SEC v. 8000, Inc. Et Al Doc 29 Filed 30 Oct 13

7/27/2019 SEC v. 8000, Inc. Et Al Doc 29 Filed 30 Oct 13

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UNITED STATES DISTRICT COURTFOR THE SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGECOMMISSION,

Plaintiff,

v.

8000, INC., JONATHAN E. BRYANT, THOMASJ. KELLY, and CARL N. DUNCAN,

Defendants.

CIVIL ACTION

NO. 12-cv-7261 (TPG)

RESPONSE OF THOMAS J. KELLY IN OPPOSITION TO THE SECURITIES ANDEXCHANGE COMMISSIONS MOTION REQUESTING REMEDIES

Case 1:12-cv-07261-TPG Document 29 Filed 10/30/13 Page 1 of 28


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TABLE OF CONTENTS

I. INTRODUCTION ...............................................................................................................1II. BACKGROUND. ................................................................................................................2

A. Mr. Kelly Becomes a Mark in the Bryant/Duncan Scheme. ................................... 21. Mr. Kelly Begins Online Stock Trading in 2005 and is Targeted by

Jonathan Bryant. ......................................................................................... 32. Jonathan Bryant Lures Mr. Kelly In Further, and Sets the Hook. .............. 63. Mr. Bryant sets up 8000, Inc. and Uses Mr. Kelly to Unwittingly Send Out

False Press Releases. ................................................................................... 84. Mr. Kellys Purchase and Sale of EIGH Shares With Carl Duncans

Advice. ...................................................................................................... 115. Mr. Kellys Testimony Before the SEC While Represented by Carl

Duncan. ..................................................................................................... 12B. Mr. Kellys Cooperation in the Governments Investigation. .............................. 14C. Settlement Terms & Calculation of Disgorgement. .............................................. 17

III. ARGUMENT .....................................................................................................................18A. Disgorgement and Interest Should not Exceed the Amount Calculated

Previously by the Government and Memorialized in the October 18, 2012Agreement. ............................................................................................................ 19

B. Mr. Kellys Cooperation with the Government, His Unwitting Role in theScheme, and the Relatively Minor Penalty Imposed Upon Carl DuncanWarrant, at Most, a Penalty Consistent with the October 18, 2012Agreement. ............................................................................................................ 23

IV. CONCLUSION ..................................................................................................................25



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Thomas J. Kelly, by and through undersigned counsel, respectfully submit this Response

in Opposition to the Securities and Exchange Commissions (SECs or Commissions)

Motion Requesting Remedies (Motion for Remedies).1

I. INTRODUCTIONTwo things set this case apart from others that might come before this Court. First, the

FBI Agent assigned to the criminal investigation in this matter has vouched in a declaration as to

Mr. Kellys navet and lack of awareness as to how he was used to perpetuate Mr. Bryants and

Mr. Duncans scheme. See Declaration of FBI Special Agent Kendra McLamb (McLamb

Decl.) at 4, 10, 11, 13, 14. Second, the Commission has changed wildly its calculation of

disgorgement for reasons that cannot be discernedreasons unrelated to any facts that might be

relevant to disgorgement, which have been previously and well-known to the Commission.

The remedies that the Commission seeks are a sharp and puzzling departure from the

Commissions previous calculations of the appropriate remedy. The remedies sought are

extremeparticularly in light of the facts of this case. The Commission has taken a surprisingly

harsh, and in some ways contrary, position in its current motion against Mr. Kelly. The position

that the Commission takes now is particularly harsh because (as the Commission is fully aware)

Mr. Kelly was unquestionably a mark in a confidence game operated by Jonathan Bryant and

the lawyer, Carl Duncan, Esq. Nevertheless, the remedy imposed upon Carl Duncan, Esq.the

attorney whose position of trust was central in manipulating and misleading Mr. Kelly

throughoutso greatly pales in comparison to that sought against Mr. Kelly. That Mr. Kelly

should be left holding the proverbial bag and suffer more than an architect of this scheme is

inequitable at bestand even shameful.

1Citations to the Motion for Remedies herein are to the Commissions Memorandumof Law in support thereof.



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The Commissions Motion for Remedies conspicuously and studiously avoids key facts

about Mr. Kellys cooperation with an investigation into Messrs. Duncan and Bryant. It is silent

as to Mr. Kellys previously-recognized navet and lack of experience and sophistication in his

appointment as an officer of a company. It likewise avoids any mention of the Commissions

retreat from its previous position as to Mr. Kellys disgorgement and interest of approximately

only 16% of what the Commission now seeks. As memorialized in an October 18, 2012 Letter

to Counsel for the Commission, more than a year ago, Mr. Kelly and the Commission agreed to

resolve this matterbased upon the Commissions own calculationsfor $73,408 in

disgorgement, $2,732.89 in prejudgment interest, and $25,000 as a fine . . . . Declaration of

Michael M. Mustokoff, at Exhibit D (October 18, 2012 Correspondence from Michael M.

Mustokoff, Esq. to Sue Curtin, Esq. and Deena Bernstein, Esq.). The Commissions silence is

inexplicable in light of the fine of $15,000 fine imposed upon Carl Duncan. Whatever excuses

the Commission might now propound for its current stance, Mr. Kelly respectfully requests that

this Court deny the Commissions Motion for Remedies, and impose no greaterfinancial remedy

than that set forth in the October 18, 2012 Letter.

II. BACKGROUND.A. Mr. Kelly Was a Mark in the Bryant Duncan Scheme.Put simply, Mr. Kelly was selected by Mr. Bryant and Mr. Duncan as a mark in an

internet scheme. Mr. Kellys business experience was comprised primarily of owning two failed

dollar stores, and residential real estate appraisals. SeeDeclaration of Thomas J. Kelly (Kelly

Decl.), at 1-11.



