Sec. & Exch. Comm'n v. Sharp

• Decision Date: 06 September 2022
• Docket Number: Civil Action 21-11276-WGY
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. 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.
• Court: U.S. District Court — District of Massachusetts

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SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. 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.

Civil Action No. 21-11276-WGY

United States District Court, D. Massachusetts

September 6, 2022

MEMORANDUM & ORDER

WILLIAM G. YOUNG, JUDGE.

I. INTRODUCTION

In this case, the Securities and Exchange Commission (the “SEC”) brings an enforcement action against nine defendants for their alleged violation of several securities laws and regulations. Six of these nine defendants move to dismiss the case against them based on two main arguments (1) the claims against them are untimely because the SEC (a) is applying the incorrect statute of limitations and (b) does not allege sufficient facts within the applicable time-period to impose liability; and (2) the SEC does not state facts with sufficient particularity plausibly to allege violations of the aforementioned statutes and regulations.

First, the SEC applies the correct statute of limitations to scienter-based disgorgement claims. The limitations period is governed by Section 6501 of the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021 (“NDAA”), which applies retroactively to extend the statute of limitations to ten years for claims commenced after its passage. This conclusion is necessitated by the clear mandate provided by Congress in the text of the statute.

Furthermore, as to timely pleading on the face of the complaint, the defendants are incorrect on two bases: (1) the SEC alleges sufficient facts within both the ten- and five-year time periods -- the latter being still applicable to other types of claims relevant to this action; and (2) the five-year statute of limitations may not even apply to, or have start to run for, several of the defendants, as exceptions to the statute of limitations apply for those who have been absent from the United States.

Second, the SEC has alleged sufficient facts with particularity as to all defendants to buttress the violations claimed. This Court therefore DENIES all six of the defendants' motions to dismiss in their entirety.

II. PROCEDURAL HISTORY

On August 5, 2021, the SEC brought this enforcement action for violation of securities and exchange laws against nine defendants: Frederick L. Sharp (“Sharp”), Zhiying Yvonne Gasarch (“Gasarch”), Courtney Kelln (“Kelln”), Mike K. Veldhuis (“Veldhuis”), Paul Sexton (“Sexton”), Jackson T. Friesen (“Friesen”), William T. Kaitz (“Kaitz”), Avtar S. Dhillon (“Dhillon”), and Graham R. Taylor (“Taylor”) (collectively, the “Defendants”). See Compl., ECF No. 1. On the same day the SEC filed an emergency ex parte motion for a temporary restraining order (“TRO”) freezing assets and requesting equitable relief against all the Defendants. See Pl.'s Emergency Ex Parte Mot. TRO, Order Freezing Assets, & Order Other Equitable Relief, ECF No. 3. Judge Gorton entered an order granting the TRO on August 6, 2021. See TRO Order, Order Freezing Assets, & Order Other Equitable Relief, ECF No. 7. Subsequently, a series of preliminary injunctive orders were sought and granted.^[1] After these preliminary injunctions were issued, six of the defendants -- Friesen, Taylor, Sexton, Gasarch, Kelln, and Veldhuis -- moved to dismiss the case. See Def. Jackson T. Friesen's Mot. Dismiss Compl., ECF No. 109; Def. Graham R. Taylor's Mot. Dismiss Strike Pl.'s Compl., ECF No. 126; Def. Paul Sexton's Mot. Dismiss Compl., ECF No. 132; Def. Yvonne Gasarch's Mot. Dismiss Compl., ECF No. 143; Def. Courtney Kelln's Mot. Dismiss SEC's Compl., ECF No. 147; Def. Mike K. Veldhuis's Mot. Dismiss Compl., ECF No. 151.

The Defendants have fully briefed these motions. See Mem. Supp. Def. Jackson T. Friesen's Mot. Dismiss Compl. (“Friesen Mem.”), ECF No. 110; Mem. Supp. Def. Graham R. Taylor's Mot. Dismiss Strike Pl.'s Compl. (“Taylor Mem.”), ECF No. 127; Def. Paul Sexton's Mem. Supp. Mot. Dismiss Compl. (“Sexton Mem.”), ECF No. 133; Mem. Supp. Def. Yvonne Gasarch's Mot. Dismiss Compl. (“Gasarch Mem.”), ECF No. 144; Mem. Law Supp. Def. Courtney Kelln's Mot. Dismiss SEC's Compl. (“Kelln Mem.”), ECF No. 148; Mem. Supp. Mot. Dismiss Mike K. Veldhuis (“Veldhuis Mem.”), ECF No. 152. The SEC opposed these motions. See Pl.'s Opp'n Friesen's Mot. Dismiss Compl. (“SEC's Opp'n Friesen”), ECF No. 124; Pl.'s Opp'n Sexton's Mot. Dismiss Compl. (“SEC's Opp'n Sexton”), ECF No. 157; Pl.'s Opp'n Def. Taylor's Mot. Dismiss Compl. (“SEC's Opp'n Taylor”), ECF No. 158; Pl.'s Opp'n Def. Gasarch's Mot. Dismiss Compl. (“SEC's Opp'n Gasarch”), ECF No. 162; Pl.'s Opp'n Def. Kelln's Mot. Dismiss Compl. (“SEC's Opp'n Kelln”), ECF No. 167; Pl.'s Opp'n Def. Veldhuis's Mot. Dismiss Compl. (“SEC's Opp'n Veldhuis”), ECF No. 171.

