For some reason that page is using a GET request to submit the information. A GET request can not hold that much data. So if you have selected a combination of users and sets such that together those exceed the GET request url limit (8190 bytes by default with apache2), then this will fail. I will look into seeing if that page can be switched to using a POST request instead for the next release.
In the meantime a work around is to use the "Set Assigner" page. To get there you can select one user and one set on the instructor index page you are at, and click "Assign selected users to selected sets". This will assign the selected user to the selected set, but then it will open the set assigner page. The set assigner page uses a POST request which can hold much more (approximately 2 GBs). So on this page you can select all users and all sets and it will work.