Exchange Act § 21(d)(7) Disgorgement May Be Ordered to the U.S. Treasury Without an Investor-Benefit Limitation (11th Cir.)

Introduction

In U.S. Securities and Exchange Commission v. Spartan Securities Group, Ltd, the Eleventh Circuit affirmed a jury verdict and remedies order arising from two microcap “shell company” fraud schemes. The principal actors (not the appellants) created nineteen shell issuers and then sold their securities after making them eligible for over-the-counter quotation and DTC electronic settlement.

The appellants—broker-dealer Spartan Securities Group, Ltd. (“Spartan”), transfer agent Island Capital Management (“Island”), and their principals Carl E. Dilley and Micah J. Eldred—were accused of enabling that market access by making false statements to FINRA (via Form 211 filings under Rule 15c2-11) and to a DTC clearing firm (Penson) to obtain DTC eligibility.

The central merits issue on appeal concerned Count Six: whether the defendants made materially false statements (or misleading half-truths) “in connection with” the purchase or sale of securities in violation of Exchange Act § 10(b) and SEC Rule 10b-5(b). The remedies dispute raised broader questions about statutes of limitation after the NDAA amendments and, most significantly, whether disgorgement may be ordered to the U.S. Treasury when victim distribution is infeasible.

Summary of the Opinion

Expert evidence: The court held the district court did not abuse discretion in admitting James Cangiano’s testimony under Rule 702, emphasizing experience-based expertise and reliability grounded in record review and regulatory materials.
Liability (Rule 10b-5(b)): The court held sufficient evidence supported the jury’s finding that Spartan/Dilley (Mirman/Rose issuers), Spartan/Eldred (Top to Bottom and PurpleReal), and Island (Kids Germ DTC statement) made material misrepresentations in connection with securities transactions.
Statutes of limitation: Civil penalties were timely under 28 U.S.C. § 2462 as limited to concededly timely issuers; injunction/penny-stock bar/disgorgement were timely under the NDAA’s ten-year limitations provisions applicable to pending actions.
Disgorgement: The court held the Exchange Act authorizes ordering disgorgement to the Treasury under the post-Liu NDAA provisions (15 U.S.C. § 78u(d)(3)(A)(ii) and § 78u(d)(7)), even if the payment does not satisfy § 78u(d)(5)’s “for the benefit of investors” limitation.
Penalty process: The court rejected Seventh Amendment challenges as framed: tier-two facts were necessarily found via the Rule 10b-5(b) verdict, and the “number of violations” special-finding theory was forfeited. The court also found no abuse of discretion regarding ability-to-pay considerations, citing circuit precedent.

Analysis

1) Precedents Cited

A. Expert testimony and the Rule 702/Daubert gatekeeping framework

The Eleventh Circuit’s evidentiary analysis follows its established three-part Rule 702 framework—qualification, reliability, and helpfulness—drawing heavily on:

Daubert v. Merrell Dow Pharm., Inc. (trial judge as gatekeeper; reliability focus).
Kumho Tire Co. v. Carmichael (gatekeeping applies beyond “scientific” testimony; discretion and flexibility).
United States v. Frazier and Quiet Tech. DC-8, Inc. v. Hurel-Dubois UK Ltd. (experience can qualify; do not conflate Rule 702 prongs; district court has “considerable leeway”).
Doe v. Rollins Coll. (proponent bears burden by a preponderance).
McClain v. Metabolife Int'l, Inc., Seamon v. Remington Arms Co., and Moore v. Intuitive Surgical, Inc. (reliability and the general principle that exclusion is the exception).

The court analogized the expert’s regulatory experience to prior acceptance of experience-based expertise, including United States v. Majors, and rejected the defense’s “expert on everything” attack by emphasizing the expert’s substantial OTC fraud-investigation exposure where “transfer agent elements” were sometimes integral.

