Securities – SEC civil enforcement action

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Where a U.S. District Court judge issued four “obey-the-law” permanent injunctions, one of them must be vacated because it only cross-references the Code of Federal Regulations without any guidance for the defendant as to what his court-ordered obligations are.

“The prospect of buying low on a stock just before it shoots the moon has enamored investors for centuries. But, as commonsense suggests and history has proven, not every start-up becomes a blue chip and not every investment reaps retirement-worthy profits. So, rather than taking a risk in search of the next big bonanza, some underhanded financiers elect to rig the system in their favor and, to the unfortunate detriment of unsuspecting investors, profit off pure speculation that they deceitfully conjure up.

“Appellants Zhiying Yvonne Gasarch, Jackson Friesen, Mike Veldhuis, Paul Sexton, and Courtney Kelln participated in a scheme to do just that before they ran headfirst into federal securities laws. For nearly a decade, appellants — led by a character named Frederick (‘Fred’) Sharp — bought up cheap stocks in bulk, paid promoters to drum up misleading hype for their stocks, and then sold off their shares at artificially inflated prices. All the while, appellants went to great lengths to hide their ownership of these stocks and their involvement in this nefarious scheme.

“When the music stopped and the lights came on, all five appellants found themselves subject to an SEC civil enforcement action and liable to pay back millions in ill-gotten gains. Appellants Gasarch and Friesen now appeal the results of their respective jury trials, and the remaining appellants appeal the remedies imposed by the district court after they waived their trial rights and conceded liability. For myriad reasons, each appellant claims error occurred below and that the district court abused its discretion in ordering the remedies it deemed fitting of the offenses. It will take us a minute to explain all of this, so hunker down and read on to learn why we mostly agree and affirm across the board, but for one remedy pertaining to appellant Sexton. …

“A ten-day jury trial culminated in a series of unanimous jury verdicts finding both Gasarch and Friesen liable for all securities violations charged. Both appellants say the district court whiffed on multiple fronts, beginning with the court’s decision to admit a critical piece of evidence we alluded to earlier: the Sharp Group’s internal accounting system known as the Q system. Next, Gasarch alone claims the district court erred in instructing the jury when it came to the charges against her. Finally, Gasarch mounts a challenge to the sufficiency of the evidence used to hold her liable for violating multiple securities laws. …

“Based on the totality of evidence presented to support the reliability of all Q system records, the district court did not abuse its discretion in admitting this evidence under the business records exception. So we soldier on. …

“Gasarch alone challenges the jury instructions given at her trial regarding aiding and abetting liability. …

“Upon our de novo review, Gasarch’s challenge to the district court’s jury instructions falls short for two reasons: her preferred instruction is incorrect as a matter of substantive law and her concerns were adequately incorporated into the instructions as given. …

“In sum, we conclude the district court did not err in its jury instructions related to Gasarch’s aiding and abetting liability. …

“To recap, we affirm the district court’s evidentiary rulings regarding the Q system, find no error in the district court’s jury instructions as given, and ultimately leave Gasarch and Friesen’s jury verdicts untouched. With the trial matters in the rear view, we may loop back in appellants Veldhuis, Sexton, and Kelln and proceed to the second half of this collective appeal focusing on the remedial measures ordered by the district court. …

“The SEC sought three classes of remedies before the district court: (1) disgorgement and prejudgment interest against all appellants in varying amounts tailored to the profits they received; (2) civil penalties in varying amounts likewise tailored to each appellant’s participation in the scheme; and (3) injunctive relief against Sexton, Friesen, and Gasarch. …

“As things played out here, even if appellants lacked adequate notice that joint and several liability was on the table, the district court’s sua sponte designations did not prejudice appellants. …

“Considering the district court’s prudent analysis and our reasoning just offered, we conclude, based on the totality of the circumstances here, that the court did not abuse its discretion in holding appellants jointly and severally liable for their disgorgement awards. …

“To conclude, after considering all appellants’ disgorgement related claims, the disgorgement awards as imposed by the district court remain in place. …

“The final scene of this collective appeal involves only Sexton and his challenge to four permanent injunctions imposed against him by the district court. …

“… Sexton claims the district court issued impermissible ‘obey-the-law’ injunctions that enhance the penalties he could face for potential violations down the road and deprive him of adequate notice of the barred conduct as required by Federal Rule of Civil Procedure 65(d). …

“As a general matter, we disagree with Sexton’s premise that obey-the-law injunctions are per se impermissible. … Nor do we believe the district court abused its discretion in issuing these permanent injunctions against Sexton (save one which we will address at the end). …

“One injunction, however, does impermissibly run afoul of Rule 65(d)(1)(C)’s requirement that an injunction may not incorporate a separate document by reference. The fourth permanent injunction — which permanently restrains and enjoins Sexton from violating Section 13(d) of the Exchange Act and Rule 13d-1 promulgated thereunder — references ‘information required by Schedule 13D’ and ‘any equity security of a class which is specified in Exchange Act Rule 13d-1(I).’ The other three permanent injunctions first cite the relevant securities law before listing specific conduct thereby prohibited (such as engaging in fraud). By contrast, the fourth permanent injunction only cross-references the Code of Federal Regulations without any guidance for Sexton as to what his court-ordered obligations are. … This is a bridge too far, and, accordingly, we vacate this portion of the injunction and remand for the district court to describe the requirements and proscribed conduct within its injunction. …

“For the foregoing reasons, the verdicts entered against Gasarch and Friesen, the district court’s disgorgement awards against all appellants, and the civil penalties imposed against all appellants are affirmed. Likewise, we affirm the permanent injunctions issued against Sexton barring violations of (1) Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; (2) Section 17(a) of the Securities Act; and (3) Section 5 of the Securities Act, but vacate the permanent injunction barring violations of Section 13(d) of the Exchange Act and Rule 13d-1 promulgated thereunder, and remand for proceedings consistent with this opinion.”

Securities and Exchange Commission v. Gasarch, et al. (Lawyers Weekly No. 01-033-26) (96 pages) (Thompson, J.) Appealed from a decision by Young, J., in the U.S. District Court for the District of Massachusetts. Karen A. Pickett, with whom Pickett Law Offices, P.C. was on brief, for appellant Zhiying Yvonne Gasarch; Katie Renzler, with whom Michael Tremonte and Sher Tremonte LLP were on brief, for appellant Mike K. Veldhuis; Robert S. Silverblatt, with whom Stephen G. Topetzes, Neil T. Smith and K&L Gates LLP were on brief, for appellant Paul Sexton; Frank Scaduto, with whom Kevin B. Muhlendorf and Wiley Rein LLP were on brief, for appellant Courtney Kelln; Maranda Fritz, with whom Timothy J. Fazio and MG+M The Law Firm were on brief, for appellant Jackson T. Friesen; Kerry J. Dingle, with whom Jeffrey B. Finnell, Tracey A. Hardin and Daniel Staroselsky were on brief, for the appellee (Docket Nos. 24-1770, 24-1771, 24-1772, 24-1773 and 24-1774) (Feb. 19, 2026).

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