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1. Mr. Kelly Begins Online Stock Trading in 2005 and is Targeted byJonathan Bryant.

Mr. Kelly began to research penny stocks online and began to invest with only the most

rudimentary understanding of securities:

My individual stock investing career began in mid-late 2005, whenI purchased some Sirius satellite radio stock. I opened up anaccount on TDAmeritrade and bought my stock. I got a spamemail from (I think it was called the bellwether report, an emailadvertisement) about a stock called Medify Solutions. I did a littledue diligence and bought some stock. I liked what I read aboutthis hand-held remote technology for patient medical notes in reallive time for doctors around the world. I bought stock in thecompany ($10,000). This was my first time investing in the stockmarket other than my Roth IRA mutual fund (that is now worthless, due to me buying 8000, Inc. stock with it). I didnt know howto trade stocks, all I knew was to buy and hope it went up, and thensell for a profit.

Kelly Decl. at 12.2

As Mr. Kelly further explained in a letter to the SEC:

I started researching Jonathan Bryants company Medify solutionsand bought some stock. He was the CEO at the time, and heopenly spoke with investors over the internet chat forums. I

continued to lose money in this company, however being inbusiness myself and going through a failed business myself I knowwhat it takes to be successful and that 9 out of 10 business [sic]fail. You must believe in what you do, set attainable goals, andwork as hard as you can to reach them. I really believed inJonathan and his Company Medify Solutions.

Kelly Decl. at Exhibit 1 (Correspondence of Thomas Kelly to Sue Curtin, Senior Counsel for

the SEC); Mustokoff Decl. at Exhibit C (Correspondence of Thomas Kelly to Sue Curtin,

Senior Counsel for the SEC, attached thereto as Exhibit 2).3

2Sicthroughout.

3Sicthroughout.



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Mr. Kelly was an ideal mark for the scheme because he was so thoroughly unaware of his

own limitations in experience and knowledgeand so innately trusting. Bryant no doubt

suspected that Kelly would be (as he ultimately was) unaware of how he was used in the scheme.

Mr. Kelly was the perfect choice for Messrs. Duncan and Bryant in carrying out their scheme:

Prior to meeting Jonathan Bryant over the internet in early 2007, Iwas working as a real estate appraiser and doing very well. I workvery hard, and quoting my mother Thomas you work too hardbut I get my work ethic from my hard working parents. Mymother was a nurse for 20 years after having all 5 of us, and myfather worked for the Teamsters (ACME markets) for 40 years. Ihave the best parents any son could ever ask for, and what theyhave instilled in me over the years is what made me who I am

today. I would never in a million years try to scam people out ofanything, because I was not brought up that way.

Id.

With this background, Mr. Kelly then found himself slowly pulled into Mr. Bryants web

of deceit:

After Medify solutions started going down in share price, I andmany others were concerned but still loyal shareholders. I wasable to ask questions on a blog and get answers from the CEOJonathan Bryant. I eventually emailed the Jonathan Bryant andasked him about the company, and told him I was a loyalshareholder. We had started communicating in mid to late 2006,and during 2007 became very good friends. He always told methat great things would happen with the company and suggestedthat I invest in the company. Many press releases involvingOracle, and other big names were mentioned.

Kelly Decl. at 13.

Despite having lost money in his investment with Mr. Bryants company, Mr. Kelly was

manipulated by Mr. Bryant into a relationship that Mr. Kelly perceived to be one of friendship,

mentoring, and respect. Mr. Bryant viewed Mr. Kelly as nothing more than an opportunity:

We eventually became friends, even though I lost a largeinvestment of $75,000 over a couple years. Jonathan became likean older brother to me that I never had. He had advanced degrees



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in Micro Biology, and other sciences. He sent me journals of somethings that he wrote or discovered in his fields, and we had manyconversations over the course of time were he would tell me somany scientific things that blew my mind.



Senior Counsel for the SEC, attached thereto as Exhibit 2).

In Mr. Kelly, Mr. Bryant found someone whose trust and admiration could be cultivated

and exploited:

I was very impressed with Jonathans intellect and achievements inthis business arena. He had told me about medical journals that hehad written at University in London. He sent me the articles andagain I was very impressed. We were both athletes in high schooland university so he told me. He said that he was a professionalsoccer player in London, again very impressed. He was the fatherof 1 girl, 2 boys, and a step-daughter. Jonathan is older than meand I looked up to him like an older brother that I never had.

I pride myself on being a stand up person with a work ethic secondto none, more loyalty than anyone can ask for, kind hearted,honest, smart and always striving to be the best that I can be. Ihave my parents to thank for all that I am today.

Kelly Decl. at 14-15.

Mr. Kelly mistook Mr. Bryants interest as the attention and guidance of a more worldly

and successful businessmanand most importantly a friend:

My knowledge of business comes from tripping, falling and gettingback up with my dollar store experience, and being the owneroperator of an appraisal business. At the time, I saw a lot ofmyself in Jonathan as he was a step-father, former athlete, business

owner, and similar goals of being successful that it made me feelcloser to him as a loyal friend. His stories about being aprofessional soccer player in London, his ideas of how he came upwith the Medify solutions device to eliminate paper notes in themedical arena were just amazing to me.

Kelly Decl. at 16.



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As Mr. Kelly notes, it was his (overly) trusting nature that made him ripe for

manipulation:

I believe Im a smart person, and I will put my faith in people

100% when I feel they are decent people. Ive been told that Imvery lucky to have a group of 8-12 very good friends since I was12 years old. I am 44 years old now, and they are all still veryclose to me, and range from teachers to UPS delivery drivers. Mypoint of all this is to let you know what kind of person I am andwhere I came from. I know now that I was fooled by a scam artist.




