                             In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

Nos. 07-2466, 07-2467
UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
                                                  Plaintiff-Appellee,
                                 v.

MELVIN R. LYTTLE and PAUL E. KNIGHT,
                                            Defendants-Appellants.
                          ____________
            Appeals from the United States District Court
     for the Southern District of Indiana, Indianapolis Division.
           No. 1:03-CV-1513—Sarah Evans Barker, Judge.
                          ____________

      ARGUED MAY 16, 2008—DECIDED AUGUST 7, 2008
                          ____________


 Before BAUER, POSNER, and WOOD, Circuit Judges.
  POSNER, Circuit Judge. Melvin R. Lyttle and Paul E.
Knight were charged (along with others, not before us)
in a civil case brought by the SEC with perpetrating a
“prime bank” fraud. This is a common fraud in which the
perpetrators solicit investments by telling prospective
investors that the investors’ money will be invested in
high-yield bank-issued securities not available or even
known to the general public. (For further description,
see SEC, “Investor Alert: How Prime Bank Frauds
2                                      Nos. 07-2466, 07-2467

Work,” Sept. 15, 2000, www.sec.gov/divisions/enforce/
primebank/howtheywork.shtml (visited July 21, 2008);
SEC, “Investor Alert: Warning to All Investors About
Bogus ‘Prime Bank’ and Other Banking-Related Investment
Schemes,” www.sec.gov/divisions/enforce/primebank.
shtml (visited July 21, 2008).) The district judge granted
summary judgment for the SEC on a variety of counts,
awarded injunctive relief, and assessed monetary penalties.
  Lyttle and Knight appeal only from the imposition of
the penalties, $110,000 on each of them. That amount
was proper only if the SEC proved that these defendants
engaged in fraud, 15 U.S.C. §§ 77t(d)(2)(C)(i),
78u(d)(3)(B)(iii)(aa); 17 C.F.R. § 201.1001 and pt. 201, subpt.
E, tab. I; see SEC v. Kern, 425 F.3d 143, 153 (2d Cir. 2005);
Rockies Fund, Inc. v. SEC, 428 F.3d 1088, 1099 (D.C. Cir.
2005)—that is, if it proved “scienter,” Aaron v. SEC, 446 U.S.
680, 697 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185,
201 (1976), meaning that the defendants either knew that
the representations they made to investors were false or
were reckless in disregarding a substantial risk that they
were false. Makor Issues & Rights, Ltd. v. Tellabs Inc., 513
F.3d 702, 704 (7th Cir. 2008); see also Sundstrand Corp. v.
Sun Chemical Corp., 553 F.2d 1033, 1044 (7th Cir. 1977)
(“a reckless omission of material facts upon which the
plaintiff put justifiable reliance in connection with a
sale or purchase of securities is actionable under Section
10(b) as fleshed out by Rule 10b-5”); SEC v. Infinity Group
Co., 212 F.3d 180, 192 (3d Cir. 2000); Meadows v. SEC, 119
F.3d 1219, 1226-27 (5th Cir. 1997). Although the Supreme
Court has “previously reserved the question whether
reckless behavior is sufficient for civil liability under
§ 10(b) and Rule 10b-5,” it has noted that “every Court of
Appeals that has considered the issue has held that a
Nos. 07-2466, 07-2467                                        3

plaintiff may meet the scienter requirement by showing
that the defendant acted intentionally or recklessly,
though the Circuits differ on the degree of recklessness
required.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127
S. Ct. 2499, 2507 n. 3 (2007).
   The defendants argue that because scienter is a state
of mind, summary judgment can almost never be granted
in favor of a plaintiff who has the burden of proving
scienter, as the SEC did. For it is always possible, they
say, that a reasonable jury would credit a defendant’s
testimony that he believed the representations were true.
The premise of the argument—that scienter is a state
of mind—requires qualification. In our recent Makor
decision (cited earlier), elaborating on the proposition
stated in earlier cases that proof of recklessness can estab-
lish scienter, we noted that “a popular definition of reck-
lessness in this context [proof of scienter in a securities
fraud case] is ‘an extreme departure from the standards
of ordinary care . . . to the extent that the danger was either
known to the defendant or so obvious that the defendant
must have been aware of it.’ This looks like two crite-
ria—knowledge of the risk and how big the risk is—but
as a practical matter it is only one because knowledge
is inferable from gravity (’the danger was either known to
the defendant or so obvious that the defendant must
have been aware of it’). When the facts known to a person
place him on notice of a risk, he cannot ignore the facts and
plead ignorance of the risk.” 513 F.3d at 704 (citations
omitted).
   Even when a party’s subjective beliefs are critical to
liability, it is not always true that the case cannot be
decided on summary judgment—as the present case
illustrates. The defendants are under indictment for fraud
4                                       Nos. 07-2466, 07-2467

