of an undisclosed

control person who not only encouraged close associates and

relatives to invest in the company, but also provided those

associates and relatives with the cash with which they would

then ‘buy’ the company’s stock.”).

4. Scienter

Scienter is “a mental state embracing intent to deceive,

manipulate, or defraud.” Aaron v. SEC, 446 U.S. 680, 686 n.5

(1980). The Eleventh Circuit “do[es] not require actual

knowledge to establish scienter under [Section] 17(a)(1) or

Rule 10b-5.” Radius Capital, 653 F. App’x at 753. Instead,

“[s]cienter may be established by a showing of knowing

misconduct or severe recklessness.” Monterosso, 756 F.3d at

1335 (quoting SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324

(11th Cir. 1982)).

Relying on expert testimony, Defendants argue that

Island lacked scienter because it acted in accordance with

generally accepted industry practices and norms. (Doc. # 102

at 37, 39, 44). Specifically, the transfer agent community

generally approves transfer requests when they contain

certain presentments, such as a medallion signature

guarantee. (Doc. # 100-1 at 5). Defendants argue that all of

Island’s transfer requests had such guarantees, indicating

their legitimacy. (Doc. # 102 at 37, 39, 44).

Similarly, Defendants argue that Spartan collected more

information than required by Rule 15c2-11 prior to filing its

Form 211 applications. (Doc. # 102-18 at ¶¶ 13-14). Thus,

according to Defendants, Spartan not only acted within

community norms, it exceeded the industry standard. (Doc. #

102 at 39). Defendants also argue that neither Dilley nor

Eldred had any knowledge of misconduct. On the contrary, Rose,

Harrison, and Daniels all attested to the accuracy of the

documents and never informed Defendants of the underlying

scheme. (Doc. # 102-56 at 63:11-65:1; Doc. # 102-59 at 12;

Doc. # 102-66 at ¶¶ 3-6).

The SEC provides sufficient evidence for a reasonable

jury to find scienter on the part of all Defendants. As

discussed in Section III(a)(ii)(1), Spartan was indisputably

aware of Mirman and Rose’s involvement as intermediaries with

the companies. Based on this knowledge, a reasonable jury

could conclude that Spartan’s statements to FINRA omitting

Mirman and Rose’s intermediary relationship were severely

reckless.

Furthermore, as discussed in Section III(a)(ii)(1),

Spartan learned that Daniels and Harrison had paid for all

shares from one issuer. But in response to a FINRA deficiency

letter, Spartan stated that individual friends and family

members had purchased those shares. A reasonable jury could

find this misrepresentation to be severely reckless.

Regarding Island, Island represented to the DTC that a

company was “not a shell,” and submitted twelve DTC transfer

agent attestation forms stating it would exercise diligence

in order to provide DTC with complete and accurate information

about the securities. (Doc. ## 115-14; 115-15; 115-6; 115-7;

115-8; 115-9; 115-10; 115-11; 115-12). However, Island did

not follow its internal policies on collecting insider lists

to ensure the transfers were not restricted. (Doc. # 113 at

¶ 19; Doc. # 108-16 at 92:9-16; Doc. # 108-23 at 24).

The SEC also points out numerous red flags surrounding

the Mirman/Rose companies. For example, Island overlooked the

fact that issuer Kids Germ had significant ties to another

Mirman/Rose company, Envoy (Doc. ## 106-35; 106-36; 105-9;

104-14; 104-15), and that Mirman and Rose used the funds of

one company to pay the expenses of a different, purportedly

unrelated company. (Doc. # 105-19). On two occasions, Island

received requests to transfer all the unrestricted shares of

two independent issuers to the same buyers, represented by

the same counsel. (Doc. ## 105-23; 105-24; 105-25; 105-26;

106-5; 106-6; 106-7; 106-8; 106-9; 106-10; 106-11; 106-12).

Despite expert testimony that it is industry practice to

approve transfers containing medallion signature guarantees,

a reasonable jury could nonetheless conclude that Island’s

representations to the DTC were severely reckless in the face

of such red flags.

