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

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF FLORIDA

TAMPA DIVISION

U.S. SECURITIES AND

EXCHANGE COMMISSION,

Plaintiff,

v. Case No. 8:19-cv-448-VMC-CPT

SPARTAN SECURITIES GROUP, LTD.,

ISLAND CAPITAL MANAGEMENT,

CARL E. DILLEY, and

MICAH J. ELDRED,

Defendants.

____________________________/

ORDER

This matter comes before the Court upon consideration of

Defendants’ Renewed Motion for Judgment as a Matter of Law

(Doc. # 259), filed on September 3, 2021. Plaintiff U.S.

Securities and Exchange Commission (“SEC”) responded on

October 4, 2021. (Doc. # 262). For the reasons that follow,

the Motion is denied.

I. Background

In February 2019, the SEC brought a 14-count Complaint

against the Defendants here – Spartan Securities Group, Ltd.

(“Spartan”), Island Capital Management (“Island”), Carl E.

Dilley, and Micah J. Eldred – along with David D. Lopez,

alleging a broad scheme to aid and abet the creation of fake

1

publicly traded companies and the subsequent issuance of

stock. (Doc. # 1). As relevant here, Count Six of the

Complaint alleged that: Spartan, Island, Dilley, and Eldred

made materially misleading statements or omissions in

connection with the purchase or sale of securities, in

violation of Section 10(b) and Rule 10b-5(b) of the Exchange

Act. (Id. at 49).

The evidence at trial centered on the process whereby

companies go public, that is, how to enable the purchase and

sale of the company’s securities on the public market. The

first step is registration with the SEC, which is accomplished

through an S-1 registration statement. (Doc. # 228 at 23).

Once the SEC approves the registration, the offering is

declared “effective” and is eligible to be sold. (Id. at 23-

24). But the true goal is listing the security on the public,

secondary market so that stockholders can easily liquidate

their holdings. (Id. at 24).

Therefore, the second step is for a company, or “issuer,”

to work with a broker-dealer to fill out and file a Rule 15c-

211 application (a “Form 211”) with the Financial Industry

Regulatory Authority (“FINRA”). (Id. at 24-25). As part of

the Form 211 process, FINRA may issue comments, also called

2

deficiency letters, to the broker-dealer when FINRA

determines that it needs more information. (Doc. # 226 at 33;

Doc. # 249 at 12-13). FINRA works directly with the broker-

dealer, who then works with the issuer to fill out the Form

211 and respond to FINRA’s comments. (Doc. # 228 at 24-29).

Once FINRA approves the application, the final step is to get

clearance from the Depository Trust Company (“DTC”). (Id. at

37-38). Approval from the DTC allows the shares to be freely

traded electronically, which is necessary to be fully trading

on the market. (Id. at 38).

At all relevant times, Spartan was registered as a

broker-dealer with the SEC. (Doc. # 249 at 10). Spartan’s

sister company, Defendant Island Capital Management, also

referred to as Island Stock Transfer, was registered with the

SEC as a transfer agent. (Id.; Doc. # 216 at 115). Transfer

agents handle recordkeeping on behalf of the issuer as to who

the shareholders are in the company. (Doc. # 228 at 40). They

will issue certificates to new shareholders and cancel

certificates to former shareholders. (Id.). Further, because

the DTC will take only free-trading shares, one role transfer

agents play is to cancel any “restricted legends” on the

certificates and issue clean certificates. (Id.).

3

Defendant Micah Eldred formed Spartan and Island, served

as the Chief Executive Officer of each company, and indirectly

owned a majority ownership in the companies. (Doc. # 216 at

115-16). Defendant Carl Dilley was a registered principal of

Spartan and the President of Island. (Doc. # 249 at 10).

Beginning in 2009, Spartan and Island began to assist

two men named Sheldon Rose and Alvin Mirman in ushering a

batch of companies through the process described above. (Doc.

# 190 at 64, 67-69). Specifically, Spartan acted as the

broker-dealer for these companies and assisted them in the

Form 211 application process, and sometimes helped them

achieve DTC clearance as well, while Island acted as the

transfer agent. (Doc. # 249 at 10-14).

