U.S. Eleventh Circuit - The FindLaw 11th Circuit Court of Appeals Opinion Summaries Blog

11th Cir. Affirms Judgment for SEC in CyberKey Fraud Case

A company making USB drives discovered that honesty isn't just the best policy -- it's the only policy that the SEC likes. Following some questionable press releases and financial disclosures, the SEC investigated the company and its PR firm, then filed a civil action against them.

A jury found in favor of the SEC at trial. On appeal, the Eleventh Circuit affirmed the judgment in this case of a fairly ham-handed scheme to boost stock prices by lying (and not doing it very well).

Too Good to Be True

CyberKey made USB drives preloaded with encryption software so that users could encrypt the data on the drives. A marketing company called MJMM, a subsidiary of Big Apple Consulting, agreed to promote CyberKey's business in exchange for cash or CyberKey stock (throughout their relationship, CyberKey paid only in stock, suggesting -- according to Courthouse News Service -- that this was a "pump and dump" scheme).

CyberKey CEO James Plant began to falsely report that it had been awarded contracts (of increasing value every time he told the story) with the "Military Post Exchange," a branch of government that doesn't exist. Plant even fabricated official-looking contracts, which the Eleventh Circuit said "contained several obvious inconsistencies," meaning Big Apple's head honchos didn't look them carefully enough. And even though CyberKey purportedly received a $4.2 million contract, it had just $6,000 in its bank account.

Nevertheless, Big Apple drafted a press release touting the new contracts, as it did with other press releases over the next 15 months -- all touting fake contracts.

We Had No Idea

Eventually (and you knew this was going to happen, right?), DHS came calling. They spoke to Big Apple about CyberKey's alleged contracts, which DHS said it had no record of. The whole scheme fell apart and Plant was sentenced to 97 months (that's eight years) for securities fraud. The SEC also filed a civil suit against CyberKey and Big Apple for making misleading statements.

The defendants claimed that they didn't act with the requisite intent to commit the fraud. In particular, Big Apple defendants said they didn't act "knowingly," which might be true -- except that definition also encompasses "severe recklessness." Similarly, Big Apple objected to including "deliberate ignorance" in the jury instructions. While it claimed that such a standard usually applies only to criminal cases, the Eleventh Circuit said there was no problem with applying it to civil cases in general, and this case in particular, finding "there was more than sufficient evidence to support the instruction."

There were plenty of opportunities, the court said, where a red flag should have gone up -- the small amount of money in the checking account and the contract document full of errors not being the least of them. And then, when DHS came calling, Big Apple still didn't investigate. All of this, the court said, added up to "deliberate ignorance."

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