As for the individuals, Dilley’s extensive

communications with Mirman and Rose (detailed in Section

III(a)(ii)(2)) could lead a reasonable jury to believe he was

severely reckless in his representations to FINRA that the

sole officers of various companies contacted Spartan to file

Forms 211. Similarly, Eldred’s various communications with

Daniels about shell companies (detailed in Section

III(a)(ii)(2)) could lead a reasonable jury to believe he was

severely reckless in his representations to FINRA that each

issuer was pursuing local business operations with no plans

for mergers or changes in control. Furthermore, Eldred’s

knowledge that Daniels paid for the shares of stockholders,

(Doc. # 108-8 at 26-27; Doc. # 108-9), could lead a reasonable

jury to believe he was severely reckless in his

representations to FINRA that the shareholders had purchased

their shares.

iv. Count 14

Defendants seek summary judgment on Count 14, alleging

that Spartan, Island, and Dilley violated Sections 5(a) and

5(c) of the Securities Act.

Sections 5(a) and (c) of the Securities Act “forbid[]

the use of any means of interstate commerce or of the mails

to sell or offer to sell securities without having first filed

a registration statement with the Securities and Exchange

Commission.” SEC v. Cont’l Tobacco Co. of S.C., 463 F.2d 137,

155 (5th Cir. 1972) (citation omitted). “No showing of

scienter or negligence is necessary to prove a Section 5

violation, as the provision carries strict liability.” SEC v.

Universal Express, Inc., 475 F. Supp. 2d. 412, 434 n. 15

(S.D.N.Y. 2007); see also SEC v. Sierra Brokerage Servs.,

Inc., 608 F. Supp. 2d 923, 939 (S.D. Ohio 2009) (“Section 5

imposes strict liability on sellers of securities”).

1. Prima facie case

To establish a prima facie case for a violation of

Section 5 of the Securities Act, the SEC must demonstrate

that “(1) the defendant directly or indirectly sold or offered

to sell securities; (2) through the use of interstate

transportation or communication and the mails; (3) when no

registration statement was in effect.” SEC v. Calvo, 378 F.3d

1211, 1214 (11th Cir. 2004) (citations omitted).

As for the first and third element, Rose and Mirman pled

that they transferred unregistered shares for all fourteen of

their companies. (Doc. # 104-5 at 13; # 104-6 at 12-13).

Island admitted it transferred shares for eleven of these

fourteen companies and acted as a transfer agent for transfers

of a controlling portion of shares for these eleven companies.

(Doc. # 102-18 at ¶¶ 50, 55-56).

As for the second element, “the facilities of interstate

commerce” is broadly construed. United States v. Wolfson, 405

F.2d 779, 784 (2d Cir. 1968). Courts have found that element

violated “when, in connection with the sale of such stock,

the mails are used to transmit an offer or other sales

literature, to transport the securities after sale, to remit

the proceeds to the seller, to send confirmation slips to the

buyer, and perhaps even when used in more tangential ways.”

Id. Rose admitted in his deposition to receiving stock

certificates from Island in the mail (Doc. # 104-8 at 107:8-

13) and the SEC attaches sample stock certificates Island

mailed to Rose. (Doc. # 108-30). The SEC thus creates a

material dispute that unregistered shares were transferred in

violation of the statute.

Defendants’ only response to the prima facie case is

that the SEC does not “articulate what transfers are [at]

issue,” therefore Defendants cannot prove the transfers were

registered. (Doc. # 113 at 20). The Court disagrees. The

transfers at issue are the resales and reverse mergers of the

Mirman/Rose companies. Island admits it processed transfers

for at least eleven of these companies, therefore Mirman and

Rose’s statements create a triable issue for this count.

2. Participation

“[C]ourts have established the concept of ‘participant’

liability to bring within the confines of [Section] 5 persons

other than sellers who are responsible for the distribution

of unregistered securities.” SEC v. Murphy, 626 F.2d 633, 649

(9th Cir. 1980). Therefore, an “indirect participant” that

did not pass the title himself may still be liable for a

violation of Section 5 if he is a necessary participant or

substantial factor in the transaction, or he engages in steps

necessary to complete the distribution of shares to the

public. Id. at 1215; Calvo 378 F.3d at 1215.

However, “not everyone in the chain of intermediaries

between a seller of securities and the ultimate buyer is

sufficiently involved in the process to make him responsible

for an unlawful distribution.” Geiger v. SEC, 363 F.3d 481,

487 (D.C. Cir. 2004) (internal quotation marks omitted). The

Ninth Circuit in SEC v. CMKM Diamonds, Inc., 729 F.3d 1248,

1255 (9th Cir. 2013), identified conduct that could qualify

a defendant as a “participant.” In that case, the court

reversed summary judgment against a transfer agent, holding

that title alone did not create liability under Section 5.