Rose and Mirman both later pled guilty to criminal

charges of conspiracy to commit securities fraud in

connection with their respective participation in fraudulent

schemes. (Doc. # 249 at 10). Mirman pled guilty to conspiracy

to commit securities fraud concerning 10 companies at issue

in this case, while Rose pled guilty to charges concerning 14

companies at issue in this case. (Id.).

Specifically, as described in Rose’s plea agreement,

Mirman and/or Rose would recruit a sole officer, director,

4

employee, and majority shareholder – typically a family

member or friend – to act as CEO in name only for the 14

companies at issue in this case. (Doc. # 255-53 at 10-14;

Doc. # 249 at 11). These “straw CEOs” would sign the necessary

documents, but it was Mirman and/or Rose who directed all

corporate activities. (Id.). Mirman and/or Rose would also

prepare false and misleading S-1 registration statements and

subsequent SEC filings which falsely depicted the issuers as

actively pursuing a variety of business plans, when the only

plan from the onset was for the company to be sold as a public

vehicle. (Doc. # 249 at 11).

Shell companies are companies with nominal assets and

little to no business activity. (Doc. # 228 at 46). Blank

check companies are similar, in that they are not formed to

conduct business but are formed “primarily [to] become a

candidate for acquisition.” (Id.). The SEC and FINRA both

inquire as to whether companies seeking to go public are shell

companies or blank check companies because there are

recognized risks to these types of companies. As one expert

witness testifying for the SEC explained, shell companies are

of concern to the SEC “because they’re generally the vehicles

that are used in pump and dump and other manipulative-type

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schemes.” (Id. at 48). A testifying FINRA analyst explained

how a “pump and dump” scheme would work: An individual or

individuals that control the majority of a company’s shares

might release press releases and other information meant to

generate interest and “pump” up the company’s shares. (Doc.

# 226 at 61). Then, that individual or individuals may begin

to sell off their shares, make an “astronomical . . . profit[]

on the shares that . . . they have control of. And by the

time they’re done selling the shares, usually because it’s

based on a ruse, the price of the shares actually tanks.”

(Id. at 61-62). The SEC’s expert witness testified that, in

his opinion, all of the companies involved in this case were

shell companies. (Doc. # 234 at 107).

Indeed, Spartan’s own written policies stated that a

shell corporation’s acquisition of a private company was a

“red flag.” That guidance stated that:

A shell corporation is characterized by no business

operations and little or no assets. In a fraud

scheme, a reporting company with a large number of

shares controlled by one person or a small number

of persons often merges with a nonreporting company

having some business operations. The new public

company is then used as the vehicle for pump and

dump and other fraudulent schemes. Broker-dealers

placing quotes for these issuer’s securities should

be mindful of the potential for abuse.

6

(Doc. # 210 at 68-69).

In other words, an operating, private company might seek

out this public “shell” corporation, and the public shell

would acquire the private company. Such a “reverse merger” is

a relatively quick and cheap way for a private company to get

access to the capital available in the public market. (Doc.

# 224 at 24-25).

In addition to Defendants’ involvement with the

Rose/Mirman companies, the trial evidence also demonstrated

that Spartan and Island assisted Michael Daniels, his wife

Diane Harrison, and a man named Andy Fan in the FINRA

registration process. Daniels and Harrison had been friends

with Eldred for at least 10 years. (Doc. # 249 at 13). Eldred

was aware that Daniels and Harrison were active in the reverse

merger business and had consummated a number of reverse

mergers for clients who wanted to enter the public market.

(Id.).

In 2018, the SEC brought suit against Daniels and

Harrison, alleging that they made misrepresentations related

to at least five undisclosed blank check companies at issue

in this case. (Doc. # 249 at 10). As a result of the SEC

action, Daniels and Harrison consented to a Judgment but

7

neither admitted nor denied the allegations. (Id. at 10-11).

Also in 2018, the SEC entered a cease-and-desist order and

certain bars against Fan in relation to certain companies at

issue in this case. (Id. at 11). Fan also consented to the

order but neither admitted nor denied the allegations. (Id.).

