SEC v. Veldhuis (1st Cir. Feb. 19, 2026): Retroactive 10-Year Disgorgement, Q-System “Business Records,” and Rule 65(d) Limits on SEC “Obey-the-Law” Injunctions

1. Introduction

In SEC v. Veldhuis, the First Circuit reviewed a sweeping SEC civil enforcement action arising from a long-running “pump-and-dump” operation orchestrated by Frederick (“Fred”) Sharp and executed through offshore brokerage arrangements, nominee entities, paid stock promotions, and an internal encrypted ledger (“the Q system”). The SEC alleged violations of registration requirements (Securities Act § 5), beneficial ownership disclosure (Exchange Act § 13(d)), and antifraud provisions (Exchange Act § 10(b) and Securities Act § 17(a)).

Two defendants—Zhiying Yvonne Gasarch and Jackson Friesen—went to a jury trial and were found liable. Three others—Mike Veldhuis, Paul Sexton, and Courtney Kelln—waived trial rights and consented to judgments conceding liability, leaving remedies (disgorgement, penalties, and injunctions) for the court to decide. The appeal primarily tested (i) the admissibility of the Q system, (ii) the scienter standard for aiding-and-abetting, (iii) the framework for disgorgement (including joint-and-several liability and statutes of limitation), and (iv) the enforceability of broad SEC injunctions under Federal Rule of Civil Procedure 65(d).

2. Summary of the Opinion

  • Trial rulings affirmed: The Q system was properly authenticated and admitted as a business record; Gasarch’s jury-instruction challenge failed; the evidence was sufficient to sustain Gasarch’s liability as a primary violator of Securities Act § 17(a)(3) and as an aider-and-abettor of other antifraud violations.
  • Remedies largely affirmed: Disgorgement (including joint-and-several designations) and civil penalties were upheld.
  • NDAA retroactivity: The court applied the National Defense Authorization Act’s 10-year disgorgement limitations period retroactively to actions “commenced on or after” January 1, 2021.
  • Rule 65(d) limit enforced: One permanent injunction—barring Sexton from violating Exchange Act § 13(d) and Rule 13d-1—was vacated because it improperly required him to consult external regulatory materials (e.g., Schedule 13D and a specific CFR rule) rather than stating the prohibited conduct “in reasonable detail” within the order itself.

3. Analysis

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

1) Securities-law “table setting” and breadth of antifraud provisions

  • Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund and Pinter v. Dahl: Used to underscore that Securities Act registration is the “linchpin” of the statute and investor-protection oriented, framing why circumvention schemes are treated seriously.
  • United States v. Naftalin: Cited to reinforce Congress’s intentionally broad conception of fraud “in” the “offer” or “sale,” supporting expansive coverage of scheme-based conduct under Securities Act § 17(a).

2) Authentication and evidentiary admissibility of the Q system

  • SEC v. Happ and BioPoint, Inc. v. Dickhaut: Provided the lens for reviewing facts post-trial/consent remedies and deference to record-supported findings.
  • United States v. Paulino: Supplied the key analytic separation between authentication and admissibility and supported use of internal characteristics to authenticate records.
  • United States v. Blanchard: Anchored the Rule 901 standard—evidence sufficient for a finding that the item is what the proponent claims.
  • U.S. Bank Tr., N.A. as Tr. for LSF9 Master Participation Tr. v. Jones: Drove the First Circuit’s discussion of Rule 803(6) business records: who is a “qualified witness,” the reliability focus, and when integrated records can be trusted.
  • United States v. Doe: Provided the multi-factor articulation of Rule 803(6).
  • FTC v. Direct Mktg. Concepts, Inc.: Reinforced the “reliable enough to be admissible” theme the court applied to an atypical ledger.
  • Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. W. Lake Acad.: Supported the court’s observation that even if the business-record route were challenged, alternate hearsay exceptions could sustain admission.

