978-1285770178 Case Printout Case CPC-07-08 Part 2

subject Type Homework Help
subject Pages 11
subject Words 3231
subject Authors Roger LeRoy Miller

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2000. Lyttle used these monies to pay his company's bills.
In January of 2000, Lyttle directed Eldridge to transfer $2 million into the trust account of his
attorney. From the trust account, Lyttle directed that funds be withdrawn to permit the
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© 2006 Thomson/West. No Claim to Orig. U.S. Govt. Works.
minimum $100 million increments would be triggered. While all the contracts involved here
contained these and other contradictory provisions, the $100 million threshold necessary to
trigger the program trading was part of the deal, both by virtue of verbal representations and
under the terms of the EAMA. In fact, delays in making payouts were often explained to
investors as being the result of needing to wait for the minimum amount to be reached or
because someone had put “bad” funds into the Trading Program. A common enterprise was
clearly what was intended here by Defendants in offering and selling these investment
contracts.
Since it is undisputed that the Trading Program was not registered as a security, and having
found that the Trading Program was a common enterprise, we conclude that the sale and offer
violated Sections 17(a)(1), (a)(2), and (a)(3) of the Securities Act, , and of the Exchange Act, ,
and Rule 10-b thereunder, . These statutes require that the SEC establish that Defendants
made misrepresentations or omissions of material fact in connection with the offer or sale of a
security. Section 17(a)(1) of the Securities Act and of the Exchange Act require the SEC to
prove scienter, whereas sections 17(a)(2) or (3) require only a showing of negligence on the
generate extraordinary rates of return with no risk to the principal. The evidence makes clear
that neither promise was ever intended nor did it ever materialize. In fact, no Trading Program
even existed. The SEC has proffered unchallenged expert testimony establishing that those
programs did not exist beyond the world of con artists and defrauders arguably such as these
defendants. Further, the deposition testimony of the investors makes it clear that Defendants'
Persons who act with an intent to deceive or with reckless regard for the truth are deemed to
possess the necessary scienter to support a violation of section 17(a)(1) of the Securities Act
and of the Exchange Act. . A company may have imputed to it the scienter of the individuals
who control it. .
At the very least, it is clear that Montana, through Worldwide T & P, acted recklessly in relying
page-pf3
could actually be achieved or whether the investor funds were, in fact, safe. Further, Montana
continued to rely on Lyttle's descriptions of the Trading Program and to solicit additional
investors' funds, even though he has stated that he did not think Lyttle had provided him with
sufficient information. In terms of resolving the issues presented in the pending motion,
Montana has not troubled himself to provide any response to the SEC's motion. Thus, the
unsophisticated clients. We will not be so easily misled. It is clear to the court that Lyttle,
through First National Equity, acted with scienter insofar as he had to have known that his
statements about the Trading Program were false. Even if, as Lyttle implausibly asserts, he
was nothing more than a conduit to Estridge who ultimately pulled the wool over his eyes,
Lyttle continued to sign people up through his EAMAs long after he well knew that the investor
and after the investments were made.
In their submissions to the Court, Lyttle and Knight (the latter through his “me too” copying of
Lyttle's brief) invoke statements totally unsupported by the record and distort the terms of the
written agreements often to a point of absurdity. Neither defendant provided substantive
testimony in their depositions, invoking their *785 Fifth Amendment right against self-
them on Counts II, III and IV is appropriate.
Count V
The SEC has also charged Montana and Knight in Count V with violating Section 15(a)(1) of
the Exchange Act, . Section 15(a)(1) makes it illegal for a “broker” to effect any transaction in,
or to induce or attempt to induce the purchase or sale of any security unless such broker is
that they offered interests to investors in the Trading Program and that, in doing so, they were
page-pf4
not registered as securities brokers or dealers. Our conclusion that the interests they offered
to investors were, in fact, securities resolves this count against each of them, and summary
registration. . Each has a duty of fair dealing which requires, at a minimum, that each must
undertake some investigation to substantiate the legitimacy of the securities being
recommended by them.
In this instance, not only did Montana and Knight indisputably fail to fully investigate the
investment contracts they offered to their clients, there is clear evidence that Knight knew that
their money. That's fraud, plain and simple.
The elements of a Section 15(c)(1) violation are essentially the same as the elements under
Section 17(a)(1) of the Securities Act and of the Exchange Act and Rule 10b-5 thereunder.
See . As *786 discussed above, while acting as unregistered brokers, Montana and Knight
knowingly misrepresented and failed to disclose material facts regarding the nature of the
funds. As explained above, the SEC is entitled to summary judgment on all its claims against
Montana, Lyttle, Knight and their respective corporate entities. That decision leads to the
issue of what relief is available and appropriate here.