Spartan filed Form 211 applications with FINRA to

initiate quotations in the common stock for 19 companies

associated with Rose, Mirman, Daniels, Harrison and/or Fan.

(Doc. # 249 at 12). Dilley signed the Form 211 applications

for 15 companies at issue, while Eldred signed the remaining

four. (Id.). Mirman and Rose forwarded documents involved in

the Form 211 application process as requested by Spartan.

(Id. at 13). Daniels and Harrison requested that Spartan file

Form 211 applications for five of their issuers. (Id.).

FINRA examiners reviewed all the Form 211 applications

for the 19 issuers in this case and cleared all but one for

quotation in the public market. (Id.). After an issuer was

cleared for quotation, Spartan acted as the exclusive market-

maker for the issuer for 30 days. (Id.). Island served as the

transfer agent for 16 companies at issue in this case. (Id.).

The case proceeded to a 12-day jury trial in July 2021.

During trial, Defendants made an oral motion for judgment as

8

a matter of law, which the Court denied. (Doc. ## 244, 251).

The jury handed down a verdict in Defendants’ favor on 13 of

the 14 counts. (Doc. # 250). However, the jury rendered a

verdict in favor of the SEC as to Count Six. (Id.). The Clerk

entered judgment in accordance with the jury’s verdict on

August 9, 2021. (Doc. # 256).

On September 3, 2021, Defendants filed the instant

Renewed Motion for Judgment as a Matter of Law, requesting

that the Court enter judgment in their favor on Count Six.

(Doc. # 259). The Motion has been fully briefed and is ripe

for review.

II. Legal Standard

In reviewing a motion for judgment as a matter of law

under Federal Rule of Civil Procedure 50(b), “a court’s sole

consideration of the jury verdict is to assess whether that

verdict is supported by sufficient evidence.” Chaney v. City

of Orlando, Fla., 483 F.3d 1221, 1227 (11th Cir. 2007); see

also Cleveland v. Home Shopping Network, Inc., 369 F.3d 1189,

1192 (11th Cir. 2004) (stating that judgment as a matter of

law should only be granted “when there is no legally

sufficient evidentiary basis for a reasonable jury to find

for the party on that issue”). “In considering whether the

9

verdict is supported by sufficient evidence, ‘the court must

evaluate all the evidence, together with any logical

inferences, in the light most favorable to the non-moving

party.’” McGinnis v. Am. Home Mortg. Servicing, Inc., 817

F.3d 1241, 1254 (11th Cir. 2016) (quoting Beckwith v. City of

Daytona Beach Shores, 58 F.3d 1554, 1560 (11th Cir. 1995)).

The district court must not make credibility determinations

or weigh evidence, as these are functions reserved for the

jury. HGR Constr., Inc. v. Hanover Ins. Co., No. 6:18-cv-

1406-PGB-LRH, 2021 WL 868609, at *2 (M.D. Fla. Feb. 1, 2021).

Judgment as a matter of law should be granted only where “the

evidence is so overwhelmingly in favor of the moving party

that a reasonable jury could not arrive at a contrary

verdict.” Middlebrooks v. Hillcrest Foods, Inc., 256 F.3d

1241, 1246 (11th Cir. 2001).

III. Analysis

In a cause of action under § 10(b) and Rule 10b–51, a

1 Rule 10b–5, promulgated by the SEC under Section 10(b) of

the Securities Exchange Act of 1934, provides:

It shall be unlawful for any person, directly or

indirectly, by the use of any means or

instrumentality of interstate commerce, or of the

mails or of any facility of any national securities

exchange,

10

plaintiff must demonstrate: (1) a material misrepresentation

or omission; (2) made with scienter; (3) a connection with

the purchase or sale of a security; (4) reliance on the

misstatement or omission; (5) economic loss [i.e., damages];

and (6) a causal connection between the material

misrepresentation or omission and the loss, commonly called

“loss causation.” FindWhat Inv. Grp. v. FindWhat.com, 658

F.3d 1282, 1295 (11th Cir. 2011).

