Securities and Exchange Commission v. Sharp

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

___________________________________

)

SECURITIES AND EXCHANGE )

COMMISSION, )

)

Plaintiff, )

)

v. ) CIVIL ACTION

) NO. 21-11276-WGY

FREDERICK L. SHARP, )

ZHIYING YVONNE GASARCH, )

COURTNEY KELLN, )

MIKE K. VELDHUIS, )

PAUL SEXTON, )

JACKSON T. FRIESEN, )

WILLIAM T. KAITZ, )

AVTAR S. DHILLON, and )

GRAHAM R. TAYLOR, )

)

Defendants. )

)

___________________________________)

YOUNG, D.J. June 17, 2024

MEMORANDUM & ORDER

I. INTRODUCTION

Following a ten day civil securities fraud jury trial

resulting in a verdict for the plaintiff Securities and Exchange

Commission (“SEC”), the SEC now moves for remedies against the

defendants Zhiying Yvonne Gasarch (“Gasarch”), Courtney Kelln

(“Kelln”), Mike K. Veldhuis (“Veldhuis”), Paul Sexton

(“Sexton”), and Jackson T. Friesen (“Friesen”) (collectively,

the “Defendants”). See generally Pl.’s Mot. for Remedies

against Defs. (“Mot. Remedies”), ECF No. 425. The Defendants

oppose the SEC’s proposed remedies. See Def. Sexton’s Opp’n

Mot. Remedies (“Sexton’s Opp’n”), ECF No. 454; Defs. Kelln &

Veldhuis’ Opp’n Mot. Remedies (“Kelln & Veldhuis’ Opp’n), ECF

No. 455; Def. Gasarch’s Opp’n Mot. Remedies (“Gasarch’s Opp’n),

ECF No. 464; Def. Friesen’s Opp’n Mot. Remedies (“Friesen’s

Opp’n”), ECF No. 471.

The SEC filed replies to all of the above-mentioned

opposition memoranda. See Pl.’s Reply Mem. Supp. Mot. Remedies

against Defs. Sexton, Veldhuis, and Kelln (“Pl.’s Reply to

Sexton, Veldhuis & Kelln”), ECF No. 470; Pl.’s Reply Mem. Supp.

Mot. Remedies against Def. Gasarch (“Pl.’s Reply to Gasarch”),

ECF No. 474; Pl.’s Reply Mem. Supp. Mot. Remedies against Def.

Friesen (“Pl.’s Reply to Friesen”), ECF No. 480. Sexton and

Gasarch filed sur-replies to the SEC’s replies. See Sexton’s

Sur-Reply Mot. Remedies (“Sexton’s Sur-Reply”), ECF No. 473;

Gasarch’s Sur-Reply Mot. Remedies (“Gasarch’s Sur-Reply”), ECF

No. 481.

On September 27, 2023, a unanimous jury found Friesen and

Gasarch to have committed various securities violations alleged

by the SEC. See Jury Verdict, ECF No. 402.1 As to the other

defendants presently before the Court, Kelln, Veldhuis, and

1 These were various violations of both the Securities Act of

1933 (“Securities Act”) and the Securities Exchange Act of 1934

(“Exchange Act”).

Sexton, the Court entered partial judgments against them before

the trial. See J. as to Kelln (“Kelln J.”), ECF No. 317; J. as

to Veldhuis (“Veldhuis J.”), ECF No. 325; J. as to Sexton

(“Sexton J.”), ECF No. 378. Pursuant to those judgments, the

Court ordered Kelln, Veldhuis, and Sexton, and they each agreed,

not to “contest liability under the claims filed by the [SEC]”

at the remedies stage. Kelln J. 5; Veldhuis J. 5; Sexton J. 1-

2. In the same partial judgments, however, the Court ordered

that these three defendants, while accepting liability, would

“be permitted to challenge the remedies and sanctions sought by

the [SEC],” Kelln J. 5; Veldhuis J. 5, and that they would “be

permitted to oppose the [SEC’s] requested relief, including any

calculations thereof.” Sexton J. 2.

The remedies now sought by the SEC are three-fold. See

generally Pl.’s Mem. Supp. Mot. Remedies (“Mem. Supp.”), ECF No.

426. First, the SEC requests injunctive relief against Sexton,

Friesen, and Gasarch, asking this Court to (1) permanently

restrain and enjoin them from violating securities laws; (2)

issue specific conduct-based injunctions permanently barring

them from professionally –- but not personally -- participating

in a national securities exchange; and (3) issue penny stock

bars permanently barring them from trading in penny stocks.2 See

id. at 2-11.

Second, the SEC requests this Court impose civil penalties

against the Defendants in the following amounts: (1) $1,562,603

against Sexton; (2) $1,562,603 against Friesen; (3) $1,562,603

against Veldhuis; (4) $904,078 against Kelln; and (5) $558,072

against Gasarch. Id. at 1.

Third, the SEC seeks disgorgement awards and prejudgment

interest as to the Defendants in the following amounts: (1)

$17,367,474 in disgorgement and $5,872,145 in prejudgment

interest against Sexton; (2) $11,846,176 in disgorgement and

$4,057,737 in prejudgment interest against Friesen; (3)

$13,289,897 in disgorgement and $4,314,031 in prejudgment

interest against Veldhuis; (4) $1,582,785 in disgorgement and

$460,687 in prejudgment interest against Kelln; and (5)

$2,522,367 in disgorgement and $646,366 in prejudgment interest

against Gasarch. Id.

Having reviewed the parties’ briefs and having held a

hearing on the question of remedies, see ECF No. 484, this Court

(1) granted the SEC’s request for injunctive relief against

2 Penny stock “generally refers to a security issued by a

very small company that trades at less than $5 per share.” Am.

Compl. ¶ 40, ECF No. 230; see also Securities and Exchange

Commission v. Sharp, 626 F. Supp. 3d 345, 366 n.3 (D. Mass.

2022).

Sexton, Friesen, and Gasarch in its entirety; (2) imposed civil

penalties against Sexton, Friesen, Veldhuis, and Kelln in the

amounts requested by the SEC, and as to Gasarch, having

considered a downward variance from the SEC’s requested amount

of $558,072 equitable and appropriate, imposed a civil penalty

of $269,651; and (3) took the issue of disgorgement and

prejudgment interest as to all of the Defendants under

advisement. See id.

With this memorandum and order, the Court now provides its

written disposition of the SEC’s motion for remedies. In

addition to providing its explanation for imposing the above-

mentioned injunctions and civil penalties against the

Defendants, for the reasons elucidated below, the Court now

GRANTS the SEC’s motion for disgorgement in its entirety, but

modifying it to hold the Defendants jointly and severally liable

in the following manner, and DENIES the SEC’s motion for

prejudgment interest.

II. FACTUAL BACKGROUND

At its core, the present enforcement action centers around

an elaborate securities fraud scheme involving a sequence of

separate pump and dump endeavors. Each proceeded in three

steps. Certain defendants (1) accumulated penny stocks in

national markets in micro-cap companies; (2) promoted the penny

stocks in these companies by using paid promotions to garner the

attention and interest of unwitting investors; and (3) sold

their stocks to investors, not in their own names but through

so-called shell or nominee companies they formed in order to

skirt securities laws that otherwise prohibit the unregulated

sale of restricted and control securities. See Sharp, 626 F.

Supp. 3d at 366 (detailing the scheme based on allegations in

SEC’s complaint). In essence, the Defendants “engaged in a

decade-long scheme to profit at the expense of unwitting

investors by concealing their, or their clients’, ownership and

control of many microcap companies.” Mem. Supp. 1.

Each of the Defendants played a different role in the

interconnected pump-and-dump schemes. Sexton, Veldhuis, and

Friesen acted as a group that teamed with Sharp to “sell stock

surreptitiously in the public market.” Am. Compl. ¶ 7. They

acquired, held, and then disposed of shares. Id. ¶ 153. Kelln,

Sharp’s employee, helped conceal common control of shares by

distributing them accordingly to Sharp’s directions. Id. ¶¶ 52-

53. “Much of Kelln’s work was grouping stocks for transmission

to transfer agents such that the totals appeared five percent to

avoid disclosure and registration requirements.” Sharp, 626 F.

Supp. 3d at 366 (footnote omitted). Gasarch, another Sharp

employee, “organized wire transfers of the proceeds from the

illegal stock sales while concealing the beneficiaries,

maintained records in the encrypted accounting system, and

routinely created false invoices to support the payments.” Id.

at 366-67; see also Am. Compl. ¶¶ 57-59.

Importantly, Kelln, Veldhuis, and Sexton have admitted

their liability, and this Court has entered partial judgments

against them in which they were instructed not to contest

liability but were given the opportunity to challenge any and

all remedies the SEC now seeks against them. See Kelln J. 5;

Veldhuis J. 5; Sexton J. 1-2. As for the remaining defendants,

Friesen and Gasarch, a ten-day trial ensued in which a unanimous

jury found both liable for the various securities laws

violations alleged in the SEC’s complaint. See Jury Verdict;

see also generally Tr. Jury Trial Day Ten 7-9, ECF No. 445.

III. ANALYSIS

The SEC seeks three remedies: (1) injunctive relief against

Sexton, Friesen, and Gasarch; (2) civil penalties against the

Defendants, in varying amounts; and (3) disgorgement and

prejudgment interest against the Defendants, in varying amounts.

See generally Mem. Supp. 1.

A. Injunctive Relief Against Sexton, Friesen, and

Gasarch

Section 21(d) of the Exchange Act permits the SEC to seek

temporary or permanent injunctions against persons “engaged or

[] about to engage” in Exchange Act violations. 15 U.S.C. §

78(u)(d)(1); see also Securities and Exchange Commission v.

Sargent, 329 F.3d 34, 39 (1st Cir. 2003). “Such an injunction

is appropriate where there is, ‘at a minimum, proof that a

person is engaged in or is about to engage in a substantive

violation of either one of the Acts or of the regulations

promulgated thereunder.’” Sargent, 329 F.3d at 39 (quoting

Aaron v. SEC, 446 U.S. 680, 700-01 (1980)). “The legal standard

for issuing an injunction is ‘reasonable likelihood of

recidivism, not an imminent threat of it.’” Securities and

Exchange Commission v. Lemelson, 596 F. Supp. 3d 227, 231 (D.

Mass. 2022) (Saris, J.) (quoting Sargent, 329 F.3d at 39). In

assessing the likelihood of recidivism, courts look at several,

non-dispositive factors, including “the nature of the violation,

including its egregiousness and its isolated or repeated

nature”; “whether the defendants will, owing to their

occupation, be in a position to violate again”; and “whether the

defendants have recognized the wrongfulness of their conduct.”