B. Who “makes” a statement for Rule 10b-5(b)

The court invoked Janus Cap. Grp., Inc. v. First Derivative Traders for the proposition that the “maker” is the person with “ultimate authority” over the statement’s content and communication. On the facts, the panel found the broker-dealer’s cover letters on Spartan letterhead (and the principal’s Form 211 certification) supported a finding that Spartan/Dilley and Spartan/Eldred “made” the challenged statements—even where some language attributed representations to the issuer.

C. Materiality and “total mix”

Materiality was grounded in the standard articulated in SEC v. Goble and the Supreme Court’s “total mix” approach from TSC Indus., Inc. v. Northway, Inc., as applied through Matrixx Initiatives, Inc. v. Siracusano and circuit precedent like SEC v. Morgan Keegan & Co. and SEC v. Ginsburg. The panel distinguished SEC v. Goble by emphasizing that Form 211 materials could be disclosed “to the public upon request” per the form’s acknowledgment (even if a witness suggested otherwise), thereby supporting potential investor access and significance.

The court’s materiality discussion also drew on the logic of control-person identity as investment-relevant, citing SEC v. Blackburn.

D. “In connection with” and indirect/structural market access fraud

The opinion applied the Supreme Court’s flexible construction of “in connection with” from SEC v. Zandford, together with earlier Fifth/Eleventh Circuit authority:

Superintendent of Ins. v. Bankers Life & Cas. Co. (broad reach; not a strict temporal or transactional identity test).
Rudolph v. Arthur Anderson & Co., Smallwood v. Pearl Brewing Co., Alley v. Miramon, and Brown v. Ivie (schemes formed before transactions can still satisfy the nexus; fraud need only “touch” the transaction).
Grippo v. Perazzo and SEC v. Goble (in some instances, a violation can exist without a completed purchase/sale).
Graham v. SEC and United States v. Naftalin (misrepresentations need not be made directly to investors; fraud on intermediaries can qualify).

This matters because the misstatements here were directed to FINRA and to a DTC clearing firm, yet the court treated those statements as integral to enabling public quotation and electronic settlement—the functional gateway to over-the-counter trading.

E. Disgorgement after Kokesh, Liu, and the NDAA amendments

On disgorgement, the opinion traces the arc from judicially fashioned “equitable” disgorgement to legislative codification:

Kokesh v. SEC (disgorgement as a form of restitution measured by wrongful gain; also historically treated as a penalty for limitations purposes).
Liu v. SEC (disgorgement under § 78u(d)(5) must not exceed net profits and must be “awarded for victims,” leaving open the Treasury-deposit question where distribution is infeasible).

The panel then treats the NDAA’s creation of § 78u(d)(7) (“the Commission may seek, and any Federal court may order, disgorgement”) and the companion authorization in § 78u(d)(3)(A)(ii) as textually unconditional, contrasting them with § 78u(d)(5)’s explicit “for the benefit of investors” limitation. For interpretive method, it relied on expressio and negative-implication reasoning (e.g., Badgerow v. Walters, State Farm Fire & Cas. Co. v. U.S ex rel. Rigsby, Marx v. Gen. Revenue Corp., Jones v. Governor of Fla.) and the specific-governs-general canon (RadLAX Gateway Hotel, LLC v. Amalgamated Bank).

The court explicitly noted post-briefing Second Circuit decisions, SEC v. Ahmed and SEC v. Govil, but distinguished them as not answering the “open question” framed in Liu about Treasury deposit when victims cannot practicably be paid.

F. Equitable payment to the Treasury when victim distribution is infeasible

To support payment to the Treasury as equitable, the court cited non-securities restitution precedents:

Burk Builders, Inc. v. Wirtz (unclaimed/unreturnable funds need not revert to wrongdoer).
FTC v. Gem Merch. Corp. (Treasury payment permissible when victim distribution infeasible; later abrogated on other grounds by AMG Cap. Mgmt., LLC v. FTC).
Supplementary appellate support: FEC v. Craig for U.S. Senate and Off. Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC.

And for foundational equity principle, it cited Root v. Ry. Co. and the Supreme Court’s discussion in Liu v. SEC.

