U.S. S.E.C. v. Montana

• Citation: 464 F.Supp.2d 772
• Decision Date: 22 November 2006
• Docket Number: No. 1:03-CV-1513-SEB-VSS.,1:03-CV-1513-SEB-VSS.
• Parties: UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. John L. MONTANA, Jr., Melvin R. Lyttle, Paul E. Knight, Worldwide T & P, Inc., First National Equity, LLC, and P.K. Trust & Holding, Inc., Defendants.
• Court: U.S. District Court — Southern District of Indiana

Page 772

464 F.Supp.2d 772

UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. John L. MONTANA, Jr., Melvin R. Lyttle, Paul E. Knight, Worldwide T & P, Inc., First National Equity, LLC, and P.K. Trust & Holding, Inc., Defendants.

No. 1:03-CV-1513-SEB-VSS.

United States District Court, S.D. Indiana, Indianapolis Division.

November 22, 2006.

COPYRIGHT MATERIAL OMITTED

John E. Birkenheier, Steven Lee Klawans, Jason Yonan, United States Securities and Exchange Commission, Chicago, IL, for Plaintiff

John L. Montana, Jr., Staten Island, NY, pro se.

Boris Parad, Parad Law Offices P.C., Skokie, IL, for Defendants.

Paul E. Knight, Kodak, TN, pro se.

ENTRY ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

BARKER, District Judge.

This is a lawsuit brought by the United States Securities and Exchange Commission (SEC), seeking permanent injunctive relief, civil penalties and disgorgement, with prejudgment interest against the Defendants, who were all alleged in some manner to be involved in an investment scam. After obtaining defaults against some of the corporate defendants, the SEC has set forth a detailed account of the pertinent transactions supported by depositions, affidavits and other materials to substantiate its claim of entitlement to summary judgment. Defendant John L Montana has neglected to respond to the motion. Defendants Melvin R. Lyttle and First National Equity, LLC filed a response and surreply. Defendant Paul E. Knight, who is appearing pro se, essentially copied his co-defendants' response and surreply and submitted it with minimal additions pertinent to his particular situation. After reviewing the briefs and supporting materials, we are left with little doubt that the SEC is entitled to summary judgment.

I. SUMMARY JUDGMENT STANDARD

The purpose of summary judgment is to "pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Summary judgment should be granted only where the pleadings, depositions, answers to interrogatories affidavits, and other materials demonstrate that there exists "no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). However, only bona fide disputes over facts essential to a determination can prevent a grant of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

II. FACTUAL BACKGROUND¹

Between August 1999 and April 2000, Montana, Lyttle and Knight, through the companies they owned (Lyttle's First National Equity ("FNE"), Knight's P.K. Trust and Holding, Inc. ("P.K.Trust") and Montana's Worldwide T & P, Inc. ("Worldwide T & P"))², sold interests in what was described as a high yield investment program ("Trading Program"). The program purported to finance the "private placement" trading of various instruments, including bonds, notes, securities and debentures. Montana, Lyttle and Knight promised investors that, for a minimum investment of one million dollars and without risk, they could earn extraordinary rates of return, through the Trading Program. They also represented to investors that the "Fed" or Federal Reserve Bank monitored and controlled the transactions in the Trading Program and that the banks and securities dealers involved had insurance which would more than cover each investor's principal investment.

Apparently, Defendants were good salesmen and P.T. Barnum³ was right when he quipped "There's a sucker born every minute!", because the Defendants in a very short amount of time raised over $32 million from 31 investors. As it turned out, Defendants' representations about the Trading Program were not true, and the promised financial gains did not accrue either. In fact, as bank and other records show, Lyttle and Knight misappropriated millions of dollars they had received from the investors and transferred much of the investors' funds to a British Virgin Islands Corporation named UTA-BVI Ltd. ("UTA-BVI"), which was previously a defendant in this litigation and controlled by another former defendant, Violet Gail Eldridge ("Eldridge").⁴ There, the money was further depleted through a second tier of misappropriation and investment in high risk margin trading through various investment accounts. In the end, approximately half of the funds invested were eventually returned to about half of the investors.

