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Securities and Exchange Commission v. E-Smart Technologies, Inc.

United States District Court, District of Columbia

March 30, 2015

E-SMART TECHNOLOGIES, INC., et al., Defendants.


JAMES E. BOASBERG, District Judge.

This long-running case features a civil-enforcement action brought by the Securities and Exchange Commission, alleging that e-Smart Technologies, Inc., a public company, was a sham. While it purported to be at the cutting edge of developing and manufacturing a biometric "smart" card, such claims, according to the Commission, were pie in the sky. In fact, pro se Defendants Mary Grace (the company's CEO) and Tamio Saito (its Chief Technology Officer) repeatedly misrepresented the cards' capabilities to investors. This Court, having granted summary judgment to the SEC on most of its claims against Grace, turns now to its allegations concerning Saito.

The Commission moves for summary judgment on both counts asserted against him - namely, that (1) he 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, and that (2) he violated Section 16(a) of the Act by failing to file required ownership statements. Saito both opposes and cross-moves for summary judgment on these claims. Resolution of these motions, in turn, requires the Court to rule on the parties' dueling independent motions to exclude the others' expert reports. Having waded through the extensive submissions - including Saito's, which are particularly resistant to sensible interpretation - the Court ultimately believes that the SEC has proven its case. It will thus grant the Commission's Motion for Summary Judgment and deny Saito's.

I. Background

This Court has already described much of the relevant background of this case in previous lengthy Opinions. See SEC v. e-Smart Technologies, Inc. (E-Smart I), 31 F.Supp. 3d 69, 74-78 (D.D.C. 2014); SEC v. e-Smart Technologies, Inc. (E-Smart II), No. 11-895, 2014 WL 6612422, at *1-4 (D.D.C. Nov. 21, 2014); SEC v. e-Smart Technologies, Inc. (E-Smart III), No. 11-895, 2015 WL 583931, at *1-2 (D.D.C. Feb. 12, 2015). It therefore summarizes only the basic underlying facts here and sets out more details where relevant in the subsequent analysis. See Section III, infra. In so doing, the Court is aware that, on a motion for summary judgment, it must view the facts in the light most favorable to the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). As explained more fully later on, however, the filings Saito has styled "Statements of Fact" are an often-impenetrable pastiche of passages from emails, reports, and unidentified documents interspersed with commentary. As a result, to summarize the relevant background, the Court draws primarily from undisputed documents and its prior Opinions.

E-Smart was a publicly traded company "engaged in the business of creating, marketing, manufacturing, installing, operating and maintaining biometric identification verification systems." Pl. Mot., Att. 1 (2006 10-KSB) (ECF No. 388-4) at 3. According to its public filings, its "core technology" was a "state-of-the-art Super Smart Card and Biometric Verification System... designed to accomplish immediate, local recognition of a person's fingerprint." Id. at 4. Key to e-Smart's card was "an on-board biometric matching engine, " which enabled it to "perform identification verification without reference to any external database." Id . According to e-Smart, this technology could be applied in a variety of contexts - such as banking or security access - to verify people's identities and protect personal information contained on, or accessed by, the cards. Id . This, e-Smart claimed, represented a unique and highly lucrative technology. In representations to investors, it claimed to be "the first... [and] only company offering a commercially available [contact]... and... [wireless]... smart card with a fingerprint sensor onboard, biometric matching engine onboard and a multi-application processor...." Id. at 5.

Notwithstanding these reported achievements, the company struggled to stay afloat. It had little revenue and depended continuously on investors for more funds. See E-Smart III, 2015 WL 583931, at *2. E-Smart frequently assured such investors that significant contracts and investments were just around the corner, and its press releases echoed this theme. Id . The purported contracts and investments almost never seemed to materialize, however, and many investors later felt that they had been deceived. Id.

Agreeing, the SEC brought this civil-enforcement action on May 13, 2011, against several Defendants including e-Smart and its CTO, Tamio Saito. Id . The crux of the SEC's Complaint against Saito is 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. Based on these allegedly false statements, the Commission claims 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. See First Am. Compl. (ECF No. 169), ¶¶ 113-15. It also alleges that he violated Section 16(a) of the Act by failing to file certain required ownership statements. See id., ¶¶ 127-29.

