Attorney Kara Rollins said the financial punishment meted out to the Florida financial companies functioned as a penalty rather than a means to compensate victims.
Defendants including two Florida financial firms are challenging a three-member federal appeals panel’s ruling that affirmed civil penalties and a disgorgement order related to the creation of “sham” public companies more than a decade ago.
Florida-based Spartan Securities Group and Island Stock Transfer, as well as their principal officers, filed a motion requesting that the full 11th Circuit Court of Appeals rehear the panel’s January decision upholding the nearly $1 million in civil penalties and profit disgorgement order imposed on the defendants.
The Securities and Exchange Commission (SEC) filed the civil action against the companies and their principals, Micah Eldred and Carl Dilley, in 2019. The SEC accused the defendants of taking part in schemes supporting the creation of fake publicly traded companies. In 2021, a jury rejected 13 of 14 complaints against the defendants, including counts related to taking part in a scheme to defraud and deceive investors, but the jury affirmed a count accusing the firms of making misleading statements or omissions on stock sales.
The New Civil Liberties Alliance (NCLA), which represents the defendants, said in a news release that the SEC never identified a victim in the alleged company actions and failed to prove any investors were harmed.
“This order exceeds the permissible boundaries of equitable relief, because it operates as a penalty to deter rather than a means of compensating any victims,” the NCLA reported. “It also contradicts other circuits’ rulings, which have recognized that disgorgement requires a victim.”
The NCLA motion argues that the three-judge court panel’s finding allowing the disgorgement of Island Stock Transfer profits to the federal treasury went beyond the “bounds of equity” and contrasted with the positions of other federal appeals courts. The motion also contends the decision conflicted with the Eighth Amendment’s provision against excessive fines and subverted the jury’s conclusion that the defendants did not take part in any conspiracy to defraud and mislead investors.
Observers view the SEC’s actions as reflecting its institutional dislike of the creation of shell companies, even though that process has been legal provided relevant information about the transaction is fully disclosed. In addition, the SEC viewed the civil penalties and disgorgement as needed to avert general harm to the marketplace, even though no specific financial harm against investors was identified.
The federal agency also held the view that shell companies posed a threat by often engaging in “pump and dump schemes,” meaning that they artificially inflate the price of a low-volume stock through misleading or exaggerated statements and then sell off their shares after the stock price has been driven up.
“There’s a sense that when the SEC starts an enforcement action, it’s going to fight that to the end,” the NCLA’s senior litigation counsel, Kara Rollins, told the Florida Record.
Rollings said the U.S. Supreme Court has held that disgorgement goes beyond the bounds of equity when it is used in a punitive way.
“Despite clear evidence that the disgorgement ordered here acted as a penalty, the panel still upheld an order requiring disgorgement to the U.S. Treasury,” she said. “En banc rehearing should be granted to address this issue.”
The federal court in the Middle District of Florida concluded in 2022 that “the evidence demonstrated … defendants abused their ‘gatekeeper’ role” during the financial activities in question and that injunctive relief was merited.
