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Free-Spending E-Smart CEO Lied to Net Funds

(CN) - The chief executive of a company marketing a smart card to protect users' bank accounts lied to investors to persuade them to buy unregistered securities in her firm, a federal judge ruled.

The ruling by U.S. District Judge James Boasberg decided two of the fifth claims made against Mary Grace by the Securities and Exchange Commission, which in 2011 sued her company, e-Smart Technologies Inc., claiming it was nothing more than a sham.

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.

In its complaint, the SEC said e-Smart's allegedly fraudulent activities came to its attention after the company failed to filed several required reporters, including a registration statement for a massive stock sale.

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."

Since the SEC filed the lawsuit, a default judgment has been entered against the corporate defendants, and the court has also approved a consent judgment against two of three brokers who participated in the sale of unregistered e-Smart stock.

In March 2014, Judge Boasberg refused to dismiss the SEC's claims against Grace and e-Smart chief technology officer Tamio Saito. His ruling on Friday addressed one of two motions for summary judgment on the agency's claims against Grace.

Because a ruling on the second motion is pending, he did not get into the issues of remedies.

As he did in March, Boasberg began his latest ruling with an unsparing assessment of e-Smart Technologies, which despite its reported achievements, "had little to no revenue."

"To keep the company going, its CEO, Mary Grace, was constantly seeking funds from investors and other sources. ... " the judge wrote. "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."

"She also frequently divulged that e-Smart had just obtained, or was about to obtain, significant contracts and investments," he continues.

As a result, Boasberg said, "investors ponied up millions of dollars to the company."

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

All during this time, the opinion continues, the funds that did come in were moved among accounts at e-Smart and two other entities, Intermarket Ventures Inc., and IVI Smart Technologies Inc., corporations that Grace controlled.

Boasberg said these corporation had only two employees, Grace and Saito, and no business operations other than licensing technology to e-Smart.

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.

"Despite the company's lack of revenue ... Grace lived extravagantly while CEO. One accountant estimated that, over a four- and five-year period, her expenses were in the millions." Boasberg wrote.

In one example, Boasberg wrote that in just one month in 2007, Grace spent $177,000 from an IVI account on hotel accommodations, jewelry, clothing, and restaurants. That same month, the judge said, she also spent "tens of thousands of dollars from an e-Smart account on flights and hotels."

The SEC claims that after its review of e-Smart's accounts, it found that Grace transferred over $1.3 million to her personal accounts and $311,319 to family members. The agency said that in addition, Grace withdrew $397,501 in cash, spent $409,038 on retail purchases, $1.1 million on hotel charges, $59,310 on restaurant charges, and $356,917 on travel expenses.

"Such spending continue over the years, even though the company frequently had trouble paying employees' salaries and consultants' fees," Boasberg wrote.

Grace attempted to explain her spending in voluminous filings that maintained the money either went toward legitimate business expenses, or were permissible as part of her salary arrangement with e-Smart.

"The Court must note at the outset that it remains astounded by Grace's filings in this case," Boasberg wrote. "She has filled the docket with seemingly endless errata, failed to comply with various federal and loc

al rules of procedure, and ignored repeated orders regarding her pleadings."

Her filing in opposition to the SEC's motion "is another mish-mash of cut-and-pasted materials, interspersed among legal argument, and presented in varied colors, fonts and font sizes," he continued. 'While this Court is sympathetic to pro se parties' efforts to navigate procedural requirements, the instruction here did not ask for Grace's compliance with some obscure legal rule. Instead, there are basic precepts of 8th grade composition."

Admittedly frustrated with the defendant, Boasberg said the court went ahead and "waded through hundreds of pages of the materials that Grace submitted."

"It finds that, even if Grace could provide the evidence in proper form, there is no material fact in genuine dispute on the issues the Court now resolves."

On the first count, that Grace made material misrepresentations that led investors to think e-Smart had a deal in place with Samsung, Boasberg said Grace approved the press release saying this was so, and that her contention that she was making "forward-looking" statements was undermined by the press release being written in the present tense.

On the second count, he found the evidence in undisputable that Grace engaged in the sale of unregistered securities through which millions of dollars of "loans" were exchanged for missions of unregistered, free-trading shares.

"The evidence ... shows that the scheme was a method to offer and sell unregistered shares of e-Smart stock, and Grace has not established an exemption from registration," Boasberg wrote.

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