3) Aiding-and-abetting scienter and jury instructions

  • SEC v. Apuzzo (and its discussion of pre-Dodd-Frank “knowledge” framing): Addressed as incomplete for modern purposes because it did not apply the post-2010 statutory text adding “recklessly” to 15 U.S.C. § 78t(e).
  • SEC v. Tambone: Used as the First Circuit’s baseline articulation of aiding-and-abetting elements (as adapted to the statute’s current “knowingly or recklessly” language).
  • Davignon v. Hodgson and White v. N.H. Dep't of Corr.: Provided the doctrinal test for when refusal of a requested instruction is reversible.
  • Sparkle Hill, Inc. v. Interstate Mat Corp. and Seafreeze Shoreside, Inc. v. U.S. Dep't of Interior: Enforced waiver rules for arguments raised too late or inadequately developed (notably on “law of the case”).

4) Scienter and liability under Securities Act § 17(a)(3)

  • Aaron v. SEC: Controlled the core point that § 17(a)(3) does not require scienter (negligence suffices).
  • SEC v. Johnston: Reinforced the scienter/negligence division across § 17(a) subsections.
  • Lorenzo v. SEC: Helped frame scheme-based liability beyond “making statements,” supporting the court’s rejection of Gasarch’s “I made no representations” defense.
  • SEC v. Morrone (and the district court’s SEC v. Bio Def. Corp.): Supported the proposition that deceptive “scheme” conduct can sustain § 17(a)(3) liability even absent direct public statements.

5) Disgorgement doctrine, joint-and-several liability, and uncertainty allocation

  • Liu v. SEC: Provided the modern equitable limits: disgorgement must be net-profit-focused and “awarded for victims,” while leaving room for joint-and-several liability for “partners engaged in concerted wrongdoing.”
  • SEC v. Commonwealth Equity Servs., LLC: Reaffirmed that disgorgement must be a “reasonable approximation” causally connected to the violation.
  • SEC v. Navellier & Assocs., Inc.: Supplied the First Circuit’s burden-shifting framework and confirmed joint-and-several disgorgement can be permissible post-Liu when concerted wrongdoing exists.
  • SEC v. Happ and SEC v. MacDonald: Established the critical remedial maxim: uncertainty in calculating ill-gotten gains is charged to the wrongdoer who created it (“doubts are to be resolved against the defrauding party”).
  • BioPoint, Inc. v. Dickhaut: Used as a contrast case—joint-and-several disgorgement was improper there because profits accrued solely to the corporate employer and were not commingled; Veldhuis distinguished that scenario because the Q system allocation data tied amounts to each defendant and caps prevented liability for another’s gains.

6) Retroactivity of the NDAA disgorgement limitations period

  • Landgraf v. USI Film Prods.: Supplied the canonical retroactivity framework and the significance of “pending on, or commenced after” as clear retroactivity language.
  • Lattab v. Ashcroft: Used for the First Circuit’s approach: if Congress clearly prescribes temporal reach, the inquiry ends.
  • SEC v. Ahmed and SEC v. Hallam: Supported applying the NDAA’s ten-year window per its explicit directive, and reinforced the uniform trend among courts to treat the text as a clear command.
  • In re Enter. Mortg. Acceptance Co., Sec. Litig.: Distinguished Sarbanes-Oxley’s different retroactivity text and interpretive complications, undermining defendants’ analogy.
  • Bostock v. Clayton Cnty., Ga.: Cited for the “absurdity canon” to reject a reading that would perversely narrow the SEC’s authority for post-enactment filings.

7) Consent judgments and limits on appealing liability “through” remedies

  • Coughlin v. Regan and Swift & Co. v. United States: Grounded the rule that consent judgments waive objections within scope; parties cannot relitigate merits absent an unequivocal reservation.
  • SEC v. Hallam: Reinforced that defendants who consent to liability cannot later contest foundational elements indirectly while challenging remedies.