At the same time, the SEC moved for entry of default as to Frederick Sharp, see Pl.'s Mot. Entry Default Def. Frederick L. Sharp, ECF No. 116, which this Court granted, see Electronic Order Granting Mot. Entry Default Sharp, ECF No. 122. This Court later entered final judgment against Sharp. See Final J. Def. Frederick L. Sharp, ECF No. 211.

At a hearing held on January 20, 2022, this Court heard argument on the Defendants' six motions to dismiss and tentatively denied all of them pending further review.^[2] See Electronic Clerk's Notes (“Clerk's Notes”), ECF No. 189; see also Hearing Tr. 22:6-9, ECF No. 193. The Court also allowed the SEC to file a motion for leave to file an amended complaint as to Gasarch and Taylor. See Clerk's Notes; Hearing Tr. 22:1013. The SEC so moved, submitting a proposed Amended Complaint containing more specific allegations as to Taylor and Gasarch. See Pl. Mot. Leave File Am. Compl., ECF No. 195; id. Ex. 1, Proposed Am. Compl. (“Am. Compl.”), ECF No. 195-1. Taylor and Gasarch both oppose the Amended Complaint on the ground that it is futile, as it would not redress the insufficiency of the Complaint's factual allegations. See Def. Taylor's Opp'n Pl.'s Mot Leave File Am. Compl. (“Taylor's Opp'n Am. Compl.”) 4-11, ECF No. 199; Gasarch's Opp'n SEC's Mot. Leave Am. Compl. (“Gasarch's Opp'n Am. Comp.”) 1-6, ECF No. 205. Taylor also suggests that these new allegations are “manufactured.” See Taylor's Opp'n Am. Compl. 1.

This Court hereby GRANTS the SEC's motion to amend the complaint. The issues of futility will be dealt with on the merits by determining whether the allegations raised in the Amended Complaint are sufficient to pass muster under Federal Rule of Civil Procedure 12(b)(6) (“Rule 12(b)(6)”). As to the allegation that these claims are manufactured, this is an issue of fact to be dealt with at the fact-finding stage. All of the motions to dismiss, see Def. Jackson T. Friesen's Mot. Dismiss Compl.; Def. Graham R. Taylor's Mot. Dismiss Strike Pl.'s Compl.; Def. Paul Sexton's Mot. Dismiss Compl.; Def. Yvonne Gasarch's Mot. Dismiss Compl.; Def. Courtney Kelln's Mot. Dismiss SEC's Compl.; Def. Mike K. Veldhuis's Mot. Dismiss Compl., filed as to the prior complaint, Compl., will be treated as applying to the Amended Complaint with equal force, as it is identical in nearly all material respects to the original complaint, with the exception of allegations against Taylor and Gasarch, see generally Am. Compl. As to any additional objections raised by Taylor and Gasarch in their oppositions to the SEC's motion for leave to amend, these objections shall be construed as additional possible grounds for dismissal pursuant to Rule 12(b)(6).

III. FACTS ALLEGED

A. Background

This SEC-enforcement action targets a specific type of securities violation pertaining to stock registration and sale requirements. See Am. Compl. ¶ 35. Securities must be registered pursuant to Section 5 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e, unless (1) they fall under an applicable exemption or (2) the stock is sold in accordance with the conditions of SEC Rule 144, 17 C.F.R. § 240.144.

One registration exemption is that securities need not be registered if the individual selling the stocks is not an “issuer, underwriter, or dealer.” 15 U.S.C. § 77d(a)(1).

Section 2(a) of the Securities Act defines an issuer as any “person who issues or proposes to issue a security” and an underwriter as “any person who has purchased from an issuer with a view to . . . the distribution of any security.” 15 U.S.C. § 77b(a)(4), (11). Rule 144 dictates that an individual is not an underwriter if he is not an affiliate of the issuer at the time of sale and has not been an affiliate for the last three months - as long as one year has elapsed from when the securities were obtained from the issuer or an affiliate. See 17 C.F.R. § 230.144(b)(1)(i). An “affiliate” is “a person that directly, or indirectly . . . controls, or is controlled by, or is under common control with, such issuer.” Id. § 230.144(a)(1).

When referring to a “control group” this Court describes individuals who are affiliates or controlled by the issuer. This Court utilizes the term “restricted stock” as shorthand for stock that has been acquired from an issuer or affiliate, absent one of the above exemptions, or is held by an issuer or affiliate that has not been registered; this stock cannot be sold to the public without violating securities laws. When referring to “unrestricted stock” this Court describes stock that can be sold in the public market. “Unrestricted stock” can become restricted if it is purchased by an affiliate. This Court also refers to stock as “registered” or “unregistered” depending on whether a registration statement has been filed with respect to that stock's sale transaction.

Another securities requirement, relevant to this suit, mandates that an individual must file a...