Sec. & Exch. Comm'n v. E-Smart Techs., Inc.

• Decision Date: 21 November 2014
• Docket Number: Civil Action No. 11–895 JEB
• Citation: 74 F.Supp.3d 306
• Parties: Securities and Exchange Commission, Plaintiff, v. E–Smart Technologies, Inc., et al., Defendants.
• Court: U.S. District Court — District of Columbia

74 F.Supp.3d 306

Securities and Exchange Commission, Plaintiff

v.E–Smart Technologies, Inc., et al., Defendants.

Civil Action No. 11–895 JEB

United States District Court, District of Columbia.

Signed November 21, 2014

Kenneth John Guido, Jr., Daniel Joseph Maher, U.S. Securities & Exchange Commission, Washington, DC, for Plaintiff.

Mary A. Grace, Boulder, CO, pro se.

Tamio Saito, Las Vegas, NV, pro se.

Robert J. Rowen, Sebastapol, CA, pro se.

MEMORANDUM OPINION

JAMES E. BOASBERG, United States District Judge

In this civil-enforcement action, the Securities and Exchange Commission alleges that e-Smart Technologies, Inc., a public company, was a sham. While it purported to be at the cutting edge of developing and manufacturing a biometric “smart” card, such claims, according to the Commission, were bogus. Instead, pro se Defendant Mary Grace (the company's CEO) and others repeatedly misrepresented the cards' capabilities and e-Smart's success to induce investors to part with their money. That money, in turn, was used to subsidize Grace's extravagant, globe-trotting lifestyle.

Through three years of contentious litigation, this Court has had occasion to rule on myriad motions. It now addresses the SEC's First Motion for Summary Judgment against Grace. That Motion seeks resolution of two of the five claims against her—namely, that she violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b–5 by making material misrepresentations in connection with the sale of securities (Count I), and that she violated Sections 5(a) and 5(c) of the Securities Act by selling unregistered securities (Count II). Although the materials submitted are voluminous and Grace's are particularly daunting, the Court believes that the SEC has proved its case. It will therefore grant the Motion and enter judgment against Grace on both counts.

I. Background

On a motion for summary judgment, the Court must view the facts in the light most favorable to the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). As explained more fully below, however, Grace did not submit a proper Statement of Facts. As a result, to summarize the relevant background, the Court draws primarily from the SEC's Statement of Undisputed Material Facts, ECF No. 324–1.

A. E–Smart's Technology

E–Smart was a publicly traded company “engaged in the business of creating, marketing, manufacturing, installing, operating and maintaining biometric identification verification systems.” Mot., Att. 165 (2006 10–K) at 3. Its “core technology” was a “smart card” that used fingerprint matching “to positively authenticate” card users. See Mot., Att. 162 (Amended 2005 10–K) at 5. Such technology could be applied in a variety of contexts—such as banking or security access—to verify people's identities and protect personal information contained on, or accessed by, the cards. See 2006 10–K at 4.

The company's research and development efforts appeared to be quite successful. In October 2007, for example, e-Smart reported in its 2006 10–K—a mandatory annual-disclosure form for publicly traded companies—that it believed it was “the first ... [and] only company offering a commercially available dual !SO [sic ] 7816 (contact) and ISO 14443 B (wireless) compatible smart card with a fingerprint sensor onboard, biometric matching engine onboard and a multi-application processor.” Id. at 5. In March 2008, when the company filed an amended 2005 10–K, it reported that it still believed it was the only company offering such technology. See Amended 2005 10–K at 6. These filings also described the card's various features, including its “unique” “Match–on–Card” capability, which enabled the card to verify a person's fingerprints without connecting to an external database or network. See 2006 10–K at 4–5; Amended 2005 10–K at 6–7. The company similarly announced major technological advancements in press releases and communications with investors. See, e.g. , Mot., Att. 234 (November 4, 2008, Press Release).

B. E–Smart's Investors

Despite these reported achievements, e-Smart had little to no revenue. See Mot., Att. 63 (Deposition of Mary Grace) at 155:4–156:3; 158:8–16; Att. 68 (Deposition of Charlie Black) at 50:2–4; Att. 67 (Deposition of Stewart Hung) at 37:18–38:8. To keep the company going, its CEO, Mary Grace, was constantly seeking funds from investors and other sources. See, e.g., Mot., Att. 58 (Deposition of William McVey) at 27:13–28:19; Att. 25 (Investigative Testimony of Michael Elek) at 36:10–23; Att. 88 (E-mail from Grace to Henry Mollett & Bill McVey (July 30, 2006, 12:46 PM)); Att. 56 (Deposition of Kenneth Wolkoff) at 30:2–31:6.

In her communications with investors, she often explained that money was urgently needed to secure other opportunities or to protect their prior investments in the face of a funding emergency. See E-mail from Grace to Henry Mollett & Bill McVey (July 30, 2006, 12:46 PM); Mot., Att. 101 at 5 (E-mail from Grace to “Michael and Francesca” (Oct. 22, 2008, 3:08 PM)).¹ She also frequently divulged that e-Smart had just obtained, or was about to obtain, significant contracts and investments. See, e.g., E-mail from Grace to Henry Mollett & Bill McVey (July 30, 2006, 12:46 PM); E-mail from Grace to “Michael and Francesca” (Oct. 22, 2008, 3:08 PM); Mot., Att. 105 (E-mail from Grace to “Ron” (Feb. 22, 2008, 1:01 PM)).

