Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 1 of 28

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. 8000, INC., JONATHAN E. BRYANT, THOMAS J. KELLY, and CARL N. DUNCAN, Defendants. NO. 12-cv-7261 (TPG)

CIVIL ACTION

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

DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 2 of 28

TABLE OF CONTENTS

I. II.

INTRODUCTION ...............................................................................................................1 BACKGROUND. ................................................................................................................2 A. Mr. Kelly Becomes a Mark in the Bryant/Duncan Scheme.................................... 2 1. 2. 3. 4. 5. B. C. Mr. Kelly Begins Online Stock Trading in 2005 and is Targeted by Jonathan Bryant. ......................................................................................... 3 Jonathan Bryant Lures Mr. Kelly In Further, and Sets the Hook. .............. 6 Mr. Bryant sets up 8000, Inc. and Uses Mr. Kelly to Unwittingly Send Out False Press Releases.................................................................................... 8 Mr. Kellys Purchase and Sale of EIGH Shares With Carl Duncans Advice. ...................................................................................................... 11 Mr. Kellys Testimony Before the SEC While Represented by Carl Duncan. ..................................................................................................... 12

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

III.

ARGUMENT .....................................................................................................................18 A. Disgorgement and Interest Should not Exceed the Amount Calculated Previously by the Government and Memorialized in the October 18, 2012 Agreement. ............................................................................................................ 19 Mr. Kellys Cooperation with the Government, His Unwitting Role in the Scheme, and the Relatively Minor Penalty Imposed Upon Carl Duncan Warrant, at Most, a Penalty Consistent with the October 18, 2012 Agreement. ............................................................................................................ 23

B.

IV.

CONCLUSION ..................................................................................................................25

DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 3 of 28

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. INTRODUCTION Two 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. Citations to the Motion for Remedies herein are to the Commissions Memorandum of Law in support thereof.
1

DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 4 of 28

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 greater financial 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. See Declaration of Thomas J. Kelly (Kelly Decl.), at 1-11.

2
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 5 of 28

1.

Mr. Kelly Begins Online Stock Trading in 2005 and is Targeted by Jonathan 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, when I purchased some Sirius satellite radio stock. I opened up an account on TDAmeritrade and bought my stock. I got a spam email from (I think it was called the bellwether report, an email advertisement) about a stock called Medify Solutions. I did a little due diligence and bought some stock. I liked what I read about this hand-held remote technology for patient medical notes in real live time for doctors around the world. I bought stock in the company ($10,000). This was my first time investing in the stock market other than my Roth IRA mutual fund (that is now worth less, due to me buying 8000, Inc. stock with it). I didnt know how to trade stocks, all I knew was to buy and hope it went up, and then sell 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 solutions and bought some stock. He was the CEO at the time, and he openly spoke with investors over the internet chat forums. I continued to lose money in this company, however being in business myself and going through a failed business myself I know what it takes to be successful and that 9 out of 10 business [sic] fail. You must believe in what you do, set attainable goals, and work as hard as you can to reach them. I really believed in Jonathan 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

2 3

Sic throughout. Sic throughout. 3

DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 6 of 28

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, I was working as a real estate appraiser and doing very well. I work very hard, and quoting my mother Thomas you work too hard but I get my work ethic from my hard working parents. My mother was a nurse for 20 years after having all 5 of us, and my father worked for the Teamsters (ACME markets) for 40 years. I have the best parents any son could ever ask for, and what they have 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 of anything, 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 and many others were concerned but still loyal shareholders. I was able to ask questions on a blog and get answers from the CEO Jonathan Bryant. I eventually emailed the Jonathan Bryant and asked him about the company, and told him I was a loyal shareholder. We had started communicating in mid to late 2006, and during 2007 became very good friends. He always told me that great things would happen with the company and suggested that I invest in the company. Many press releases involving Oracle, 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 large investment of $75,000 over a couple years. Jonathan became like an older brother to me that I never had. He had advanced degrees 4
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 7 of 28