Permanent Injunction
The SEC seeks a permanent injunction against the defendants, pursuant to section 20(b) of
In predicting the likelihood of future violations, a court must assess the totality of the
circumstances surrounding the defendant and his violation, including such factors as the
gravity of harm caused by the offense; the extent of the defendant's participation and his
degree of scienter; the isolated or recurrent nature of the infraction and the likelihood that the
defendant's customary business activities might again involve him in such transactions; the
page-pf5
© 2006 Thomson/West. No Claim to Orig. U.S. Govt. Works.
defendant's recognition of his own culpability; and the sincerity of his assurances against
future violations.
The SEC contends that permanent injunctions against all the Defendants are required here
because of the egregious frauds they each perpetrated through which they wrongfully acquired
$32.8 million from a total of 31 investors. Total investor losses amount to approximately $15.6
million, which, as the late, legendary Everitt R. Dicksen, United States Senator from Illinois,
would have put it, is “real money.” The Defendants' repeated misrepresentations about the
use, safety and control of investor funds and the existence and assurance of profits in the
Trading Program clearly evidence their criminal scienter. Moreover, Defendants knew, at the
has simply opted out of playing any active role in this litigation against him and his cohorts.
He retains a majority interest in the corporate defendant, Worldwide T & P, which he claims he
created to assist in conducting *787 financial arrangements for importers and exporters of
various products.
We have no difficulty concluding that the SEC is entitled to the injunctive relief it seeks against
and a front for their fraudulent activity. Because the SEC has not submitted to the Court any
proposed language for such an order of injunctive relief, we shall defer the entry of such an
order until the SEC submits its proposal, after which Defendants will be allowed 10 days within
which to comment on or otherwise respond or object to the submission from the SEC.
Disgorgement, Prejudgment Interest & Civil Penalties
portion of investor funds in terms of how much was improperly and fraudulently drawn down by
any particular defendant, and nearly all of that evidence came in through affidavit without
opportunity for cross-examination or other clarification. Further, we lack any evidence of the
current financial circumstances of any of the Defendants. In fashioning equitable remedies,
we think it advisable to defer entry of any order of disgorgement or interest penalties until
page-pf6
SEC is ordered to tender to the court and serve on the parties proposed language for a
permanent injunction, within 30 days of the entry of this order; Defendants may file their
responses and or objections to the tendered proposal within 10 days of the SEC's submission
to the court. Upon receipt of same, the court will determine whether and when a hearing
should be scheduled to allow the court to receive evidence and argument with respect to the
appropriateness and amount of any order of disgorgement with prejudgment interest as well as
with respect to the assessment and amount of any other civil penalties. Evidence from
defendants relevant to extenuating circumstances, if any, will be accepted at that time as well.
See .
IT IS SO ORDERED.
© 2006 Thomson/West. No Claim to Orig. U.S. Govt. Works.
minimum $100 million increments would be triggered. While all the contracts involved here
contained these and other contradictory provisions, the $100 million threshold necessary to
trigger the program trading was part of the deal, both by virtue of verbal representations and
under the terms of the EAMA. In fact, delays in making payouts were often explained to
investors as being the result of needing to wait for the minimum amount to be reached or
because someone had put “bad” funds into the Trading Program. A common enterprise was
clearly what was intended here by Defendants in offering and selling these investment
contracts.
Since it is undisputed that the Trading Program was not registered as a security, and having
found that the Trading Program was a common enterprise, we conclude that the sale and offer
violated Sections 17(a)(1), (a)(2), and (a)(3) of the Securities Act, , and of the Exchange Act, ,
and Rule 10-b thereunder, . These statutes require that the SEC establish that Defendants
made misrepresentations or omissions of material fact in connection with the offer or sale of a
security. Section 17(a)(1) of the Securities Act and of the Exchange Act require the SEC to
prove scienter, whereas sections 17(a)(2) or (3) require only a showing of negligence on the
generate extraordinary rates of return with no risk to the principal. The evidence makes clear
that neither promise was ever intended nor did it ever materialize. In fact, no Trading Program
even existed. The SEC has proffered unchallenged expert testimony establishing that those
programs did not exist beyond the world of con artists and defrauders arguably such as these
defendants. Further, the deposition testimony of the investors makes it clear that Defendants'
Persons who act with an intent to deceive or with reckless regard for the truth are deemed to
possess the necessary scienter to support a violation of section 17(a)(1) of the Securities Act
and of the Exchange Act. . A company may have imputed to it the scienter of the individuals
who control it. .
At the very least, it is clear that Montana, through Worldwide T & P, acted recklessly in relying
could actually be achieved or whether the investor funds were, in fact, safe. Further, Montana
continued to rely on Lyttle's descriptions of the Trading Program and to solicit additional
investors' funds, even though he has stated that he did not think Lyttle had provided him with
sufficient information. In terms of resolving the issues presented in the pending motion,
Montana has not troubled himself to provide any response to the SEC's motion. Thus, the
unsophisticated clients. We will not be so easily misled. It is clear to the court that Lyttle,
through First National Equity, acted with scienter insofar as he had to have known that his
statements about the Trading Program were false. Even if, as Lyttle implausibly asserts, he
was nothing more than a conduit to Estridge who ultimately pulled the wool over his eyes,
Lyttle continued to sign people up through his EAMAs long after he well knew that the investor
and after the investments were made.
