U.S. Securities and Exchange Commission v. E-Smart Technologies, Inc.
139 F. Supp. 3d 170
D.D.C.2015Background
- SEC sued Mary A. Grace, Tamio Saito, e‑Smart, Intermarket, and IVI for securities‑law violations arising from (1) a convertible‑loan scheme that produced unregistered, free‑trading e‑Smart shares and (2) false public statements (a 2006 10‑KSB and a 2008 Samsung press release). Brokers settled; corporate defendants defaulted.
- Court granted summary judgment on liability for Grace and Saito (multiple counts under the Securities Act and Exchange Act); defaults entered against the three corporate entities.
- Grace was CEO/CFO/director and used investor funds for personal expenses; Saito was CTO and authored technical claims in the 10‑KSB.
- SEC sought remedies: permanent injunctions (broad securities‑law bar; officer/director bar; penny‑stock bar), disgorgement + prejudgment interest, third‑tier civil penalties, and permission to move later to establish a Fair Fund for investor distribution.
- Court found violations were deliberate, repeated, and created a reasonable likelihood of recurrence; awarded injunctions, limited officer/director and penny‑stock bars (10 years for Grace; 5 years for Saito), ordered corporate statutory penalties and a single $130,000 penalty for Saito, but deferred and required SEC to revise substantiation of disgorgement/Grace’s penalty request.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Permanent securities‑violations injunction | Pattern of deliberate securities fraud; likelihood of repetition warrants permanent bar | Defendants contest scope and need for lifetime relief | Injunctions granted: corporate and individual defendants barred from specified securities violations; lifetime bar on securities‑law violations for Grace and Saito as to specified statutes/rules (but other prospective bars were time‑limited) |
| Officer/director bar | Grace and Saito are unfit given egregious, repeated misconduct and continued intent to seek investors | Defendants deny fraud or claim reform; oppose lifetime bans | Bar imposed: Grace 10 years, Saito 5 years (court declines lifetime bars as excessive) |
| Penny‑stock participation bar | Penny‑stock market attracts repeat offenders; Patel factors justify bars | Defendants dispute scope and duration | Penny‑stock bars imposed: Grace 10 years, Saito 5 years (not lifetime) |
| Disgorgement & apportionment | SEC seeks disgorgement of investor proceeds ($19.6M for e‑Smart and allocated joint/several liability) and prejudgment interest | Defendants contest causal connection, apportionment, and Saito’s liability/profit; defaulting corps offered no rebuttal | Court held SEC may use investor proceeds as reasonable approximation but rejected SEC’s broad date ranges and causal linkage for the Samsung press release period; disgorgement denied without prejudice and SEC ordered to revise figures; Saito required to pay no disgorgement |
| Civil penalties & Fair Fund | SEC seeks third‑tier penalties (maximum for corporations; gross pecuniary gain for Grace; multiple multipliers for Saito) and authorization to move for Fair Fund | Defendants contest amounts and multiplicative counting of misstatements | Third‑tier penalties appropriate; court awarded corporate statutory maxima and $130,000 to Saito (treating the 10‑KSB as a single violation). Grace’s penalty deferred pending SEC’s revised disgorgement/penalty submission; Court authorized future motion to establish a Fair Fund. |
Key Cases Cited
- SEC v. Whittemore, 659 F.3d 1 (D.C. Cir.) (SEC may meet disgorgement burden by reasonable approximation of profits)
- SEC v. First City Fin. Corp., 890 F.2d 1215 (D.C. Cir.) (disgorgement must be causally related to wrongdoing; injunction‑analysis factors)
- SEC v. Patel, 61 F.3d 137 (2d Cir.) (multi‑factor test for officer/director bars and assessing unfitness)
- SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072 (9th Cir.) (gross proceeds may serve as reasonable approximation where fair‑market valuation is speculative)
- SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir.) (joint‑and‑several disgorgement appropriate where collaborators profited)
- SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir.) (reasonable likelihood of repetition standard for injunctions)
- SEC v. Savoy Indus., Inc., 665 F.2d 1310 (D.C. Cir.) (statutory authority to seek injunctions under §21(d))
- Steadman v. SEC, 603 F.2d 1126 (5th Cir.) (guidance on imposing the most drastic remedies and burden to justify lifetime bars)