in Micro Biology, and other sciences. He sent me journals of some things that he wrote or discovered in his fields, and we had many conversations over the course of time were he would tell me so many scientific things that blew my mind. 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). 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 in this business arena. He had told me about medical journals that he had written at University in London. He sent me the articles and again I was very impressed. We were both athletes in high school and university so he told me. He said that he was a professional soccer player in London, again very impressed. He was the father of 1 girl, 2 boys, and a step-daughter. Jonathan is older than me and 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 second to none, more loyalty than anyone can ask for, kind hearted, honest, smart and always striving to be the best that I can be. I have 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 getting back up with my dollar store experience, and being the owner operator of an appraisal business. At the time, I saw a lot of myself in Jonathan as he was a step-father, former athlete, business owner, and similar goals of being successful that it made me feel closer to him as a loyal friend. His stories about being a professional soccer player in London, his ideas of how he came up with the Medify solutions device to eliminate paper notes in the medical arena were just amazing to me. Kelly Decl. at 16.

5
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 8 of 28

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 Im very lucky to have a group of 8-12 very good friends since I was 12 years old. I am 44 years old now, and they are all still very close to me, and range from teachers to UPS delivery drivers. My point of all this is to let you know what kind of person I am and where I came from. I know now that I was fooled by a scam artist. 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). 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 back and forth to Jonathan Bryant about the company and getting to know him. I really took a liking to him thinking how smart he was, how educated he was, and being the CEO of a public company who was becoming a friend to me. As 2006 went on there were many things happening in my friends life and his company. He told me that others in the industry sabotaged and financially hurt his abilities to do business and things were getting very bad. We started talking to each other on a personal basis. He would ask me about my family and always gave me advice on different things that I had going on in my life whether it be health issues, women, business, sports, life, etc. We became very close as friends and I hated that people were taking advantage of Jonathan and his ability to grow the business. Kelly Decl. at 17.

6
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 9 of 28

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 he was falling on a very desperate time with his kids, food, mortgage payments, heating system, etc. At first it was a couple hundred here and there, but then became more. I told Jonathan everything about me, and maybe even boasted a bit about myself to appear on a similar level as him even though I thought I wasnt even in his class. 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 my business and building myself as a little more than I was to show him that I was worthy if he ever wanted to expand in business, as I would 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 and downs of any normal business, Jonathan would always talk about how good things would be, how exciting the future was, etc. I continued to invest in the company. As time went on, and the share price went down, or I noticed that selling was occurring and didnt understand, I asked Jonathan and he would give me great reasons all the time as to why there was selling. I believed every word 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:

7
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 10 of 28

Mr. Bryant started opening up to me about how Medify was getting brought down by others that wanted him to fail, and he saw an opportunity to save the company by doing a reverse merger into another company. I didnt know a lot of what Jonathan was talking 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 to step down as CEO of Medify and he was still a majority shareholder but wanted to move on to bigger and brighter things (including me in the future). His reason for leaving Medify seemed 100% justified to me at the time. He said that he wanted to let the other corporate guys handle the company and that he needed a change. I believed every word, and moved forward. The company eventually reversed merged into PETEL, Inc. I think I bought and sold more with the new company, and took a loss. Upset with my investment, Jonathan always knew what to say to me, and I believed every word as gospel. He was always doing, or talking about brokering deals in the market and I thought it was normal at the time. Id. at 21-23. 3. Mr. Bryant sets up 8000, Inc. and Uses Mr. Kelly to Unwittingly Send Out 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 lifestyle company out of London with millionaires and awesome cars, with rallies that were held in different countries. It was going to be this huge lifestyle company. In the fall of 2009, Jonathan asked me to go into business with him. He told me that 8000 (EIGH) had filed for bankruptcy and that Jonathan had purchased the shell company from the former CEO, Conrad Wall. Jonathan told me that he could not be the CEO because of something having to do with his not being able to gain collateral 8
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 11 of 28