2. Jonathan Bryant Lures Mr. Kelly In Further, and Sets the Hook.Although Mr. Kellynot a man of great meanslost a significant amount of money

investing in Mr. Bryants Medify Solutions company, Mr. Bryant lured in Mr. Kelly further with

the idea of having a close personal relationship with a purportedly successful entrepreneur who

Mr. Kelly admired:

Question and answers on a blog turned into personal emails backand forth to Jonathan Bryant about the company and getting toknow him. I really took a liking to him thinking how smart hewas, how educated he was, and being the CEO of a publiccompany who was becoming a friend to me. As 2006 went onthere were many things happening in my friends life and hiscompany. He told me that others in the industry sabotaged andfinancially hurt his abilities to do business and things were gettingvery bad. We started talking to each other on a personal basis. Hewould ask me about my family and always gave me advice ondifferent things that I had going on in my life whether it be health

issues, women, business, sports, life, etc. We became very close asfriends and I hated that people were taking advantage of Jonathanand his ability to grow the business.

Kelly Decl. at 17.



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Having cultivated a personal relationship with, and manipulated Mr. Kelly to trust him

implicitly, Mr. Bryant began to get Mr. Kelly to send him moneysomething that did not strike

Mr. Kelly as out of the ordinary, or out of line with a request from someone he admired:

Eventually, I would start sending him and his family money as hewas falling on a very desperate time with his kids, food, mortgagepayments, heating system, etc. At first it was a couple hundredhere and there, but then became more. I told Jonathan everythingabout me, and maybe even boasted a bit about myself to appear ona similar level as him even though I thought I wasnt even in hisclass.

Id.at 18.

Mr. Bryant continued to reel Mr. Kelly in, even as Mr. Kelly lost more and more money

with Medify.

Thinking back on it now, I remember telling Jonathan about mybusiness and building myself as a little more than I was to showhim that I was worthy if he ever wanted to expand in business, as Iwould love the opportunity to worth with him.

Id.at 19.

Mr. Kelly never doubted Mr. Bryants honesty and business acumen, and blindly

continued to follow him out of loyalty.

As Medify moved forward with what I thought were the ups anddowns of any normal business, Jonathan would always talk abouthow good things would be, how exciting the future was, etc. Icontinued to invest in the company. As time went on, and theshare price went down, or I noticed that selling was occurring anddidnt understand, I asked Jonathan and he would give me greatreasons all the time as to why there was selling. I believed everyword he ever said to me.

Id.at 20.

As Mr. Bryants Medify began to unravel, Mr. Kelly did not want to question things that

he did not understandhe did not want to appear ignorant to Mr. Bryant:



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Mr. Bryant started opening up to me about how Medify wasgetting brought down by others that wanted him to fail, and he sawan opportunity to save the company by doing a reverse merger intoanother company. I didnt know a lot of what Jonathan wastalking about when he discussed with me how the company would

buy another company but I trusted my friend.

At one point, in late 2007, Jonathan explained to me why he had tostep down as CEO of Medify and he was still a majorityshareholder but wanted to move on to bigger and brighter things(including me in the future). His reason for leaving Medifyseemed 100% justified to me at the time. He said that he wanted tolet the other corporate guys handle the company and that he neededa change. I believed every word, and moved forward.

The company eventually reversed merged into PETEL, Inc. I thinkI bought and sold more with the new company, and took a loss.Upset with my investment, Jonathan always knew what to say tome, and I believed every word as gospel. He was always doing, ortalking about brokering deals in the market and I thought it wasnormal at the time.

Id.at 21-23.

3. Mr. Bryant sets up 8000, Inc. and Uses Mr. Kelly to Unwittingly SendOut False Press Releases.

Having lured in Mr. Kelly, Mr. Bryant now had an eager mark for his 8000, Inc. scheme.

Mr. Kellylacking the background, education and sophistication to know what questions to

askwould prove to be an ideal pawn in Mr. Bryants scheme to generate false positive news

about a company.

Jonathan told me that EIGH Cannonball 8000 was a lifestylecompany out of London with millionaires and awesome cars, withrallies that were held in different countries. It was going to be thishuge lifestyle company.

In the fall of 2009, Jonathan asked me to go into business withhim. He told me that 8000 (EIGH) had filed for bankruptcy andthat Jonathan had purchased the shell company from the formerCEO, Conrad Wall.

Jonathan told me that he could not be the CEO because ofsomething having to do with his not being able to gain collateral



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money of more than 10% of shares held by an office. It was a bitunclear to me, but I trusted him, and thought he trusted me. Iagreed to be the CEO.

Id.at 24-26.

After Mr. Kelly was made the CEO of EIGH, Mr. Bryant regularly informed Mr. Kelly of

purported business activity that the company was engaging in, drafted press releases, and Mr.

Kellybelieving and trusting them to be truesigned off as the CEO of the company. Mr.

Bryant told Mr. Kelly (and provided press releases to him),see Kelly Decl. at 28-29, 33,

among other things, that:

EIGH acquired a modeling agency called Breitinger Agency in November 2009; EIGH acquired a company called Sky Villas in December 2009; EIGH acquired Southbridge Development Group in January 2010; Press releases issued in January through March of 2010 addressed activity with

these purportedly acquired entities;

Mr. Bryant also showed Mr. Kelly photographs, an empty storefront that he claimed was

to be an EIGH retail location, t-shirts, and represented that EIGH was engaged in numerous

sponsorships. See Kelly Decl. at 27 & 32.