G. Statutes of limitation and retroactive application to pending actions

The court applied the NDAA limitations provisions to this pending action, relying on the “clearly manifested intent” principle in Sarfati v. Wood Holly Assocs. and the NDAA’s express pending-case applicability. It treated equitable remedies (including injunction/penny stock bars) as governed by § 78u(d)(8)(B)’s ten-year limitations period, and scienter-based disgorgement as governed by § 78u(d)(8)(A)(ii).

H. Verdict consistency, forfeiture, and Seventh Amendment framing

The court enforced forfeiture doctrine for inconsistent verdict challenges under Reider v. Philip Morris USA, Inc.. On the penalties process, it avoided broader Seventh Amendment questions by holding that the Rule 10b-5(b) verdict necessarily entailed “deceit,” satisfying the tier-two threshold, and that the “number of violations” issue was not preserved.

I. Omissions after Macquarie

The panel addressed Macquarie Infrastructure Corp. v. Moab Partners, L.P., distinguishing “pure omissions” from actionable half-truths (as explained through Universal Health Servs., Inc. v. United States). It concluded its affirmance rested on misstatements and half-truths, not pure silence.

2) Legal Reasoning

A. Market-gatekeeper misstatements can satisfy Rule 10b-5(b)

A central practical feature of the opinion is its treatment of statements to FINRA and DTC intermediaries as classic securities-fraud predicates. The panel reasoned that:

Form 211 clearance “open[s] the door” to public quotation; without it, the public cannot access the OTC market in that security.
DTC eligibility is not a peripheral administrative step but a trading-enablement mechanism that materially affects whether securities can be practically bought and sold (electronic settlement vs. “ex-clearing” physical delivery).

That functional market-access approach drives both the “in connection with” analysis and the materiality analysis: the lies were not merely about internal compliance—they were about unlocking trading and liquidity for shells intended to be sold.

B. “Maker” authority and attribution gamesmanship

The defendants attempted to reframe the cover letters as merely repeating issuer-provided information. The court rejected that characterization as a fact question that could be resolved against them given:

Spartan letterhead and principal certification, coupled with affirmative narrative “Introductions” that were not attributed to issuers.
Evidence that “point people” (Mirman/Rose) fed information and that officers were straw figures who did not communicate with Spartan as claimed.

The opinion is notable for treating false “attribution” itself as a misstatement: saying “the issuer described” a business plan can be false if the issuer (or its genuine representatives) never gave that description.

C. Materiality without broad public dissemination

Rejecting the argument that nonpublic FINRA correspondence is per se immaterial, the court emphasized that materiality concerns what would matter to a reasonable investor in the “total mix,” and it pointed to evidence that Form 211 materials could be provided to the public upon request. This reframes materiality away from mass dissemination and toward practical availability and significance.

D. Disgorgement as a statutory remedy decoupled from § 78u(d)(5)’s investor-benefit clause

The opinion’s most consequential statutory holding is interpretive: after the NDAA, disgorgement is expressly authorized by provisions that do not contain the “benefit of investors” limitation. The panel:

Treated § 78u(d)(7) and § 78u(d)(3)(A)(ii) as unconditional authorizations.
Read § 78u(d)(5) as a general equitable-relief provision that does not cabin the specific disgorgement provisions.
Used the negative-implication canon to infer Congress’s deliberate omission of investor-benefit language from the disgorgement-specific provisions.

This resolves, at least in the Eleventh Circuit, the post-Liu uncertainty about whether Treasury payment is categorically barred where victim distribution is infeasible.

E. Equity and feasibility: the wrongdoer should not keep the gain

Even apart from statutory text, the court relied on equitable first principles: where returning funds to investors is infeasible (as stipulated), it is more equitable to deprive the wrongdoer of profits than to leave the profits with the wrongdoer. The “unclean hands” argument failed because it did not explain why fraudsters paying the fees should entitle the transfer agent to keep gains obtained through its own wrongdoing.