Id. In analyzing whether injunctive relief is appropriate,

courts consider the relevant factors to be established based on

“a preponderance of the evidence.” Steadman v. SEC, 450 U.S.

91, 95 (1981) (affirming a lower court “holding that in a

disciplinary proceeding before the [SEC] violations of the

antifraud provisions of the securities laws may be established

by a preponderance of the evidence”).

Here, the SEC seeks three types of injunctive relief: (1)

permanent injunctions; (2) specific, conduct-based injunctions;

and (3) penny stock bars. See Mem. Supp. 2-11.

1. Permanent Injunctions

The SEC seeks permanent injunctions against Sexton,

Friesen, and Gasarch that would prevent them from violating

securities laws. Id. at 2.

Specifically, the SEC makes three arguments. First, it

argues that the three Defendants’ conduct was “egregious,

recurrent, and sustained.” Id. at 3. The SEC notes in support

of this contention that the scheme in which these three

Defendants were involved “resulted[ed] in the fraudulent sale of

more than $144 million worth of penny stocks,” id.; that Gasarch

enabled the scheme by, among other things, concealing beneficial

ownership and fabricating invoices and other documents, id. at

3-4; and that Sexton and Friesen exercised control over the

stock of 14 issuers but concealed their control in their pump-

and-dump schemes, id. at 4. Second, the SEC argues that these

three Defendants “have the opportunity to violate again.” Id.

at 5. The SEC notes that they engaged in illegal conduct

spanning a decade; that they are located in “metropolitan

Vancouver where they apparently have not found gainful

employment”; and that they have refused to testify before the

SEC to answer questions about their activity. Id. at 5-6.

Third, the SEC argues that these three Defendants “have not yet

recognized the wrongful nature of their conduct.” Id. at 6.

The SEC also notes that this Court has issued similar

injunctions against certain other defendants in this case. Id.

at 3; see, e.g., Final J. as to Sharp 2 (“Sharp J.”), ECF No.

211 (ordering that Sharp “is permanently restrained and

enjoined” from violating securities laws); Kelln J. 2-4 (same

language); Veldhuis J. 2-4 (same language).

The three Defendants oppose. Sexton argues that the SEC

“has not established a reasonable likelihood of recurrence,”

Sexton’s Opp’n 16, emphasizing that the last purported profit

attributed to him is dated 2018, and that “nearly 93 percent of

the alleged profits are from in or before 2015,” id. Friesen

contends that the SEC has failed to provide the Court with

“evidence of any conduct in the last six years” to establish a

likelihood of recurrence. Friesen’s Opp’n 11 (emphasis in

original). Gasarch also opposes a permanent injunction, arguing

that she was never involved in the actual issuance, purchase,

offer or sale of security, which the permanent injunction seeks

to enjoin. Gasarch’s Opp’n 15. She also notes that the SEC has

failed to establish the likelihood of recurrence. Id. at 16.

While “an injunction is a drastic remedy,” Aaron, 446 U.S.

at 703 (Burger, C.J., concurring), for the following reasons,

this Court concludes that a permanent injunction against Sexton,

Friesen, and Gasarch is an appropriate remedy.

First, the Court finds that these three Defendants’

securities laws violations were egregious and of a repeated

nature. As the First Circuit has observed, a securities law

“violation [may be considered] not an egregious one,

particularly where [the defendant] neither traded on the

information himself nor derived any direct personal profit.”

Sargent, 329 F.3d at 39. Conversely, here, each of the three

Defendants directly and personally profited from the scheme.

Pursuant to the partial judgment as to Sexton, he “is liable

under Counts I-IV of the Amended Complaint[.]” Sexton J. 1.

Those counts attribute liability to Sexton for engaging in fraud

in connection with the offer and sale of unregistered

securities, Am. Compl. ¶¶ 250-63, which has resulted in “the

fraudulent sale of more than $144 million worth of penny

stocks,” Mem. Supp. 3, from which Sexton personally profited.

See, e.g., Decl. of Ryan Murphy (“Decl. of Ryan Murphy I”) ¶¶

48-49, ECF No. 273; Mem. Supp. 4. Friesen and Gasarch have

similarly profited from the schemes. See Decl. of Ryan Murphy I

¶¶ 48-49 (Friesen); Mem. Supp. 3-4 (Gasarch).

In addition to the egregiousness of the deceit undergirding

it, the pump-and-dump schemes, far from being isolated or short

in duration, lasted for a decade. See Mem. Supp. 1. Courts in

this district and others have not hesitated to impose permanent

injunctive relief against securities law violations much shorter

in duration. See, e.g., Securities and Exchange Commission v.

Chan, 465 F. Supp. 3d 18, 38 (D. Mass. 2020) (Burroughs, J.)

(finding an “egregious” violation where “an [] insider trading

scheme [] lasted for nearly two years and involved multiple

trades”); Securities and Exchange Commission v. Wall, 2020 U.S.

Dist. LEXIS 56152, at *25 (D. Me. Mar. 31, 2020) (ordering

permanent injunction where “the defendants’ violations were part

of a pattern lasting more than four years”).

Additionally, in view of the fact that the pump-and-dump

scheme involved fourteen separate issuers, thus rendering these

Defendants’ securities violations repetitive and schematic in

nature, the Court does not hesitate to conclude that said

violations were egregious. Cf. Securities and Exchange

Commission v. Cody, 2019 U.S. Dist. LEXIS 210452, at *11 (D.

Mass. Dec. 5, 2019) (Saylor, J.) (finding egregious conduct in

view of “the fact that [defendant] made multiple representations

over a prolonged period of time and created falsified documents

to hide his deceptions”); Securities and Exchange Commission v.

Weed, 315 F. Supp. 3d 667, 676 (D. Mass. 2018) (Gorton, J.)

(finding egregiousness where “[t]he violations [] were repeated

in nature”); Securities and Exchange Commission v. Spencer

Pharm. Inc., 2015 U.S. Dist. LEXIS 132909, at *17 (D. Mass.

Sept. 30, 2015) (Talwani, J.) (finding that “the scope and

complexity of the scheme supports the need for a permanent

injunction”).

Second, the Court finds that these three Defendants have

the opportunity to violate securities laws again. As the First

Circuit has clarified, under this prong of the analysis, courts

must find a reasonable likelihood –- not mere possibility -- of

recidivism. See Securities and Exchange Commission v. Lemelson,

57 F.4th 17, 31 (1st Cir. 2023). Here, the Court so finds.

Although Sexton points out that his “proceeds have been frozen,”

Sexton’s Opp’n 17, the SEC notes that “all three defendants

recently sought a release of frozen funds,” and none presented

the Court with evidence that there are now gainfully employed

outside of the microcap industry in which their fraudulent

scheme operated. See Mem. Supp. 5. Remaining in the same

sector or industry in which one’s offensive conduct took place

is a factor that courts have weighed in favor of finding a

likelihood of recidivism. Cf. Lemelson, 57 F.4th at 31

(“Lemelson's continued position as a hedge fund manager and

investment adviser would readily allow him to benefit from

future material misstatements concerning investments.”).

Further, Sexton’s argument that the “so-called Sharp network is

no more,” Sexton’s Opp’n 16-17, is unavailing. The “Sharp

network” is no more not because the Defendants ceased to operate

it on their own accord, which could have been an indication to

the Court that the Defendants do not intend to engage in future

violations. That counterfactual is of no moment: the Sharp

network is no more simply because of law enforcement and the

present action brought by the SEC, not because the Defendants do

not intend to engage in future violations.

Moreover, that considerable time has elapsed since these

three Defendants last violated securities laws, see, e.g.,

Sexton’s Opp’n 16; Friesen’s Opp’n 11, does not persuade the

Court that they will not offend in the future. Courts have

found a likelihood of recurrence where Defendants were seemingly

similarly, if not more, unlikely to offend again. See, e.g.,

Cody, 2019 U.S. Dist. LEXIS 210452, at *10-11 (finding

likelihood of recurrence “[a]lthough it is true that he is

currently imprisoned, and thus not immediately in a position to

commit further violations”); Securities and Exchange Commission

v. Present, 2018 U.S. Dist. LEXIS 45056, at *5 n.1 (D. Mass.

Mar. 20, 2018) (Sorokin, J.) (finding likelihood of recidivism

in 2018 even though defendant “has not worked in the securities

industry since 2014”).3

3 The Court also observes that the duration of the schemes,

spanning nearly a decade, in addition to weighing in favor of

issuing a permanent injunction in and of itself, persuades the

Court, in combination with the reasons provided under this

paragraph, that the three defendants have significant experience

in the securities industry, rendering a future violation more

Third, the Court finds that these three Defendants have not

acknowledged their wrongdoing. Sexton still contends that the

SEC, at most, can establish discrete securities laws violations

but not that there was a fraudulent scheme where “all

transactions involving 14 issuers were fraudulent,” Sexton’s

Opp’n 8, thereby attempting to minimize his offensive conduct.

Sexton also contends that “[t]here is nothing unlawful about

stock promotion,” id. at 9, denying the impropriety and

illegality of his conduct. Sexton further avers that the SEC

has not been able to show that there “are any victims” of the

scheme, id. at 10, a contention reiterated by Friesen, see

Friesen’s Opp’n 8, that, once again, endeavors to deny or at

least minimize the large-scale harm perpetrated by their

schemes. In similar fashion, Gasarch, despite a unanimous jury

verdict finding her liable of independent and aiding-and-

abetting violations of securities laws, see Jury Verdict,

continues to argue that her involvement in the scheme was

legitimate. See, e.g., Gasarch’s Opp’n 10 (“Clearly, given the

length of time and the number of accounts and activities, Mrs.

Gasarch was compensated for supporting Mr. Sharp in his

likely than not. Cf. Securities and Exchange Commission v.

Baccam, 2017 U.S. Dist. LEXIS 88450, at *26 (C.D. Cal. June 8,

2017) (granting SEC’s request for a permanent injunction in view

of the fact, among others, that “[defendant] has more than a

decade of experience in the securities industry”).

legitimate business activities.”); see also id. at 16

(contending that her conduct was not “grave” and her involvement

in the scheme not “prominent”). The Court accordingly finds

that these three Defendants have failed to show proper remorse

and acknowledge the wrongful nature of their conduct.

Finally, Gasarch unpersuasively argues that a permanent

injunction restraining and enjoining her from the issuance,

purchase, offer or sale of securities is inappropriate because

she did not independently and directly engage in any violations

involving such actions but, at most, aided and abetted others

who directly engaged in those actions. See Gasarch’s Opp’n 15.

Other sessions of this Court have not hesitated to permanently

restrain and enjoin defendants from engaging in violations whose

perpetration they aided and abetted. See, e.g., Spencer Pharm.