In February 2010 and again in June 2010, Mr. Bryant invited Mr. Kelly and his fianc to

visit him in Barbados. Mr. Kelly paid for their travel. During these trips, Mr. Bryant appeared

to casually show Mr. Kelly what was purported to be evidence of the robust business activity

of EIGH:

Mr. Bryant showed Mr. Kelly what Bryant stated were samples of theBrand8000 clothing lineonline. Id. at 32(a);

Mr. Bryant purported to order clothing for the Amateur Athletic Association ofBarbadosand did so in Mr. Kellys presence. Id. at 32(b);

Mr. Bryant took Mr. Kelly to what Mr. Bryant stated was a meeting with theAthletic Director of the Amateur Athletic Association of Barbados, and made a



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show of handing over a check for $25,000 as part of a purported sponsorship byEIGH. Id. at 32(c);

Mr. Bryant took Mr. Kelly to a track meet, and claimed that EIGH wassponsoring it. Id. at 32(d);

Mr. Bryant showed Mr. Kelly artists renderings of a purported 8000, Inc. retailspace in an upscale shopping center that was under construction. Id. at 32(e);

Mr. Bryant then showed Mr. Kelly a construction site that he stated was the futurelocation of that retail space. Id. at 32(f);

Mr. Bryant showed Mr. Kelly numerous boxes, purportedly all containing 8000,Inc. clothing. Id. at 32(g); and

Mr. Bryant set up banners and an artists rendering of an 8000, Inc. sponsoredrace car near a golf course. Id. at 32(h).

To a more sophisticated and experienced business person, the information provided by

Mr. Bryant would have raised more questions than it answered. Mr. Kelly, however, had no

understanding that the Potemkin Village of photos, clothing, empty buildings, drawings, press

releases, and purported sponsorships provided an insufficient basis upon which to believe that

Mr. Bryants representations and assurances about the enormous growth of EIGH was true. He

never saw behind the cut-out village. To the contrary:

Throughout 2010, there numerous press releases includingsponsorship of gold tournaments, other athletic Olympic games forthe Athletic Association of Barbados, quarterly reports, andinvestor updates. I didnt fully understand all of the information inthe press releases but they were all explained to me by Jonathan,and I believed and trusted him 100%.

Id.at 33.

Mr. Kelly was also assured that Carl Duncan had signed off on any activity:

Whenever I asked Jonathan if something was legal or if we neededan attorney for something, he always referred to our Great formerSEC attorney, Carl Duncan.

Id. at 34.



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Throughout this time, Mr. Kelly paid (on his credit card), for the press releases, for

virtual office space, for filing fees, and $15,000 at one point for Mr. Duncan to represent him

before the SEC. Id.at 42. Mr. Kelly expended more than $171,000 dollars on EIGH alone. Id.

at 41.

4. Mr. Kellys Purchase and Sale of EIGH Shares.As noted in the Commissions own previous calculations, Mr. Kelly purchased and sold

shares regularly over the course of his titular role as CEO. See Mustokoff Decl. at Exhibit A

(April 27, 2012 Correspondence of Michael Mustokoff to Kevin Kelcourse, noting that Mr.

Kelly sold based upon Duncans advice, and still retains many shares); & Exhibit B (May 4,

2012 Correspondence to Michael M. Mustokoff from Sue Curtin, containing SEC calculation of

profit and loss in Mr. Kellys six accounts). Mr. Kelly does not dispute that he sold shares. He

did not, however, do so in a manner designed to take advantage of any upward movement based

upon now-understood to be false press releases. As hard as it may be to believe now, Mr. Kelly

never understood the cause-and-effect relationship between the releases provided by Mr. Bryant

and the stock price, because he was never aware (as Agent McLamb acknowledges) of their false

content. He trusted Mr. Bryants representations and misdirection. Declaration of FBI Special

Agent Kendra McLamb (McLamb Decl.) at 4, 10, 11, 13, 14. Moreover, he sought and

received legal advice from Carl Duncan to ensure that it was permissible for him to sell shares

because he was losing money in his investment. See Kelly Decl. at 5. As Mr. Kelly has

previously noted in correspondence with the SEC:

You have to realize that I believed in Jonathan and Carl Duncanlike I would believe a police officer on the corner in myneighborhood, or a teammate on the baseball field. More than ateammate, however, these were people that I felt were far moreknowledgeable in these matters than me. I would not have sold thestock without their advise. I started complaining to Jonathan aboutall the money and time that I had put into him and the company



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and he said that I should sell some stock. Then I specifically askedCarl Duncan how much I was allowed to sell and when as I did notknow the legalities since I was an officer of the Company.




5. Mr. Kellys Testimony Before the SEC While Represented by CarlDuncan, Esq.

Mr. Kellys testimony before the SEC revealed Mr. Kelly to have been completely

unaware of the role he was set up to play by Mr. Bryant and Mr. Duncan. In response to

questioning by Counsel for the Commission, Mr. Kelly repeatedly revealed his lack of

sophistication, experience, or any understanding of the impropriety of his actions. That Mr.

Kelly would be so ill-equipped to testify before the SEC is perhaps less surprising given the false

comfort provided by his then-attorney, Mr. Duncana confederate of Mr. Bryants in the

scheme. In a letter to the Commission, Mr. Kelly described that experience:

I have to say that this is the most emotionally draining situation I

have ever experienced Ms. Curtin, and it really hurt me to think Iwas lied to and deceived by someone who I thought was a friend,and a professional SEC attorney (so I thought). The questions thatwere needed for the deposition w[ere] prepared by Jonathan andCarl. They told me what to say and how to fill out the forms andquestionnaire. When I needed to speak with Carl in the other roomhe would yell at me for not knowing what I was doing. I felt like Iwas all alone, and completely shocked that he treated me this way.Only now with new council and the FBI do I realize that I was apuppet.

Id.

Throughout his examination, Mr. Kellys testimony before the SEC showed that he did

not understand that relying upon Mr. Bryants representations and the press releases drafted by



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Mr. Bryant was insufficient to sign off on press releases, and revealed an absence of knowledge

about basic business and securities principles at issue. For example:

Kelly could not identify 8000, Inc. subsidiaries, appears uncertain about thedefinition of a subsidiary, and was corrected by Duncan. Selected Excerpts ofNov. 22, 2010 Testimony of Thomas J. Kelly before the SEC (KellyTestimony), attached hereto as Exhibit A, at 19:12-22:1, 92:13.