The company likewise publicized that it had secured profitable contracts and investments in press releases and investor updates. See, e.g., Mot., Att. 79 (February 2005 “News from the Chairman”). In a May 2007 release, for instance, it stated that it had a “guaranty” of $50 million in funding from the Growth Enterprise Fund. See Mot., Att. 230 (May 18, 2007, Press Release) at 1. In a February 2008 release, similarly, it announced that it had a contract with Samsung under which e-Smart would deliver 20 million smart cards over two years. See Mot., Att. 108 (February 26, 2008, Press Release) (“Samsung Release”).

As a result of Grace's pleas and these reported successes, investors ponied up millions of dollars to the company. See, e.g., McVey Depo. at 13:2–15; Mot., Att. 59 (Deposition of Henry Mollett) at 11:14–15:4; Att. 87 at 232–234 (E-mail from William Sandler to Grace (July 31, 2009, 10:11 AM)). Unfortunately, the promised funding and contracts never materialized, see, e.g., Mot., Att. 117 (Letter from Charles Black, et al., to Grace, Dec. 30, 2008) at 1–2, and many investors later felt that Grace had lied to them about the supposedly imminent deals. See, e.g., Mot., Att. 85 at 64 (E-mail from Tom Howard to Richard Dick, et al. (Sept. 14, 2009)); Att. 115 at 1–2 (E-mail from Douglas Borwick to Grace (Apr. 3, 2007, 8:04 PM)); Att. 116 (E-mail from Ken Wolkoff to Grace (Oct. 24, 2006, 9:03 PM)); Mollett Depo. at 22:5–14; Att. 78 at 4 (E-mail from Bill McVey to Grace (Oct. 21, 2011, 8:53 PM)). They communicated their anger and frustration to her over a number of years. For instance, one investor informed her in April 2007:

I believe that millions of dollars were raised over the last two years by telling investors that funding was about to take place, as you did with the loans you solicited from me and Ralph.... There are many investors that believe they were told a lie regarding imminent funding, just to get their money.

E-mail from Douglas Borwick to Grace (Apr. 3, 2007, 8:04 PM); see also Att. 85 at 23 (E-mail from Bill McVey to Grace, et al. (Oct. 22, 2011, 9:19 AM)) (expressing frustration that he had invested $1.5 million over nine years, and none of the deals Grace promised ever happened). Grace, nevertheless, continued to promise investors that contracts and big investments were just around the corner.

C. E–Smart's Finances

In addition to its ceaseless search for revenue, the company struggled to keep its books and accounting in order. See, e.g., Mot., Att. 134 (E-mail from Stewart Hung, CPA, Horowitz & Ullmann to Tony Russo (Nov. 16, 2007, 6:08 PM)); Att. 135 (E-mail from Hung to Russo (Mar. 7, 2008, 5:44 PM)) (listing problems); Att. 70 (Deposition of Anthony Russo) at 42:4–16; Att. 85 at 57–58 (Letter from Henry Mollett to “Investors/ Shareholders,” Mar. 9, 2010); Hung Depo. at 39:17–40:17; 112:11–113:15. In fact, one accountant for the company did not even realize Grace had raised millions of dollars for e-Smart because he never saw these sums deposited into the company's accounts. See Russo Depo. at 42:4–16,48:10–49:25; 55:5–56:4.

One source of confusion may have been the way in which funds were moved among accounts at e-Smart, Intermarket Ventures, Inc., and IVI Smart Technologies, Inc. The latter two companies were corporations that Grace controlled. See Def. Am. Ans., ¶¶ 19, 20. Their only employees were Grace and e-Smart's Chief Technology Officer, Tamio Saito, and they had no business operations other than licensing certain technology to e-Smart. See id. Over the years, transactions involving the three companies were “commingled” on the books. Mot., Att. 66 (Deposition of Joseph Leshkowitz, CPA) at 18:1–20:18; Russo Depo. at 42:4–16; 48:10–49:25; 55:5–56:4. Grace also frequently directed significant numbers of e-Smart shares and investor funds to IVI and Intermarket, saying that those funds and shares were supposed to go to those companies. See, e.g., Mot., Att. 94 (E-mail from Grace to Emile Merzoug (May 20, 2007, 10:27 PM)); Att. 8 (Account Opening Document); Att. 2 (April 2007 Bank Record); Att. 86 at 88 (Letter from Grace to William Sandler, Jan. 26, 2009); Russo Depo. at 59:16–61:8; 92:5–94:5; Hung Depo. at 109:20–111:19; Att. 123 (Letter from Maranda Fritz, Hinshaw & Culbertson LLP, to David B. Deitch, Aug. 7, 2008) at 2. E–Smart's accountants, however, did not have access to the IVI or Intermarket accounts. See, e.g., Russo Depo. at 23:2–5; 41:18–23; 55:11–56:4; Leshkowitz Depo. at 58:2–9.

D. Grace's Spending

Despite the company's lack of revenue, see Mot., Att. 166 (2007 10–K) at 21,...