Inc., 2015 U.S. Dist. LEXIS 132909, at *15, *18 (issuing

permanent injunction against aider and abettor of securities law

violation).4

4 Accepting Gasarch’s contention that the Court ought not

issue a permanent injunction against her because she merely

aided and abetted others in their fraudulent participation in

the securities market is unmeritorious for two additional

reasons. First, the jury, in addition to finding her to have

aided and abetted others, found Gasarch independently liable of

violating Section 17(a)(3). See Jury Verdict 2. While that

independent violation does not directly pertain to the issuance

of securities, it supports this Court’s finding - - made during

the trial - - that Gasarch was “at the hub” of the scheme. Tr.

Jury Trial Day Eight 41, 164, ECF No. 442. Her role at the hub

of the scheme supports this Court’s finding that she was an

Accordingly, this Court finds that Sexton, Friesen, and

Gasarch engaged in egregious and repeated violations of

securities laws for many years; are in a position to violate

again; and have failed to recognize the wrongfulness of their

conduct. In view of these findings, a permanent injunction

against each of the three is appropriate.5

important part of the scheme even though she may not have been

as culpable as the other defendants. Second and more generally,

permanent injunctions are equitable remedies over which courts

enjoy a great degree of latitude. See, e.g., Securities and

Exchange Commission v. Tropikgadget FZE, 2017 U.S. Dist. LEXIS

25495, at *12 (D. Mass. Feb. 23, 2017) (Burroughs, J.) (“The

Court has broad authority to grant such an injunction.”).

Gasarch’s contention that she ought not be enjoined from

activity she herself did not commit but only aided and abetted

would run afoul of that latitude and also of the relevant

statutory text that grants this Court broad equitable powers:

“In any action or proceeding brought or instituted by the [SEC]

under any provision of the securities laws, the [SEC] may seek,

and any Federal court may grant, any equitable relief that may

be appropriate or necessary for the benefit of investors.” 15

U.S.C. § 78(u)(d)(5) (emphasis added).

5 At least one of the three defendants has averred that

permanent injunctions enjoining future securities laws

violations, so-called “obey-the-law injunctions,” do not make

sense because everyone, regardless of an injunction, is bound to

not violate laws, including the securities laws in question.

See, e.g., Sexton’s Opp’n 17; see also Securities and Exchange

Commission v. Goble, 682 F.3d 934, 949 (11th Cir. 2012) (“As the

name implies, an obey-the-law injunction does little more than

order the defendant to obey the law. We have repeatedly

questioned the enforceability of obey-the-law injunctions not

only in the context of securities cases but other cases as

well.”).

While the First Circuit has struck general and vaguely

worded “obey-the-law” injunctions in other contexts, see Equal

Employment Opportunity Commission v. Aviation Port Servs., LLC,

2020 U.S. Dist. LEXIS 57073, at *34-35 (D. Mass. Apr. 1, 2020)

(Saylor, C.J.) (collecting and analyzing cases), courts in this

2. Specific, Conduct-Based Injunctions

The SEC requests this Court specifically enjoin Sexton,

Friesen, and Gasarch from “participating in the issuance,

purchase, offer, or sale of any security; provided, however,

that such an injunction shall not prevent [defendants] from

purchasing or selling securities listed on a national securities

exchange for [their] own personal account.” See, e.g., Mot.

Remedies, Text of Proposed Order Proposed Final J. as to

Gasarch, ECF No. 425-2. In essence, the requested conduct-based

injunction would prevent the three Defendants from

professionally –- but not personally –- engaging in the national

securities market.

This Court is authorized to issue the requested conduct-

based injunction. See 15 U.S.C. § 78(u)(d)(1); 15 U.S.C. §

78(u)(d)(5). “The Court has wide discretion to impose a

conduct-based injunction in SEC actions.” Securities and

Exchange Commission v. CKB168 Holdings, Ltd., 2022 U.S. Dist.

LEXIS 144893, at *9 (E.D.N.Y. Aug. 12, 2022). The analysis for

the SEC’s request for permanent injunctions, see supra Section

Circuit as well as other sessions of this Court have issued

injunctions in the securities context that are similar to the

injunctions requested in the present case. See, e.g., Chan, 465

F. Supp. 3d at 38; Present, 2018 U.S. Dist. LEXIS 45056, at *2-

3.

III.A.1 (“Permanent Injunctions”), is equally applicable here.

See CKB168 Holdings, Ltd., 2022 U.S. Dist. LEXIS 144893, at *9

(applying its permanent injunction analysis in its entirety –-

“[f]or the same reasons laid out [above]” –- to its conduct-

based injunction analysis).

For the same reasons elucidated above, the Court issues the

specific, conduct-based injunctions requested by the SEC. The

Court additionally notes three points in support of its

conclusion. First, as the SEC correctly brings to this Court’s

attention, “[t]his Court has issued this same requested

injunction against Sharp, Kelln, and Veldhuis already.” Mem.

Supp. 7. Sexton, Friesen, and Gasarch have not raised any

convincing argument as to why their cases ought be treated any

differently. Second, other courts, including those in this

Circuit, have issued similar specific, conduct-based

injunctions. See, e.g., Wall, 2020 U.S. Dist. LEXIS 56152, at

*26-27. Third, the injunction still allows the three Defendants

to “purchas[e] or sell[] securities listed on a national

securities exchange for [their] own personal account.” See,

e.g., Mot. Remedies, Text of Proposed Order Proposed Final J. as

to Sexton 5, ECF No. 425-3. As such, this conduct-based

injunction “does not deprive [the three defendants] of [their]

living or the opportunity to purchase and sell securities for

[their] own personal account.” Wall, 2020 U.S. Dist. LEXIS

56152, at *27.

3. Penny Stock Bars

The SEC requests that Sexton, Friesen, and Gasarch be

barred from participating in future offerings of penny stocks.

See Mem. Supp. 8-11; see also Mot. Remedies, Text of Proposed

Order Proposed Final J. as to Sexton 5 (requesting the Court

decree the three Defendants “permanently barred from

participating in an offering of penny stock, including engaging

in activities with a broker, dealer, or issuer for purposes of

issuing, trading, or inducing or attempting to induce the

purchase or sale of any penny stock”).

“The standard for imposing a penny stock bar essentially

‘mirrors that for imposing an officer-or-director bar.’” Weed,

315 F. Supp. 3d at 677 (quoting Securities and Exchange

Commission v. Universal Exp., Inc., 475 F. Supp. 2d 412, 429

(S.D.N.Y. 2007)). The criteria to determine whether an officer-

or-director bar is appropriate, in turn, are: “(1) the

egregiousness of the underlying securities law violation, (2)

whether defendant was a repeat offender, (3) defendant[’]s[]

role in the fraud[,] (4) defendant’s degree of scienter, (5)

defendant’s economic stake in the fraud and (6) the likelihood

that misconduct will recur.” Id. (citing Securities and

Exchange Commission v. Patel, 61 F.3d 137, 142 (2d Cir. 1995)).

These criteria, also known as the Patel factors, are “neither

mandatory nor exclusive.” Securities and Exchange Commission v.

Bankosky, 716 F.3d 45, 46 (2d Cir. 2013); see also Securities

and Exchange Commission v. Johnston, 368 F. Supp. 3d 247, 251

(D. Mass. Mar. 21, 2019) (Gorton, J.) (“While the Patel factors

are instructive . . . they are not exhaustive and it is not

necessary to apply all of the factors in every case.”).

Here, the analysis in the foregoing sections has already

established that Sexton, Friesen, and Gasarch meet many of the

Patel factors,6 which obviates the need for repetition.

Accordingly, the Court grants the SEC’s request for penny stock

bars against each of the three Defendants.

The Court finds it appropriate to dispose of Gasarch’s

argument concerning her scienter –- or rather, in her

formulation, the lack thereof –- here, as a “defendant’s degree

of scienter” is among the relevant Patel factors quoted above.

Weed, 315 F. Supp. 3d at 677.

In her opposition, Gasarch correctly points to a

misquotation by the SEC. See Gasarch’s Opp’n 1. Indeed, in its

motion for remedies, the SEC submitted that the jury found

6 For example, Sexton, Friesen, and Gasarch’s conduct was

egregious, see supra pp. 11-12; repeated over the course of many

years, see supra pp. 12-13; and resulted in economic benefit to

the three defendants, see supra pp. 11-12. Further, there is a

likelihood that their misconduct, in the absence of an

appropriate injunction, will recur. See supra pp. 13-14.

“Gasarch liable for violating Section 17(a)(3) of the Securities

Act and aiding and abetting violations of Sections 17(a)(1) and

(3) of the Securities Act and Section 10(b) and Rule 10b-5(a)

and (c) of the Exchange Act. . . .” Mot. Remedies (emphasis

added). Yet, as Gasarch points out and as the jury verdict form

clearly indicates, the jury found Gasarch liable for

independently violating Section 17(a)(3) of the Securities Act

and aiding and abetting violations of Section 17(a)(1) or

Section 17(a)(3) of the Securities Act or Section 10(b) and Rule

10b-5(a) and (c) of the Exchange Act. See Jury Verdict 2; see

also Gasarch’s Opp’n 1. While the jury may have found multiple

aiding and abetting violations, the use of the disjunctive “or”

indeed makes it also entirely possible, as Gasarch contends,

that the jury may have found her liable for her independent

violation of Section 17(a)(3) of the Securities Act and for

aiding and abetting violations of, again, Section 17(a)(3). See

Gasarch’s Opp’n 1.

Since a Section 17(a)(3) violation does not require

scienter, as this Court previously held, see Sharp, 626 F. Supp.

3d at 382, Gasarch argues that it is possible that she is liable

for her independent non-scienter-based conduct violating Section

17(a)(3) and for aiding and abetting others’ non-scienter-based

conduct violating the same. See Gasarch’s Opp’n 2. Gasarch

goes on to argue that, assuming those are her only two

securities law violations, “an aider and abettor may be liable

only to the same extent as the person to whom such assistance is

provided.” Gasarch’s Sur-Reply 5 (quotation omitted). Her

contention seems to be that her aiding and abetting violation

may be without scienter since the conduct she aided and abetted

itself is non-scienter-based if it is just the aiding and

abetting of others’ non-scienter-based Section 17(a)(3)

violations.

This Court rejects this contention for two reasons and

instead finds that Gasarch acted with a degree of scienter in

aiding and abetting securities violations by other defendants.