Kelly explained that he has a limited scope of knowledge in operating 8000, Inc.,and that Mr. Bryant was holding [his] hand, helping [him] with everything,and teaching him. Kelly Testimony at 144:1-20.

Kelly struggled to answer whether 8000, Inc. filed registration statements with theSEC because, as he explained, he had limited knowledge because he placedcomplete trust and reliance in Mr. Bryant to lead him in the right direction. KellyTestimony at 241:9-242:25.

Kelly explained that Mr. Bryant drafted all the 8000, Inc. press releases. KellyTestimony at 247:6-248:22.

Kelly believed the 8000, Inc. press release claim that the Breitinger modelingagency could raise its annual revenue estimate to $1 million, despite reviewing nofinancial statements or information. Kelly Testimony at 248:3-252:16.

Kelly did not understand what the term retained profit means. Kelly Testimony at252:21-253:2, 259:22-260:17.

Kelly thought that 8000, Inc. retains an auditor, but did not know whether 8000,Inc. has any audited financial statements. Kelly Testimony at 260:18-263:10.

Kelly could not explain what the term shareholder equity means, and relied uponBryants representations concerning a press release claim that EIGH had over $2million dollars in shareholder equity. Kelly Testimony at 252:21-253:2, 266:1-13.

Kelly struggled to provide support for the 8000, Inc. press release claim that itdispatched 6,000 items from its clothing line and he was also unsure whether8000, Inc. was ever paid for this clothinghe relied upon Mr. Bryant for this

information. Kelly Testimony at 252:21-253:2, 270:6-272:1.

Kelly noted that he completely relied on 8000, Inc. subsidiaries to accuratelyreport their own financial information to Mr. Bryant. Kelly Testimony at 273:3-13.

Kelly believed that 8000, Inc. held $985,000 in its subsidiaries bank accounts,based upon Mr. Bryants representations. Kelly Testimony at 275:7-276:10.



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Kelly stated that Mr. Bryant came up with the idea of an 8000, Inc. shareholderdividend, and that Kelly did not ask questions about it because did not want toappear ignorant when speaking to his colleague. Kelly Testimony at 281:10-282:3.

Kelly believed that Jonathan Bryant paid the Lime Grove complex funds to openthe 8000 Inc. flagship clothing store in Barbados because Bryant said he had.Kelly Testimony at 299:16-22.

B. Mr. Kellys Cooperation With the Governments Investigation.Shortly after his testimony before the SEC, Mr. Kelly was visited by Special Agent

Kendra McLamb of the Federal Bureau of Investigation (FBI). Mr. Kelly voluntarily spoke

with Agent McLamb and her colleague about Jonathan Bryant, Carl Duncan and EIGH.

McLamb Decl. at 2-3. Mr. Kelly was simply unaware of the significance and import of his

actions and the seriousness of the SEC investigation until he met with, and began working with,

the FBI in their investigation of Mr. Duncan and Mr. Bryant. Id. at 4, 10-11, 14; Kelly Decl.

at 36-37. As he wrote to Sue Curtin at the SEC:

When the FBI came to my house shortly after I met you, Ms.Curtin, I wish you could have seen my face. I thought I was in amovie, or a bad dream. I dont want to bore you with a very long

letter, so I will try to keep this short. The FBI agents KendraMcLamb and Mark Digiovani were very nice; however they toldme things that were the exact opposite of what I believed for 3+years.

* * *

Words cannot describe what I was hearing from the FBI agents.After realizing that this was not a movie and then havingdiscussions with other professional people and most importantlyMike Mustokoff, did I see that what does happen on TV happened

to me. I would like to also tell you that Kendra McLamb of theFBI said to my face after getting to know me Tom dont change

who you are and dont stop having faith in others because thats

what I love about you. Please talk to Ms. McLamb from the

FBI, and she can tell you a lot more about me and my life.



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Kelly Decl. at Exhibit 1; Mustokoff Decl. at Exhibit C (attached thereto as Exhibit 2)

(emphasis added).

Over the course of the next several months, Mr. Kelly cooperated with the FBI in their

investigation by gathering evidence for the FBI. See McLamb Decl. at 5-8 & Exhibit A;

Kelly Decl. at 38.

Special Agent McLamb has submitted a declaration on Mr. Kellys behalf. Agent

McLambs testimony illustrates clearly the extent of Mr. Kellys cooperation (and the SECs

awareness of that cooperation, notwithstanding its silence on that point now). It also reveals the

FBIs unambiguous view about how unaware Mr. Kelly was about his being used by Mr. Bryant

and Mr. Duncan in the scheme:

I am an Agent with the Federal Bureau of Investigation (FBI)assigned to the Washington Field Office. I have been assigned tothe investigations of financial crimes for more than nine years.During 2011, I was the case agent on a criminal investigationinvolving 8000, Inc. (EIGH).

In or around March 2011 , United States Postal Inspector MarkDiGiovanni and I first interviewed Thomas J. Kelly at his home inPennsylvania. Mr. Kelly was cooperative and agreed to speak withme without hesitation.

In that initial interview of Mr. Kelly. I questioned Mr. Kelly abouthis role with 8000, Inc. (EIGH), Jonathan Bryant and Carl Duncan.

During the course of that interview, Mr. Kelly appeared to be

unaware of the extent to which Mr. Bryant and Mr. Duncan had

used Mr. Kelly in order to perpetuate the scheme described in the

Complaint in the above action.

For the next several months following that interview, Mr. Kellycooperated with a criminal investigation into the activities ofJonathan Bryant and Carl Duncan concerning their roles in thescheme described in the Complaint.