8) Civil penalties statute of limitations and discretionary factors

  • Gabelli v. SEC: Supplied the five-year limitations period for civil penalties under 28 U.S.C. § 2462.
  • SEC v. Sargent: Provided the non-exclusive factors guiding penalty discretion and the appellate abuse-of-discretion frame.

9) Injunctions, “obey-the-law” orders, and Rule 65(d) specificity

  • SEC v. Lemelson: Provided standards for SEC injunctions and confirmed broad securities-law injunctions can be permissible where recidivism risk is shown.
  • Brown v. Trs. of Bos. Univ. and NLRB v. Express Publ'g Co.: Supported courts’ power to enjoin conduct of the same “type or class” as proven unlawful acts.
  • McComb v. Jack. Paper Co.: Supported the legitimacy of “obey-the-law” style injunctions where proclivity for unlawful conduct exists.
  • SEC v. Keener: Used to emphasize Rule 65(d)’s notice function: the enjoined party must know from the order itself what is required or prohibited.
  • SEC v. Goble: Closely informed the holding vacating the § 13(d) injunction because it forced the defendant to look beyond the “four corners” of the injunction to comply.

B. Legal Reasoning

1) The Q system: authentication first, then hearsay exception

The court treated authentication and admissibility as separate. For authentication (Rule 901), the SEC did not need a witness who personally typed every entry; it sufficed to show, through the system’s creator, seizure evidence, user testimony (including entry practices and cross-checking), and internal indicia (code names, transaction patterns), that the Q system was what it purported to be.

For admissibility, the First Circuit accepted the district court’s reliance on the business records exception (Rule 803(6)). Crucially, the court treated independent brokerage-record verification of transactional data as strong evidence of system reliability, then reasoned that allocation entries were also reliable because they were integrated into the same accounting architecture and repeatedly matched real-world disbursements and requests, while the participants’ financial incentives (including Sharp’s commission) favored accuracy.

2) Aiding-and-abetting: “knowingly or recklessly,” not “knowledge only”

Gasarch’s requested instruction failed because the controlling statute (15 U.S.C. § 78t(e)), as amended by Dodd-Frank, expressly includes “recklessly.” The instructions, read as a whole, required the jury to find she understood her conduct was part of improper activity and that she knowingly or recklessly provided substantial assistance to specified securities-law violations.

3) Liability under § 17(a)(3): scheme conduct and negligence suffice

The court rejected a “no statements/no trading” defense as legally mismatched to § 17(a)(3), which targets a fraudulent “course of business.” Under Aaron v. SEC, negligence is enough; the question was whether Gasarch’s conduct (wires, direction of disbursements, false invoices, “safe accounts,” and fabrication planning such as loan-agreement cover stories) operated as fraud or deceit on purchasers. The record permitted that inference.

4) Disgorgement: reasonable approximation, burden shifting, and joint-and-several “concerted wrongdoing”

The court affirmed a remedial approach that treated Q-account allocations as the best available approximation of gains attributable to each defendant, even without complete banking records—especially where the scheme was designed to avoid a paper trail. Once the SEC showed a reasonable approximation, defendants had to rebut it with evidence; largely they did not. Consistent with SEC v. Happ and SEC v. MacDonald, uncertainty was charged to the wrongdoers.

On joint-and-several liability, the First Circuit read Liu v. SEC to permit joint liability for “concerted wrongdoing” and held a hub-and-spoke conspiracy comfortably fits that category—particularly where the district court capped each defendant’s exposure at the amount allocated to them, preventing a shift of one person’s gains onto another (the problem identified in BioPoint, Inc. v. Dickhaut).

5) NDAA retroactivity: “commenced on or after” means what it says

Applying Landgraf v. USI Film Prods. and Lattab v. Ashcroft, the court held Congress spoke clearly: the ten-year disgorgement limitations period applies to actions “pending on, or commenced on or after” January 1, 2021. The court rejected readings that would produce anomalous timing results and confirmed alignment with other circuits’ treatment (e.g., SEC v. Ahmed; SEC v. Hallam).