Here, Defendants argue that they are entitled to

judgment as a matter of law on Count Six for the following

reasons. First, as to Spartan’s representations on the FINRA

Form 211 applications, FINRA cover letters, and the DTC

applications: (a) Spartan was not the “maker” of any

actionable statements or omissions; (b) none of the

(a) To employ any device, scheme, or artifice to

defraud,

(b) To make any untrue statement of a material

fact or to omit to state a material fact

necessary in order to make the statements

made, in light of the circumstances under

which they were made, not misleading, or

(c) To engage in any act, practice, or course of

business which operates or would operate as a

fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. § 240.10b–5.

11

statements or omissions were “material”; and (c) none of the

statements or omissions were made “in connection with” the

purchase of securities. (Doc. # 259 at 10-21). Second,

Defendants argue that Eldred, Dilley, and Island did not make

any actionable statements or omissions. (Id. at 21-25).

Defendants’ arguments as to Eldred and Dilley recycle many of

the same arguments made with respect to Spartan and so the

Court will address them together.

A. Whether Defendants were the “makers” of the

misrepresentations or omissions

Defendants argue that they cannot be held liable for

misrepresentations made by the issuers. (Doc. # 259 at 10-

12, 21, 28). The SEC counters that the jury held Defendants

liable for their own misrepresentations and omissions

contained in the Form 211 applications. (Doc. # 262 at 2-6).

Under Rule 10b-5, it is unlawful for “any person,

directly or indirectly, . . . [t]o make any untrue statement

of a material fact” in connection with the purchase or sale

of securities. 17 C.F.R. § 240.10b-5(b). To be liable,

therefore, Defendants must have “made” the material

misstatements in the Form 211 applications.

The “maker” of a statement, for purposes of Rule 10b–

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5(b) liability, is “the person or entity with ultimate

authority over the statement, including its content and

whether and how to communicate it.” Janus Cap. Grp., Inc. v.

First Derivative Traders, 564 U.S. 135, 142 (2011). “One who

prepares or publishes a statement on behalf of another is not

its maker.” Id.

This Court has already considered and rejected

Defendants’ argument as a general matter during summary

judgment briefing. See (Doc. # 135 at 27-30). As the Court

previously explained:

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.

(Doc. # 135 at 27-28).

13

There was ample evidence presented at trial that Dilley

or Eldred, on behalf of Spartan, signed the Form 211

applications that were sent to FINRA and contained inaccurate

or misleading information. (Doc. # 249 at 12). What’s more,

the Court agrees with the SEC that the jury held Spartan,

Dilley, and Eldred liable for their own misrepresentations

and omissions. The trial evidence demonstrated that:

•

Spartan represented to FINRA that three different

issuers (First Independence, Changing Technologies, and

Dinello Restaurant Ventures) contacted Spartan via

Dilley or Eldred. (Doc. # 257-45 at 8; Doc. # 257-22;

Doc. # 257-60). Dilley signed all three of these Form

211 applications. (Id.). For example, the FINRA Form 211

application for First Independence Corp. stated that:

“Carl Dilley of our firm was telephonically contacted by

Nigel Lindsay, [CEO] of First Independence Corp. in

January of 2013. . . . Following telephone conversations

and electronic communication over the past two months

with the Issuer . . . we elected to proceed with the

filing of the Form 211 on behalf of the Issuer.” (Doc.

# 257-45 at 8). However, all three of the listed sole

officers / CEOs of those issuers testified that they

14

never initiated contact with Defendants, never spoke

with Defendants, and two testified that they never even

communicated with Defendants. (Doc. # 186 at 71-73; Doc.

# 204 at 82-83; Doc. # 224 at 117-19). Rather, the listed

sole officers were recruited by Rose, Mirman, or Daniels

and Harrison and exclusively followed their instructions

with respect to the issuers.