Mr. Kelly gathered evidence for this investigation by recordingtelephone calls at my direction, and providing recordings and ofthose conversations to me. I would provide Mr. Kelly with talking



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points for those conversations in order to obtain evidence in myinvestigation

Mr. Kelly also corresponded with Mr. Bryant at my direction-using language I drafted for Mr. Kelly- in order to gatheradditional evidence.

* * *

During the initial interview, and throughout my dealings with

Mr. Kelly, it appeared to me that Mr. Kelly was not fully aware of

all aspects of the scheme of which he was a part. Mr. Kelly

appeared to lack an appreciation of the full significance of the

actions he took at Mr. Bryant's behest on behalf of EIGH.

I understand that Mr. Kelly was represented by Carl Duncan whenhe appeared before the SEC, prior to my initial interview with him

and his subsequent retaining of the law firm of Duane Morris.

I have no reason to believe that Mr. Kelly was aware that he was

receiving anything other than sound legal advice from Mr.

Duncan, despite Mr. Duncan's role in the scheme described in

the Complaint.

Not until Mr. Kelly retained new counsel, did he appear to fully

understand the scope of the scheme described in the Complaint.

I advised attorneys for the Securities and Exchange Commission of

Mr. Kelly's cooperation in this matter.

McLamb Decl. at 1-7, 10-15 (emphasis added).

There can be no doubt that the investigators with whom Mr. Kelly was working

understood that he was manipulated by Mr. Bryant. For example, in one email that Agent

McLamb draftedfor Mr. Kelly to send to Mr. Duncan and Mr. Bryant, Agent McLamb

succinctly encapsulated her understanding of Mr. Kellys role as an unwitting puppet:

Carl,

I wont be sending you any bullet points. You and Jonathan canremove me from the company however you wish. Ive put up witha lot of crap over the last two yearsthe harassment, the bullying,his [Mr. Bryants] emotional tirades etc. When you and Jonathantold me to jump, I just asked how high.



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Im tired of being the puppet. Its clear that you and JB neverthought of me as anything else. And what did I do? I went alongwith it; I paid Jonathan every time he was in trouble and being anidiot. I signed off on those bogus press releases and got excitedabout what I now believe was just a big scheme. Now its me who

is facing an SEC investigation and harassment from shareholders.

Im tired and for the sake of my family, Im ready for this to beover.

You should know that Ive been advised to back to the SEC andprovide additional testimony. I am doing so voluntarily andwithout counsel. I may have done some illegal things, but it wasunder your and Jonathans direction, and Im done getting sickover this. Im ready to get my life back.

McLamb Decl. at Exhibit A, p. KM000109.

C. Settlement Terms & Calculation of Disgorgement.As memorialized in an October 18, 2012 Letter to Counsel for the Commission, more

than a year ago, Mr. Kelly and the Commission agreed to resolve this matter as follows:

$73,408 in disgorgement, $2,732.89 in prejudgment interest, and $25,000 as a fine . . . .

Declaration of Michael M. Mustokoff, at Exhibit D (October 18, 2012 Correspondence from

Michael M. Mustokoff to Sue Curtin and Deena Bernstein).

The Commission could not credibly suggest that documents and information provided by

Mr. Kellys counsel subsequent to that October 2012 calculation led the Commission to renege

on its agreement. To the contrary, the information provided to the Commission after the October

2012 agreement related solely to Mr. Kellys financial inability to pay. SeeMustokoff Decl. at

Exhibit G, H, I (Correspondence and attached financial information provided to the

Commission subsequent to October 18, 2012).

According to the Commission, financial inability has no bearing on the determination of

what amount of disgorgement should be ordered. See Motion for Remedies, at 6. Accordingly,

such subsequently-provided information (which shows only Mr. Kellys inability to pay), could



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not have conceivably led the Commission to depart so sharply from its agreement. There is no

apparent basis for the Commission to have done so.

In fact, the October 2012 Agreement (based upon the Commissions own calculations)

was reached after providing the Commission with additional financial information following the

Commissions initial calculation of a disgorgement amount of $264,224a far smaller number

than that sought now. See Mustokoff Decl. at Exhibit B (May 4, 2012 Correspondence to

Michael M. Mustokoff, Esq. from Sue Curtin, Esq.); Exhibit C (Financial Information

submitted to the Commission following the May 4, 2012 calculation, attached thereto as Exhibit

1).

III. ARGUMENTAs discussed below, Mr. Kelly respectfully requests that this Court exercise its discretion

to order disgorgement, if any, in the amount calculated previously by the Commission ($73,408

in disgorgement and $2,732.89 in prejudgment interest). If financial remedies are to be imposed

at all, Mr. Kelly requests that this Court adopt the Commissions October 2012 calculation of

disgorgement and interest, which appears to have been a calculation of all accounts profits and

losses, all expenses subtracted from the profits, and recognizing Mr. Kellys cooperation with

the FBI. In making this request, Mr. Kelly asks that this Court take into account all of the

relevant brokerage accounts (not merely the single account used by the Commission in its

calculation), expenditures made by Mr. Kelly on EIGHs behalf, Mr. Kellys financial

limitations, his role as an unsophisticated puppet in Mr. Bryants and Duncans scheme, and to

recognize the input from Special Agent McLamb.

Additionally, Mr. Kelly respectfully suggests that no penaltyis appropriate under the

circumstances (and in any event, not exceeding $25,000), in light of his lack ofscienter, his

cooperation with the Government upon learning of the significance and meaning of his action,



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his admitting to having violated securities laws, and the total lack of any penalty to deter Mr.

Kelly.

A. Disgorgement and Interest Should not Exceed the Amount CalculatedPreviously by the Government and Memorialized in the October 18, 2012Agreement.

