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CEO Dodged Rules in Sorry Bid to Save Firm

(CN) - A smart card technology firm's CEO failed to file documents required by the U.S. Securities and Exchange Commission, and ignored discrepancies in others, as she tried to persuade investors to buy unregistered securities in her faltering company, a federal judge ruled.

The ruling by U.S. District Judge James Boasberg decided two of three outstanding claims the SEC filed against e-Smart Technologies Inc. in 2011, leaving open the question of whether CEO Mary Grace lied when she claimed her firm's smart cards could protect consumers against cyber threats.

The ruling is Boasberg's second in the case, and the second he's decided in the agency's favor. In November 2014, he ruled Grace had misled potential and actual investors about the health of her firm, and that she unlawfully sold unregistered securities.

In that ruling, Boasberg described Grace as "constantly seeking funds" to keep her company going, and in doing so lied in investors, telling them e-Smart "had just obtained, or was about to obtain, significant contracts and investments.".

Convinced of Grace's sincerity, the judge said, "investors ponied up millions of dollars to the company."

Boasberg said even as investors began to complain these contracts and investments never materialized, Grace continued "to promise investors that contracts and big investments were just around the corner."

The situation confounded even e-Smart's accountant, who had no access to the other corporation's books, and therefore couldn't get a handle on what was going on, the judge said.

The latest ruling is a bit more mundane, dealing with ancillary steps that Grace was alleged to have taken to avoid government scrutiny while she kept money rolling in.

On its website, e-Smart portrays itself as being on the front line of defense against financial fraud, identity theft and other forms of cybercrime. Specifically, the company produces "smart cards," wallet-sized cards with a built-in identity-verification system based on biometric data such as the user's fingerprint.

But the agency said the cards, which are marketed as protection against identity theft and other cyber threats, "do not work as advertised and have never been anywhere near ready for production, despite e-Smart promises."

In his latest ruling, dealing with e-Smart's reporting, recordkeeping, and internal financial controls, Boasberg said the case "continues to provide a cautionary tale for investors."

He also bemoaned Grace's actions during the case, describing her voluminous submissions were "jumbled and confusing," "opaque," and rife with shortcomings.

Nevertheless, Boasberg tried to offer a succinct summary of the more than 6,000 pages of documents as he moved through the SEC's motions.

Grace's first defense is that she relied the advice of counsel and didn't know of all the filings she was required to make.

"The Court ... notes that such a defense would seem inapplicable here, given that Grace reviewed and certified the company's 10-Ks, which explicitly acknowledged that its executive officers and directors (among whom Grace was listed) were subject to Section 16(a)'s reporting requirements and that, to the best of the company's knowledge, none of its executive officers and directors had filed the necessary forms," Boesberg wrote.

Despite having this responsibility, the judge said, e-Smart did not filed annual reports with the SEC for six years between 2008 and 2013.

"As if that were not enough, the Commission also provides evidence that the reports eSmart did file were often submitted long after the applicable deadlines," Boesberg wrote. "The Commission is, therefore, entitled to summary judgment against Grace on the ground that she knowingly aided and abetted e-Smart's violations" of the SEC's rules.

On the final charge the SEC has made against Grace, which focuses on the viability of the e-Smart technology itself, Boasberg said "the Court remains loath to enter this thicket now."

"The Court, accordingly, feels that it is more prudent and efficient to deny summary judgment at this ... It does so without prejudice, leaving open the possibility of revisiting this claim," he wrote.


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