•

Trial testimony established that Eldred signed Form 211

applications for companies brought public by Harrison,

Daniels, and/or Fan, stating that each issuer was

pursuing business operations with no plans for mergers

or changes in control. (Doc. # 257-70 at 8; Doc. # 255-

62 at 9). However, according to an employee who worked

for Fan, the actual business plan from the outset was to

take the companies public and then merge them into one

of Fan’s companies. (Doc. # 216 at 55, 59, 64, 66). For

example, the employee testified that, with respect to

issuer Court Document Services, Fan “didn’t need a

document preparation company . . . . That was never part

of his plan. He had a movie company in China. . . . [H]e

just needed a public company. That’s all he needed. So

however it came about, it just happened to be a court

15

document company because Michael could get it for a good

price.” (Id. at 62). Similarly, with respect to Court

Document Services, Eldred testified that he had

knowledge at least six days after Spartan submitted the

Form 211 that Daniels was contemplating using the issuer

as the vehicle for a reverse merger, but the Form 211

was never updated to reflect that knowledge. (Doc. # 222

at 62-64). In fact, Eldred wrote in an email that he

would be “happy to use Court as a vehicle” for a reverse

merger with his own companies – Spartan and Island –

although this never came to pass. (Id. at 63-64). Eldred

acknowledged that Court Documents’ Form 211 application

was never amended to reflect those negotiations. (Id. at

67).

•

Spartan represented to FINRA in certain Form 211

applications that it had no other relationship with

Mirman, but Mirman testified at trial that that was not

an accurate statement because he “would ask them to file

the 211s for different companies” and he was in constant

communication with people at Spartan. (Doc. # 196 at 29-

30). Mirman also confirmed that he and Rose were the

“point people” for all communications between Spartan

16

and the issuers, and that Spartan never asked for the

issuers’ CEOs to provide information to complete the

Form 211 applications or responses to deficiency

letters. (Id. at 15). According to Mirman, he reached

out to Dilley to request that Spartan prepare the Form

211 applications for ten issuers. (Id. at 23). Dilley

acknowledged that he knew Rose and Mirman were acting as

intermediaries for several issuers and that he had gone

to lunch with Rose and/or Mirman on three occasions.

(Doc. # 199 at 141; Doc. # 202 at 11). Eldred also

admitted that at various times he had referred to Mirman

as Spartan’s “client.”2 (Doc. # 216 at 126-28). As a

witness employed by FINRA explained, the fact that

Mirman had been previously barred from associating with

any FINRA members would be an important piece of

information that FINRA would expect to be disclosed.

(Doc. # 226 at 65).

•

Eldred acknowledged during his trial testimony that —

although Spartan represented to FINRA that, with respect

2 While Defendants presented testimony that broker-dealers

routinely dealt with such intermediaries, this explanation

goes to the credibility of the witnesses and the weight of

the evidence.

17

to issuer Dinello Restaurant Ventures, it did not have

“any other relationship [than what was disclosed] with

Diane Harrison of Harrison Law PA, John Paquette, the

Issuer and/or its representatives” (Doc. # 257-60) – he

did in fact have other business relationships with

Harrison that were not disclosed to FINRA. (Doc. # 222

at 35). Eldred further acknowledged that Daniels’s role

of “owning or controlling” Dinello was not disclosed to

FINRA. (Id. at 37). The SEC elicited testimony that

Daniels had previously been convicted on securities-

fraud related charges. (Doc. # 210 at 105). Once Dinello

went public, it was renamed AF Ocean. (Doc. # 222 at 50-

51, 54). Eldred also testified that he and Fan discussed

merging AF Ocean and Spartan / Island. (Id. at 53).

Thereby, Spartan would become a wholly owned subsidiary

of AF Ocean and would have received $3 million. (Id. at

53-56).

In light of this evidence, a reasonable juror could find

that Defendants Spartan, Dilley, and Eldred were the “makers”

of certain misrepresentations or omissions made to FINRA in

the Form 211 applications and attached cover letters.

18

B. Whether the misrepresentations and omissions were

“material”

Defendants argue that any misrepresentations that might

have been made were not “material” under the law because the

misrepresentations would not have been relevant or important

to a reasonable investor in making an investment decision.

(Doc. # 259 at 12-17). The SEC disagrees and argues that

Defendants’ misrepresentations were material. (Doc. # 262 at

6-12).

