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

> District Court, M.D. Florida · December 28, 2020

URL: https://www.frixlaw.com/law-library/cases/10106599

## Case

- **Court:** District Court, M.D. Florida
- **Decided:** December 28, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10106599

## How later opinions describe it (automated extraction)

- finding that a transfer agent was not a substantial factor where it merely removed restrictive legends from stocks
- 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

## Opinion text

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10106599. Public record. Not legal advice.