First, even assuming, arguendo, that they jury found Gasarch

liable only for her independent and non-scienter-based violation

of Section 17(a)(3) and for aiding and abetting other

defendants’ violation of the same, this Court is still permitted

to make findings of fact as to the appropriate remedy that do

not conflict with the jury’s findings as to liability. Such

findings as to remedy may –- and here they do –- include the

finding that Gasarch acted with scienter. Based on ample

evidence presented at trial, and as the Court made clear during

the hearing on remedies, the Court finds that there is

sufficient evidence to establish that Gasarch acted

intentionally. Second, and relatedly, the Court rejects

Gasarch’s contention as erroneous that an aiding and abetting

violation ought have, at most, the same degree of scienter as

the underlying violation. That is because here, the very act of

aiding and abetting a securities violation, regardless of

whether the aided conduct itself requires scienter for its

commission, requires its own culpable mental state. See, e.g.,

Malouf v. SEC, 933 F.3d 1248, 1268 (10th Cir. 2019) (holding

that “scienter is an essential element of aiding and abetting a

violation of the securities law”); Securities and Exchange

Commission v. Blackburn, 2015 U.S. Dist. LEXIS 120747, at *21

(E.D. La. Sept. 10, 2015) (“[A] prima facie claim for aiding and

abetting a violation of securities laws involves an underlying

requirement of scienter.”). In the case at bar, this Court

instructed the jury during Gasarch’s trial that an aiding and

abetting violation requires knowing or reckless conduct. See

Tr. Jury Trial Day Nine 34:24-25, 35:1, ECF No. 444 (instructing

the jury on the aiding and abetting allegation against Gasarch,

explaining that it must find, among other things, that “Gasarch

knowingly or recklessly provided substantial assistance to the

violation”). Thus, regardless of the conduct Gasarch aided and

abetted, that she aided and abetted others’ conduct in violation

of the securities laws suffices for this Court to find that she

acted with scienter.7

7 In any event, in view of the fact that scienter is but one

Accordingly, a permanent penny stock bar will issue against

Sexton, Friesen, and Gasarch.

B. Civil Penalties Against All of the Defendants

1. Legal Standard

Section 20(d)(2) of the Securities Act and Section 21(d)(3)

of the Exchange Act authorize the SEC to seek, and this Court to

impose, civil penalties to be determined “in light of the facts

and circumstances.” See Lemelson, 596 F. Supp. 3d at 233. In

assessing civil penalties, courts may choose from three tiers,

Tier I, Tier II, and Tier III, in increasing order of severity.

Tier II requires “fraud, deceit, manipulation, or deliberate or

reckless disregard of a regulatory requirement.” 15 U.S.C. §

77(t)(d)(2)(B). Tier III requires all of the elements of Tier

II and the additional requirement that “such violation directly

or indirectly result[] in substantial losses or create[] a

significant risk of substantial losses to other persons.” 15

U.S.C. § 77(t)(d)(2)(C). Tier I is available for all other

violations. See also Mem. Supp. 12 (outlining the tier system).

“The tier determines the maximum penalty, with the actual amount

of the penalty left up to the discretion of the district court.”

of the many Patel factors discussed above, the egregiousness of

Gasarch’s conduct, her economic stake in the fraud, and the

likelihood that her misconduct will recur, still weigh in favor

of issuing a penny stock bar against her.

Securities and Exchange Commission v. Kern, 425 F.3d 143, 153

(2d Cir. 2005) (citing 15 U.S.C. § 77(t)(d)).

In fashioning an appropriate civil penalty, courts look to

a variety of factors, including: “the egregiousness of the

violation, the defendant’s willingness or failure to admit

wrongdoing, the isolated or repeated nature of the violations,

the degree of scienter involved, the defendant’s cooperation

with authorities or lack thereof, and the defendant’s current

financial condition.” Securities and Exchange Commission v.

Esposito, No. 16-cv-10960-ADB, 2018 U.S. Dist. LEXIS 72728, at

*9 (D. Mass. Apr. 30, 2018) (Burroughs, J.).

Importantly, civil penalty claims may be time-barred. As

this Court previously held in disposing of a prior motion to

dismiss in this case, see Sharp, 626 F. Supp. 3d at 385-86, the

applicable statute subjects civil penalty claims like those

requested here to a five-year statute of limitations. Thus,

this Court may impose civil penalties only in relation to

securities law violations that may have occurred between August

5, 2016, and August 5, 2021, id. at 382. By contrast, as this

Court previously stated, it cannot impose a monetary penalty in

relation to violations prior to August 2016. See Tr. Motion and

Charge Conference 55:15-18, ECF No. 443 (“So let me be clear.

If we get to remedies, and I’m coming to think about remedies,

and I think that violation was pre-August 2016, then I cannot

impose a monetary penalty.”); see also Sexton’s Opp’n 14 (same);

Gasarch’s Opp’n 13 (same).

2. Parties’ Arguments

With the foregoing legal standard in mind, the SEC requests

this Court condemn the Defendants’ conduct as repeated and

egregious violations “evinc[ing] a high degree of scienter.”

Mem. Supp. 13. The SEC also argues that none of the Defendants

have acknowledged the wrongfulness of their conduct and that

they are in possession of “substantial assets to satisfy a

judgment.” Id. at 14; see also id. at 3-5 (describing how the

Defendants’ conduct caused substantial loss to investors).

As for each of Sexton, Veldhuis, and Friesen, the SEC

requests the Court impose “individual civil penalties in the

amount of $1,562,603.” Id. at 14. The SEC’s proposed

methodology is as follows: multiply a one-time Tier III penalty

amount of $223,229 by seven since each of these three Defendants

traded in seven issuers’ stock –- out of the 14 -- during the

five-year statute of limitations period between August 2016 and

August 2021, that is, $223,229 x 7 = $1,562,603. See id.

Sexton opposes, arguing that the SEC’s position that he was

involved in issuing stock from seven companies between August

2016 and August 2021 is based on “a summary witness[’]

alleg[ations.]” Sexton’s Opp’n 14. Sexton also argues that the

evidence, at most, demonstrates that he profited from three

issuers, not seven, and even then, that the passive receipt of

pay checks is not, in and of itself, sufficient to restart the

five-year clock for what were payments relating to conduct

predating August 2016. See id. at 15. Finally, Sexton argues

that in alleging that he has sufficient funds to pay a civil

penalty -- $13,808,338 in frozen assets according to the SEC,

see Mem. Supp. 14 –- the SEC has failed to take into account the

fact that it is also asking this Court to impose disgorgement

and prejudgment interest against him in the amount of

$17,367,474. Sexton’s Opp’n 15. Veldhuis concurs with Sexton’s

objections. See Kelln & Veldhuis’ Opp’n 2. Friesen similarly

argues that the evidence proffered by the SEC shows that he

“ceased his involvement with the other defendants in or about

2015,” thus before the applicable five-year window beginning in

August 2016. Friesen’s Opp’n 10.

As for Kelln and Gasarch, the SEC requests this Court

impose civil penalties in the amount of $904,078 and $558,072,

respectively. Mem. Supp. 15. For Kelln, the SEC’s proposed

methodology is as follows: the sum of (1) one Tier III penalty

for violating Section 17(a); (2) one Tier III penalty for

violating Section 10(b); (3) one Tier III penalty for aiding and

abetting violations of the Securities Act by the Sharp network

clients; (4) one Tier III penalty for aiding and abetting

violations of the Exchange Act by the Sharp network clients; and

(5) one Tier I penalty for her primary violation of Section 5 of

the Securities Act. See id. In general, Kelln concurs with

Sexton’s objections to the civil penalties sought by the SEC.

See Kelln & Veldhuis’ Opp’n 2.

For Gasarch, the SEC’s proposed methodology is as follows:

the sum of (1) one Tier III penalty for aiding and abetting

violations of the Securities Act by the Sharp network clients;

(2) one Tier III penalty for aiding and abetting violations of

the Exchange Act by the Sharp network clients; and (3) one Tier

II penalty for her primary violation of Section 17(a)(3) of the

Securities Act. Mem. Supp. 15. Gasarch opposes, arguing that

the SEC has failed to proffer evidence that convincingly imputes

any post-August 2016 liability to Gasarch. See Gasarch’s Opp’n

13. She further objects to the amount as excessive, contending

that the jury finding regarding her aiding and abetting “could

have been based on one underlying violation,” not two or three,

id. at 14; that her distribution of proceeds happened after the

purported fraud, id.; and that she does not have the requisite

financial condition to pay the requested sum, id. at 15.

3. Analysis

The Court agrees with the SEC’s proposed methodology for

calculating civil penalties against Sexton, Veldhuis, and

Friesen, determining that they each ought be liable for seven

Tier III violations, as their fraudulent schemes concerned seven

out of the 14 issuers during the applicable five-year period.

Another session of this Court recently adopted a similar

methodology where a civil penalty was imposed against each of

the so-called entity defendants, that is, corporations who

engaged in penny stock fraud. See Securities and Exchange

Commission v. Knox, 2022 U.S. Dist. LEXIS 99321, *9-10 (D. Mass.

June 3, 2022) (Stearns, J.). Similarly, this Court finds it

appropriate to impose a civil penalty against each of Sexton,

Veldhuis, and Friesen per the number of entities they utilized

to defraud unwitting investors during the five years preceding

August 2021. The SEC asserts, and this Court agrees, that that

number is seven.

Further, that the SEC is not seeking civil penalties in

relation to stock sold through all 14 of the issuers is

congruent with this Court’s statement during trial that if it is

persuaded that a violation “was pre-August 2016, then [it]

cannot impose a monetary penalty.” Tr. Motion and Charge

Conference 55:17-18.

Indeed, evidence offered by the SEC supports its contention

that seven out of the 14 issuers were involved in the fraudulent

scheme between August 2016 and August 2021. An affidavit by

Ryan Murphy, an enforcement accountant at the SEC, submits to

this Court “[his] determin[ation] that during that time period,

Veldhuis, Sexton and Friesen traded the securities of seven of

the Fourteen Issuers: Stevia First/Vitality, Arch Therapeutics,

Liberty One Lithium, NewGen Biopharma, StartMonday Technology

Corp., Lexington Biosciences, and BreathTec Biomedical.” Decl.

of Ryan Murphy (“Decl. of Ryan Murphy II”) ¶ 30, ECF No. 427.

While Sexton attempts to have the Court dismiss this as an

unsupported allegation of “a summary witness,” Sexton’s Opp’n

14, the SEC responds by drawing the Court’s attention to

numerous pieces of evidence from trial exhibits as well as other

witness statements that show that Sexton sold stock of the seven

aforementioned issuers between August 5, 2016, and August 5,

2021. See Pl.’s Reply to Sexton 11 (collecting evidence). In

his sur-reply, Sexton argues that certain pieces of evidence put

forward by the SEC do not meaningfully identify that it was

Sexton who traded the stock of these seven issuers. Sexton’s

Sur-Reply 5-6. Even assuming, arguendo, that Sexton’s

objections have any merit, he fails to respond to witness

testimony as well as other evidence relating to his involvement

in these issuers. See, e.g., Tr. Jury Trial Day Two 108:19-20,

ECF No. 436 (Dhillon’s testimony that Seton participated in the

sale of Vitality stock “in 2017 and maybe even ‘18”); Tr. Jury

Trial Day Five 91:9-18, ECF No. 439 (Knox’s testimony regarding

Sexton’s involvement in Vitality and Arch throughout 2018); Tr.

