(CN) - Officers at a company with technology that supposedly protects users' bank accounts must face claims that they defrauded investors, a federal judge ruled.
On its website, e-Smart Technologies 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.
It faces a 2011 complaint from the Securities and Exchange Commission, however, accusing the company, its officers and two affiliates of defrauding investors, neglecting to file several required reports - including a registration statement for a massive sale of stock - and failing to keep their accounts in order.
"In an era where identity theft is a realty and cyber threats increase in prominence, having a simple means to verify a user's identity could be a true boon - and e-Smart had the technology," U.S. District Judge James Boasberg wrote. "At least, that is what the company's unwitting investors believed."
The SEC, however, thought otherwise. As Boasberg bluntly put it, the agency believes "the cards do not work as advertised and have never been anywhere near ready for production, despite e-Smart's promises."
A default judgment has since 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, according to the ruling.
In a lengthy Wednesday ruling, Boasberg refused to dismiss claims against CEO Mary Grace and chief technology officer Tamio Saito.
A considerable portion of the 29-page ruling focuses on a 2006 SEC filing that claimed the company's smart card was "multifunctional," met international standards, and could contain multiple, independent and secure applications.
The SEC alleges Grace and Saito were well aware this information was not true, but they signed the document anyway.
Regulators have also offered detailed examples of instances where the company failed to disclose "certain material events," such as the resignation of a chief technology officer and the entire tech staff.
"The SEC contends, moreover, that 'Grace repeatedly lied to potential and current investors and to the e-Smart Board of Directors about major funding commitments and lucrative contracts she claimed to have obtained for e-Smart," Boasberg wrote.
It also alleges that "Grace also had a habit of heralding non-existent contracts to purchase e-Smart cards to the Board and would-be investors," the ruling states.
One alleged instance describes Grace's approval of a press released announcing that Samsung had signed a contract to purchase 200 million of e-Smart's smart cards, claiming the deal could produce as much as $100 million in profits.
"According to the SEC, however, Samsung had not ordered any cards from e-Smart," Boasberg wrote. "Rather, the two companies had executed a supply contract, which gave Samsung 'the option of purchasing cards from e-Smart' under agreed-upon terms ... the company later 'apologiz[ed] to SamsungS1 for the confusion related to e-Smart's press release,' but the company never publicly corrected its misstatements."
Grace and Saito are accused of violating at least five separate mandates of security statutes and regulations, and Boasberg said the SEC met its burdens of specificity.
The statute of limitations is also not an issue, nor have the officers shown that the SEC unfairly relied on information from a confidential informant, the court found.
While the amended complaint does refer to information provided by e-Smart's Chief operating officer, "all parties involved know that the COO during the relevant period was Richard Barrett," the ruling states.
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