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

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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 From the trust account, Lyttle directed that funds be withdrawn to permit the

purchase of the Industrial Hardwoods factory in Greendale, Indiana, in the amount of

$984,615. He also ordered the release of funds for, among other things, a $32,000 cashier’s

check to purchase an automobile, a $20,000 cashier’s check payable to his daughter, Rena Jill

Lyttle, and $10,000 in cash for himself. Lyttle’s daughter used the funds to write checks to

Industrial Hardwoods and to pay over to Knight nearly $12,000. Lyttle also directed transfers

from his attorney’s trust account to Knight in the amount of $19,985. In all, from August 1999

to December 2000, Lyttle misappropriated more than $7.8 million of investor funds.

left $1.35 million, which was sent to various overseas accounts and otherwise remains

permit $180,000 in cash withdrawals. Also, at Knight’s direction, $2.5 million in investor funds

were transferred from the Bach trust account to the escrow account of an attorney named

Michael Fine, in Cleveland, Ohio. Knight falsely represented to Fine that these were corporate

funds under his signatory control. From the Fine account, an amount in excess of $1 million

was returned to an investor, while another $100,000 was sent to Knight’s bank account. That

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

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.