626 F.Supp.3d 345
D. Mass.2022Background
- The SEC sued nine defendants (including Sharp, Gasarch, Kelln, Veldhuis, Sexton, Friesen, Taylor, Dhillon, Kaitz) for an alleged long-running scheme (2010–2019) to sell large blocks of restricted, unregistered penny stock in U.S. markets by using nominee/shareholder shells, offshore trading platforms, false documents, and coordinated promotions.
- The Complaint alleges two core enterprise components: the Sharp Group ( Sharp, Gasarch, Kelln ) providing nominee entities, encrypted accounting, and concealment services, and the Veldhuis Control Group ( Veldhuis, Sexton, Friesen ) acting as control persons who sold the restricted shares—others (Taylor, Dhillon, Kaitz) aided via mergers, nominee control, board actions, or promotions.
- The SEC seeks injunctions, disgorgement, civil penalties, and bars, asserting violations of Sections 5, 10(b)/Rule 10b-5, 17(a), 13(d), 15(b), and 20(e) of the securities laws; the Complaint includes detailed allegations of transfers, invoices, communications, and payments from 2016–2018.
- Six defendants moved to dismiss arguing (1) claims are time‑barred (NDAA §6501’s 10‑year limit cannot be applied retroactively or does not save all claims) and (2) the SEC failed to plead fraud and scienter with sufficient particularity.
- The Court granted the SEC leave to amend limited allegations as to Gasarch and Taylor, treated the motions to dismiss as addressed to the Amended Complaint, and denied all six motions to dismiss in full.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether NDAA §6501 (10‑year limit) applies retroactively to actions commenced after enactment | NDAA expressly applies to actions pending on or commenced on/after Jan 1, 2021; Congress intended to undo Kokesh limits | Applying retroactivity to revive pre‑existing conduct violates retroactivity presumption and Ex Post Facto principles | NDAA §6501 applies retroactively to cases commenced after enactment; Congress’ language is an express retroactivity command and Ex Post Facto concerns fail (disgorgement is civil/equitable) |
| Whether claims are timely pled on face of Amended Complaint under applicable limitations | SEC alleges sufficient post‑2016 facts for five‑year matters and post‑2011 facts for ten‑year scienter disgorgement/injunctive claims; presence abroad can affect accrual | Defendants say many alleged wrongful acts occurred earlier and that SEC didn’t plead facts within five‑year window | Allegations are timely under both five‑ and ten‑year frameworks; additionally, five‑year limitations may not run at all while defendants were outside U.S., so dismissal premature |
| Pleading sufficiency (Rule 9(b)) for fraud/scheme claims and scienter | SEC contends Rule 9(b) applies but PSLRA ‘strong inference’ scienter standard does not apply to SEC enforcement; alleges particularized scheme acts and general scienter | Defendants contend allegations are conclusory, improperly lumped (group pleading), and fail to plead deceptive acts or individual scienter | Court applies Rule 9(b) (not PSLRA strong inference) and finds the Amended Complaint pleads deceptive acts, who did them, when, and alleges scienter sufficiently for SEC enforcement context; group references are permissible where roles are specified |
| Personal jurisdiction over Canadian defendants (Kelln, Gasarch) | SEC argues defendants purposefully directed conduct at U.S. markets (contacts with U.S. transfer agents, U.S. companies, profits used in U.S. markets), and statutes permit worldwide service | Defendants assert insufficient minimum contacts; residence abroad precludes jurisdiction | Court finds prima facie minimum contacts and purposeful availment satisfied (claims targeted U.S. markets); Gasarch waived jurisdictional defense; Kelln’s challenge fails at pleading stage |
Key Cases Cited
- Kokesh v. SEC, 137 S. Ct. 1635 (Sup. Ct.) (disgorgement treated as a penalty for §2462 limitations purposes)
- Liu v. SEC, 140 S. Ct. 1936 (Sup. Ct.) (disgorgement may be equitable relief if limited to net profits and awarded for victims)
- Landgraf v. USI Film Prod., 511 U.S. 244 (Sup. Ct.) (two‑step test for statutory retroactivity and importance of clear congressional command)
- Gabelli v. SEC, 568 U.S. 442 (Sup. Ct.) (§2462 five‑year limitations for civil penalties)
- Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308 (Sup. Ct.) (standard for pleading scienter in private securities actions; distinguished here for SEC enforcement)
- Plaut v. Spendthrift Farm, Inc., 514 U.S. 211 (Sup. Ct.) (when a case is ‘‘pending’’ for retroactivity analysis)
- SEC v. Tambone, 550 F.3d 106 (1st Cir.) (SEC securities enforcement pleading context)