F. Causation and approximation: the Calvo burden-shift with Liu’s net-profits constraint

On amount, the panel applied SEC v. Calvo’s “reasonable approximation” framework (with the burden shifting to defendants to show unreasonableness) while incorporating Liu v. SEC’s insistence on deducting legitimate expenses to arrive at net profits. It endorsed the district court’s approach of:

Using Island’s own financial records as the baseline for fees received;
Deducting certain line-item expenses and additional amounts the court found legitimate;
Placing residual uncertainty risk on the defendant where the defendant failed to substantiate broader overhead allocations.

3) Impact

A. Disgorgement to the Treasury becomes a clearer enforcement pathway in the Eleventh Circuit

The opinion supplies a direct answer to a recurring post-Liu question: whether disgorgement may be ordered when it cannot be distributed to victims. By holding that § 78u(d)(7) and § 78u(d)(3)(A)(ii) authorize disgorgement without an investor-benefit limitation, the court strengthens the SEC’s ability to pursue disgorgement in “diffuse victim” microcap and market-structure cases where tracing and distribution are impracticable.

B. Market-structure lies to gatekeepers are litigable as classic 10b-5(b) misstatements

The decision underscores that misstatements to SROs and clearance intermediaries—when they enable public quotation and electronic settlement—can be “in connection with” securities transactions. This may encourage more SEC cases focusing on the plumbing of microcap markets (broker-dealer submissions, transfer-agent conduct, DTC eligibility) rather than only issuer-facing investor solicitations.

C. Practical evidentiary consequences

By affirming experience-based expert testimony on transfer-agent and DTC practices, the opinion reduces friction for the SEC to use former regulators to explain market infrastructure to juries—particularly in cases where defendants challenge expertise on the ground that the expert was not an industry practitioner.

D. Limitations periods: NDAA’s “pending actions” clause has real bite

The court’s straightforward application of the NDAA’s ten-year limitations period to pending actions signals that defendants should not assume pre-NDAA timing defenses will hold for equitable remedies and certain disgorgement claims, especially in scienter-based fraud counts.

Complex Concepts Simplified

Form 211 / Rule 15c2-11: Before a broker-dealer can publicly quote many OTC securities, it must gather and submit issuer information to FINRA via Form 211. Approval effectively enables public quotation.
DTC eligibility: DTC acts like the electronic “settlement highway.” If a security is DTC-eligible, transfers can settle electronically; without it, trades may require physical certificates and checks (“ex-clearing”), making trading far harder.
Rule 10b-5(b) misstatement vs. omission: A misstatement is saying something false; an actionable omission is typically a half-truth—saying something that becomes misleading because critical qualifying facts are left out. Under Macquarie Infrastructure Corp. v. Moab Partners, L.P., pure silence (a “pure omission”) is not covered by Rule 10b-5(b) absent a statement made misleading by what was omitted.
“In connection with”: The fraud does not have to be spoken directly to an investor or occur at the exact moment of a trade. If the deceit is part of the same scheme that enables or “touches” a securities transaction, the nexus can be satisfied.
Disgorgement: A remedy forcing a wrongdoer to give up net profits from wrongdoing. After Liu v. SEC, courts should aim at “net profits,” subtracting legitimate expenses. This opinion adds that, under the NDAA’s disgorgement provisions, the funds may be ordered paid to the Treasury even when victim repayment is infeasible.

Conclusion

U.S. Securities and Exchange Commission v. Spartan Securities Group, Ltd is most significant for its statutory holding that post-NDAA Exchange Act disgorgement under § 78u(d)(7) (and § 78u(d)(3)(A)(ii)) may be ordered to the U.S. Treasury without importing § 78u(d)(5)’s “benefit of investors” limitation. Alongside that, the decision reinforces that misstatements to market gatekeepers (FINRA and DTC intermediaries) can be material and “in connection with” securities trading when they functionally enable public quotation and settlement. The result is an enforcement-friendly roadmap for microcap market-structure fraud cases in the Eleventh Circuit, with extended limitations periods and a clarified disgorgement destination when victim distribution cannot practically occur.