Materiality depends on the significance of a

misrepresented or omitted fact to a reasonable investor. SEC

v. Morgan Keegan & Co., Inc., 678 F.3d 1233, 1246 (11th Cir.

2012). That is, a misstatement or omission is “material,” as

an element of securities fraud, if there is a substantial

likelihood that the disclosure of that fact would have been

viewed by a reasonable investor as having significantly

altered the total mix of information that the investor would

consider in making an investment decision. Id. at 1245-46.

Misstatements need not be publicly disseminated in order to

be material. Id. at 1248.

Once again, the Court considered and rejected this

argument at summary judgment, writing:

19

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.”).

(Doc. # 135 at 31-32).

What’s more, “[m]ateriality is considered at least a

mixed question of law and fact involving assessments

particularly within the province of the trier of fact.” SEC

v. Bank Atl. Bancorp, Inc., 2013 WL 5588139, at *12 (S.D.

Fla. Oct. 10, 2013) (quoting SEC v. Merchant Cap., LLC, 483

F.3d 747, 766 (11th Cir. 2007)). “So ‘[t]he trier of fact

usually decides the issue of materiality.’” Id. (quoting

Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1189 (11th

20

Cir. 2002)).

The Court agrees with the SEC that Defendants are asking

this Court to second guess the jury’s materiality

determination. The jury was instructed that “[a] misstatement

or omission of fact is ‘material’ if there is a substantial

likelihood that a reasonable investor would attach importance

to the misrepresented or omitted fact in determining his

course of action. Put another way, there must be a substantial

likelihood that a reasonable investor would view the

misstated or omitted fact’s disclosure as significantly

altering the total mix of available information. A minor or

trivial detail is not a ‘material fact.’” (Doc. # 249 at 25).

The Court’s instruction to the jury correctly stated the law

on materiality, and Defendants do not argue otherwise.

Here, jurors could have reasonably concluded that the

misrepresentations made by Spartan, Dilley, and Eldred would

be material to a reasonable investor. Misstatements or

omissions that enabled the public sale of stock that posed a

risk of “pump and dump” or other market manipulation schemes

would be important to a reasonable investor who would,

understandably, wish to avoid being duped into such a scheme.

As witness Deji Adams, a FINRA analyst, explained,

21

transparency and truthful information is vital to the

securities market because “general public investors need to

be informed so they don’t make a bad investment.” (Doc. # 226

at 51). FINRA attempts to monitor for and prevent market

manipulation schemes, such as pump and dumps, “because not a

lot of investors are savvy. So [FINRA is] trying to make

everything transparent and level the playing field for

investors that are trying [to] enter the market or are in the

market.” (Id. at 62).

Adams additionally testified that there were certain red

flags with respect to Defendants’ disclosures in this case.

For example, he testified that “if you have certain

individuals that get market makers to file 211s for multiple

companies, it’s because of possible manipulation of the

market.” (Id. at 43). This is troublesome because “[i]t is

unusual to have one individual be . . . the reason of a 211

being filed for multiple [issuers]. That is very, very

uncommon.” (Id. at 43-44).

Adams also testified that if the introduction between an

issuer and a broker-dealer was made by a third-party

intermediary, that would have impacted FINRA’s Form 211

analysis and he would expect it to be disclosed. (Id. at 49,

22

53). The trial evidence indicated exactly this – that third-

party intermediaries Rose and Mirman initiated and managed

the Form 211 process with Spartan for more than a dozen

issuers, and yet their involvement with the process was not

disclosed to FINRA.

Similarly, Adams testified that accurate and complete

information regarding an issuer’s plan to conduct a reverse

merger should be disclosed in a Form 211 application. (Id. at

63). This is because “the 211 is not just about that issuer;

it’s also about the other entity that they’re going to either

reverse merge with or take over. . . . That issuer’s

information would also be reviewed like it was that issuer

that filed a Form 211.” (Id. at 63-64). Yet there was trial

testimony that the Rose/Mirman companies, the

Daniels/Harrison companies, and the Fan companies were merely

shell companies or blank check companies where the owners

planned, and then effected, a sale or change of control

shortly after the company went public. Further, the evidence

demonstrated that Spartan did not disclose these intentions

to FINRA or the DTC.

