NDAA’s 10-Year Disgorgement Limitations Applies Retroactively, While SEC “Obey-the-Law” Injunctions Must Independently Satisfy Rule 65(d) (No Incorporation by Reference)

1. Introduction

This First Circuit decision arises from an SEC civil enforcement action targeting a decade-long, cross-border “pump and dump” operation orchestrated by Frederick (“Fred”) Sharp and facilitated by a web of offshore accounts, nominee entities, encrypted communications, and a bespoke internal ledger (“the Q system”). The SEC sued multiple participants, including Sharp’s employees and Sharp Group clients who acquired micro-cap “penny stocks,” promoted them with paid hype, and then sold at inflated prices while concealing beneficial ownership.

Five appellants reached the First Circuit in two procedural postures:

• Trial appellants: Zhiying Yvonne Gasarch and Jackson T. Friesen proceeded to a jury trial and were found liable on all charged violations.
• Remedies-only appellants: Mike K. Veldhuis, Paul Sexton, and Courtney Kelln waived trial and entered consent judgments conceding liability, then appealed remedies.

The appeal presented a dense cluster of issues, notably: (i) admissibility of the Q system under the Federal Rules of Evidence; (ii) aiding-and-abetting jury instructions; (iii) sufficiency of evidence as to Gasarch; (iv) the structure and calculation of disgorgement (including joint and several liability and causal approximation); (v) the retroactive reach of the National Defense Authorization Act (“NDAA”) disgorgement statute of limitations; (vi) civil penalties within the five-year limitations window; and (vii) the validity of SEC “obey-the-law” injunctions under Federal Rule of Civil Procedure 65(d).

2. Summary of the Opinion

• Q system evidence: Properly authenticated under Fed. R. Evid. 901 and admissible as business records under Fed. R. Evid. 803(6).
• Jury instructions (Gasarch): No error; aiding-and-abetting scienter correctly included “knowingly or recklessly” under the post-Dodd-Frank version of 15 U.S.C. § 78t(e).
• Sufficiency (Gasarch): Sufficient evidence supported liability as a primary violator of Section 17(a)(3) and as an aider and abettor.
• Disgorgement: Disgorgement was available; amounts were a reasonable approximation; joint and several liability with Sharp was permissible under Liu v. SEC’s “concerted wrongdoing” exception, especially with caps tied to Q-account allocations.
• NDAA limitations: The NDAA’s ten-year disgorgement limitations period applies retroactively to actions “pending on, or commenced on or after” January 1, 2021.
• Victim identification/distribution: Disgorgement was not barred by the absence of an already-approved distribution plan or identified victims list at the judgment stage.
• Civil penalties: Affirmed against Gasarch and Sexton; evidence supported post–August 5, 2016 conduct for Gasarch, and the district court did not err in counting violations for Sexton.
• Injunctions: “Obey-the-law” injunctions are not per se invalid; three broad securities-law injunctions against Sexton were upheld. The Section 13(d)/Rule 13d-1 injunction was vacated for violating Rule 65(d) specificity (improper incorporation by reference).

3. Analysis

3.1. Precedents Cited (and How They Shaped the Decision)

A. Securities-law architecture and disclosure policy

• Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund (quoting Pinter v. Dahl): used to emphasize that Section 5 registration is the Securities Act’s “linchpin” protecting investors through “full and fair disclosure.”
• Tax-Free Fixed Income Fund for P.R. Residents, Inc. v. Ocean Cap. LLC (citing Gen. Aircraft Corp. v. Lampert): framed Section 13(d) as a beneficial-ownership transparency tool to inform markets about large stakes and potential control motives.
• United States v. Naftalin: reinforced Congress’s intentionally broad conception of fraud “in” the “offer” and “sale,” supporting expansive anti-fraud reach beyond classic misrepresentation cases.

B. Evidence law: authentication and business records

• United States v. Blanchard and United States v. Paulino: supplied the First Circuit’s framework separating authentication from admissibility, and validating authentication via circumstantial “distinctive characteristics” plus witness testimony.
• U.S. Bank Tr., N.A. as Tr. for LSF9 Master Participation Tr. v. Jones and Wallace Motor Sales, Inc. v. Am. Motor Sales Corp.: established that a “qualified witness” under Rule 803(6) need not be the record’s preparer; it suffices that the witness can explain how records are made and kept and be cross-examined.
• Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. W. Lake Acad.: supported the principle that affirmance may rest on an alternative hearsay exception even if the district court admitted evidence under a different one (invoked as a “belt-and-suspenders” point for co-conspirator statements).

C. Scienter and Section 17(a)

• Aaron v. SEC: decisive on the point that Section 17(a)(3) does not require scienter; negligence suffices.
• SEC v. Johnston: First Circuit authority reaffirming the scienter/negligence split within Section 17(a) (scienter for 17(a)(1), negligence for 17(a)(2) and 17(a)(3)).
• Lorenzo v. SEC: used to situate scheme liability and the overlap among anti-fraud provisions, supporting the viability of aiding/abetting and scheme-based theories even absent direct public statements by the defendant.

