A broker-dealer, a transfer agent, and three individuals have been charged with failing to disclose at least 19 companies were shells so they could be publicly traded.

The U.S. Securities and Exchange Commission said broker-dealer Spartan Securities Group and transfer agent Island Capital Management operated a microcap shell factory fraud from 2009 to 2014.

According to a civil complaint, Spartan Securities filed fraudulent applications with Financial Industry Regulatory Authority to publicly list the companies’ common stock and ultimately enable the shares to become free-trading and available to public investors.

Spartan Securities’ principals Carl E. Dilley and Micah J. Eldred allegedly signed the false applications even though they knew or should have known the companies were fake and another principal, David D. Lopez, allegedly failed to investigate red flags raised by FINRA or even familiarize himself with the companies.

Island Capital facilitated the public sale of the stock of at least 12 of the sham companies through the bulk issuance and transfer of the “free-trading” securities, the SEC said.

“Broker-dealers are critical gatekeepers protecting the integrity of our markets, with obligations under our rules to fulfill that role,” Eric I. Bustillo, director of the SEC’s Miami Regional Office, said in a news release. “We allege, however, that Spartan Securities and three of its principals failed as gatekeepers by enabling multiple illicit supply chains of undisclosed blank check companies.”

Spartan Securities, which is based in Clearwater, Fla., was fined $100,000 by FINRA in July 2017 for failing to establish and implement an appropriate anti-money laundering program related to its business of accepting low-priced securities for deposit and liquidation.

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One response to “Two Firms Charged in Shell Factory Fraud”

  1. SPARTAN SECURITIES GROUP / ISLAND STOCK TRANSFER STATEMENT REGARDING RECENT SEC LITIGATION

    February 21, 2019 (Clearwater, FL.). Spartan Securities Group, Ltd. (“Spartan”) and its affiliated company, Island Capital Management, LLC, doing business as Island Stock Transfer (“Island”), are disappointed in the decision by the U.S. Securities Exchange Commission (“SEC”) to file this Complaint.

    Spartan, Island, and their principals vehemently deny any wrongdoing and look forward to taking this case to trial. Contrary to what is alleged and/or insinuated in the Complaint, neither Spartan nor Island (nor any of their employees) were involved in the creation or operation of any of the 19 named companies listed in the Complaint. Those 19 companies – which it is important to note represent a miniscule fraction of the thousands of legitimate issuers that Spartan and Island have worked closely with over the years – were, unbeknownst to Spartan and Island, operated by two convicted felons and other alleged fraudsters. According to the SEC, those alleged fraudsters went to great lengths to make everyone – including Spartan, Island, and the SEC itself – believe that they were real businesses with actual operations.

    In fact, before Spartan or Island provided any services to any of these 19 companies, each company prepared and filed a registration statement with the SEC. Each registration statement was declared effective by the SEC. The representations the companies made to the SEC in support of their respective registration statements – i.e., the representations on which the SEC relied – were the same representations made to Spartan and Island, and the same ones on which Spartan and Island relied. In short, Spartan and Island – just like the SEC – were victims of the fraud that the individuals behind these 19 companies were committing, and not, as the Complaint alleges, themselves perpetrators of any fraud.

    Spartan and Island appreciate all of the expressions and offers of support already provided by a multitude of our friends and colleagues, including law firms, other financial institutions and issuer clients alike. We have always strived to create and maintain a stellar reputation for service in our industry, and will continue to do so.

    The micro-cap and small-cap industry has endured an inordinate amount of regulatory assaults over the last ten years. Alan Wolper, partner with Ulmer & Berne LLP in Chicago, longtime outside counsel for Spartan and Island, stated, “My clients and I look forward to our day in court, as we are confident that any reasonable judge or jury will conclude that the SEC is unable to carry its burden of proof.”

    Spartan and Island wish to reassure their clients that this litigation will not affect the services our clients have come to expect and our services will continue with the same great staff that our clients have come to appreciate.

    For information, contact: Alan M. Wolper (email: awolper@ulmer.com) or Heidi VonderHeide (email: hvonderheide@ulmer.com) at (312) 658-6500.

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