Id. at 1258. Devising the underlying scheme, finding

potential buyers, and structuring the unregistered

securities’ sales were all forms of “integral[]” involvement

that might satisfy the participant theory. Id. at 1259. But

merely issuing shares without a restrictive legend, after

receiving two attorney opinion letters to do so, was

“insufficient, in and of itself,” to establish that the

transfer agent was a substantial factor as a matter of law.

Id. at 1259.

a. Spartan

It is undisputed that Spartan filed the Forms 211 for

the relevant shell companies. (Doc. # 102-18 at ¶ 6). Courts

have found defendants that engaged in the Form 211 process to

be necessary under Section 5. See Farmer, 2015 WL 5838867 at

*18 (holding defendant who provided false information during

Form 211 process “was a necessary participant in the

distribution of [the fraudulent company’s] stock to the

public”).

Furthermore, as explained in Section III(a)(ii)(1),

during the Forms 211 process Spartan made the following

representations to FINRA: (1) that the purported sole officer

of each company contacted Spartan or Dilley; (2) that the

sole officer had solicited shareholders as a friend; and (3)

that Mirman had no relationship to a certain issuer. However,

most officers testified they had never contacted Spartan,

most officers testified they were unfamiliar with any

shareholders, and Spartan was aware Mirman was acting as an

intermediary for that issuer.

A reasonable jury could conclude that but for this

information, FINRA would not have approved the Forms 211 and

the securities would not have gone to market, making Spartan

a necessary participant.

b. Island

Summary judgment is likewise inappropriate for Island.

Unlike the transfer agent in CMKM Diamonds, the undisputed

facts show Island did more than just effectuate the disputed

transfers. Dilley agreed for Island to act as an escrow agent

in one company’s sale (Doc. # 105-17; Doc. # 113-9 at 157:4-

17), and Island (through Dilley) affirmatively attested to

potential buyers that the companies’ shares were

unrestricted. (Doc. ## 105-27; 106-2).

Furthermore, the transfer agent in CMKM Diamonds

requested a second opinion letter from counsel to confirm the

removal of restrictive legends. CMKM Diamonds, 729 F.3d at

1255. But here, as discussed in Section III(a)(iii)(4), the

SEC has provided evidence showing that Island (1) failed to

obtain insider lists for the Mirman/Rose companies (despite

it being company policy for new clients) and (2) overlooked

numerous red flags. A reasonable jury could conclude this

conduct was a substantial factor in bringing the securities

to market. But for Island ignoring several red flags, the

restrictive legends would not have been removed and the

securities would not have been sold unrestricted. Summary

judgment is thus inappropriate for Island.

c. Dilley

As both president of Island and a registered principal

of Spartan, Dilley was actively involved in both companies’

actions. In that role, as detailed in Section III(a)(ii)(2),

Dilley communicated frequently with Mirman and Rose about

several aspects of the sales, including providing attestation

letters to reassure potential buyers that the shares were

unrestricted.

Dilley also personally performed several tasks in the

process of selling the securities. Dilley signed the Forms

211 for at least seven companies (Doc. # 102-18 at ¶ 9), and

agreed for Island to act as an escrow agent for a sale. (Doc.

# 105-17; Doc. # 113-9 at 157:4-17). Dilley also signed the

stock certificates selling all shares. (Doc. # 105-17; Doc.

# 113-9 at 157:4-17).

A reasonable jury could conclude that Dilley was

involved in the scheme from start to finish, making him a

necessary participant under Section 5.

b. SEC’s Motion

i. Counts 1 and 2

The SEC also seeks summary judgment for Count 1, alleging

that Spartan violated Section 15(c)(2) and Rule 15c2-11 of

the Exchange Act, and Count 2, alleging that Dilley, Eldred,

and Lopez aided and abetted those violations.

1. Primary liability for Spartan

The SEC alleges that Spartan violated Rule 15c2-11 by

failing to consider the adverse information in its

possession, as required by Paragraph (b). (Doc. # 115 at 16).

Specifically, the SEC alleges that Spartan possessed several

red flags indicating the true purpose of the shell companies.