money of more than 10% of shares held by an office. It was a bit unclear to me, but I trusted him, and thought he trusted me. I agreed 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 the Brand8000 clothing lineonline. Id. at 32(a); Mr. Bryant purported to order clothing for the Amateur Athletic Association of Barbadosand did so in Mr. Kellys presence. Id. at 32(b); Mr. Bryant took Mr. Kelly to what Mr. Bryant stated was a meeting with the Athletic Director of the Amateur Athletic Association of Barbados, and made a 9
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 12 of 28

show of handing over a check for $25,000 as part of a purported sponsorship by EIGH. Id. at 32(c); Mr. Bryant took Mr. Kelly to a track meet, and claimed that EIGH was sponsoring it. Id. at 32(d); Mr. Bryant showed Mr. Kelly artists renderings of a purported 8000, Inc. retail space 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 future location 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. sponsored race 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 including sponsorship of gold tournaments, other athletic Olympic games for the Athletic Association of Barbados, quarterly reports, and investor updates. I didnt fully understand all of the information in the 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 needed an attorney for something, he always referred to our Great former SEC attorney, Carl Duncan. Id. at 34.

10
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 13 of 28

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 Duncan like I would believe a police officer on the corner in my neighborhood, or a teammate on the baseball field. More than a teammate, however, these were people that I felt were far more knowledgeable in these matters than me. I would not have sold the stock without their advise. I started complaining to Jonathan about all the money and time that I had put into him and the company 11
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 14 of 28

and he said that I should sell some stock. Then I specifically asked Carl Duncan how much I was allowed to sell and when as I did not know the legalities since I was an officer of the Company. 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 1). 5. Mr. Kellys Testimony Before the SEC While Represented by Carl Duncan, 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 I was lied to and deceived by someone who I thought was a friend, and a professional SEC attorney (so I thought). The questions that were needed for the deposition w[ere] prepared by Jonathan and Carl. They told me what to say and how to fill out the forms and questionnaire. When I needed to speak with Carl in the other room he would yell at me for not knowing what I was doing. I felt like I was 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 a puppet. 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

12
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 15 of 28

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 the definition of a subsidiary, and was corrected by Duncan. Selected Excerpts of Nov. 22, 2010 Testimony of Thomas J. Kelly before the SEC (Kelly Testimony), 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 the SEC because, as he explained, he had limited knowledge because he placed complete trust and reliance in Mr. Bryant to lead him in the right direction. Kelly Testimony at 241:9-242:25. Kelly explained that Mr. Bryant drafted all the 8000, Inc. press releases. Kelly Testimony at 247:6-248:22. Kelly believed the 8000, Inc. press release claim that the Breitinger modeling agency could raise its annual revenue estimate to $1 million, despite reviewing no financial statements or information. Kelly Testimony at 248:3-252:16. Kelly did not understand what the term retained profit means. Kelly Testimony at 252:21-253:2, 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 upon Bryants representations concerning a press release claim that EIGH had over $2 million dollars in shareholder equity. Kelly Testimony at 252:21-253:2, 266:113. Kelly struggled to provide support for the 8000, Inc. press release claim that it dispatched 6,000 items from its clothing line and he was also unsure whether 8000, 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 accurately report their own financial information to Mr. Bryant. Kelly Testimony at 273:313. 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. 13
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 16 of 28

Kelly stated that Mr. Bryant came up with the idea of an 8000, Inc. shareholder dividend, and that Kelly did not ask questions about it because did not want to appear ignorant when speaking to his colleague. Kelly Testimony at 281:10282:3. Kelly believed that Jonathan Bryant paid the Lime Grove complex funds to open the 8000 Inc. flagship clothing store in Barbados because Bryant said he had. Kelly Testimony at 299:16-22. Mr. Kellys Cooperation With the Governments Investigation.

B.

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 a movie, 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 Kendra McLamb and Mark Digiovani were very nice; however they told me 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 having discussions with other professional people and most importantly Mike Mustokoff, did I see that what does happen on TV happened to me. I would like to also tell you that Kendra McLamb of the FBI 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.