Jury Trial Day Six 34:24-25, 35:1-2, ECF No. 440 (Knox’s

testimony regarding NewGen trading in 2017).

Sexton’s remaining objections that he, at most, profited

from three out of the seven issuers during the five-year period

and that the penalty amount is excessive, see Sexton’s Opp’n 14-

15, are unavailing. As for profits, Sexton misconstrues the

law: the relevant inquiry for purposes of determining the

applicable period in relation to which civil penalties are to be

imposed is not whether he profited from his misconduct during

the relevant period but rather whether his misconduct, that is,

the illegal stock trading, occurred during that same period.

See, e.g., Securities and Exchange Commission v. Cohen, 332 F.

Supp. 3d 575, 591 (E.D.N.Y. 2018) (“[T]he statute of limitations

runs from when Defendants allegedly engaged in misconduct, not

when they received compensation in connection with that

misconduct.”). Regarding the alleged excessiveness of the

penalty, the SEC convincingly raises two points: (1) that the

Sexton, Veldhuis, and Friesen control group generated a total

amount of $31,000,000 in profits during the five-year window;

and (2) that Sexton “entirely ignores the value of his

significant real estate holdings and other assets not held in

frozen financial institutional accounts.” Pl.’s Reply to Sexton

12. Sexton’s frozen assets already total $13,808,338 as of

December 2022, according to the SEC. Mem. Supp. 14.

Accordingly, this Court overrules Sexton’s objection based on

his purported financial inability to pay the requested civil

penalty.

Much of the above analysis applies with equal force to

Veldhuis and Friesen against whom the SEC requests identical

civil penalties. Veldhuis and Friesen, too, illegally traded in

the stock of seven out of the 14 issuers during the relevant

five-year period.8 Friesen, like Sexton, argues that the SEC has

failed to establish that he engaged in illegal conduct during

the five-year window, averring instead that he simply profited

from some deals that transpired prior to those five years. See

Friesen’s Opp’n 10-11. The voluminous evidence provided during

trial contradicts that contention. See Pl.’s Reply to Friesen 3

(referring to numerous trial exhibits). Indeed, evidence was

put before the jury during trial that indicated Friesen’s –- and

Veldhuis’ –- involvement in the scheme post-dating August 5,

2016. See Pl.’s Reply to Sexton 11; see also Decl. of Ryan

Murphy II ¶ 30 (documenting Friesen and Veldhuis’ engagement in

the trade of stocks of seven out of the 14 issuers during the

applicable window). In view of the foregoing as well as

voluminous evidence from trial demonstrating that Sexton,

Veldhuis, and Friesen acted in concert, the Court is persuaded

8 Since Veldhuis concurs with Sexton’s objections to the

civil penalty sought by the SEC, see Kelln & Veldhuis’ Opp’n 2,

and since those objections have been overruled above, the

remainder of this paragraph deals with Friesen’s objections.

that these three Defendants illegally traded in the stock of

seven issuers between August 2016 and August 2021. See, e.g.,

Tr. Jury Trial Day Five 78, 87-88, 90; Tr. Jury Trial Day Three

13-16, 24, 41, 96-97, ECF No. 437.

The Court also agrees with the SEC that the maximum Tier

III penalty is warranted for each of the seven violations. The

scheme in which Sexton, Veldhuis, and Friesen were involved,

this Court finds, operated through fraud and deceit, thereby

fulfilling the statutory requirement that this Court impose Tier

III penalties against violations involving “fraud, deceit,

manipulation, or deliberate or reckless disregard of a

regulatory requirement.” 15 U.S.C. § 77(t)(d)(2)(B). It is

also clear that their violations “directly or indirectly

resulted in substantial losses or created a significant risk of

substantial losses to other persons,” 15 U.S.C. §

77(t)(d)(2)(C), as it is inconceivable for the scheme these

three Defendants participated in during the five-year period to

not have caused actual loss, let alone a significant risk

thereof.9

9 While courts have split over the issue of whether a

demonstration of actual loss is required to impose a Tier III

penalty, see Lemelson, 596 F. Supp. 3d at 235 (collecting

cases), this Court need not adopt a position as to that split

since here it is clear that investors were defrauded through the

pump-and-dump schemes.

Accordingly, the SEC’s request of one Tier III penalty

multiplied by seven against each of the three Defendants Sexton,

Veldhuis, and Friesen is appropriate and hereby granted. The

Court imposes a civil penalty of $223,229 x 7 = $1,562,603

against each of them.

The Court also grants the SEC’s proposed civil penalty

against Kelln. Pursuant to the partial judgment as to her,

Kelln was ordered to “not contest liability under the claims

filed by the [SEC].” J. as to Kelln 5. Those claims allege

five different violations: (1) an independent violation of

Section 17(a) of the Securities Act; (2) an independent

violation of Section 10(b) of the Exchange Act; (3) aiding and

abetting others in their violation of the Securities Act; (4)

aiding and abetting in their violation of the Exchange Act; and

(5) an independent violation of Section 5 of the Securities Act.

See Mem. Supp 15; see also Am. Compl. ¶¶ 259-58, 277-85.

“Liability under Section 17(a)(1) [and] Section 10(b) . . .

requires materiality and scienter.” Flannery v. SEC, 810 F.3d

1, 9 (1st Cir. 2015). Aiding and abetting securities

violations, as the above discussion regarding Gasarch’s aiding

and abetting violation reveals, see supra pp. 21-24, requires,

at a minimum, knowledge or recklessness. As such, the first

four of the five violations by Kelln, this Court finds, qualify

as Tier III violations.

As for Kelln’s independent violation of Section 5 of the

Securities Act, because liability under thereof need not require

a showing of scienter, a less severe civil penalty is

appropriate. See Securities and Exchange Commission v.

Esposito, 2017 U.S. Dist. LEXIS 192120, at *5-6 (D. Mass. Nov.

21, 2017) (Burroughs, J.) (collecting cases that have held that

a Section 5 violation does not require scienter); Securities and

Exchange Commission v. Smith, 2015 U.S. Dist. LEXIS 86625, at

*25 (D.N.H. July 2, 2015) (“Section 5 imposes no scienter

requirement.”); see also Mem. Supp. 15 (contending that

“liability under [Section 5] does not require a showing of

scienter”). Accordingly, a Tier I civil penalty for Kelln’s

independent and non-scienter-based violation of Section 5 is

appropriate. In sum, a Tier III civil penalty of $223,229 for

each of her first four violations and a Tier I civil penalty of

$11,162 for her Section 5 violation is appropriate. This Court

therefore imposes a civil penalty against Kelln in the amount of

($223,229 x 4) + $11,162 = $904,078.

As for Gasarch, the Court agrees with the SEC’s proposed

methodology for calculating a monetary penalty but is persuaded

that a downward variance from the SEC’s requested amount is

appropriate. At the outset, the Court dismisses Gasarch’s

contention that she merely rendered legitimate secretarial

services to Sharp and, at most, just arranged the distribution

of proceeds after the fraud by other occurred. See Gasarch’s

Opp’n 14. That is precisely the unwitting secretary contention

and defense mounted by Gasarch during trial that the jury

necessarily rejected in finding her liable for various

securities law violations. Relying on the disjunctive “or”

appearing on the jury verdict, see Jury Verdict 2, that found

her liable for alternative aiding and abetting violations,

Gasarch contends that she is liable for, at most, two

violations: (1) an independent violation of Section 17(a)(3) of

the Securities Act and (2) one aiding and abetting violation of

securities laws. See Gasarch’s Opp’n 14.

Gasarch is not wrong, per se, to argue that the jury, in

addition to finding her independently liable for a violation of

Section 17(a)(3) of the Securities Act, may have found that she

aided and abetted just one of the two violations separated by

the disjunctive “or” on the jury slip. Conversely, the jury may

have found Gasarch liable for aiding and abetting both

Securities Act and Exchange Act violations in addition to her

independent violation of the Securities Act.

Moreover, and more importantly, for purposes of fashioning

appropriate remedies in the context of a securities enforcement

adjudication, “[a]t the remedies stage, trial judges may make

factual findings and rely on such findings in assessing the

amount of civil penalties so long as the court’s findings do not

conflict with the jury’s findings as to liability.” Securities

and Exchange Commission v. Life Partners Holdings, Inc., 854

F.3d 765, 781-82 (5th Cir. 2017). At trial, this Court found

that Gasarch worked “at the hub” of the fraudulent Sharp

enterprise. See Tr. Jury Trial Day Eight 41:10, 164:21, ECF No.

442. In her role as Sharp’s aide working “at the hub,” id., she

aided and abetted the Sharp scheme clients in their violation of

both the Securities Act and the Exchange Act. This finding does

not conflict but rather comports with and honors the jury

verdict against Gasarch.

Accordingly, this Court agrees with the SEC that she is

liable for three violations: (1) her independent violation of

Section 17(a)(3) of the Securities Act; (2) aiding and abetting

others in their violation of the Securities Act; and (3) aiding

and abetting others in their violation of the Exchange Act. See

Mem. Supp. 15. Further, in view of the earlier discussion that

Gasarch’s aiding and abetting required scienter, see supra pp.

21-24, a Tier III monetary penalty for her two aiding and

abetting violations is appropriate. As for her independent

violation of Section 17(a)(3) of the Securities Act, a Tier II

penalty is appropriate, as an independent violation of Section

17(a)(3) does not require a showing of scienter. See Sharp, 626

F. Supp. 3d at 382; see also supra p. 22.

While the Court agrees with the SEC’s proposed methodology

for imposing a monetary penalty against Gasarch, the Court will

not impose the exact amount proposed by the SEC of ($223,229 x

2)10 + $111,61411 = $558,072. At least three reasons persuade

this Court that a downward variance is appropriate. First,

while this Court indeed found Gasarch to be an operative of the

Sharp scheme and one at its hub, see Tr. Jury Trial Day Eight

41:10, 164:21, her role at the hub was necessarily under the

command of Sharp and also meant that she did not operate at the

spoke end of the hub-and-spoke scheme, where investors were

directly harmed. Second, evidence presented at trial points to

the fact that Gasarch was involved in the fraudulent enterprise

not at the outset but later in time.12 As such, the Court finds

that, at least as an initial matter, prior to joining the scheme

as co-conspirator, Gasarch performed legitimate secretarial

10 A total of two Tier III penalties for Gasarch’s two

aiding and abetting violations: one for aiding and abetting

Securities Act violations and the other for aiding and abetting

Exchange Act violations.

