No Harm, Still Foul? Spartan Securities and the SEC Face Off at the Supreme Court No Harm, Still Foul? Spartan Securities & SEC Face Off at Supreme Court

Thirteen Counts Rejected, Two Questions Presented

The petition for a Supreme Court review (writ of certiorari) in Spartan Securities Group, Ltd. v. SEC asks the U.S. Supreme Court to review a decision by the Eleventh Circuit Court of Appeals.

In the original trial, the SEC lost 13 out of 14 counts. However, a single surviving charge under Rule 10b-5(b) resulted in $954,394.05 in civil penalties, disgorgement, and interest. This penalty was imposed against Spartan Securities Group, Ltd. (Spartan), Island Capital Management LLC (doing business as Island Stock Transfer), Carl E. Dilley and Micah J. Eldred.

The court also issued injunctions and penny-stock bars against the defendants.

What the Jury Rejected

The jury rejected almost all of the SEC’s claims, including:

Direct and aiding-and-abetting Rule 15c2-11 claims
Direct Section 17(a)(1) and (3) claims
Rule 10b-5(a) and (c) claims
All aiding-and-abetting claims under Section 17(a) and Rule 10b-5
Section 5 unregistered-offering claims

Only Count VI survived against all four defendants. The fact that the jury rejected the broader scheme and aiding-and-abetting counts separates this final misstatement verdict from a finding that the defendants participated in a larger shell-company scheme.

What Count VI Covered

Count VI focused on two separate sets of nonpublic communications:

Spartan’s Form 211 Submissions: Signed by Dilley or Eldred and submitted to FINRA.
Island’s DTC Communication: A separate statement sent to a DTC participant regarding the DTC eligibility of Kids Germ Defense Corporation (a Mirman/Rose microcap issuer).

Financial Penalties and Restrictions

The $954,394.05 total financial judgment includes:

$150,000 civil penalty against Dilley
$150,000 civil penalty against Eldred
$250,000 civil penalty against Spartan
$250,000 civil penalty against Island
$114,520 in disgorgement against Island
$39,874.05 in prejudgment interest

Additionally, the district court imposed 5-year injunctions and 10-year penny-stock bars on Dilley and Eldred, permanently barred Spartan from participating in penny-stock offerings, and permanently enjoined Island. The Eleventh Circuit affirmed this ruling.

The Two Questions Presented to the Supreme Court

Question One: Do Section 10(b) and Rule 10b-5 apply to private statements made to FINRA or the DTC when no public investor ever saw or heard them?
Question Two: Can a court order a company to disgorge (surrender) profits to the U.S. Treasury when the SEC has not identified any harmed investors and distributing the funds is impossible?

Perspective: Question Two is the stronger candidate for Supreme Court review because it involves an active conflict between lower federal circuits and resolves open questions left behind in Liu v. SEC and Sripetch v. SEC. Question One is critical for market makers and transfer agents, but the legal split it points to comes from cases with very different factual backgrounds.

Rule 10b-5 Liability for Nonpublic Form 211 and DTC Statements

A sponsoring market maker files a Form 211 with FINRA to initiate quotations for an over-the-counter (OTC) security. FINRA is a private, nongovernmental self-regulatory organization—not a government agency.

The petition highlights that Spartan’s Form 211 filings and Island’s DTC communications were entirely nonpublic. No evidence was presented showing that any investor ever viewed or relied on these statements.

The Eleventh Circuit’s View

The Eleventh Circuit held that these statements were still connected to securities transactions because:

FINRA relied on the Form 211 applications.
FINRA’s clearance enabled public trading to occur.
Spartan acted as the exclusive market maker for the first 30 days.
Form 211 language notes that materials could be provided to the public upon request (even though no evidence showed any investor ever asked for or received them).

The Narrow Focus of the Petition

The defendants did not challenge every part of Count VI. They disputed whether the statements were materially misleading and whether they were made “in connection with” a securities transaction, but they did not challenge “scienter” (intent or knowledge of wrongdoing). The Supreme Court petition is even narrower, focusing solely on the “in-connection-with” requirement.

Is There a Circuit Split?

The petition argues that the Eleventh Circuit created a split with seven other Circuits (1st, 2nd, 3rd, 4th, 9th, 10th, and D.C.). Those circuits require statements to be publicly disseminated in a medium on which a reasonable investor would rely on, or a misstatement material to an actual buying/selling decision.

The petition contends that the Eleventh Circuit departed from that standard by allowing Rule 10b-5 liability for private statements to an industry self-regulator and a private clearinghouse.

While this disagreement exists in principle, the facts differ. The other circuit cases did not specifically involve Form 211 or DTC filings. The Supreme Court might view this as a routine application of a broad rule to unusual facts rather than a direct legal split, making Question One less likely to be granted review than Question Two.

For background on the quotation process, see FINRA Requirements for Form 211: OTC Market Quotation Eligibility Explained.