The jury considered the evidence on this point and

determined that the misrepresentations or omissions were

23

material. The Court cannot say that a reasonable jury could

not have arrived at this conclusion. See SEC v. Husain, No.

2:16-cv-03250-ODWE, 2017 WL 810269, at *8 (C.D. Cal. Mar. 1,

2017) (“There is little doubt that a reasonable investor would

have wanted to know the true identity of the shell’s leader,

whether the shell was a viable business operating according

to its stated business plan, and whether the shell intended

to merge with another corporation.”).

C. Whether the misrepresentations or omissions were

made “in connection with” the purchase or sale of

securities

Defendants argue that because the alleged false

statements were not made to the public, the

misrepresentations were not made “in connection with” the

purchase or sale of securities. (Doc. # 259 at 17-19).

Defendants point out that the Form 211 applications, and any

correspondence related thereto, is between FINRA and the

broker-dealer and is not publicly available. (Id. at 17).

The Court has already rejected this argument. As it

explained in both its Order on a motion to dismiss and in its

summary judgment Order:

“The ‘in connection with’ requirement is satisfied

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

way, including situations where ‘the purchase or

24

sale of a security and the [preceding] proscribed

conduct are part of the same fraudulent scheme.’”

[SEC v. Radius Cap. Corp., 653 F. App’x 744, 751

(11th Cir. 2016)] (quoting Rudolph v. Arthur

Andersen & Co., 800 F.2d 1040, 1046 (11th Cir.

1986)). Although the information contained in the

Form 211 applications and responses to deficiency

letters was not filed with the public, that

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. See SEC v. Jones

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

(“[F]alse allegations [in Form 211 applications]

enabling a stock to be publicly traded are

‘reasonably calculated to influence the investing

public’ and hence made ‘in connection with’ the

purchase or sale of a security.”).

(Doc. # 44 at 13-14); see also (Doc. # 135 at 30-31 (same)).

Defendants have not raised any reason that the Court should

ignore its earlier rulings.

The Eleventh Circuit has held that “[m]isrepresentations

themselves need not be explicitly directed at the investing

public or occur during the transaction to be ‘in connection

with the purchase or sale’ . . . of any security.” Radius

Cap., 653 F. App’x at 751; see also SEC v. Zandford, 535 U.S.

813, 819 (2002) (stating that the “in connection with” phrase

should be construed “not technically and restrictively, but

flexibly to effectuate its remedial purposes”); SEC v.

Zouvas, No. 3:16-cv-0998-CAB (DHBx), 2016 WL 6834028, at *8

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(S.D. Cal. Nov. 21, 2016) (“[T]he alleged false information

that [the defendant] gave to FINRA, the organization relied

on by investors to ensure that the information they receive

is truthful and complete,” enabled “the stock to be publicly

traded and [was], therefore, sufficiently connected to

subsequent securities transactions.”).

Here, a reasonable juror could find that the trial

evidence demonstrated that Defendants’ misrepresentations or

omissions to FINRA enabled the securities to be eligible for

public quotation and thereby facilitated the purchase or sale

of securities. This is sufficient to meet the “in connection

with” requirement.

D. Statements or omissions concerning DTC applications

As to misrepresentations made in the DTC process, the

SEC’s proffered expert witness testified that Defendants’

role in obtaining DTC eligibility for the shell or blank check

companies seriously jeopardized the integrity of the

clearance and settlement systems through the filing of false

information. (Doc. # 234 at 42). This witness testified that

Defendants’ actions made the companies “more eligible to be

sold [and] made them more clean, so to speak.” (Id.). Dilley

confirmed in his testimony that DTC eligibility is important

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because it allows for electronic settlement of any purchase

or sale of securities, which makes the transaction easier to

accomplish. (Doc. # 202 at 32-33).

