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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. What a fine article, thank you! I can testify firsthand and by detailed legal reports (at end of this note) as to the dire consequences of rejecting this truth from the fine article above: "The inclusion and expansion of this right [to jury] in Indiana’s Constitution is a clear reflection of our state’s intention to emphasize the importance of every Hoosier’s right to make their case in front of a jury of their peers." Over $20? Every Hoosier? Well then how about when your very vocation is on the line? How about instead of a jury of peers, one faces a bevy of political appointees, mini-czars, who care less about due process of the law than the real czars did? Instead of trial by jury, trial by ideological ordeal run by Orwellian agents? Well that is built into more than a few administrative law committees of the Ind S.Ct., and it is now being weaponized, as is revealed in articles posted at this ezine, to root out post moderns heresies like refusal to stand and pledge allegiance to all things politically correct. My career was burned at the stake for not so saluting, but I think I was just one of the early logs. Due, at least in part, to the removal of the jury from bar admission and bar discipline cases, many more fires will soon be lit. Perhaps one awaits you, dear heretic? Oh, at that Ind. article 12 plank about a remedy at law for every damage done ... ah, well, the founders evidently meant only for those damages done not by the government itself, rabid statists that they were. (Yes, that was sarcasm.) My written reports available here: Denied petition for cert (this time around): http://tinyurl.com/zdmawmw Denied petition for cert (from the 2009 denial and five year banishment): http://tinyurl.com/zcypybh Related, not written by me: Amicus brief: http://tinyurl.com/hvh7qgp

  2. Justice has finally been served. So glad that Dr. Ley can finally sleep peacefully at night knowing the truth has finally come to the surface.

  3. While this right is guaranteed by our Constitution, it has in recent years been hampered by insurance companies, i.e.; the practice of the plaintiff's own insurance company intervening in an action and filing a lien against any proceeds paid to their insured. In essence, causing an additional financial hurdle for a plaintiff to overcome at trial in terms of overall award. In a very real sense an injured party in exercise of their right to trial by jury may be the only party in a cause that would end up with zero compensation.

  4. Why in the world would someone need a person to correct a transcript when a realtime court reporter could provide them with a transcript (rough draft) immediately?

  5. This article proved very enlightening. Right ahead of sitting the LSAT for the first time, I felt a sense of relief that a score of 141 was admitted to an Indiana Law School and did well under unique circumstances. While my GPA is currently 3.91 I fear standardized testing and hope that I too will get a good enough grade for acceptance here at home. Thanks so much for this informative post.

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