11 One Tier II penalty for Gasarch’s independent and non

scienter-based violation of Section 17(a)(3) of the Securities

Act.

12 At trial, the Court stated as much: “[Gasarch] joined the

conspiracy later in time than her initial employment, which

candidly I think is the fact, I’m not persuaded she was a co-

conspirator at that time, whenever it was, that she became

employed by Sharp. I’m not clear when she joined the

conspiracy.” Tr. Jury Trial Day Eight 165:8-13.

services to Sharp. Third, the two Tier III civil penalties

against her are in relation to Gasarch’s aiding and abetting,

not independent and primary, violations. While her aiding and

abetting required its own mental culpability and scienter,

equitable considerations demand that a lesser civil penalty be

imposed against her than other Defendants whom she aided and

abetted in their primary and scienter-based violations of the

various securities laws. Cf. Securities and Exchange Commission

v. Zwick, 2007 U.S. Dist. LEXIS 19045, at *83-84 (S.D.N.Y. Mar.

16, 2007) (imposing a Tier III penalty against an aider and

abettor but with a downward variance because of aider and

abettor status, as opposed to being the primary violator, among

other reasons).

In view of the fact that the SEC submits to this Court that

as of December 2022 Gasarch has $296,651 in frozen assets, the

Court imposes a civil penalty of $296,651 against her.13

13 The Court observes that the civil penalty amounts

requested by the SEC are all based on inflation-adjusted figures

from 2023. See Mem. Supp. 12. Since the SEC moved for remedies

in December 2023, the SEC has updated its civil penalty amounts,

announcing in January 2024 its inflation adjustment figures for

2024. See Inflation Adjustments to the Civil Monetary Penalties

Administered by the Securities and Exchange Commission (as of

January 15, 2024), SEC.gov (Jan. 16, 2024),

https://www.sec.gov/enforce/civil-penalties-inflation-

adjustments. The question arises whether the Court ought

consider the most recent inflation-adjusted figures for 2024 or

instead ought consider the inflation-adjusted figures for 2023

used by the SEC in its calculation.

C. Disgorgement and Prejudgment Interest Against All of

the Defendants

1. Legal Standard

Disgorgement is an equitable remedy that is intended to

deprive a wrongdoer of his ill-gotten gains at the expense of

victims. See Liu v. SEC, 591 U.S. 71, 75 (2020) (clarifying

“that a disgorgement award that does not exceed a wrongdoer’s

net profits and is awarded for victims is equitable relief

permissible under § 78(u)(d)(5)”). Liu provided three

clarifications to disgorgement law.

First, it clarified that disgorgement is non-punitive and

intended to make victims whole. See id. at 74 (defining courts’

power to award equitable relief as “a power that historically

excludes punitive sanctions”); id. at 75 (holding that a

disgorgement award “is awarded for victims”); see also Sharp,

626 F. Supp. 3d at 380 (“The Supreme Court has entrenched

disgorgement’s non-punitive character in the context of

securities violations, by requiring that it be used to make

victims whole.”).

The parties have not raised the issue of inflation

adjustment in their briefs nor during oral argument. In the

interest of fairness, the Court will not adjust figures to

reflect inflation for 2024, although it is highly likely that

the Court has the equitable power to do so sua sponte. Cf.

Weed, 315 F. Supp. 3d at 677 (taking notice of the SEC’s

“increasing the maximum Tier-III penalty from the statutory

limit of $100,000 to account for inflation adjustments”).

Second and relatedly, a disgorgement award ought be limited

to a wrongdoer’s “net profits,” Liu, 591 U.S. at 75, calculated

by “deducting legitimate expenses” from a wrongdoer’s gross ill-

gotten gains, id. at 1946. The Court noted one historical

exception to the rule that legitimate expenses ought be

diminished from the show of profits, defining that exception as

“when the entire profit of a business or undertaking results

from [a] wrongful activity.” Id. at 84 (quotation omitted).

Third, Liu clarified that the general rule in awarding

disgorgement is to hold wrongdoers individually liable for their

personal ill-gotten gains. See id. at 82-83 (“Equity courts

also generally awarded profits-based remedies against

individuals or partners engaged in concerted wrongdoing, not

against multiple wrongdoers under a joint-and-several liability

theory.”). Reviewing a corpus of precedents, the Supreme Court

observed that a “rule against joint-and-several liability for

profits that have accrued to another appears throughout equity

cases awarding profits.” Id. Still, the Supreme Court also

observed that “[t]he common law did . . . permit liability for

partners engaged in concerted wrongdoing.” Id. at 90.

In sum, then, “[t]he [C]ourt’s power to order disgorgement

extends only to the amount with interest by which the defendant

profited from his wrongdoing.” Securities and Exchange

Commission v. MacDonald, 699 F.2d 47, 54 (1st Cir. 1983) (en

banc) (quoting Securities and Exchange Commission v. Blatt, 583

F.2d 1325, 1335 (5th Cir. 1987)). “[C]ourts consistently

restrict[] awards to net profits from wrongdoing after deducting

legitimate expenses[,]” Liu, 591 U.S. at 84, though it is also

possible –- under exceptional circumstances -- to dispense with

that requirement, especially if the entire business,

undertaking, or enterprise involves wrongful activity, id. at

83.

In any case, “[t]he amount of disgorgement ‘need only be a

reasonable approximation of profits causally connected to the

violation.’” Securities and Exchange Commission v. Happ, 392

F.3d 12, 31 (1st Cir. 2004) (quoting Securities and Exchange

Commission v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C.

Cir. 1981)). “The risk of uncertainty in calculating

disgorgement should fall on the wrongdoer whose illegal conduct

created that uncertainty.” Id. “Once the SEC shows that the

disgorgement is a reasonable approximation, the burden shifts to

the defendant to demonstrate that the amount of disgorgement is

not a reasonable approximation.” Id.

Finally, the Court takes notice of its previous holding

regarding the applicable statute of limitations in issuing

disgorgement awards: scienter-based claims for disgorgement

require a ten-year statute of limitations whereas non-scienter-

based claims for disgorgement “continue to require a five-year

statute of limitations.” Sharp, 626 F. Supp. 3d at 381.

2. Parties’ Arguments

The SEC requests this Court issue disgorgement awards in

the following amounts: (1) $17,367,474 against Sexton; (2)

$13,289,897 against Veldhuis; (3) $11,846,176 against Friesen;

(4) $1,582,785 against Kelln; and (5) $2,522,367 against

Gasarch. Mem. Supp. 1.

The SEC bases its calculation “on the sums that each of

them received into their personal Q accounts of the Fourteen

Issuers whose illegal trading was at issue.”14 Id. at 17-18.

The SEC further asserts that the applicable statute of

limitations is ten, not five, years, rendering the Defendants’

profits from 2011 –- not from 2016 –- onward susceptible to

disgorgement. Id. at 17 (“[I]t is appropriate to award

disgorgement for a ten-year time period, given that each of the

14 As the following discussion on the Q data will make

clear, in proposing respective amounts for its proposed

disgorgement awards, the SEC focuses on a specific piece of

evidence presented at trial: the so-called “Q records” or “Q

data” that is a compilation of internal records kept by Sharp

that the SEC contends shows stock proceeds allocated to each of

the Defendants that they gained throughout the course of the

pump-and-dump scheme, as well as commissions received by some of

them. See, e.g., Mem. Supp. 17-18, 19, 21.

Separately, because some of the transfers reflected on the

Q system were made in Canadian Dollars, the SEC informs the

Court that its estimate “converts all of those transfers into US

Dollars, using the applicable exchange rate on the date of the

transfer in the Q system.” Id. at 18.

Defendants was found liable, or is being held liable, for

violating a statute requiring the proof of scienter as an

element.”). As such, the SEC requests the Court award

disgorgement based on the time period from August 5, 2011, that

is, ten years before the SEC filed this present action. Id.

The Defendants object to the SEC’s position as well as the

specific award amounts proposed by the SEC on numerous grounds.

After having carefully reviewed their briefs and the arguments

made during the hearing held on the question of remedies, the

Court distills these various objections to seven separate

contentions.

First, the Defendants impeach the credibility of the Q data

evidence by variously characterizing it as hearsay or as a

document susceptible to manipulation. See, e.g., Sexton’s Opp’n

6 (arguing that “the Court has already ruled, the database is

not a business record, because, among other issues, there are

not sufficient indications that the records were entered

contemporaneously”); Kelln & Veldhuis’ Opp’n 2 (concurring with

Sexton’s objections); Friesen’s Opp’n 5 (characterizing Q

records as inadmissible hearsay); Gasarch’s Opp’n 2, 7-8

(arguing that the Q data is unreliable and unverified). As a

corollary to the objection regarding its reliability, Gasarch

also contends that there is no evidence that the designations

“PEAC” or “PERE” in the Q data indicate her Q account.

Gasarch’s Opp’n 4.

Second, even assuming that the Q data is reliable, the

Defendants argue, it shows, at most, the proceeds generated over

the course of a decade but, crucially, not the actual

disbursements made from the generated proceeds to the individual

Defendants. Sexton argues that the Q system may be considered

indicative of the stock transactions that transpired, but that

there is no evidence that this data is reflective of “the

division of proceeds stemming from those transactions.”

Sexton’s Opp’n 7. In furtherance of his objection, Sexton also

points out that the SEC has not presented this Court with any

“documentary evidence to corroborate the purported gains” shown

on the Q system, specifically, bank records that would verify

that the Q system transfers actually happened and were received

by the Defendants. See id. at 4-5; see also Kelln & Veldhuis’

Opp’n 2 (concurring with Sexton’s objections). Friesen, too,

argues that the Q records, at most, indicate stock entries but

not actual transfers to each of the Defendants. See Friesen’s

Opp’n 7.

Third, the Defendants argue that the SEC has not shown that

any transfers that they may have received from trading in all 14

of the issuers are ill-gotten, and not legitimate, gains. See

Sexton’s Opp’n 8 (arguing that the SEC “has not tied funds to

violations of the securities laws”); Kelln & Veldhuis’ Opp’n 2

(same); Friesen’s Opp’n 3 (same); Gasarch’s Opp’n 12 (rejecting

the SEC’s position that she received ill-gotten funds).

