978-1285770178 Case Printout Case CPC-07-08 Part 1

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464 F.Supp.2d 772

UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff,

over facts essential to a determination can prevent a grant of summary judgment. .

The local rules require that a party responding to a summary judgment motion must

finance the “private placement” trading of various instruments, including bonds, notes,

securities and debentures. Montana, Lyttle and Knight promised investors that, for a minimum

investment of one million dollars and without risk, they could earn extraordinary rates of return,

through the Trading Program. They also represented to investors that the “Fed” or Federal

Reserve Bank monitored and controlled the transactions in the Trading Program and that the

banks and securities dealers involved had insurance which would more than cover each

investor’s principal investment.

P.K. Trust and Worldwide T & P have both been defaulted in this action.

Apparently, Defendants were good salesmen and P.T. Barnum was right when he quipped

“There’s a sucker born every minute!”, because the Defendants in a very short amount of time

(“Eldridge”). There, the money was further depleted through a second tier of misappropriation

and investment in high risk margin trading through various investment accounts. In the end,

approximately half of the funds invested were eventually returned to about half of the investors.

The phrase, “there’s a sucker born every minute” is most often credited to circus

entrepreneur, P.T. Barnum. However, his biographer could never verify that he made

them were improperly venued here. However, SEC claims that Eldridge and UTA-BVI

were part of a “fraud within a fraud” scheme whereby the management of funds

designated to them in trust by FNE and P.K. Trust was actually managed for the benefit

of Eldridge and certain entities with which she was affiliated, including at least $700,000

which was transferred to a bank account controlled by one of those entities without the

Program with him. In October of 1999, in the second phase of the scheme, Knight began

soliciting investors and continued to do so through March of 2000. He managed to raise

another $8 million. The involvement of each of these individual defendants is detailed below.

John (Jack) Montana and Worldwide T & P

Montana is a resident of Staten Island, New York, and the sole-owner and president of

Montana informed potential investors that he could direct them into the Trading Program run

by Lyttle, representing that this was a “high yield investment program.” Montana described

the Trading Program to investors in general terms, telling them that various trading

instruments, including medium term notes, would be purchased and sold and that a buyer for

the notes would be in place before the instrument was ever purchased. The instruments

qualify to participate in these types of bulk transactions that constituted the Trading Program.

Over a four-month period, from August 1999 through December 1999, Montana, acting under

the aegis of Worldwide T & P, raised approximately $23 million contributed by 22 investors.

He solicited these investors, had them sign joint venture agreements and transmitted the

documents to the investors that Lyttle provided. The Lyttle investors either returned the

designated by Lyttle. According to Montana, additional security or safety was ensured

because a government agency, namely, the Federal Reserve, monitored and controlled all the

transactions.

The affidavit of Securities Compliance Examiner, Matthew Harris, details his

investigative tracing of investor dollars which were placed in accounts owned or

silence; that is, the information about the Trading Program was to be kept secret. Investors

testified that Montana told them that secrecy was the lifeblood of these programs and any

public divulgement of information would cause the investor to be kicked out of the program

and, in all likelihood, suspended from the Trading Program as well. In an August 25, 1999

letter sent to investors with the heading, “Urgent Notice!! Urgent Notice!!”, Montana repeated

without recourse, and which will automatically exclude the individual(s) and/or entity (ies) from

participation in these types of transaction [sic], ever.” P.T. Barnum’s famous phrase again

comes to mind.

medium term notes at a discount and reselling them to institutional investors at a profit. Lyttle

explained to Montana that transactions in the Trading Program were entirely safe and that

investor funds would be segregated and converted into United States Treasury Bills. Lyttle

also told Montana to expect, at a bare minimum, profit in the range of 10% to 11 % on each

trade in the Trading Program, with as many as five trades taking place in a week. Moreover,

including a five-page “Letter of Application, Proof of Asset, Authority to Verify and Exclusivity”;

a three-page “Non-circumvention, Non-Disclosure Agreement;” and a one–page “Non–

Solicitation Letter,” each investor received and was required to execute an Exclusive Asset

Management Agreement (“EAMA”). The EAMA referenced Lyttle as CEO of FNE and the

“Funds Manager.” It set forth the nature of the Trading Program, the rates of return that could

the client or investor attests that the funds provided are “good, clean, clear, legally earned and

held” and that the term of the agreement is the amount of time it takes for the Fund Manager

“to complete 156 trades but not to exceed 380 calendar days per account, from date initial

funding of said account is available within the part of this agreement by signed addendum to

the same.”

than one hundred trades occurring within a year. It promised that investor funds would be

kept safe in a segregated account to prevent “co–mingling of funds” and that no one other than

the investor would be authorized to remove the funds from the account. After executing an

EAMA, investors were led to believe that trading would begin shortly. In truth, there were long

periods of delay with no trades occurring for which investors were given excuse after excuse.