D. Disgorgement: net profits, causation, and joint and several liability

• Liu v. SEC: the cornerstone for modern SEC disgorgement limits—tethered to “net profits” and awarded “for victims,” with joint and several liability generally disfavored but still permissible for “partners engaged in concerted wrongdoing.”
• SEC v. Navellier & Assocs., Inc., SEC v. Commonwealth Equity Servs., LLC, and SEC v. Happ: provided the First Circuit’s burden-shifting template (SEC shows reasonable approximation; defendant must rebut), and the rule that uncertainty risk falls on the wrongdoer.
• BioPoint, Inc. v. Dickhaut: served as the limiting comparator—joint and several liability was improper there where profits accrued solely to a corporate entity and red flags suggested penalty-like overreach. The court distinguished this case because allocations and caps tied each defendant to a quantified share of unjust enrichment.
• SEC v. MacDonald: supported the doctrinal maxim that doubts in disgorgement calculations are resolved against the defrauding party.

E. Statute of limitations and retroactivity

• Kokesh v. SEC: supplied the prior (pre-NDAA) landscape treating disgorgement as a “penalty” for limitations purposes under 28 U.S.C. § 2462.
• Landgraf v. USI Film Prods. and Lattab v. Ashcroft: provided the retroactivity framework—if Congress clearly commands a statute’s temporal reach, the inquiry ends and courts apply it as written.
• SEC v. Ahmed and SEC v. Hallam: persuasive out-of-circuit support for reading the NDAA’s “pending on, or commenced on or after” language as an explicit retroactivity command for disgorgement limitations.
• In re Enter. Mortg. Acceptance Co., Sec. Litig. and Lieberman v. Cambridge Partners, L.L.C.: used to distinguish Sarbanes-Oxley retroactivity disputes and explain why the NDAA’s text is materially stronger on retroactive application.

F. Civil penalties limitations

• Gabelli v. SEC: fixed the five-year limitations period for civil penalties under 28 U.S.C. § 2462, anchoring the district court’s August 5, 2016–August 5, 2021 window.
• SEC v. Sargent (2003): supplied factors guiding penalty discretion (egregiousness, repetition, concealment, financial worth, etc.).

G. Injunction specificity and “obey-the-law” orders

• NLRB v. Express Publ'g Co. and Brown v. Trs. of Bos. Univ.: supported the breadth principle—courts may restrain “acts of the same type or class” as past unlawful acts when future violations are reasonably anticipated.
• McComb v. Jack. Paper Co.: underwrote the permissibility of broad injunctions when needed to prevent further violations by shown recidivists.
• SEC v. Lemelson: First Circuit confirmation that broad securities-law injunctions can be appropriate; here it functioned as a baseline against a per se invalidity attack.
• SEC v. Goble and SEC v. Keener: reinforced Rule 65(d)’s “four corners” requirement—an injunction must not force a defendant to consult outside sources to know what is required or prohibited.

3.2. Legal Reasoning

A. The Q system: (1) authentic; (2) admissible; (3) reliable enough

The court treated authentication and hearsay as analytically distinct, following United States v. Paulino. On authentication, it emphasized a multi-witness chain: the system’s creator (Fedir Nikolayev), the FBI agent who seized the Curaçao servers, and cooperating conspirators who used and verified Q entries (Knox and Ciapala). It also relied on internal “distinctive characteristics” (code names, time-matched transactions, “Bond” server labels) consistent with United States v. Blanchard.

On admissibility, the court affirmed the district court’s use of Fed. R. Evid. 803(6). Critical to the holding was evidence that Q transactional data closely matched independent brokerage records, and testimony that entries were made close in time to trades—hallmarks of business-record reliability. The court rejected the argument that only a person who personally entered each record can qualify as the Rule 803(6) witness, tracking U.S. Bank Tr., N.A. as Tr. for LSF9 Master Participation Tr. v. Jones.

B. Aiding and abetting instructions: Dodd-Frank’s “knowingly or recklessly” controls

The First Circuit rejected Gasarch’s attempt to require “knowledge of the specific primary violation” as the sole scienter standard. It treated 15 U.S.C. § 78t(e) as amended by Dodd-Frank to authorize aiding-and-abetting liability for one who “knowingly or recklessly provides substantial assistance.” It then read the jury instructions as a whole—per Davignon v. Hodgson—and concluded the charge sufficiently required understanding that her conduct furthered improper overall activity and that she knowingly or recklessly provided substantial assistance.

C. Sufficiency: Section 17(a)(3) requires negligence, not scienter

The court’s sufficiency analysis turned on a doctrinal correction: Aaron v. SEC forecloses a scienter requirement for Section 17(a)(3). It then found evidence adequate to show Gasarch’s role “directly or indirectly” in a fraudulent course of business—fabricated invoices, wiring practices structured to avoid scrutiny, and operational control over nominee-account disbursements.