Fourth, the Defendants argue that the SEC has failed to

show that disgorgement would make victims whole, as the SEC has

failed to specifically point to any victims who have suffered

pecuniary harm as a result of the Defendants’ alleged

misconduct. Sexton avers, for example, that the SEC “has not

established that there are any victims to whom disgorgement

should be allocated.” Sexton’s Opp’n 10; see also Friesen’s

Opp’n 8-9 (same); Gasarch’s Opp’n 10-11 (same).

Fifth, the Defendants argue that the SEC, in relying on the

sums reflected in the Q system to calculate proposed

disgorgement award amounts, failed to factor out legitimate

expenses and payments received by the Defendants. Friesen

agues, for example, that the Q records also show repayments,

debt payments, and offsets, which the SEC has not but should

have considered in its calculation. Friesen’s Opp’n 6. Gasarch

similarly contends that the SEC does not attempt to factor out

“legitimate” payments to her for her secretarial services.

Gasarch’s Opp’n 4-5, 10.

Sixth, the Defendants contend that disgorgement is time-

barred as the SEC has failed to establish that disgorgement is

tied to scienter-based conduct. Sexton’s Opp’n 11; Gasarch’s

Opp’n 12 (similar).

Seventh, the Defendants argue that the SEC should have but

has not avoided double counting in its calculations, failing to

offset funds frozen or funds collected from others –- such as

Sharp, Knox, or Dhillon –- involved in the Sharp enterprise.

See ECF No. 484.

3. Analysis

After reading the briefs and hearing the above-mentioned

objections from Defendants during a hearing held on the question

of remedies, the Court took the issue of disgorgement and

prejudgment interest under advisement. See id. The Court is

now prepared to rule on the issue and for the following reasons

GRANTS the SEC’s motion for disgorgement in its entirety,

subject to certain caps as described below, see infra pp. 56-57,

and DENIES its motion for prejudgment interest in its entirety.

First, the Court has previously rejected, and once again

rejects, characterizations of the Q data that seek to describe

it as hearsay. While the Court did not make a final finding

during the course of the trial, it intimated that it was

prepared to admit the Q system into evidence under the business

records exception to the rule against hearsay. See generally

Tr. Jury Trial Day Four 69-72, ECF No. 438 (the Court, upon

hearing from witness testimony, holding that the Q data “would

seem to satisfy the business records exception”; noting that not

“anyone could write in the book”; holding that the Q data

“satisfies the requirements of a business record”); see also Tr.

Hr’g Disgorgement 24:8-11, ECF No. 491 (the Court holding during

the hearing on remedies that “[t]his Court is satisfied that the

Q system records qualify as business records under the federal

rules of evidence”). Thus, the Q system is admissible evidence

and not hearsay.

Further, the Defendants’ efforts to describe the Q data as

easily manipulable are unavailing. See, e.g., Tr. Jury Trial

Day Two 10:15-16 (Gasarch contending that Sharp “had the power

as the administrator to change all the Q data”); id. at 21:11-12

(Friesen describing the Q system data as Sharp “sort of

inputting data apparently in any way that he sees fit”); see

also id. at 21:18-19 (Friesen arguing that the Q system data “is

not a believable, authentic, reliable recitation of anything”);

Tr. Jury Trial Day Nine 61:2 (Gasarch calling the Q data

“garbage”). That Sharp may have been the main administrator of

the Q system, see, e.g., Tr. Jury Trial Day Seven 129:3, ECF No.

441 (witness testimony characterizing the Q system as “[Sharp]’s

own accounting system”), does not by itself demonstrate that the

data has been unreliably manipulated.

The SEC has compared the Q data to independent brokerage

records, Decl. of Ryan Murphy I ¶ 15, and the comparison has

returned a very high rate of accuracy. As the affidavit of Ryan

Murphy indicates, the comparison between Q data for each of the

14 issuers and independent brokerage records has confirmed the

reliability of Q data with considerable accuracy: (1) 95% for

Stevia First/Vitality, id. ¶ 17; (2) 94% for Echo Automotive,

id. ¶ 20; (3) 97% for Arch Therapeutics, id. ¶ 23; (4) 100% for

Stevia Corp., id. ¶ 26; (5) 95% for Liberty One Lithium Corp.,

id. ¶ 29; (6) 96% for Oryon Technologies, id. ¶ 31; (7) 100% for

Makism 3D Corp., id. ¶ 33; (8) 98% for Graphite Corp., id. ¶ 35;

(9) 97% OncoSec Medical Inc., id. ¶ 37; (10) 97% for NewGen

Biopharma Corp., id. ¶ 39; (11) 91% for StartMonday Technology

Corp., id. ¶ 41; (12) 100% for Lexington Biosciences Holdings

Corp., id. ¶ 43; (13) 100% for BreathTec Biomedical Inc., id. ¶

45; and (14) 75% for RightsCorp., id. ¶ 47. While the

Defendants are correct to argue that only a sample, and not all,

of the brokerage records and Q transactions were compared, they

do not meaningfully challenge, much less demonstrate, how the

sample is not representative. Securities and Exchange

Commission v. Commonwealth Equity Servs., LLC, 2024 U.S. Dist.

LEXIS 59361, at *28 (D. Mass. Mar. 29, 2024) (Talwani, J.)

(rejecting the argument that the SEC’s sample was “cherry-

picked”). Accordingly, the Q record, as a comparison with

independent brokerage records confirms, is a detailed and highly

accurate representation of the funds generated by the Sharp

pump-and-dump schemes.

The Court is further persuaded that the Q data is highly

accurate since evidence presented at trial demonstrated that Q

system entries were made very close in time to the illegal

trading that occurred. See, e.g., Tr. Jury Trial Day Six 49:9

(witness testimony that Q entries were made within “less than 24

hours” following trade). The Court therefore finds the Q data

reliable and credible evidence of the proceeds generated through

the illegal trading that occurred with respect to the 14

issuers.

Second, the Court rejects the Defendants’ contention that

there is no evidence that the proceeds recorded in the Q system

were actually disbursed and distributed to and received by the

Defendants. To be sure, the Defendants are correct to point out

that the SEC compared the Q data to independent brokerage

records but did not “look at any bank records.” Tr. Jury Trial

Day Eight 150:22 (SEC analyst testifying that he did not look at

bank records to confirm receipt of the proceeds by the

Defendants). The Defendants repeatedly emphasized this point

during the hearing on remedies. See Tr. Hr’g Disgorgement

16:12, 17:1, 20:21-22, (mentioning the lack of evidence that the

Defendants “actually received money”; that there are no “funds

received were by us”; and asking the Court to focus on “what the

individual actually received”). Moreover, witness testimony at

trial seemed to indicate that not all of the proceeds generated

by the pump-and-dump scheme actually went to the Defendants.

See, e.g., Tr. Jury Trial Day Seven 89.

The SEC notes that the Q system shows the transfers of

illegal stock sale proceeds from the issuer accounts into each

of the Defendants’ personal accounts, and that the system shows,

just like a bank account would, the Defendants paying their

mortgages, paying the expenses of their family members, and

making other transfers. See Tr. Hr’g Disgorgement 26:9-17.

This, while true, does not change the fact that the SEC has not

submitted any bank records to this Court that show actual

receipt of funds by the Defendants.

Having carefully reviewed the record and considered the

question of the lack of bank records showing actual receipt of

funds by the Defendants, this Court is persuaded, for the

following reasons, that the balance of equities favors the

awarding of the disgorgement amounts requested by the SEC.

First, the Q data’s high degree of internal accuracy as to the

proceeds generated counsels a similar finding of accuracy as to

its figures regarding the money going into the Defendants’

personal Q accounts, especially because the Defendants failed to

argue, much less show, that there is money in their accounts in

the Q system that still remains there. See Happ, 392 F.3d at 31

(burden of proof shifting to defendants once SEC makes a

reasonable approximation).

Second, the production of bank records confirming actual

receipt of funds, to this Court’s knowledge, has never been

declared a sine qua non before finding the SEC’s disgorgement

calculation reasonable. Rather, courts in this district and in

others have looked at bank records in combination with other

evidence and sometimes have not looked at bank records at all.

See, e.g., Securities and Exchange Commission v. Lazare Indus.,

294 Fed. Appx. 711, 715 (3d Cir. 2008) (holding that the

defendants’ argument that the district court “abused its

discretion in fixing the amount of disgorgement because the SEC

did not offer bank records showing that defendants actually

received the amounts memorialized on the subscription

agreements” “lacks merit”); Securities and Exchange Commission

v. Eiten, 2014 U.S. Dist. LEXIS 139428, at *3 (D. Mass. Sept.

30, 2014) (O’Toole, J.) (finding the SEC’s disgorgement

calculation based on “bank records, other financial information,

and documents” reasonable).

Third and most importantly, in cases involving concerted

wrongdoing, joint and several liability may be appropriate, in

which case the ill-gotten gains subject to disgorgement need not

accrue to each defendant individually.15 Cf. Securities and

Exchange Commission v. San Francisco Reg'l Ctr. LLC, 2019 U.S.

Dist. LEXIS 4983, at *9-10 (N.D. Cal. Jan. 10, 2019) (rejecting

the SEC’s contention that the court can disgorge profits

accruing to a defendant that “it never had” because SEC failed

to articulate a conspiracy claim and that the defendant was “a

participant in the wrongdoing”). Here, the Defendants were co-

conspirators within a hub-and-spoke model: Gasarch conspired

with Sharp; Kelln conspired with Sharp; and Sexton, Veldhuis,

and Friesen conspired with each other and with Sharp as part of

15 Here, the Court notes that the antecedent question may

arise as to whether joint and several liability is permissible

in the context of disgorgement. As noted above, Liu, while

articulating the default rule of individual liability in the

disgorgement context, still carved out an exception applicable

to instances of “concerted wrongdoing.” Liu, 591 U.S. at 90.

Further, the Liu Court eschewed “wad[ing] into all the

circumstances where an equitable profits remedy might be

punitive when applied to multiple individuals[,]” id. at 91,

remanding the case to the lower court instead so that it could

determine whether joint and several liability would be

appropriate, “[g]iven the wide spectrum of relationships between

participants and beneficiaries of unlawful schemes—from equally

culpable codefendants to more remote, unrelated tipper-tippee

arrangements.” Id. As such, the Liu Court recognized the

permissibility of assigning joint and several liability to

defendants engaged in concerted wrongdoing.

Post-Liu, at least two sessions of this Court have held

securities law offenders jointly and severally liable for

disgorgement. See Knox, 2022 U.S. Dist. LEXIS 99321, at *11

(“The interchangeable role the Entity Defendants played within

the scheme makes joint and several liability appropriate.”); see

also Securities and Exchange Commission v. Gomes, 2022 U.S.