14
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 17 of 28

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 to the investigations of financial crimes for more than nine years. During 2011, I was the case agent on a criminal investigation involving 8000, Inc. (EIGH). In or around March 2011 , United States Postal Inspector Mark DiGiovanni and I first interviewed Thomas J. Kelly at his home in Pennsylvania. Mr. Kelly was cooperative and agreed to speak with me without hesitation. In that initial interview of Mr. Kelly. I questioned Mr. Kelly about his 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. Kelly cooperated with a criminal investigation into the activities of Jonathan Bryant and Carl Duncan concerning their roles in the scheme described in the Complaint. Mr. Kelly gathered evidence for this investigation by recording telephone calls at my direction, and providing recordings and of those conversations to me. I would provide Mr. Kelly with talking 15
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 18 of 28

points for those conversations in order to obtain evidence in my investigation Mr. Kelly also corresponded with Mr. Bryant at my directionusing language I drafted for Mr. Kelly- in order to gather additional 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 when he 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 drafted for 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 can remove me from the company however you wish. Ive put up with a lot of crap over the last two yearsthe harassment, the bullying, his [Mr. Bryants] emotional tirades etc. When you and Jonathan told me to jump, I just asked how high.

16
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 19 of 28

Im tired of being the puppet. Its clear that you and JB never thought of me as anything else. And what did I do? I went along with it; I paid Jonathan every time he was in trouble and being an idiot. I signed off on those bogus press releases and got excited about 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 be over. You should know that Ive been advised to back to the SEC and provide additional testimony. I am doing so voluntarily and without counsel. I may have done some illegal things, but it was under your and Jonathans direction, and Im done getting sick over 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. See Mustokoff 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 17
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 20 of 28

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. ARGUMENT As 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 penalty is appropriate under the circumstances (and in any event, not exceeding $25,000), in light of his lack of scienter, his cooperation with the Government upon learning of the significance and meaning of his action, 18
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 21 of 28

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

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 not to 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 all it 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 510. Second (and regardless of how the Commission might characterize the October 2012 agreement), the Commission understood and calculated the correct, reliable, and equitable 19
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 22 of 28

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) remains somewhat 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 six accounts, 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]

20
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 23 of 28

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 41,4 a 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 to consider 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 might be 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 Mr. Kelly has refrained from submitting voluminous financial documents (many of which contain confidential information) at this time in support of factual issues that have not been a subject of dispute between the parties. To the extent that the Commission now disputes this figure (or any other financial details) despite having been provided support for itor if the Court wishes Mr. Kelly to submit that informationMr. Kelly respectfully requests the opportunity to submit the underlying documents through a supplemental declaration or at a hearing on the issue of remedies. 21
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 24 of 28

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. As 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 received extensive documentation and having provided Mr. Kellys counsel with authority concerning the absence of contempt for financial ability, See Mustokoff Decl. at Exhibit D, Mr. Kelly respectfully requests the opportunity to submit underlying financial documents through a supplemental declaration or at a hearing on the issue of remedies. 22
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 25 of 28

B.

Mr. Kellys Cooperation with the Government, His Unwitting Role in the Scheme, 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 no civil 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 lacked scienter; and promptly ceased violating any laws and cooperated with the Federal Bureau of Investigation as 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.

23
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 26 of 28

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.

24
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 27 of 28

IV.

CONCLUSION For 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. Walworth Michael M. Mustokoff (pro hac vice) Daniel R. Walworth 30 S. 17th Street Philadelphia, Pennsylvania 19103-4196 Tel.: (215) 979-1810/(215) 979-1194 Fax.: (215) 689-3607/(215) 405-2917 mmustokoff@duanemorris.com dwalworth@duanemorris.com Evangelos Michailidis 1540 Broadway New York, NY 10036-4086 Tel: (212) 471-1864 Fax: (212) 214-0650 Email: emichailidis@duanemorris.com Attorneys for Defendant Thomas J. Kelly Dated: October 30, 2013

25
DM1\4310824 4

Case 1:12-cv-07261-TPG Document 29

Filed 10/30/13 Page 28 of 28

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

DM1\4310824 4