D. Disgorgement: “reasonable approximation,” uncertainty placed on wrongdoers, and “concerted wrongdoing” joint liability

The opinion harmonizes the post-Liu v. SEC world with the First Circuit’s established burden-shifting line (SEC v. Happ, SEC v. Navellier & Assocs., Inc., SEC v. Commonwealth Equity Servs., LLC): once the SEC provides a reasonable approximation of ill-gotten gains, defendants must rebut—otherwise uncertainty is allocated against them.

The key equity move was the district court’s imposition (sua sponte) of joint and several disgorgement with Sharp, paired with a cap equal to the amounts allocated to each appellant’s Q account. The First Circuit held that:

• Joint and several disgorgement remains permissible under Liu v. SEC where defendants are “partners engaged in concerted wrongdoing.”
• The caps tied to Q-account allocations reduced the BioPoint, Inc. v. Dickhaut risk that an individual would pay profits “accrued to another.”
• Even if sua sponte joint-and-several designations are “sparingly” used, the appellants failed to show prejudice—because the caps did not increase their exposure beyond what the SEC sought, and joint liability could only shift some burden to Sharp.

E. NDAA retroactivity: explicit command ends the Landgraf inquiry

On limitations, the court treated the NDAA’s language—“shall apply with respect to any action or proceeding that is pending on, or commenced on or after” January 1, 2021—as the kind of clear retroactivity directive discussed in Landgraf v. USI Film Prods.. That textual clarity allowed the court to stop at step one of the retroactivity analysis (following Lattab v. Ashcroft), without weighing “impermissible retroactive effect.” It also rejected an “absurd result” reading (invoking the canon described in Bostock v. Clayton Cnty., Ga.) that would perversely make the SEC worse off for filing after Congress expanded its authority.

F. Injunctions: broad “obey-the-law” relief upheld—except when it violates Rule 65(d)’s four-corners requirement

The court made two moves that, together, form the decision’s most practically new guidance for SEC litigators and district judges:

• No per se ban: It rejected the premise that “obey-the-law” injunctions are categorically impermissible, citing McComb v. Jack. Paper Co. and the breadth principle in NLRB v. Express Publ'g Co. (as quoted in Brown v. Trs. of Bos. Univ.).
• But Rule 65(d) is a hard constraint: It vacated the Section 13(d)/Rule 13d-1 injunction because it did not itself describe prohibited/required acts and instead cross-referenced “Schedule 13D” and “Exchange Act Rule 13d-1(I),” forcing Sexton to “look beyond the four corners” to comply—precisely the defect condemned in SEC v. Goble (and consistent with SEC v. Keener).

3.3. Impact

A. Disgorgement litigation: stronger SEC posture in the First Circuit post-NDAA

This opinion cements, for First Circuit purposes, that the NDAA’s ten-year limitations period for scienter-based disgorgement claims applies retroactively to cases commenced after January 1, 2021. Practically, this expands the SEC’s recoverable time horizon in fraud cases and reduces defendants’ ability to cabin disgorgement to five years by invoking Kokesh v. SEC.

B. Joint-and-several disgorgement: a workable template after Liu

The court’s approval of joint and several disgorgement in a hub-and-spoke conspiracy—particularly with individualized caps based on internal allocation data—provides a blueprint: district courts may navigate Liu v. SEC concerns by (i) making explicit “concerted wrongdoing” findings and (ii) limiting each defendant’s liability to a reasoned approximation of their own share.

C. Evidence of hidden financial systems: authentication/admissibility path for “shadow ledgers”

The Q system analysis illustrates how the SEC (and prosecutors) can authenticate and admit bespoke, encrypted ledgers seized abroad: combine creator testimony, seizure-chain evidence, participant-user testimony, and external verification against independent records. This is likely to influence future cases involving crypto exchanges, offshore payment processors, and internal compliance or accounting databases.

D. Injunctive practice: “obey-the-law” survives, but drafting must be self-contained

The remand on the Section 13(d)/Rule 13d-1 injunction is a drafting warning: injunctions that merely point to schedules or regulatory provisions—without spelling out the concrete obligations—risk vacatur. This matters beyond securities law, but especially in it, where disclosure rules are often implemented through forms (e.g., Schedule 13D) and cross-references.

4. Complex Concepts Simplified

5. Conclusion

SEC v. Sexton is a wide-ranging First Circuit decision that (i) validates the SEC’s evidentiary use of an internal “shadow ledger” under traditional authentication and business-records principles; (ii) confirms post-Dodd-Frank aiding-and-abetting instructions using “knowingly or recklessly”; (iii) endorses disgorgement grounded in reasonable approximations derived from concealed systems, placing uncertainty risk on wrongdoers; (iv) adopts a clear First Circuit position that the NDAA’s ten-year disgorgement limitations provision applies retroactively to actions commenced after January 1, 2021; and (v) most distinctly, holds that while broad SEC “obey-the-law” injunctions are not categorically improper, Rule 65(d) requires self-contained specificity—and an injunction that merely cross-references Schedule 13D/Rule 13d-1 must be vacated and redrafted.