Federal regulators say Clearwater firms helped sham companies sell stock with little value

The U.S. Securities and Exchange Commission this week filed a lawsuit in federal court pursuing civil sanctions against Spartan Securities Group and Island Capital Management.
Published Feb. 21, 2019

CLEARWATER — The 19 companies had names like Obscene Jeans and Kids Germ Defense Corp., but federal regulators say they were shams and yet that didn't stop two Clearwater financial firms from helping them sell at least $3.7 million in nearly worthless stock.

In a lawsuit filed this week, the U.S. Securities and Exchange Commission have targeted broker-dealer Spartan Securities Group and transfer agent Island Capital Management, which does business as Island Stock Transfer.

Both firms work out of the Roosevelt Office Center near the St. Pete-Clearwater International Airport. Regulators say both are commonly owned and tout their "one-stop shop" for "microcap" shares in companies with stock market values of $50 million to $300 million.

From 2009 to 2014, securities officials say, Spartan Securities filed fraudulent applications to publicly list the companies' common stock and allow their shares to trade freely among public investors.

"If the truth had been known to the public, the securities would have been restricted from such sales and would have had little value," the commission said in its lawsuit, which was filed in U.S. District Court in Tampa.

Wrong, say the defendants.

"Spartan, Island, and their principals vehemently deny any wrongdoing and look forward to taking this case to trial," they said Thursday through Island Stock Transfer general counsel A. Patricia Morales. "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."

The 19 companies were created by two different groups with members, some who have been the subjects of previous enforcement cases, from Sarasota and Manatee counties and Las Vegas, according to the lawsuit.

Securities regulators say two Spartan Securities principals, Micah Eldred and Carl Dilley, both residents of Seminole, signed the false applications either recklessly or knowing that the companies were fake. Dilley has not worked at Spartan since 2015.

Another Spartan executive, David D. Lopez of St. Petersburg, "failed to investigate red flags raised by (financial regulators) or even familiarize himself with the companies," the commission said in a news release.

"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 Miami regional office of the Securities and Exchange Commission, said in a statement. But "Spartan Securities and three of its principals failed as gatekeepers."

The commission is asking the court to make Island Stock Transfer disgorge money it received through the activities in question, order the defendants to pay civil penalties and impose restrictions related to working with penny stocks on Spartan Securities, Eldred, Lopez and Dilley.

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In their response, Spartan and Island contend that the 19 sham companies:

• "Unbeknownst to Spartan and Island, (were) operated by two convicted felons and other alleged fraudsters" who "went to great lengths to make everyone — including Spartan, Island and the (Securities and Exchange Commission) itself — believe that they were real businesses with actual operations."

• Filed registration statements at their creation declared to be effective by federal officials. Spartan and Island relied on the same representations and thus were not "themselves perpetrators of any fraud."

• Represent "a miniscule fraction of the thousands of legitimate issuers that Spartan and Island have worked closely." The firms "have always strived to create and maintain a stellar reputation for service. ... This litigation will not affect the services our clients have come to expect."

"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," Alan Wolper, a Chicago attorney for both companies, said in a statement.