As a remedy, the SEC seeks disgorgement and civil penalties. See id. at 30-31 (Prayer for Relief). It also seeks an injunction prohibiting Saito from participating in penny-stock offerings, serving as an officer or director of certain issuers of securities, and engaging in further securities violations. Id . As mentioned previously, the Court has already granted summary judgment to the SEC on the lion's share of counts related to CEO Mary Grace. See E-Smart II, 2014 WL 6612422; E-Smart III, 2015 WL 583931. It is now Saito's turn in the spotlight.

II. Legal Standard

Summary judgment may be granted if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see also Liberty Lobby, 477 U.S. at 247-48; Holcomb v. Powell, 433 F.3d 889, 895 (D.C. Cir. 2006). A fact is "material" if it is capable of affecting the substantive outcome of the litigation. See Liberty Lobby, 477 U.S. at 248; Holcomb, 433 F.3d at 895. A dispute is "genuine" if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. See Scott v. Harris, 550 U.S. 372, 380 (2007); Liberty Lobby, 477 U.S. at 248; Holcomb, 433 F.3d at 895. "A party asserting that a fact cannot be or is genuinely disputed must support the assertion" by "citing to particular parts of materials in the record" or "showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." Fed.R.Civ.P. 56(c)(1).

When a motion for summary judgment is under consideration, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in [his] favor." Liberty Lobby, 477 U.S. at 255; see also Mastro v. PEPCO, 447 F.3d 843, 850 (D.C. Cir. 2006); Aka v. Wash. Hosp. Ctr., 156 F.3d 1284, 1288 (D.C. Cir. 1998) ( en banc ). On a motion for summary judgment, the Court must "eschew making credibility determinations or weighing the evidence." Czekalski v. Peters, 475 F.3d 360, 363 (D.C. Cir. 2007). The non-moving party's opposition, however, must consist of more than mere unsupported allegations or denials and must be supported by affidavits, declarations, or other competent evidence, setting forth specific facts showing that there is a genuine issue for trial. See Fed.R.Civ.P. 56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). The non-movant is required to provide evidence that would permit a reasonable jury to find in its favor. Laningham v. Navy, 813 F.2d 1236, 1242 (D.C. Cir. 1987). If the non-movant's evidence is "merely colorable" or "not significantly probative, " summary judgment may be granted. Liberty Lobby, 477 U.S. at 249-50.

III. Analysis

Before resolving the substantive issues raised in the parties' Cross-Motions for Summary Judgment, the Court must attend to two threshold issues: the significant deficiencies in Defendant's filings and the parties' competing Motions to Strike expert reports. After clearing away this underbrush, it will then turn to the SEC's contentions against Saito - namely, that the undisputed material facts demonstrate that: (1) he violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; and (2) he violated Section 16(a) of the Act.

A. Saito's Filings

The Court is once again astonished by the 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." E-Smart I, 31 F.Supp. 3d at 85-86. "Further filings, " the Court has stated bluntly, "should satisfy the basic demands of readability." Id. at 86. Saito's filings - whether styled as memoranda, statements of fact, or reports - are, nonetheless, 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.

This presentation renders it difficult for the Court to make the determination that is pivotal on summary judgment - viz., whether a dispute of material fact actually exists. Under Local Rule 7(h), for instance, an opposition to a motion for summary judgment must "be accompanied by a separate concise statement of genuine issues setting forth all material facts as to which it is contended there exists a genuine issue necessary to be litigated." Such statement "shall include references to the parts of the record relied on to support the statement." LCvR 7(h)(1). Instead of addressing the SEC's Statement, however, Saito has produced only his own multi-part "Statement of Undisputed Material Facts" - several often duplicative filings totaling 357 pages of text, diagrams, and photographs. See ECF Nos. 492-500. The paragraphs of these filings do not correspond to the SEC's Statement of Undisputed Material Facts. And the only time they reference the Commission's Statement is when Defendant, intermittently and in a conclusory fashion, states that some pasted passage from another document "proves false" a long list of the SEC's facts. This format significantly burdens the Court's efforts to determine with any precision the import of the materials he includes - let alone whether they create a dispute. As a result, Saito often leaves the Court guessing at the inferences he would have it draw from his filings.