Question Two: Disgorgement Without an Identified Victim

The district court ordered Island to pay $114,520 in disgorgement plus $39,874.05 in interest directly to the U.S. Treasury. Both parties agreed that distributing this money to individual investors was impossible, and the SEC never identified a single investor who suffered financial harm.

Supreme Court Precedents: Liu and Sripetch

Liu v. SEC: Established that disgorgement must be limited to a wrongdoer’s net profits and must be used to benefit victims. Liu left open whether money can go to the Treasury if returning it to victims is impossible. (Congress later passed Section 21(d)(7) to explicitly allow the SEC to seek disgorgement).
Sripetch v. SEC: Clarified that the SEC does not need to prove that an identified victim suffered direct monetary loss. However, Sripetch did not decide whether disgorgement is allowed when there are no identified victims at all, or whether the Treasury can keep the money.

The Issue with Island’s Penalty

Island was found liable regarding nonpublic statements for just one issuer (Kids Germ Defense Corporation). Island’s total fees earned from that specific issuer were only $8,300.

Yet, the court ordered Island to disgorge $114,520—sweeping in total fees earned across 14 different issuers. The petition argues that the court improperly treated routine business fees as illegal profits and used corporate affiliation to inflate the penalty, turning an equitable remedy into an unauthorized punishment.

The Arguments

The SEC’s Defense: Section 21(d)(7) was added by Congress after Liu. Unlike older statutes, this section does not explicitly state that disgorgement must “benefit investors,” suggesting Congress intentionally removed that limitation. The Eleventh Circuit agreed with this interpretation.
The Petitioners’ Defense: The term “disgorgement” inherently carries traditional equitable limits, and Section 21(d)(3)(A)(ii) limits penalties strictly to unjust enrichment caused directly by the violation.

The Federal Circuit Split

5th Circuit (SEC v. Hallam): Ruled that Section 21(d)(7) authorizes disgorgement in a legal sense, meaning it isn’t bound by Liu’s equitable restrictions.
2nd Circuit (SEC v. Ahmed & SEC v. Govil): Disagreed with Hallam, ruling that disgorgement remains an equitable remedy subject to Liu.
9th Circuit (Sripetch): Stated that a victim is required, though the Supreme Court affirmed Sripetch on narrower grounds without addressing victimless disgorgements.

Because this question involves an unresolved issue and a clear conflict across circuit courts, Question Two has a much higher chance of Supreme Court review.

This issue builds directly on the concerns discussed in To Disgorge or Not to Disgorge: The Supreme Court Puts SEC Enforcement to the Test.

Compliance Takeaways for Market Makers and Transfer Agents

Because Question One is less likely to be reviewed by the Supreme Court, firms should assume the Eleventh Circuit’s ruling remains the standard:

Jurisdiction: This decision is binding law in Alabama, Florida, and Georgia, and can be cited by the SEC as persuasive authority nationwide.
Treat Nonpublic Forms as Public Statements: Firms filing Form 211 must treat the form and any associated FINRA correspondence as potential Rule 10b-5 statements, even if they are nonpublic.
Verify Issuer Information: Market makers should independently test issuer data, resolve contradictions, and keep thorough records regarding ownership, business plans, control, and shell-company status.
Transfer Agent Due Diligence: Transfer agents must exercise the same discipline regarding DTC filings, free-trading status, and restrictive legends. Relying solely on issuer certifications or legal opinions is not enough if clear warning signs exist.

The Nonpublic Speech Theory Under Rule 10b-5

The New Civil Liberties Alliance (NCLA) frames Question One as a core issue of nonpublic speech: Can the SEC use Rule 10b-5 to penalize statements that no investor ever saw or heard?

The petition argues that federal law already provides specific tools to penalize false regulatory filings, and Rule 10b-5 should be reserved strictly for fraud that impacts investors. However, because this is framed as a statutory issue rather than a direct First Amendment constitutional claim, the Court has a narrower path if it chooses to accept the case.

Current Status and Certiorari Outlook

Getting the Supreme Court to grant a petition for certiorari remains rare.

Best Route: Question Two offers the best chance because Sripetch specifically reserved the “no-victim” and “Treasury payment” questions, and federal circuit courts explicitly disagree on how to apply Section 21(d)(7) disgorgement.
Current Docket Status: As of September 9, 2026, the Supreme Court’s public docket for application No. 26A18 shows an approved filing extension, but does not yet list a merits docket number, response deadline, or conference date.
Next Steps: Once formally docketed, a response brief from the SEC is usually due within 30 days. A conference date will be scheduled after opposition and reply briefs are submitted.

Key Takeaways From SEC v. Spartan Securities

Nonpublic Communications Carry Liability: In the Eleventh Circuit, private Form 211 and DTC filings can trigger Rule 10b-5 liability if they serve as preliminary steps to public trading.
Broad Remedial Impact: Question Two has consequences far beyond the microcap market. Allowing the SEC to collect fees across unrelated transactions and send them to the Treasury without identifying a harmed victim significantly expands federal enforcement power.

Sources and Further Reading

This article is provided for informational purposes only and does not constitute legal advice.

To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].

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