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Judges: Evidence proves scienter in fraud case

Jennifer Nelson
January 1, 2008
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The 7th Circuit Court of Appeals upheld fines against two men convicted of defrauding investors, finding a reasonable jury would have found them guilty of scienter even though the defendants didn't take the stand.

In Thursday's ruling in United States Securities and Exchange Commission v. Melvin R. Lyttle and Paul E. Knight, Nos. 07-2466, 07-2467, Melvin Lyttle and Paul Knight appealed the $110,000 fines each got following a grant of summary judgment in favor of the SEC on a variety of counts and an award of injunctive relief.

Lyttle and Knight argued because scienter - knowledge that a person knows he is making false or reckless representations to investors - is a state of mind, summary judgment can almost never be granted in favor of a plaintiff who has the burden to prove it. And, because the two refused to testify in the case, they believe a jury couldn't convict them without knowing their states of mind.

But the 7th Circuit didn't accept Lyttle or Knight's arguments, finding the SEC provided sufficient circumstantial evidence with regard to the defendants' beliefs that was reinforced by the inference of guilt from their refusal to testify. As a result, no reasonable jury could doubt the two acted with scienter, wrote Judge Richard Posner.

Lyttle and Knight offered three defenses regarding their states of mind which Judge Posner labeled as "'I am just a copying machine' defense, the 'honor among thieves' defense, and the 'better liar' defense." They argued they merely repeated the lies and misrepresentations made to them by another person who may have been the ringleader in the defrauding scheme. They were victims of fraud by that person, who pocketed more money in the scheme than they did, they argued. That reminded the judge of the highwayman's case in which one highwayman sued another, claiming he was entitled to a larger share of the money they had stolen. Summing up the outcome, "The suit was dismissed, both were hanged, and the plaintiff's lawyers were fined for having brought a suit 'both scandalous and impertinent,'" wrote Judge Posner.

In regards to the "better liar" defense, the defendants believed the false representations that they made because the investors believed them, so if the lie was skillful enough to deceive the victim, then it must have also deceived the liar, he wrote.

"For it is inconceivable that the defendants could have believed the cascade of fantastic lies that they told the investors," wrote the judge, who ended the opinion with: "Enough said."
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  1. Major social engineering imposed by judicial order well in advance of democratic change, has been the story of the whole post ww2 period. Contraception, desegregation, abortion, gay marriage: all rammed down the throats of Americans who didn't vote to change existing laws on any such thing, by the unelected lifetime tenure Supreme court heirarchs. Maybe people came to accept those things once imposed upon them, but, that's accommodation not acceptance; and surely not democracy. So let's quit lying to the kids telling them this is a democracy. Some sort of oligarchy, but no democracy that's for sure, and it never was. A bourgeois republic from day one.

  2. JD Massur, yes, brings to mind a similar stand at a Texas Mission in 1836. Or Vladivostok in 1918. As you seemingly gloat, to the victors go the spoils ... let the looting begin, right?

  3. I always wondered why high fence deer hunting was frowned upon? I guess you need to keep the population steady. If you don't, no one can enjoy hunting! Thanks for the post! Fence

  4. Whether you support "gay marriage" or not is not the issue. The issue is whether the SCOTUS can extract from an unmentionable somewhere the notion that the Constitution forbids government "interference" in the "right" to marry. Just imagine time-traveling to Philadelphia in 1787. Ask James Madison if the document he and his fellows just wrote allowed him- or forbade government to "interfere" with- his "right" to marry George Washington? He would have immediately- and justly- summoned the Sergeant-at-Arms to throw your sorry self out into the street. Far from being a day of liberation, this is a day of capitulation by the Rule of Law to the Rule of What's Happening Now.

  5. With today's ruling, AG Zoeller's arguments in the cases of Obamacare and Same-sex Marriage can be relegated to the ash heap of history. 0-fer

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