The deficiencies in Defendant's Statements of Fact could alone warrant the grant of summary judgment in the SEC's favor. "In determining a motion for summary judgment, the court may assume that facts identified by the moving party in its statement of material facts are admitted, unless such a fact is controverted in the statement of genuine issues filed in opposition to the motion." LCvR 7(h)(1); see also SEC v. Banner Fund Int'l, 211 F.3d 602, 615-16 (D.C. Cir. 2000) (upholding district court's grant of summary judgment for SEC because defendant failed to follow Local Rule 7(h)). Given this rule, the Court "is not obliged to sift through hundreds of pages of depositions, affidavits, and interrogatories in order to make [its] own analysis and determination of what may, or may not, be a genuine issue of material disputed fact.'" Potter v. Dist. of Columbia, 558 F.3d 542, 550 (quoting Twist v. Meese, 854 F.2d 1421, 1425 (D.C. Cir. 1988)); see Jackson v. Finnegan, et al., 101 F.3d 145, 154 (D.C. Cir. 1996).

At bottom, Local Rule 7(h) "embodies the thought that judges are not like pigs, hunting for truffles buried in briefs' or the record." Potter, 558 F.3d at 553 (Williams, J., concurring) (quoting United States v. Dunkel, 927 F.2d 955, 956 (7th Cir. 1991)). This observation is especially apt in a case like this, where a hunt through the entire record would prove toilsome and tedious and any promise of truffles illusory. The docket is now bloated with hundreds of entries comprising tens of thousands of pages of documents often simply identified as "errata." A team of pigs could root around in there for years and find nothing but dirt.

The Court, however, mindful of the impact of granting summary judgment and unwilling to take such a step lightly, has waded through hundreds of pages of the materials that Saito submitted in order to give him, as a pro se defendant, the widest latitude possible in construing his response to the SEC's allegations.

B. Expert Reports

The second threshold issue the Court must address relates to the parties' expert reports. The SEC's case against Saito hinges in part on the falsity of certain technological claims made in e-Smart's press releases and filings. Both parties, accordingly, have marshalled evidence on the state of e-Smart's science in the form of expert reports, and both have moved to strike the other's report.

A district court has "broad discretion in determining whether to admit or exclude expert testimony.'" United States ex rel. Miller v. Bill Harbert Int'l Constr., Inc., 608 F.3d 871, 895 (D.C. Cir. 2010) (quoting United States v. Gatling, 96 F.3d 1511, 1523 (D.C. Cir. 1996)). Federal Rule of Evidence 702, which governs the admissibility of such testimony, provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:
(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and methods; and
(d) the expert has reliably applied the principles and methods to the facts of the case.

Under Rule 702, trial courts are required to act as gatekeepers who may only admit expert testimony if it is both relevant and reliable. See Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993); Calvetti v. Antcliff, 346 F.Supp.2d 92, 110-11 (D.D.C. 2004) (describing "gatekeeping function" of the district court).

Expert testimony is relevant if it will "help the trier of fact to understand the evidence or to determine a fact in issue." Fed.R.Evid. 702(a); see also Daubert, 509 U.S. at 591 ("This condition goes primarily to relevance. Expert testimony which does not relate to any issue in the case is not relevant and, ergo, non-helpful.") (internal quotation marks omitted). The trial judge, moreover, has "considerable leeway in deciding in a particular case how to go about determining whether particular expert testimony is reliable." Kumho Tire Co. v. Carmichael, 526 U.S. 137, 152 (1999); see also Daubert, 509 U.S. at 588 (noting "the liberal thrust of the Federal Rules and their general approach of relaxing the traditional barriers to opinion' testimony" in the context of expert testimony) (internal quotation marks omitted). While the way in which "reliability is evaluated may vary from case to case, " United States v. Frazier, 387 F.3d 1244, 1262 (11th Cir. 2004) ( en banc ), in all cases, "[t]he trial judge... must find that [the proffered expert testimony] is properly grounded, well-reasoned, and not speculative before it can be admitted." Fed.R.Evid. 702 advisory comm. notes (2000 amend.).

1. The SEC's Motion

For his part, Saito submitted a report drafted by himself and three other experts, which the SEC seeks to exclude. The Commission summarizes its basis for striking:

[Saito's] report... does not even attempt to employ the scientific method, and does not in any way fit the relevant issues in this case. It is just a mish-mash of record evidence, reports submitted years ago in other contexts, and ipse dixit opinions from current or former e-Smart employees, including... Saito. Moreover, the opinions included in the report, to the extent it is even possible to determine what those opinions are, are submitted by unqualified "experts" and are based upon inadmissible evidence.

