E-Smart Tech Officer Lied About Smart Cards

(CN) - The chief technology officer of a firm marketing supposed identity-protecting smart cards lied to investors and regulators as he and others at the e-Smart Technologies Inc. desperately tried to keep their foundering company afloat, a federal judge ruled.

U.S. District Judge James Boasberg's condemnation of Tamio Saito, the inventor of the troubled technology, comes a month after he ruled e-Smart Technologies CEO Mary Grace failed to filed documents required by the U.S. Securities and Exchange Commission, and ignored discrepancies in others.

In November 2014, he held that Grace had misled potential and actual investors about the health of her firm, and that she unlawfully sold unregistered securities.

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.

The SEC maintains all of this was "pie in the sky." As it had in regard to its claims against Grace, the agency moved for summary judgment against Saito on charges he lied to promote the sale of securities in e-Smart Technologies, and failed to file required ownership statements.

Saito both opposed the motion and cross-moved for summary judgment on the claims.

As Boasberg seemed only too happy to make clear, Saito, representing himself, did little to help his case, filing submission after submission that the judge found " resistant to sensible interpretation."

"As explained more fully later on ... the filings Saito has styled 'Statements of Fact' are an often-impenetrable pastiche of passages from emails, reports, and unidentified documents interspersed with commentary ... ," the judge wrote.

Later Boasberg said he was frankly "astonished" by Saito's filings in this case. "Defendants have been warned that pleadings should not 'feature every font available in Microsoft Word and every color in the rainbow, with cut-and-paste e-mails and other outside materials sprinkled throughout the legal argument without demarcation.' Further filings, the Court has stated bluntly, 'should satisfy the basic demands of readability.'"

Despite this warning, Boasberg said Saito's most recent filings in the case were "consistent in one thing only: they all ignore this admonition. Every operative document is a potpourri of excerpted sources, interspersed with legal argument, and arranged in varied colors, fonts, and font sizes. ...The deficiencies in Defendant's Statements of Fact could alone warrant the grant of summary judgment in the SEC's favor."

The crux of the SEC's complaint against Saito was that, in his role as the principal architect of e-Smart's technology, he repeatedly lied about the actual capabilities of any product that e-Smart had produced.

Although he 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, the agency said.

Based on these allegedly false statements, the commission claimed that Saito 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.

But as frustrated as he was with Saito, Boasberg said the SEC's case wasn't a slam dunk.

"The problem," he explained, "is that e-Smarts technology evolved over time ..." and its capabilities "Ebbed and flowed."

"To further complicate matters, the communications with which the SEC takes issue vary one from another - sometimes drastically," the judge wrote.

As a result, Boasberg went to great pains in his opinion to review each of the party's claims against a strict timeline, and to explain his conclusions " at a science-for-poets level." In the end, that analysis doomed Saito, and won summary judgment for the SEC.

"Given Saito's role at e-Smart, there is simply no way he could have been mistaken about the state of its technology," Boasberg wrote. " ... 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. There is no way that the only person in a company who could verify the truth of its technological claims could be confused about those claims when making them.

"Nor could Saito have been in the dark on the various aspects of e-Smart's technological development," the judge continued. "As he himself asserts in briefing, 'Policies and Procedures were implemented that required every employee to make reports in writing - so the company had records - and so they could be translated - and the company would have a record of the daily and weekly activities related to all information from each office and lab, which was required to be put into daily and weekly reports.'"

"Given the uncontroverted evidence, no reasonable jury could believe that Saito, as CTO, did not know that the product he claimed to have ready for deployment in 2007 was, in fact, lacking in both significant technological respects and prohibitively expensive to manufacture," Boasberg said.

At the end of the day, Boasberg said, it was inescapable that "Saito falsely represented significant aspects of e-Smart's purported product. He boasted, contrary to the truth, that e-Smart used a fingerprint sensor that was unique and able to function regardless of a user's skin condition. He claimed that e-Smart had a commercially available smart card that could perform its biometric-matching functions wirelessly, when it did not. He touted e-Smart's so-called BVS2 system, which did not exist. And he represented that e-Smart's card was ready for deployment when, in fact, it could not even be feasibly produced.

"Any one of these misrepresentations on its own would be material to an investor; added up, they show the yawning gap between e-Smart's representations and the reality of its product," the judge wrote.

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