Dist. LEXIS 191457, at *19-20 (D. Mass. Oct. 20, 2022) (Saylor,

C.J.).

specific pump-and-dump schemes. As such, joint and several

liability is appropriate: Gasarch is jointly and severally

liable with Sharp; Kelln is jointly and severally liable with

Sharp; and Sexton, Veldhuis, and Friesen are jointly and

severally liable with Sharp. Given that Sharp was a co-

conspirator in each of the conspiracies, the ill-gotten gains

need not have accrued personally to each of the Defendants –-

that they may have partially or entirely accrued to Sharp

suffices to award disgorgement. See Securities and Exchange

Commission v. Platforms Wireless Int'l Corp., 617 F.3d 1072,

1098 (9th Cir. 2010) (“We hold that the district court did not

abuse its discretion in holding Martin jointly and severally

liable with Platforms. We have never held that a personal

financial benefit is a prerequisite for joint and several

liability.”); see also Securities and Exchange Commission v.

Monterosso, 756 F.3d 1326, 1337-38 (11th Cir. 2014)

(“[Defendant] argues it would be inequitable to hold him liable

for disgorgement when he did not receive proceeds. The Ninth

Circuit, however, has stated, and we agree, a personal financial

benefit is not a prerequisite for joint and several liability.”

(quotations omitted)).

The Court, in exercising its “broad discretion not only in

determining whether or not to order disgorgement but also in

calculating the amount to be disgorged[,]” Securities and

Exchange Commission v. Druffner, 802 F. Supp 2d 293, 297 (D.

Mass. 2011) (Gorton, J.) (quotation omitted), will, however, cap

the individual amount that may be disgorged from each of the

Defendants, notwithstanding their joint and several liability,

at the following amounts requested by the SEC based on the Q

system data: (1) $17,367,474 against Sexton; (2) $11,846,176

against Friesen; (3) $13,289,897 against Veldhuis; (4)

$1,582,785 against Kelln; and (5) $2,522,367 against Gasarch.

Third, the Court finds the remaining objections raised by

the Defendants unavailing. As evidence submitted to this Court

as well as presented during trial indicates, the proceeds

reflected in the Q system are, absent any showing to the

contrary proffered by the Defendants, generated by illegal pump-

and-dump schemes that involved 14 different issuers.

Additionally, the argument the SEC has failed to show any

victims is premature: the SEC has agreed in writing, see, e.g.,

Mem. Supp. 22-24, and verbally represented to this Court during

the hearing on remedies, see ECF No. 482, that a plan can and

will be submitted to the Court, to its satisfaction, detailing

plans to return the disgorged funds to the harmed investors.

The objection that disgorgement is time-barred is also

without merit, as all of the Defendants acted with varying

degrees of scienter, rendering the applicable statute of

limitations ten, not five, years. Finally, as to offsetting

legitimate expenses, the Defendants’ objections are, again,

unpersuasive for two reasons. First, the Defendants do not

meaningfully counter the SEC’s calculation by any showing how

certain payments were indeed legitimate, bearing in mind the

SEC’s obligation is to formulate a “reasonable approximation.”

Happ, 392 F.3d at 31. Second, even though there may have been

incidental expenses that could be offset, the exception

articulated in Liu that offsetting or diminishing legitimate

business expenses is not necessary where the enterprise itself

is fraudulent, see Liu, 591 U.S. at 83-84, is applicable here.

For the foregoing reasons, the Court holds the Defendants

jointly and severally liable as follows:

- Gasarch is jointly and severally liable with Sharp for

disgorgement in the amount of $2,522,367;

- Kelln is jointly and severally liable with Sharp for

disgorgement in the amount of $1,582,785; and

- Sexton, Veldhuis, and Friesen are jointly and severally

liable with Sharp for disgorgement in the amount of $42,503,547;

provided, however, that the amount to be disgorged from Sexton,

Veldhuis, and Friesen will be capped at, and shall not exceed,

$17,367,474, $13,289,897, and $11,846,176, respectively.

The disgorgement awards are, of course, subject to the

SEC’s submission, and this Court’s approval, of a plan detailing

how the disgorged funds will be returned to the harmed

investors.

4. Prejudgment Interest

“Prejudgment interest, like disgorgement, prevents a

defendant from profiting from his securities violations.”

Sargent, 329 F.3d at 40 (internal quotations omitted). “An

award of prejudgment interest is based on consideration of a

variety of factors, including the remedial purpose of the

statute [involved], the goal of depriving culpable defendants of

their unlawful gains, and . . . unfairness to defendants.” Id.

(citing Securities and Exchange Commission v. First Jersey

Securities, 101 F.3d 1450, 1477 (2d Cir. 1996)). The award of

prejudgment interest in securities violations prevents a

defendant from “receiving the benefit of what would otherwise be

an interest-free loan.” Druffner, 802 F. Supp. 2d at 298.

Here, the SEC seeks prejudgment interest against all five

Defendants. See Mem. Supp. 24. The SEC “computed prejudgment

interest using the IRS underpayment rate, compounded quarterly

on defendants’ net proceeds for each calendar year separately,

assuming (favorably to the defendants) that each year’s net

profit was received on the last day of the year in which it was

received into each defendant’s personal Q account.” Id. at 25.

The end date for the SEC’s calculation is August 5, 2021, when

the SEC obtained the asset freeze against the Defendants. See

id. The IRS methodology for calculating prejudgment interest is

one which other sessions of this Court have previously

determined to be appropriate. See, e.g., Commonwealth Equity

Servs., LLC, 2024 U.S. Dist. LEXIS 59361, at *34; Securities and

Exchange Commission v. Esposito, 260 F. Supp. 3d 79, 83 (2017)

(Burroughs, J.).

Accordingly, the SEC asks that the Defendants pay the

following amounts in prejudgment interest: (1) $5,872,145

against Sexton; (2) $4,314,031 against Veldhuis; (3) $4,057,737

against Friesen; (4) $460,687 against Kelln; and (5) $646,366

against Gasarch. Mem. Supp. 25.

The Defendants do not meaningfully oppose, having instead

focused their objections on the SEC’s request for disgorgement.

Sexton argues, however, that the SEC “has not presented any

evidence that [he] invested any funds or even placed them in an

interest-bearing account.” Sexton’s Opp’n 13. Sexton

misconstrues the law here: a showing of the defendant gaining

interest on the ill-gotten funds is not necessary for the Court

to award prejudgment interest. The very act of obtaining and

retaining ill-gotten funds is enough for defendants to benefit

from what resembles an interest-free loan: a showing that the

Defendants used ill-gotten funds to make more money out of it is

not necessary. Cf. Druffner, 802 F. Supp. 2d at 298 (“The

defendants derived direct monetary benefit from their

misrepresentations and retained those profits unjustly.”).

Because this Court holds the Defendants jointly and

severally liable as described above, see supra pp. 54, 56,

however, the imposition of prejudgment interest is not

equitable. In holding the Defendants jointly and severally

liable, the Court noted above that the ill-gotten gains need not

have accrued to each of the individual offenders, see supra p.

54, and noted further that it suffices in the context of

disgorgement for ill-gotten gains to have accrued to one or more

of the co-conspirators.

The institution of prejudgment interest is premised, on the

other hand, on the notion that a wrongdoer derives direct

monetary benefit by unjustly “retain[ing]” profits. Druffner,

802 F. Supp. 2d at 298. While the Q data evidence, verified by

external brokerage records, persuades this Court that ill-gotten

gains have been generated by the pump-and-dump scheme

perpetrated by the Defendants -- irrespective of to whom among

the co-conspirators the proceeds accrued -- thereby

necessitating disgorgement, the same data does not show that

ill-gotten gains have been obtained and retained by the

individual Defendants, much less in the amounts requested by the

SEC. Where actual accrual to each of the Defendants cannot be

shown and where it is entirely possible that at least a portion

of the ill-gotten gains may never have reached the pockets of

individual Defendants, it is not possible to speak with any

reasonable degree of certainty that the Defendants benefited

from what resembled an “interest-free loan.” Sargent, 329 F.3d

at 41.

Additionally, and equally importantly, as “[t]he decision

whether to grant prejudgment interest [is] confided to the

district court’s broad discretion,” Sargent, 329 F.3d at 40

(quotation omitted), this Court, in view of having issued

injunctive relief, imposed monetary penalties, and awarded

disgorgement, is satisfied that the foregoing relief will serve

a significant remedial purpose. Going any further and awarding

prejudgment interest, in the absence of a precise determination

as to the amount of ill-gotten gains actually obtained by the

individual co-conspirators in the various conspiracies, may

occasion unfairness to defendants. Having weighed these

factors, the Court will not award prejudgment interest. Cf. id.

at 40-41 (upholding a district court’s finding of joint and

several liability in the context of disgorgement, its

disgorgement award, and its refusal to award prejudgment

interest).

For the foregoing reasons, this Court DENIES the SEC’s

motion for prejudgment interest.

IV. CONCLUSION

Pursuant to the proposed judgments by the SEC, see ECF No.

485, which this Court hereby incorporates into this memorandum

and order, injunctive relief will issue forthwith.

Civil penalties imposed against the Defendants in these

amounts:

- Sexton: $1,562,603

- Friesen: $1,562,603

- Veldhuis: $1,562,603

- Kelln: $904,078

- Gasarch: $296,651

Such sums will be payable to the SEC within 30 days after entry

of this memorandum and order, and together with it, entry of the

incorporated judgments as to the Defendants.

Disgorgement, is ordered as follows:

- Gasarch is jointly and severally liable with Frederick L.

Sharp (“Sharp”) for disgorgement in the amount of $2,522,367;

- Kelln is jointly and severally liable with Sharp for

disgorgement in the amount of $1,582,785; and

- Sexton, Veldhuis, and Friesen are jointly and severally

liable with Sharp for disgorgement in the amount of $42,503,547;

provided, however, that the amount to be disgorged from Sexton,

Veldhuis, and Friesen will be capped at, and shall not exceed,

$17,367,474, $13,289,897, and $11,846,176, respectively.

The disgorgement awards shall be subject to the SEC’s

submission, and this Court’s approval, of a plan detailing how

the funds disgorged will be used to make victims whole. The SEC

shall submit said plan in due course and without any

unreasonable delay.

No prejudgment interest will be awarded.

For the reasons elucidated above, the Court GRANTS the

SEC’s motion for remedies in part, ECF No. 425.

SO ORDERED.

_/s/ William G. Young_

WILLIAM G. YOUNG

JUDGE

of the

UNITED STATES16

16 This is how my predecessor, Peleg Sprague (D. Mass. 1841-

1865), would sign official documents. Now that I’m a Senior

District Judge I adopt this format in honor of all the judicial

colleagues, state and federal, with whom I have had the

privilege to serve over the past 46 years.