See Pl. Mot. to Excl. (ECF No. 434) at 4.

In the main, the SEC has accurately characterized Defendant's report. The document entitled "report" consists of: an index of documents; a short statement by the experts; partial quotes from reports submitted in other contexts, interlineated with commentary by the current experts; biographies for individuals, some of whom, it appears, are not being offered as experts; and a conclusion, which claims that everything the SEC has said about the card is wrong. See Def. Exp. Rep. (ECF No. 334-1). Saito then filed with this report hundreds of documents, consisting of purported declarations, schematics, emails, and prior reports on unidentified software and hardware - some of which stand alone, others of which are introduced with a few sentences of commentary or argument. See ECF Nos. 334-53.

In the ordinary course, such dizzying and persistent disorganization would warrant exclusion of an information dump like this - especially when proffered as an expert report. At the summary-judgment stage in a case like this, however, the Court will not take such a drastic step. Considering Defendant's pro se status, and conscious that Saito, perhaps unintentionally, often blurs the lines between expert and fact witnesses, the Court will not exclude the report. It will, however, consider only the portions of it upon which Saito actually relies in his briefs. In this respect, although considered, the report is rarely much help to him.

2. Defendant's Motion

Believing that what is sauce for the goose is sauce for the gander, Saito also moves to exclude the SEC's report. To prepare its expert report, the Commission retained R. Michael McCabe of Identification Technology Partners, Inc., a firm that "specializes in the design, development, and testing of secure systems." See Pl. Mot., Att. 39 (ECF No. 390-10) (Expert Report of IDTP), ¶ 1. As will be detailed more fully below, e-Smart claimed in 2007 to have a commercially available smart card that was able to accurately identify users through a fingerprint sensor while functioning both wirelessly and on contact. IDTP was asked to evaluate these claims and did so by reviewing previous test data and deposition transcripts, and by performing tests of its own. Saito, nonetheless, argues that the report should be stricken on several grounds.

First, he claims that the SEC's experts lack the requisite expertise to opine on the technological issues in this case. See Def. Mot. to Excl. (ECF No. 541-1) at 37 ("Plaintiff['s] purported Expert Witnesses by their own admission and testimony, are not qualified Expert Witnesses."). Saito's main lament is that because McCabe and the engineers he worked with - Gerald Smith and Thomas Greiner - are not experts in all aspects of "biometric match-on card smart cards with system on the card, " they are not qualified to provide the opinions expressed in the SEC's report. Id. at 3-4. This argument, however, misinterprets expert-witness requirements.

As the Supreme Court stated in the seminal opinion of Daubert, the trial court must determine whether the proposed expert possesses "a reliable basis in the knowledge and experience of [the relevant] discipline." 509 U.S. at 592. "Formal education ordinarily suffices, and a person who holds a graduate degree typically qualifies as an expert in his or her field." Khairkhwa v. Obama, 793 F.Supp.2d 1, 11 (D.D.C. 2011) (citing Lavespere v. Niagara Mach. & Tool Works, Inc., 910 F.2d 167, 176-77 (5th Cir. 1990), and Am. Gen. Life Ins. Co. v. Schoenthal Family, LLC, 555 F.3d 1331, 1338-39 (11th Cir. 2009)). At bottom, an expert witness need only wield such expertise that he is able to aid the trier of fact. Coleman v. Parkline Corp., 844 F.2d 863, 865 (D.C. Cir. 1988). The SEC's experts meet this standard.

McCabe has a Bachelor's of Science in Physics and a Master's Degree in Computer Applications. See Pl. Opp. (ECF No. 562) at 11. He has authored 20 articles on biometric-matching systems, including one on the performance of the National Institute of Science and Technology's fingerprint-matching database. Id . To top things off, in 2001, he received an award specifically for the development of biometric image-data-exchange standards. Id . Smith and Greiner are equally qualified. Smith has over 30 years' experience as an engineer with computer electronics and smart cards, he received a Bachelor's of Science in Electrical Engineering, and he presently provides technical support on smart-card specifications. Id . Greiner also has over 30 years' experience in electronics and computer-systems engineering, he received a degree in Electronics Technology, and he is a Certified Smart Card Alliance Professional. Id . These are sufficient qualifications to produce admissible opinions on the technological capacities of e-Smart's cards. ...

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