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Five defendants accused in a $144 million pump-and-dump operation are urging the First Circuit to wipe out a $42M Disgorgement Stock Scheme order, arguing the penalty rests on unreliable records created by the scheme’s fugitive mastermind.

The defendants—Paul Sexton, Mike Veldhuis, Courtney Kelln, Zhiving Yvonne Gasarch, and Jackson Friesen—claim a Massachusetts federal judge wrongly held them jointly responsible for nearly a third of the alleged haul without proof they ever saw the money.

Fugitive Mastermind at the Center

The group points the finger at Frederick Sharp, a Canadian accused of orchestrating the international penny stock scam. Sharp, now a fugitive, allegedly controlled all the cash flow, while keeping ledgers in a shadowy payment system called the “Q system.”

Defense lawyers say the Q system amounted to nothing more than “page after page of gibberish,” maintained by Sharp and an IT consultant. “What we know from the trial is the money accrued to Fred Sharp … a fugitive and a crook,” said Maranda Fritz, attorney for Friesen.

SEC Pushes Back

The SEC counters that the system was legitimate evidence of distribution, especially since defendants refused to turn over their banking records, invoking the Fifth Amendment.

“They used the Fifth Amendment as a shield, and now they’re trying to use it as a sword,” SEC lawyer Kerry J. Dingle argued.

The regulator insists the records show allocations to defendants, including a coded tuition payment linked to one participant. But defense attorneys countered it was merely a request, not proof of an actual transfer.

Jury Trial and Disputed Records

Gasarch and Friesen were found liable after a 2023 jury trial, while Sexton, Veldhuis, and Kelln stipulated to liability earlier. Sharp himself faces a $53 million default penalty after failing to appear.

District Judge William G. Young admitted the Q system as business records, despite acknowledging the difficulty of tying exact amounts to individual defendants. Defense counsel now argues that admission was an error.

Appeals Panel Weighs the Case

Judges Gustavo A. Gelpí Jr., O. Rogerlee Thompson, and Lara E. Montecalvo heard arguments and pressed counsel on whether any entries in the Q system could reasonably link funds to the defendants.

The panel has taken the matter under advisement, leaving the fate of the $42M disgorgement order hanging in the balance.