According to the SEC, “if ‘red flags’ appear at any stage

of the review process, the broker-dealer may not publish

quotations unless and until those ‘red flags’ are reasonably

addressed.” (Id. at 17) (citing SEC Release No. 34-29094,

1991 WL 292186, at *2 (Apr. 17, 1991)). Spartan failed to do

so; therefore the SEC contends, it lacked a “reasonable basis”

for believing the Paragraph (a) documents (including the

Forms S-1 and periodic reports) were accurate and reliable.

(Doc. # 103 at 40-41; Doc. # 115 at 20-21).

But Defendants have raised a genuine dispute of material

fact that Spartan had a reasonable basis to believe its

information was accurate. First, Spartan points out it not

only reviewed the twenty documents required by Paragraph (a),

but it also reviewed significant additional information not

required by the rule. (Doc. # 102-18 at ¶¶ 13-14). For every

issuer, Spartan gathered: (1) a signed Form 211 Filing

Agreement; (2) a principal officer affidavit; (3) a Director

and Officer Questionnaire; and (4) a Shareholder Data

Spreadsheet. The principal officer affidavit required a

notarized signature from the issuer’s representative

promising, under penalty of perjury, that there were no

undisclosed control persons. (Id.). For several companies,

Spartan also gathered signed certifications saying the issuer

had provided accurate information and there were no

undisclosed control persons. (Id.). Defendants argue that

Spartan had no reason to believe these documents, given to

them directly from issuers, were inaccurate.

Second, regarding the alleged failure to investigate red

flags, Defendants respond that none of the promulgations and

releases cited by the SEC are binding. Defendants stress that

red flags are not an additional regulatory burden Spartan was

required to dispel, but merely “examples [provided by the

SEC] of factors a market-maker ‘may wish’ to consider.” (Doc.

# 113 at 29). Therefore, according to Defendants, Spartan

“need only satisfy itself with respect to the accuracy of the

information based on the nature of the red flag.” (Id. at 25

(internal quotations omitted) (citing SEC Release No. 34-

29094, 1991 WL 292186, at *6 (Apr. 17, 1991)). Defendants

allege Spartan met this burden and complied with the rule by

considering the purported red flags.

Specifically, Defendants highlight several of the SEC’s

red flags and explain why Spartan was satisfied the

information it received from issuers was accurate. (Id. at

30). For example, the SEC argues that Spartan should have

been alerted to potential fraud because many issuers had

overlapping shareholders and a common attorney. But

Defendants cite testimony from a FINRA examiner that it is

“pretty common” for small issuers to have shareholders with

close relationships to the officers or directors. (Doc. #

102-32 at 37:6-23). Similarly, Defendants argue that the term

“shell” did not raise any red flags because professionals

often use shell companies for legitimate structuring

purposes. SEC Release No. 1293, 2005 WL 1667452, *2 (July 15,

2005).

Defendants also point out that the SEC actually examined

Spartan’s Form 211 files in late 2012. (Doc. # 102-67 at 18:7-

19:4, 48:8-50:7, 54:2-23). At the time, the SEC did not raise

any concern over Spartan’s treatment of red flags, and the

investigation did not give rise to an enforcement referral.

(Id. at 54:2-23). Overall, Defendants argue that Spartan

reasonably addressed each red flag and determined that the

red flags were “simply unimportant to the validity of the

applications.” (Id. at 30).

The SEC replies that Spartan, Dilley, Eldred, and Lopez

all held “inside information that undisclosed control persons

were running each of the issuers with the intention to sell

them in the exact same fashion.” (Doc. # 115 at 20).

Therefore, neither the additional documents Spartan examined

nor the measures Spartan undertook to review the red flags

created a reasonable belief that the Paragraph (a)

information was accurate.

However, the evidence cited by the SEC in support of

this argument is far from undisputed. Rather, the SEC draws

an inference from its interpretation of several emails,

Mirman and Rose’s guilty pleas, and depositions of various

individuals. Defendants dispute the SEC’s interpretation of

this evidence and argue that a reasonable jury could conclude

otherwise.

The Court agrees. Based on the documents Spartan

gathered, and the SEC’s evidence of adverse information, a

reasonable juror could conclude that Spartan reasonably

addressed the red flags it uncovered, and thus had a

reasonable basis to believe its information was accurate.

