SEC Loses Jury Trial Against Spartan In 'Shell Fac

SEC Loses Jury Trial Against Spartan In 'Shell Factory' Case

By Rachel Scharf

Law360 (August 2, 2021, 7:36 PM EDT) -- A Florida federal jury on Friday largely rejected the U.S. Securities and Exchange Commission's allegations that Spartan Securities Group Ltd. was complicit in a scheme to create sham companies and fraudulently sell their stock on over-the-counter markets.

Following a 13-day trial in Tampa, the jury cleared broker-dealer Spartan, its transfer agent Island Capital Management and the firms' owners Carl Dilley and Micah Eldred, along with fellow Spartan owner David Lopez, of a dozen claimsthat they aided and abetted a plot that prosecutors dubbed the "Shell Factory Fraud."

The SEC alleged in February 2019 that Spartan ignored "glaring red flags" when it submitted applications to the Financial Industry Regulatory Authority to publish securities quotations for various sham companies that were later sold to investors at a profit.

Spartan had fiercely fought the SEC allegations, arguing that it had no way of knowing that the FINRA applications it submitted were part of a vast fraud, and that the SEC was attempting to "radically expand" its authority by holding the broker-dealer liable.

The jury largely sided with Spartan, finding that it should not be held liable for aiding and abetting or various other fraud claims brought under the Securities Act and Exchange Act. But the SEC did prevail on a single claim that Spartan omitted material facts in its FINRA filings.

In a comment to Law360 on Monday, defense counsel Caleb Kruckenberg of New Civil Liberties Alliance said they intend to contest the material omissions verdict in post-trial motions. But regardless, he said, the jury rightly sided with Spartan on the bulk of the SEC's allegations.

"There's a very clear rejection of the 'broader scheme' argument," Kruckenberg said. "There were multiple levels of aiding and abetting counts, and all of those were rejected. I think the jury was very clear on that."

A representative from the SEC did not respond to a request for comment Monday.

In the now-nixed claims, the SEC alleged that Spartan's conduct furthered a pump-and-dump scheme helmed by Florida residents Alvin S. Mirman and Sheldon R. Rose. Both men pled guilty to conspiracy charges in 2016 and were sentenced to 12 and 40 months in prison, respectively.

The SEC also alleged that Spartan's FINRA applications helped Florida attorney Diane J. Harrison and her husband Michael J. Daniels run a pair of related microcap schemes. Harrison and Daniels both settled with the SEC in 2020, agreeing to disgorgement and a ban on penny stock trading.

Spartan's trial was initially scheduled to begin in February, but was delayed a number of times due to the COVID-19 pandemic. The trial was ultimately held from July 12 through 30.

The defendants are represented by Caleb Kruckenberg, Kara McKenna Rollins and John Julian Vecchione of New Civil Liberties Alliance and Matthew Seth Sarelson of Dhillon Law Group Inc.