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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. I just wanted to point out that Congressman Jim Sensenbrenner, Senator Feinstein, former Senate majority leader Bill Frist, and former attorney general John Ashcroft are responsible for this rubbish. We need to keep a eye on these corrupt, arrogant, and incompetent fools.

  2. Well I guess our politicians have decided to give these idiot federal prosecutors unlimited power. Now if I guy bounces a fifty-dollar check, the U.S. attorney can intentionally wait for twenty-five years or so and have the check swabbed for DNA and file charges. These power hungry federal prosecutors now have unlimited power to mess with people. we can thank Wisconsin's Jim Sensenbrenner and Diane Feinstein, John Achcroft and Bill Frist for this one. Way to go, idiots.

  3. I wonder if the USSR had electronic voting machines that changed the ballot after it was cast? Oh well, at least we have a free media serving as vicious watchdog and exposing all of the rot in the system! (Insert rimshot)

  4. Jose, you are assuming those in power do not wish to be totalitarian. My experience has convinced me otherwise. Constitutionalists are nearly as rare as hens teeth among the powerbrokers "managing" us for The Glorious State. Oh, and your point is dead on, el correcta mundo. Keep the Founders’ (1791 & 1851) vision alive, my friend, even if most all others, and especially the ruling junta, chase only power and money (i.e. mammon)

  5. Hypocrisy in high places, absolute immunity handed out like Halloween treats (it is the stuff of which tyranny is made) and the belief that government agents are above the constitutions and cannot be held responsible for mere citizen is killing, perhaps has killed, The Republic. And yet those same power drunk statists just reel on down the hallway toward bureaucratic fascism.

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