As the Commission notes, [t]his Court has broad equity powers to order the

disgorgement of ill-gotten gains obtained through violation of the securities laws. Motion for

Remedies, at 5 (citing SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1474 (2d Cir. 1996)). The

Commissions request for disgorgement is overreaching. The Commission is correct: [t]he

district court has broad discretion not only in determining whether or not to order disgorgement

but also in calculating the amount to be disgorged. First Jersey Secs., Inc., 101 F.3d at 1474-75

(emphasis added) (citing SEC v. Lorin, 76 F.3d 458, 462 (2d. Cir. 1996)). We recognize that,

although it would not be an abuse of discretion, id. at 475 (citing SEC v. Posner, 16 F.3d 520,

522 (2d Cir. 1994)), under these circumstances for the Court notto order disgorgement, it would

be unusual. Thus, taking into account Mr. Kellys role as a trusting and unwitting puppet of

Mr. Bryant and Mr. Duncan, to the extent that disgorgement is appropriate at allit should be

calculated based upon the Governments own previous calculation of $73,408 in

disgorgement, $2,732.89 in prejudgment interest. Mustokoff Decl. at Exhibit D.

Although we anticipate that the Commission will argue that its October 2012 agreement

and calculations were merely a settlement communication, and neither admissible nor relevant

to this Courts determination of the appropriate remedy, the Commissions calculations are

highly relevant. First, the Commissions agreement was not part of a negotiation. It was an

agreementone based upon the Commissions own calculations. See Mustokoff Decl. at 5-

10. Second (and regardless of how the Commission might characterize the October 2012

agreement), the Commission understood and calculatedthe correct, reliable, and equitable



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remedya reasonable approximation of profitsto be a mere fraction of what it now seeks. It

is therefore highly relevant to this Courts decision as to what the equities require in this case.

See First Jersey Securities, Inc., 101 F.3d at 1475 (quoting SEC v. Patel, 61 F.3d 137, 139 (2d

Cir. 1995)) ([t]he amount of disgorgement ordered need only be a reasonable approximation of

profits causally connected to the violation . . . .).

Although the precise formula used by the Commission to reach that October 18, 2012

figure ($73,408 in disgorgement, $2,732.89 interest) remainssomewhat of a mystery, it would

appear to be based upon accounting for all six brokerage counts, and for expenditures Mr. Kelly

was induced by Mr. Bryant to pay on EIGHs behalf. The Commission initially calculated a

disgorgement amount of $264,224 based upon losses and proceeds in Mr. Kellys sixaccounts,

Mustokoff Decl. at Exhibit B. After providing the Commission with information concerning

Mr. Kellys financesincluding his approximately $171,000 in expenditures on behalf of

EIGHthe Commission calculated the $73,408 disgorgement figure it now wishes to avoid.

The Commission now asks that this Court cherry pick a calculation based upon only a single

brokerage account (the Schwab account), and ignore any fuller financial picture. See Motion for

Remedies at 7 (citing Declaration of Mark Albers at 6-8). When taking into account that more

complete picture, the basis for the calculation in the Commissions October 2012 Agreement

begins to take shape.

As the Commission is no doubt aware, [c]ourts in this Circuit consistently hold that a

court may, in its discretion, deduct from the disgorgement amount any direct transaction costs,

such as brokerage commissions, that plainly reduce the wrongdoer's actual profit. S.E.C. v.

McCaskey, No. 98-CIV-6153S-WKAJP, 2002 WL 850001, at *4 (S.D.N.Y. March 26, 2002)

(citing SEC v. Rosenfeld, 97 Civ. 1467, 2001 WL 118612 at *2 (S.D.N.Y. Jan. 9, 2001) ([a]



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court may in its discretion, deduct from the defendant's gross profits certain expenses incurred

while garnering the illegal profits, including . . . transaction costs such as brokerage

commissions.);see also SEC v. Shah, 92 Civ.1952, 1993 WL 288285 at *5 (S.D.N.Y. July 28,

1993).

Beginning with the Commissions own disgorgement calculation based upon all six

accounts ($264,224)as well as the $171,252.32 expended on behalf of EIGH,see Mustokoff

Decl. at Exhibit C (June 12, 2012 Correspondence to SEC); Kelly Decl. at 41,4a fuller picture

of a reasonable approximation emergesone that closes the gap between what the

Commission now seeks and what was previously agreed to.

We also must note that, with respect to the Commissions assertion that [f]inancial

hardship is not relevant to considering [the] amount of disgorgement, Motion for Remedies at 6,

the Commission overstates the law. The fact a court is not bound toconsider a defendants

claims of financial hardship, SEC v. Universal Express, Inc., 646 F.Supp. 2d 552, 565

(S.D.N.Y. 2009) (emphasis added), does not mean that it is impermissible for the Court to do

so. To the contrary: as the Court in Universal Express, Inc.noted, claims of financial hardship

mightbe considered by the Court, upon some evidence of that hardship. 646 F.Supp. 2d at 565

([e]ven if the Court were inclined to entertain his argument, [Defendant] has provided no

evidence of financial hardship other than his own self-serving and conclusory assertions.) Here,

the Commission could not credibly claim that Mr. Kelly has financial means. The Commission

4Mr. Kelly has refrained from submitting voluminous financial documents (many ofwhich contain confidential information) at this time in support of factual issues that have notbeen a subject of dispute between the parties. To the extent that the Commission now disputesthis figure (or any other financial details) despite having been provided support for itor if theCourt wishes Mr. Kelly to submit that informationMr. Kelly respectfully requests theopportunity to submit the underlying documents through a supplemental declaration or at ahearing on the issue of remedies.



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and Mr. Kellys counsel have exchanged volumes of financial records showing precisely that

lack of financial ability. See Mustokoff Decl. at Exhibit A, B, C, G, H, I.5 In fact, the

Commission itself provided legal authority to provide comfort its position that Mr. Kellys

financial inability would not result in an order of contempt. See Mustokoff Decl. at Exhibit D,

10.

