Spartan Securities Group, Ltd., et al. v. Securities and Exchange Commission

The Securities and Exchange Commission (“SEC”) regulates microcap securities through Rule 15c2-11. It requires a broker-dealer to review information about an issuer and security and confirm its review in a nonpublic Form 211 submitted to the Financial Industry Regulatory Authority (“FINRA”). If FINRA approves a Form 211, the securities are cleared for public quotation on the over-the-counter (“OTC”) market. A transfer agent then obtains electronic trading of the issuer’s shares through a private clearinghouse called the Depository Trust Corporation (“DTC”). A jury found Petitioners liable on only one of the SEC’s 14 claims, which alleged that they submitted misleading Forms 211 to FINRA and made two misstatements to the DTC. Yet the court ordered Petitioner Island Capital Management LLC, a transfer agent, to disgorge more than $150,000, representing the fees it received from certain issuers and their affiliates who, unbeknownst to Petitioners, were engaged in fraudulent misconduct. The questions presented are:

1. Whether a nonpublic statement or omission made to a private self-regulatory organization or to DTC, where there is no evidence any investor saw or heard the statement, is made “in connection with the purchase or sale of any security” within the meaning of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder.

2. Whether, after Liu v. S.E.C., 591 U.S. 71

3. and Sripetch v. S.E.C., 608 U.S. ___, 146 S. Ct. 1403 (2026), courts may deviate from traditional equitable principles by awarding the SEC disgorgement in the absence of any harmed investors and directing that the disgorged funds be paid to the Treasury.