In their submissions to the Court, Lyttle and Knight (the latter through his “me too” copying of
Lyttle's brief) invoke statements totally unsupported by the record and distort the terms of the
written agreements often to a point of absurdity. Neither defendant provided substantive
testimony in their depositions, invoking their *785 Fifth Amendment right against self-
them on Counts II, III and IV is appropriate.
Count V
The SEC has also charged Montana and Knight in Count V with violating Section 15(a)(1) of
the Exchange Act, . Section 15(a)(1) makes it illegal for a “broker” to effect any transaction in,
or to induce or attempt to induce the purchase or sale of any security unless such broker is
that they offered interests to investors in the Trading Program and that, in doing so, they were
not registered as securities brokers or dealers. Our conclusion that the interests they offered
to investors were, in fact, securities resolves this count against each of them, and summary
registration. . Each has a duty of fair dealing which requires, at a minimum, that each must
undertake some investigation to substantiate the legitimacy of the securities being
recommended by them.
In this instance, not only did Montana and Knight indisputably fail to fully investigate the
investment contracts they offered to their clients, there is clear evidence that Knight knew that
their money. That's fraud, plain and simple.
The elements of a Section 15(c)(1) violation are essentially the same as the elements under
Section 17(a)(1) of the Securities Act and of the Exchange Act and Rule 10b-5 thereunder.
See . As *786 discussed above, while acting as unregistered brokers, Montana and Knight
knowingly misrepresented and failed to disclose material facts regarding the nature of the
funds. As explained above, the SEC is entitled to summary judgment on all its claims against
Montana, Lyttle, Knight and their respective corporate entities. That decision leads to the
issue of what relief is available and appropriate here.
Permanent Injunction
The SEC seeks a permanent injunction against the defendants, pursuant to section 20(b) of
In predicting the likelihood of future violations, a court must assess the totality of the
circumstances surrounding the defendant and his violation, including such factors as the
gravity of harm caused by the offense; the extent of the defendant's participation and his
degree of scienter; the isolated or recurrent nature of the infraction and the likelihood that the
defendant's customary business activities might again involve him in such transactions; the
© 2006 Thomson/West. No Claim to Orig. U.S. Govt. Works.
defendant's recognition of his own culpability; and the sincerity of his assurances against
future violations.
The SEC contends that permanent injunctions against all the Defendants are required here
because of the egregious frauds they each perpetrated through which they wrongfully acquired
$32.8 million from a total of 31 investors. Total investor losses amount to approximately $15.6
million, which, as the late, legendary Everitt R. Dicksen, United States Senator from Illinois,
would have put it, is “real money.” The Defendants' repeated misrepresentations about the
use, safety and control of investor funds and the existence and assurance of profits in the
Trading Program clearly evidence their criminal scienter. Moreover, Defendants knew, at the
has simply opted out of playing any active role in this litigation against him and his cohorts.
He retains a majority interest in the corporate defendant, Worldwide T & P, which he claims he
created to assist in conducting *787 financial arrangements for importers and exporters of
various products.
We have no difficulty concluding that the SEC is entitled to the injunctive relief it seeks against
and a front for their fraudulent activity. Because the SEC has not submitted to the Court any
proposed language for such an order of injunctive relief, we shall defer the entry of such an
order until the SEC submits its proposal, after which Defendants will be allowed 10 days within
which to comment on or otherwise respond or object to the submission from the SEC.
Disgorgement, Prejudgment Interest & Civil Penalties
portion of investor funds in terms of how much was improperly and fraudulently drawn down by
any particular defendant, and nearly all of that evidence came in through affidavit without
opportunity for cross-examination or other clarification. Further, we lack any evidence of the
current financial circumstances of any of the Defendants. In fashioning equitable remedies,
we think it advisable to defer entry of any order of disgorgement or interest penalties until
SEC is ordered to tender to the court and serve on the parties proposed language for a
permanent injunction, within 30 days of the entry of this order; Defendants may file their
responses and or objections to the tendered proposal within 10 days of the SEC's submission
to the court. Upon receipt of same, the court will determine whether and when a hearing
should be scheduled to allow the court to receive evidence and argument with respect to the
appropriateness and amount of any order of disgorgement with prejudgment interest as well as
with respect to the assessment and amount of any other civil penalties. Evidence from
defendants relevant to extenuating circumstances, if any, will be accepted at that time as well.
See .
IT IS SO ORDERED.

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