In response to burgeoning complaints from the initial investors, Lyttle sent a November 5, 1999

letter to Montana for distribution to investors, entitled “Investor Update,” in which investors

were informed that their funds were-

inside the largest volume Securities House in the world and the largest bank in the world under

a full TRUST agreement. United States Government T-Bills were purchased by the Securities

House which are in blocks of 10.0 Million USD with delivered CUSIP numbers handled in

Private Banking. This is to cause what we are doing to fall under the security of the U.S.

Government, TRUST laws, and the insurance company of the Securities House and is not

readily available cash for anyone to just spend. It creates insurance for the client of 196% of

and relayed that information to you and the investors. This was not the original scenario, but

just something to do while we were waiting, without exposure to deposits in any manner

whatsoever.

Lyttle’ s representations were plainly false.

Paul Knight and P.K. Trust & Holding, Inc.

Agreement.” Knight also required that all of Montana’s investors also sign the Private

Placement Agreement. Knight met with many of his investors to describe the Trading Program,

or Assets Enhancement Program, as Knight referred to it. Knight explained to one investor

that the Trading Program was an international program set up to provide funds to European

communities devastated by World War II. He gave his personal assurances to these investors

Like Montana, Knight also made representations to investors that the Federal Reserve was

monitoring and controlling the Trading Program and that he personally had security clearances

at the highest levels of the government, having formerly been a CIA agent, and thus was

“volunteered” by the government to work on these types of transactions. Acting as the

“Assets Manager” under the Private Placement Agreement, he certified that he had “special

text]:

The security of the investor funds: The Largest volume Securities House, within the top (3)

World Bank, A full Trust Agreement, United States Government T-Bills, which creates

insurance for the client of (196%) of their original deposit.

The Assets Manager has set up and operates with top 24 Western European Bank. The

A) One Million U.SD initial funding can be compound for trading. Payment will be each Monday

that the Funder doesn’t compound profits.

B) A Fifty/Fifty split between the Funder (per Trade Day) and The Asset Manager of the full

face value, of The Capital Placement Amount

C) The total full face value will be given to the Funder at the end of The Contract Period, about

waiting only on the Federal Government authorization to begin The Program; however, the

funds are secured and placed in U.S. Treasury Bills for your protection of which will be credited

to the respective account.”

As was the case with those who signed Lyttle‘s EAMA, promises were made to Knight’s

Private Placement Agreement investors that, upon the completion of their transactions, trading

We are in a program, it payout (sic) every month, minus 20% for fees. This program will

program for 40 weeks. The first payout will be about the 10th of Aug.

Kurt, you are informed as I can let you know. I’m told by Blondie this morning that the trade

will start Mon. Or Tues. This will be a start. As I told you when you was here, “you never know

for complete sure what the FED will do.”

or that “other investors put in bad money.” Some were promised that their funds would be

recouped from a separate trading program run by either Lyttle or Knight.

From the outset of their scheme, Defendants never used the investors’ funds as promised.

Montana received approximately $1 million dollars in investor funds which he placed into his

company’s bank account at Bank of America on July 24, 2000; beyond those deposits, it has

not been explained to us precisely how those monies were used by Montana.

To the extent the funds from the investors were not directly misappropriated, they were

commingled into the accounts Eldridge controlled at the brokerage firm of Donaldson Lufkin &

least $5.05 million was sent to Lyttle; at least $224,000 was sent to Knight and at least $14

million was returned to some, but not all of the 31 investors.

Initially, investor funds were sent either to bank accounts controlled by Lyttle, through FNE, at

Chase Texas Bank and Texas Capital Bank, or directly to the UTA-BVI accounts at DLJ.

Regardless of where the funds were deposited, in each instance they were commingled and

accounts to the trust account of his attorney. Money transferred into his attorney’s account

was thereafter used to pay off a mortgage on Lyttle’s new home in Lawrenceburg, Indiana and

to purchase a shoe factory in Osgood, Indiana. Lyttle has admitted using investor funds to

purchase these and other properties. He further admits to having made other personal

expenditures using investor funds, including to purchase an automobile and to repay personal

in highly leveraged stock trading in margin accounts. From September 1999 to July 2000,

trading in these accounts resulted in losses of approximately $2 million. Also, while the

investor funds were at DLJ, Eldridge transferred large amounts back to Lyttle. For example,

on December 1, 1999, Lyttle requested that Eldridge send $1.75 million to a Fifth Third bank

account in the name of Industrial Hardwoods Corporation, a company *782 in which Lyttle had

a substantial investment interest. A similar transfer of $1.3 million was made on March 28,