The investment scheme was carried out in two phases. During the final five months of 1999, Montana and Lyttle raised approximately $24 million from 23 investors. During this phase, Lyttle was referred to as the "Funds Manager" who facilitated "transactions" in the Trading Program through his company, FNE. Montana was the middle man who recruited investors and had them sign joint venture agreements requiring them to split the profits from the Trading Program with him. In October of 1999, in the second phase of the scheme, Knight began soliciting investors and continued to do so through March of 2000. He managed to raise another $8 million. The involvement of each of these individual defendants is detailed below.

John (Jack) Montana and Worldwide T & P

Montana is a resident of Staten Island, New York, and the sole-owner and president of Worldwide T & P, a New York corporation formed in 1997. Neither Montana nor his corporation has ever been registered as a broker or dealer with the SEC. Montana has described Worldwide T & P's business as providing intermediary assistance in obtaining financing for imports and exports.

Montana informed potential investors that he could direct them into the Trading Program run by Lyttle, representing that this was a "high yield investment program." Montana described the Trading Program to investors in general terms, telling them that various trading instruments, including medium term notes, would be purchased and sold and that a buyer for the notes would be in place before the instrument was ever purchased. The instruments purportedly would be purchased at a slight discount, and the difference between the purchase and sale prices would generate profit for the investors. Montana told investors that through repeated transactions on a daily or weekly basis, each transaction would generate additional profit. The minimum investment in order to participate in the program was $1 million and each investment was to be pooled with investments from others until an aggregate of $100 million dollars was achieved, which was, according to Montanta and Lyttle, the amount necessary to qualify to participate in these types of bulk transactions that constituted the Trading Program.

Over a four-month period, from August 1999 through December 1999, Montana, acting under the aegis of Worldwide T & P, raised approximately $23 million contributed by 22 investors. He solicited these investors, had them sign joint venture agreements and transmitted the documents to the investors that Lyttle provided. The Lyttle investors either returned the signed paperwork to Montana or sent it on directly to Lyttle. Montana deposited from one investor $1 million dollars into his bank account.⁵ On numerous occasions, Montana represented to investors that their investments in the Trading Program were perfectly safe and would generate extraordinary rates of return. Montana explained to investors that their principal was never at risk because, in participating in the program, their funds never left a secure account under the investor's name at the bank or securities brokerage house designated by Lyttle. According to Montana, additional security or safety was ensured because a government agency, namely, the Federal Reserve, monitored and controlled all the transactions.

Montana informed investors that nothing was required of them other than their money and their silence; that is, the information about the Trading Program was to be kept secret. Investors testified that Montana told them that secrecy was the lifeblood of these programs and any public divulgement of information would cause the investor to be kicked out of the program and, in all likelihood, suspended from the Trading Program as well. In an August 25, 1999 letter sent to investors with the heading, "Urgent Notice!! Urgent Notice!!", Montana repeated the admonishment for secrecy, warning that any unauthorized communications in "these types of transactions" would constitute "a violation of the laws of the Federal Reserve and the guidelines of the participating banks and securities firms, regarding the same." The letter further threatened that the punishment for unauthorized communications, taken to its "highest level of possible recourse," would be a "fine and/or imprisonment" and "violators will be `Blackballed' by the Federal Reserve and the banking community at large, permanently, without recourse, and which will automatically exclude the individual(s) and/or entity (ies) from participation in these types of transaction [sic], ever." P.T. Barnum's famous phrase again comes to mind.

Melvin Lyttle and FNE

Lyttle, who has been on social security disability since 1987, is 55 years old and lives in Lawrenceburg, Indiana. He is the owner, CEO and sole employee of FNE. Initially, Lyttle's representations to investors were not made directly, but through Montana. Lyttle had informed Montana that he was a trader in a program that could generate returns for investors. According to Lyttle, this trading program consisted of buying and selling bank debentures or medium term notes at a discount and reselling them to institutional investors at a profit. Lyttle explained to Montana that transactions in the Trading Program were entirely safe and that investor funds would be segregated and converted into United States Treasury Bills. Lyttle also told Montana to expect, at a bare minimum, profit in the range of 10%...