For example, Anna Krokhina, an employee of both Spartan

and Island, represented that issuer Kids Germ Defense “is not

a shell” when applying for DTC eligibility.3 (Doc. # 257-139

at 2-3; Doc. # 240 at 110; see also Doc. # 257-87 (Dilley

directing Krokhina to start the process of applying for DTC

eligibility)). Later in that email chain, Dilley directed a

Spartan employee to invoice Kids Germ Defense, a company

associated with Rose, $3,500 for DTC eligibility. (Id. at 1).

There was later testimony from the SEC’s expert witness that,

in his opinion, Kids Germ Defense was a shell company and

that this statement was a misrepresentation to the DTC

clearing agent. (Doc. # 230 at 69-70). What’s more, Dilley

acknowledged that Kids Germ Defense was sold in a reverse

merger one month later. (Doc. # 240 at 111).

There was sufficient evidence for the jury to find that

Defendants made actionable misrepresentations or omissions to

3 The email referenced was between Spartan/Island employee

Anna Krokhina and Penson Financial Services, which is a DTC

clearing firm. See (Doc. # 202 at 32).

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the DTC. And, in any event, there was no separate count for

Section 10b liability for misrepresentations made just to the

DTC. The jury reasonably concluded that Defendants made

material misrepresentations or omissions to FINRA, DTC

participants, securities purchaser and/or others. See (Doc.

# 249 at 35-38).

E. Count 6 as to Island Capital

Finally, Defendants argue that the Court should render

judgment as a matter of law in favor of Defendant Island

because it did not make any actionable statements or

omissions. (Doc. # 259 at 24-25).

The jury’s verdict against Island was supported by

sufficient evidence. First, as explained above, an employee

of Spartan and Island represented to a DTC clearing agent

that at least one of the Rose/Mirman companies was “not a

shell.” (Doc. # 257-139 at 2-3).

Second, the SEC’s proffered expert witness explained

that “insiders,” control persons, and affiliates should only

have restricted stock, at least for a period of time, because

those persons could (1) immediately sell off their stock,

thereby diluting the value and forcing the price down, or (2)

use their information advantage over the other investors in

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the market. (Doc. # 230 at 44-45). As that witness explained,

once a company has “met the requirements of resale” – that

is, the stock can be freely traded – they would have to go to

a transfer agent to get the restrictive legends removed. (Id.

at 45-46).

The evidence produced at trial demonstrated that Island

and Dilley (Island’s president) were aware that the shares

being deposited into Island were held by affiliates, or people

under the control of the issuer. For example, the trial

evidence demonstrated that the same individuals were named

multiple times as shareholders of the Rose/Mirman companies,

and all of these shareholders were friends and family of Rose

and Mirman. (Doc. # 234 at 28-29). Island would then routinely

process the bulk transfer of shares by signing and

transmitting stock certificates without restrictive legends.

There was enough evidence for a reasonable juror to conclude

that Island knew, or was reckless in not knowing, that these

share certificates should have been restricted, and thereby

made a material representation about these securities to

facilitate their public trading.

Third, Dilley, on Island’s behalf, signed letters to the

buyer of an issuer representing that the stocks were free

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trading when, for the reasons described above, a reasonable

juror could believe that the deposited shares were in truth

restricted. See (Doc. # 257-145).

IV. Conclusion

In sum, evaluating all of the evidence in the light most

favorable to the SEC, the jury’s verdict in favor of the SEC

on Count Six was supported by sufficient evidence. See Chaney,

483 F.3d at 1227; McGinnis, 817 F.3d at 1254. Put another

way, Defendants have not demonstrated that the evidence on

this Count was so overwhelmingly in their favor that a

reasonable jury could not have arrived at a different verdict.

See Middlebrooks, 256 F.3d at 1246. Accordingly, their

renewed Motion for Judgment as a Matter of Law must be denied.

Accordingly, it is

ORDERED, ADJUDGED, and DECREED:

Defendants’ Renewed Motion for Judgment as a Matter of

Law (Doc. # 259) is DENIED. The parties are directed to comply

with the briefing schedule previously entered by the Court at

Doc. # 261.

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

20th day of January, 2022.

VIR IA M. HERNANDEZ*COVINGTON

UNITED STATES DISTRICT JUDGE

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