and refused to testify in this case. Their refusal is privi-
leged by the self-incrimination clause of the Fifth Amend-
ment. But the consequence of their refusal is that they
cannot testify to their state of mind. Without such testi-
mony to contradict the mountain of circumstantial evi-
dence (circumstantial with regard to the defendants’
inmost beliefs, at any rate) that the SEC presented, evi-
dence reinforced by the inference (permissible in a
civil case) of guilt from their refusal to testify, as in SEC v.
Colello, 139 F.3d 674, 677-78 (9th Cir. 1998), no reasonable
jury could doubt that they had acted with scienter, see
LaSalle Bank Lake View v. Seguban, 54 F.3d 387, 391-92
(7th Cir. 1995); Doe ex rel. Rudy-Glanzer v. Glanzer, 232 F.3d
1258, 1264 (9th Cir. 2000), whatever the precise definition
of the word.
  To begin with, they extracted the remarkable total of
$32 million from 31 investors (the minimum investment
was $1 million) with typical “prime bank” representations.
Not only did they pocket several million dollars of the
invested money for their personal use (personal use that
included the purchase by one of the defendants of a gazebo
and a custom-built piano) rather than investing the
money in the no-risk trading program that they had
promised the investors they would invest it in; but what
they did invest they invested in a company that engaged
in high-risk, not no-risk, trading. They falsely stated to
the investors that the investments were insured—up to 196
percent of the original investment. They were not insured.
One of the defendants promised investors a return of 100
percent per week, told them their investments were being
monitored by the Federal Reserve Board, and warned
them that “unauthorized communications” about the
investments would lead to their being “blackballed by
the Federal Reserve.” When investors inquired how their
Nos. 07-2466, 07-2467                                       5

investments were doing, the defendants falsely stated
that the money had been temporarily placed in U.S.
Treasury notes.
   In the absence of contrary evidence, and there was none
as we are about to see, the brief summary that we have
given would have left a reasonable jury with no alterna-
tive to inferring scienter. SEC v. Jakubowski, 150 F.3d 675,
681-82 (7th Cir. 1998); SEC v. George, 426 F.3d 786, 795
(6th Cir. 2005); see In re Chavin, 150 F.3d 726, 728-29 (7th
Cir. 1998); United States v. Premises Known as 717 S. Wood-
ward St., 2 F.3d 529, 534 (3d Cir. 1993); United States v. One
Parcel of Property Located at 15 Black Ledge Drive, 897 F.2d
97, 102 (2d Cir. 1990). For it is inconceivable that the
defendants could have believed the cascade of fantastic
lies that they told the investors.
   They present three defenses, which we’ll call the “I am
just a copying machine” defense, the “honor among
thieves” defense, and the “better liar” defense. To establish
the first defense they argue that they merely repeated
misrepresentations that defendant Gail Eldridge (not an
appellant), who seems to have been the moving spirit in
the prime-bank scheme, made to them. That is not true, but
if it were it would not avail them. One doesn’t have to be
the inventor of a lie to be responsible for knowingly
repeating it to a dupe. The defendants could not have
thought that the fact that Eldridge told them some-
thing implausible (to put it mildly) made it true.
  Their second defense is that Eldridge defrauded them,
as shown by the fact that she pocketed the lion’s share
of the $32 million stolen from the investors. The defen-
dants, however, pocketed almost $9 million, and even if
Eldridge took more than her fair share of the loot, that
would not exonerate them. One is reminded of the high-
6                                        Nos. 07-2466, 07-2467

wayman’s case. Everet v. Williams (Ex. 1725), belatedly
reported in Note, “The Highwayman’s Case,” 9 L.Q. Rev.
197 (1893); see W. Page Keeton et al., Prosser and Keeton on
the Law of Torts § 50, p. 336 n. 4 (5th ed. 1984); Byron v. Clay,
867 F.2d 1049, 1051-52 (7th Cir. 1989); United States v.
Kravitz, 281 F.2d 581, 583-84 n. 3 (3d Cir. 1960). One
highwayman sued another, claiming that he was entitled
to a larger share of the loot from a series of joint rob-
beries. The suit was dismissed, both were hanged, and
the plaintiff’s lawyers were fined for having brought a
suit “both scandalous and impertinent.”
   The third defense is that the defendants believed the
false representations that they made because the investors
believed them. In other words, if a lie is skillful enough
to deceive the person lied to, it must have deceived the
liar as well.
    Enough said.
                                                    AFFIRMED.




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