The Commissions previous calculations and the facts of this case warrant no greater

disgorgement than that memorialized in the October 18, 2012 letter. Although Mr. Kelly does

not dispute having violated securities laws, Mr. Kelly is a far cry from a swindler,

fraudulently obtain[ing] gains. Motion for Remedies, at 5-6. The Commission knows better,

and to disregard the input of the FBI agents with whom the Commission conferred previously is

shameful. He was unaware of the degree with which he was being used by Mr. Bryant and Mr.

Duncan. See McLamb Decl. at 4, 10, 11, 14. He lacked the sophistication to understand that

he did not have sufficient information to sign off on press releases penned by Mr. Bryant. He

also sold shares of EIGH with a motive unrelated to any false press releaseand only after

seeking and receiving advice and approval from Mr. Duncan. See Kelly Decl. at 35. Mr. Kelly

is, respectfully, not the typical securities law violator who stands before this Honorable Court.

Accordingly, we respectfully request that the Court account for Mr. Kellys financial

expenditures on behalf of EIGH at Mr. Bryants urging, as well as his financial inability to pay,

and limit any order of disgorgement in an amount not to exceed the Commissions October 2012

calculation of $73,408 in disgorgement and $2,732.89 in prejudgment interest.

5As with the issue of Mr. Kellys expenditures on behalf of EIGH,see n.2,supra, if the

Commission now disputes Mr. Kellys financial inability notwithstanding having receivedextensive documentation and having provided Mr. Kellys counsel with authority concerning theabsence of contempt for financial ability, See Mustokoff Decl. at Exhibit D, Mr. Kellyrespectfully requests the opportunity to submit underlying financial documents through asupplemental declaration or at a hearing on the issue of remedies.



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B. Mr. Kellys Cooperation with the Government, His Unwitting Role in theScheme, and the Relatively Minor Penalty Imposed Upon Carl Duncan

Warrant, at Most, a Penalty Consistent with the Governments October 18,

2012 Agreement.

The Commissions request for a third-tier penalty is both heavy-handed and ignores

(deliberately or otherwise) the facts of this case. Although the parties agreed in October 2012 to

a $25,000 penalty, in light of the Commissions effort to ignore that agreement wholesale, we

respectfully request that this Court impose no penalty. There simply does not exist a factual

basis for the penalty sought by the Commission. Under the factors identified by the

Commission, we respectfully suggest that nocivil penalty is necessary for effective deterrence.

Motion for Remedies at 8.

As addressed at length above, Mr. Kellythough nave, overly trusting and

unsophisticateddid not deliberately engage in fraud, deceit, manipulation, or a deliberate

disregard of a regulatory requirement. 15 U.S.C. 77t(d)(2)(c)(ii)(I). Contrary to the

conclusory boilerplate law set forth in the Commissions Motion, the facts simply do not bear

this out. Under all relevant factors identified by the Commission,see Motion for Remedies, at 9

(citing, inter alia, SEC v. Rosenthal, 426 Fed. Appx. 1, 4 (2d Cir. 2011)), the penalty sought is

not appropriate. Mr. Kelly lackedscienter; and promptly ceased violating any laws and

cooperated with the Federal Bureau of Investigationas soon as he realized that he had been a

part of Mr. Bryants and Mr. Duncans scheme. Mr. Kelly has unambiguously admitted to his

wrongdoing and violations of securities lawshe has entered into a consent judgment to that

effect, and offers explanations, not excuses for how he found himself involved with Mr. Bryant.

Mr. Kelly engaged in regular and extensive cooperation with the FBI in their investigation of Mr.

Bryant and Mr. Duncan. Finally, as noted above, he lacks the financial ability to pay.



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It is surprising then, that the Commission would expend providing the Court with an

exegesis of civil penalties, peppered with conclusory assertionsyet simultaneously ignore the

actual facts of this case. The Commission is and was well aware of the FBIs view of Mr. Kelly

as a nave puppet in Mr. Bryants and Duncans schemeyet ignores completely those highly

relevant facts in seeking an excessive penalty. Whatever the Commissions motive might be in

ignoring the factual landscape to seek a disproportionately higher remedy from Mr. Kelly than it

has from Mr. Duncan, matters little. The facts simply do not support the imposition of a penalty.

To the extent this Court does impose a penalty, however, Mr. Kelly requests that no penalty

exceed the $25,000 penalty agreed to by the parties in October 2012.



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IV. CONCLUSIONFor all the foregoing reasons, Mr. Kelly respectfully requests that this Honorable Court

enter an order either denying entirely the Commissions request for disgorgement, or

alternatively for $73,408 in disgorgement and $2,732.89 in prejudgment interest; and that the

Court deny the Commissions request for a civil penalty, or in the alternative, impose a penalty

not to exceed $25,000.

DUANE MORRIS LLP

By: /s/Daniel R. WalworthMichael M. Mustokoff (pro hac vice)Daniel R. Walworth30 S. 17

thStreet

Philadelphia, Pennsylvania 19103-4196Tel.: (215) 979-1810/(215) 979-1194Fax.: (215) 689-3607/(215) [email protected]@duanemorris.com

Evangelos Michailidis1540 BroadwayNew York, NY 10036-4086Tel: (212) 471-1864Fax: (212) 214-0650Email: [email protected]

Attorneys for Defendant Thomas J. Kelly

Dated: October 30, 2013



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CERTIFICATE OF SERVICE

On the 30th day of October 2013, I caused a copy of the foregoing Response of Thomas

J. Kelly in Opposition to the Securities and Exchange Commissions Motion Requesting

Remedies, supporting declarations, accompanying exhibits, and proposed forms of order to be

served on all counsel of record in this action by the Courts electronic filing system.

/s/Daniel R. Walworth

Daniel R. Walworth


SEC v. 8000, Inc. Et Al Doc 29 Filed 30 Oct 13

Documents

Transcript of SEC v. 8000, Inc. Et Al Doc 29 Filed 30 Oct 13