Question: A Question of Ethics. Melvin Lyttle told John Montana and Paul Knight about a "Trading Program" that purportedly would buy and sell securities in deals that were fully insured, as well as monitored and controlled by the Federal Reserve Bank. Without checking the details or even verifying whether the Program existed, Montana and Knight, with Lyttle's help, began to sell interests in the Program to investors. For a minimum investment of $1 million, the investors were promised extraordinary rates of return-from 10 percent to as much as 100 percent per week-without risk. They were told, among other things, that the Program would "utilize banks that can ensure full bank integrity of The Transaction whose undertaking[s] are in complete harmony with international banking rules and protocol and who [sic] guarantee maximum security of a Funder's Capital Placement Amount." Nothing was required but the investors' funds and their silence-the Program was to be kept secret. Over a four-month period in 1999, Montana raised approximately $23 million from twentytwo investors. The promised gains did not accrue, however. Instead, Montana, Lyttle, and Knight depleted investors' funds in high-risk trades or spent the funds on themselves. [SEC v. Montana, 464 F.Supp.2d 772 (S.D.Ind. 2006)]

1 The Securities and Exchange Commission (SEC) filed a suit in a federal district court against Montana and the others, seeking an injunction, civil penalties, and disgorgement with interest. The SEC alleged, among other things, violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. What is required to establish a violation of these laws? Describe how and why the facts in this case meet, or fail to meet, these requirements.

2 It is often remarked, "There's a sucker born every minute!" Does that phrase describe the Program's investors? Ultimately, about half of the investors recouped the amount they invested. Should the others be considered at least partly responsible for their own losses? Why or why not?