6) “Obey-the-law” injunctions: generally permissible, but not by cross-reference

The court accepted broad securities-law injunctions as a tool to prevent likely recidivism where the past conduct shows sophistication and persistence. But it enforced Rule 65(d)’s drafting discipline: the § 13(d)/Rule 13d-1 injunction was defective because it referenced Schedule 13D and a CFR rule without describing within the order what Sexton must do or avoid. That portion was vacated and remanded for a compliant, self-contained injunction.

C. Impact

1) SEC evidence in complex, offshore schemes

The opinion materially strengthens the SEC’s ability (in the First Circuit) to prove and monetize remedies using seized internal ledgers even when defendants engineer transactions to evade conventional banking records. The “Q system” holding is likely to be cited in future cases involving encrypted platforms, shadow accounting, and multi-jurisdictional data seizures, particularly on (i) authentication via system-creator and user testimony, and (ii) business-record reliability established through partial external verification plus integrated accounting logic.

2) Disgorgement after Liu: joint liability survives where wrongdoing is collective and gains are bounded

Post-Liu, litigants often attack joint-and-several disgorgement. Veldhuis clarifies that joint liability remains viable for conspiratorial, “concerted wrongdoing,” especially where courts cap exposure to prevent payment of another’s gains—offering a pragmatic template for district courts.

3) The NDAA ten-year disgorgement window

The decision cements, for First Circuit practice, a broad reading of the NDAA’s retroactivity language for SEC disgorgement in scienter-based cases. This will expand the SEC’s remedial reach in long-running frauds that predate filing by more than five years.

4) Injunction drafting: SEC must plead broadly, courts must write precisely

The Rule 65(d) vacatur is a pointed warning: even when “obey-the-law” injunctions are justified, they must still describe prohibited acts within the order itself. Future SEC judgments—especially involving technical reporting regimes like Schedule 13D—should expect closer scrutiny of cross-references that outsource notice to the CFR.

4. Complex Concepts Simplified

  • Pump-and-dump: Accumulate cheap shares, create artificial demand through hype, then sell into the inflated price—leaving later buyers holding losses when the price collapses.
  • Nominee/shell entities: Entities used to hold and trade stock in name only, concealing the real “beneficial owner.”
  • Beneficial ownership (§ 13(d)): If you can vote or dispose of shares, you may be a beneficial owner even if your name is not on the account.
  • Authentication vs. admissibility: Authentication asks “is this what it claims to be?”; admissibility asks “even if it is, can the jury hear it (e.g., hearsay rules)?”
  • Business records exception (Rule 803(6)): Reliable records kept routinely in a business can be admitted even though they are hearsay.
  • Scienter: A mental state like intent or recklessness; for § 17(a)(3), negligence can suffice (no scienter required).
  • Disgorgement: An equitable remedy forcing wrongdoers to give up unjust enrichment (net profits) so it can be returned to victims.
  • Joint and several liability (disgorgement): More than one defendant can be responsible for the same pool of gains when they acted together—so long as the order doesn’t make someone pay profits that accrued only to another.
  • Retroactivity: Applying a new statute to older conduct; allowed when Congress clearly commands it.
  • Rule 65(d): Injunctions must be specific; they generally cannot require compliance by sending the defendant to other documents to figure out what the order means.

5. Conclusion

SEC v. Veldhuis is a remedies-and-proof decision with significant practical consequences. It (1) validates the use of a seized internal ledger as an authenticated, admissible business record in securities fraud litigation; (2) reinforces that aiding-and-abetting liability under 15 U.S.C. § 78t(e) includes recklessness; (3) confirms robust disgorgement principles—burden shifting, uncertainty charged to wrongdoers, and joint-and-several liability for concerted wrongdoing with safeguards; (4) adopts a broad retroactive application of the NDAA’s 10-year disgorgement window for scienter-based violations; and (5) draws a clear drafting line under Rule 65(d), vacating an injunction that required regulated parties to infer obligations from external cross-references rather than from the injunction itself.