2. Aiding and abetting liability

Since aiding and abetting liability flows from principal

liability, and Defendants have shown a material dispute as to

Spartan’s principal liability, there is also a dispute of

material fact whether Dilley, Eldred, and Lopez are

secondarily liable.

ii. Count 14

The SEC also seeks summary judgment on Count 14, alleging

that Spartan, Island, and Dilley violated Sections 5(a) and

5(c) of the Securities Act. Defendants raise a genuine dispute

of material fact regarding whether they were necessary

participants.

1. Spartan

A reasonable jury could find that Spartan was not a

necessary participant. In both cases cited by the SEC, the

defendant who filed Forms 211 was also engaged in several

other activities. In Farmer, the defendant not only helped

the issuer file its Form 211, but also paid the issuer’s CEO’s

salary, helped the issuer secure its initial funding,

solicited several IPO investments and secretly funded at

least 40% of the IPO, directed and financed an advertising

campaign publicizing the issuer, and funded the transfer of

shares sold in the IPO to consolidate the stock. Farmer, 2015

WL 5838867, at *18.

In SEC v. Husain, No. 216CV03250ODWE, 2017 WL 810269, at

*6 (C.D. Cal. Mar. 1, 2017), the defendant was likewise

involved in several steps of the sale. Summary judgment was

appropriate because the defendant not only assisted in the

Form 211 process, but also “devised the ‘self[-]filing’

method that produced the shells, found six of the seven shell

company purchasers, and was at least partially responsible

for crafting and processing the deals themselves.” Id.

Spartan’s only undisputed involvement beyond the Form

211 process was the DTC eligibility form for one company.

(Doc. # 105-14). Furthermore, Defendants argue that Spartan’s

conduct in the Form 211 process was always based on the

information it received from the issuers, albeit through

intermediaries Mirman and Rose. (Doc. # 113 at 27). Rose

testified that neither he nor Mirman informed Spartan or any

employee at Spartan that any of the information provided to

Spartan was inaccurate or misleading. (Doc. # 102-56 at 63:11-

65:1). Based on this information, a reasonable jury could

conclude that Spartan was not a substantial factor in the

overall scheme.

2. Island

A reasonable jury could also conclude that Island was

not necessary. Defendants’ expert testimony, although

partially excluded, was deemed admissible to opine on

industry norms. (Doc. # 133 at 20-21). According to the

expert’s report, the transfer agent community generally

approves transfer requests when they contain the guarantees

present on Island’s transfer requests. (Doc. # 100-1 at 5).

Furthermore, Defendants argue that Island’s only

undisputed actions were ministerial in nature, thus it was

not significantly involved with the broader scheme. (Doc. #

113 at 29). Indeed, Island’s only undisputed conduct beyond

effectuating the bulk transfers was involvement in DTC

applications and sending two attestation letters to potential

buyers reassuring the buyers’ the companies were

unrestricted. (Doc. # 102-18 at ¶¶ 53-54; Doc. ## 105-27;

106-2).

From this evidence, a reasonable jury could find that

Island’s conduct was not integral to the overall scheme in a

way that creates participation liability. See CMKM Diamonds

729 F.3d at 1255 (finding that a transfer agent was not a

substantial factor where it merely removed restrictive

legends from stocks). Rather, a reasonable jury could

conclude that Island was merely acting within community norms

and fulfilling its ministerial role as transfer agent,

despite the presence of red flags. Id.

3. Dilley

A reasonable jury could also find that Dilley’s conduct

was not necessary to the overall scheme. As discussed in

Section III(a)(ii)(2), the SEC cites evidence showing Dilley

was involved in most steps of the sales process and frequently

in contact with Mirman and Rose. Nonetheless, a reasonable

jury could find that sporadic emails regarding lost

certificates and potential buyers are not comparable to

devising the entire scheme or personally soliciting most of

the buyers. Id. Thus, a reasonable jury could find that Dilley

was not a substantial factor to the overall fraud.

IV. Conclusion

In sum, the Court finds there are genuine issues of

material fact for all claims that require resolution by a

jury.

Accordingly, it is hereby

ORDERED, ADJUDGED, and DECREED:

(1) Defendants’ Motion for Summary Judgment (Doc. # 102) is

DENIED.

(2) Plaintiff’s Motion for Partial Summary Judgment (Doc. #

103) is DENIED.

DONE and ORDERED in Chambers, in Tampa, Florida, this

28th day of December, 2020.

VIRGINIA M. HERNANDEZ’COVINGTON

UNITED STATES DISTRICT JUDGE

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