SEC v. e-Smart Techs.: SEC Wins Summary Judgment Case Against “Sham” Corporation
In SEC v. e-Smart Techs., Inc., et al., No. 11-895 (JEB), 2015 BL 89408, March 30, 2015, the United States District Court for the District of Columbia denied Tamino Saito’s (“Defendant”) motion for summary judgment and granted the SEC’s motion.
The SEC alleged that Defendant violated sections 10(b) of the Securities Exchange Act of 1934 (“Act”) and rule 10b-5 by materially misrepresenting investors in the sale of securities. In addition, the SEC alleged violations of Section 16(a) of the Exchange Act.
According to the SEC’s allegations, E-Smart Technologies, Inc. (“e-Smart”) was a publicly traded company that failed to deliver on promises made to investors in relation to a new e-Smart technology capable of reading and identifying a person’s fingerprints without using an external database. The SEC alleged that Defendant, as the chief technology officer, “repeatedly lied about the actual capabilities of any product that e-Smart had produced.” He was alleged to have claimed “that the company had a highly functional smart card that was ready for commercial deployment, e-Smart had in fact only developed a prototype that did not even work as promised.”
Rule 10b-5 makes actionable a false or misleading statement made in connection with the purchase or sale of a security. The statement alleged to be false must be made with scienter, a “mental state embracing intent to deceive, manipulate, or defraud” and can arise from intentional misconduct or extreme recklessness. Section 16(a) requires officers, directors, and 10% shareholders to file ownership reports with the SEC. 15 USC 78p(a).
Defendant, who represented himself pro se, and the SEC both relied on experts and both sought to exclude the reports that each had produced. The court declined to adopt the motion submitted by the SEC, noting that dong so was a “drastic step” and that Defendant was pro se.
With respect to the SEC’s expert report, the court denied Defendant’s motion to exclude. Defendant claimed that the SEC’s expert report should be struck because: (1) the expert lacked the expertise because he and his firm were not experts “in all aspects” of the card’s technology; (2) the expert failed to adequately test the card because he failed to employ a “distance test”; (3) the report included a “mish-mash of generalized assertions, without reference to dates and without conducting any specific tests, or having any first hand knowledge or experience with testing defendant’s cards”; and (4) the report “adopts” the statements of others. The court disagreed with these assertions and did not strike the expert report prepared for the SEC.
With respect to the alleged misstatements, the court laid out a five-step process for analyzing the SEC’s allegations: (1) the extent to which e-Smart misrepresented its card’s capabilities; (2) whether Defendant was responsible for making any false assertions; (3) whether Defendant possessed the requisite scienter; (4) to what extent any misrepresentations were material; and (5) whether Defendant’s statements were made in connection with the purchase or sale of securities.
The court determined e-Smart made several misrepresentations. Defendant, however, contested his responsibility for the misstatements. With respect to the SEC’s contention that Defendant had the ultimate authority over statements made regarding the card’s capabilities and was therefore the “maker” of the statement under Rule 10b-5, he asserted that he did not sign the relevant report but that someone else had attached his signature to the certification. The court, however, rejected this argument, finding that Defendant had not provided documentary evidence “to support such a serious allegation”.
Next, the court determined Defendant acted with scienter. The court found that there was “no way” Defendant was unaware of the actual capabilities of e-Smart’s technology. Because the capabilities of e-Smart’s one and only product would be important to an investor’s decision to participate, the court also held Defendant’s misrepresentations were material. Id. (“Given [Defendant’s] role at e-Smart, there is simply no way he could have been mistaken about the state of its technology. As noted above, he was the only member of e-Smart’s management team that had “ever operated a smart card business or [had] any experience with the manufacture and marketing of smart card products,” and as far as e-Smart’s core technology was concerned, he purportedly invented it.”).
Finally, the court held that Defendant’s misrepresentations were made in connection with the purchase or sale of a security. The standard requires that any action “touching the sale of securities” is considered “in connection.”
The SEC’s second claim alleged Defendant violated section 16(a) of the Act. As the court noted, scienter is not required in a section 16(a) action. The court found that at various times, Defendant served as an officer and/or director of the company and had not filed the requisite reports reflecting his beneficial owneship of the shares.
As a result, the court granted the SEC’s motion for summary judgment on both claims and denied Defendant’s motion for summary judgment.
The primary materials for this case can be found on the DU Corporate Governance Site.