Case 1:12-cv-07261-TPG Document 37-1

Filed 11/21/13 Page 1 of 4

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

SUR-REPLY IN OPPOSITION TO SECURITIES AND EXCHANGE COMMISSIONS MOTION REQUESTING REMEDIES Through counsel, Mr. Kelly respectfully submits this short memorandum of law to address what appear to be mischaracterizations and new information contained in the Commissions Reply. First, the Commissions Reply serves only to support further that its settlement offer of $73,408 was, and remains, an appropriate and reasonable approximation for disgorgement. Counsel advises that, in their experience, the government makes settlement demands and does not float[], Kelcourse Declaration at 2, settlement offers only to retract and raise them by sixfold. Despite the Commissions suggestion that its October 2012 calculation is irrelevant, and an inadmissible settlement discussion, Mr. Kelly has pointed to that number to demonstrate that the Commission itself has calculated a range of reasonable approximations, of disgorgementfrom which it now wishes to select as though from a menu of options. In its reply, the Commission provides further support, independent of October 2012 communications, for that calculation as a reasonable approximation. Declaration of Susan Curtin, Esq. at 2 (One analysis resulted in the $73,408 estimate .). It would appear that, to the Commission, the difference between an analysis and a reasonable approximation is roughly $400,000.

DM1\4352080.1

Case 1:12-cv-07261-TPG Document 37-1

Filed 11/21/13 Page 2 of 4

The Commission attacks the credibility of counsel to suggest that there is no written proof of an offer by the Commission as to the terms to which the [October 2012 Letter of Michael M. Mustokoff, Esq.] agreed. Reply at 4. The Kelcourse Declaration is an example of artful dodges of what was an offer based on its analysis of investment and loss. Second, the Commissions Reply reveals that it has now, in fact, cherry-picked facets of Mr. Kellys investment in EIGH to ignore the full financial picture and generate an artificially high disgorgement figure: That the Commission chose not to account for the large amount of (worthless) shares Mr. Kelly still owns is disingenuous and does not reflect a reasonable approximation for disgorgement. Any calculation of disgorgement should account for the fact that Mr. Kelly was so thoroughly duped into his role in Duncan and Bryants internet scheme, that he held large amounts of shares. It defies logic to suggest that his losses from holding those shares should not be part of the larger financial picture in determining what amount of ill-gotten gains should be disgorged. Third, the Commissions current position that no support exists to demonstrate that Mr. Kelly expended large amounts of money on behalf of EIGHand feigning ignorance about his financial condition and expendituresis unworthy of a governmental agency. See Reply at 7: Mr. Kelly made numerous submissions of financial records to the Commission. For the Commission to act as though that did not happen is beneath the United States Government. Mr. Kelly has submitted to this Court a supplemental declaration, together with a request to file that declaration and attachments under seal, concurrent with the instant memorandum, providing support for his expenses and financial condition. 1 See Supplemental Kelly Decl. at (1).2 Fourth, the Commissions current request for a penalty reeks of retaliation for daring to provide the investigating FBI agents description of context and personalities causing Mr.

A redacted copy, without attachments, of Mr. Kellys Supplemental Declaration has also been filed publicly with the Court. Because the Commission now takes the position that [t]he staff did not deduct any of Kellys expenses in arriving at the $73,408 figure, Reply at 7 n. 6, Mr. Kelly respectfully requests that his expenditures of more than $171,000 on behalf of EIGH be considered in the Courts determination. This staggering number, borrowed on credit cards, is the best evidence of Mr. Kellys true and misguided belief in Jonathan Bryant and the company lawyer, Carl Duncan. 2
DM1\4352080.1

Case 1:12-cv-07261-TPG Document 37-1

Filed 11/21/13 Page 3 of 4

Kellys actions. The Commission asks this Court to construct a double bind based upon Mr. Kellys admissions and cooperation: Nowhere has Mr. Kelly ignore[d] the terms of the agreement he entered into with the Commission. Reply at 1. To the contrary, he has accepted responsibility for his actions. The Commission understood the facts and circumstances surrounding his actions, as did the FBI Agent whose declaration was filed on Mr. Kellys behalf. The Commission asks this Court to find that either: Mr. Kellys agreement and admissions of violations of the Securities Act is an admission of scienter justifying a significant penalty; or that his explanation for how he became embroiled in the scheme and denial of scienter show an absence of acceptance of responsibility justifying a significant penalty. Out of one side of its mouth, the Commission argues that Section 5 of the Securities Act of 1933 does not require scienter. Reply at 3. Out of the other, that his violativebut navelack of diligence in signing off on press releases is a claim that he lacked scienter and is prohibited by the consent he signed. Reply at 9. Finally, with respect to Mr. Kellys cooperation with the Government, the Commissions attempt to minimize his assistance with the FBI (an agent of which has provided a fairly unusual supporting declaration), raises more questions about the Commissions motivations than it undermines Mr. Kellys cooperation: The fact that Mr. Kelly provided cooperation to the FBI, not the Commission, Reply at 9, after he had testified in the Commissions investigation is a misdirection and of no moment. The Commission fails to admit that, at the time of Mr. Kellys testimony, he was simply unaware of the scheme and following the advice of the Companys lawyer whom he trusted. Mr. Kelly was not a knowing co-conspirator who flipped. He was a mark who, through a combination of self-delusion and trickery, was led into believing that he could be a business executive without prior experience or knowhow. The Commission fails to recognize that, at the time of Mr. Kellys testimony, he was represented by Carl Duncanone of the architects of the scheme. The Commission fails to concede that, when he was first made aware by the FBI about the nature of the scheme, he cooperated fully and completely when first asked to do so. Since when does the Government distinguish between agencies in determining the import of cooperation?

3
DM1\4352080.1

Case 1:12-cv-07261-TPG Document 37-1

Filed 11/21/13 Page 4 of 4

CONCLUSION For of the foregoing reasons and the reasons set forth in Mr. Kellys Opposition, and all supporting exhibits and declarations, Mr. Kelly respectfully requests that the Court impose remedies not to exceed the Commissions October 2012 analysis.

Respectfully submitted, 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: November 21, 2013

4
DM1\4352080.1