Securities and Exchange Commission v. Mapp, III et al

MOTION for Summary Judgment Plaintiff's Motion For Summary Judgment and Brief in Support

E.D. Tex.September 29, 2017

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION SECURITIES AND EXCHANGE COMMISSION, § § Plaintiff, § § v. § Case No.: 4:16-CV-00246 § WILLIAM E. MAPP, III, § § Defendant. § _______________________________________________ § PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND BRIEF IN SUPPORT Dated: September 29, 2017 Respectfully submitted, Matthew J. Gulde Illinois Bar No. 6272325 Timothy L. Evans Texas Bar No. 24065211 Jessica B. Magee Texas Bar No. 24037757 United States Securities and Exchange Commission Burnett Plaza, Suite 1900 801 Cherry Street, Unit 18 Fort Worth, TX 76102 Telephone: (817) 978-1410 (mg) Facsimile: (817) 978-4927 guldem@sec.gov Attorneys for Plaintiff Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 1 of 34 PageID #: 2152 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page i TABLE OF CONTENTS TABLE OF CONTENTS ........................................................................................................... i-ii TABLE OF AUTHORITIES ................................................................................................... iii-v INTRODUCTION..........................................................................................................................1 STATEMENT OF UNDISPUTED MATERIAL FACTS ..........................................................2 I. SERVERGY’S CTS-1000 ...................................................................................................2 II. From November 2009 Through September 2013, Mapp Engaged in an Unregistered Offering ................................................................................................................................2 III. Mapp Offered and Sold Servergy Securities from November 2009 Through September 2013......................................................................................................................................4 IV. Some of Servergy’s Investors Were Unaccredited and Unsophisticated .............................5 V. Fundraising Efforts Allowed Mapp to Increase His Salary .................................................7 VI. Servergy’s Pre-Order Program ............................................................................................8 VII. Servergy Falsely Touts Koerr “Pre-Orders” ........................................................................8 VIII. Freescale and Servergy’s “First Order” .............................................................................11 SUMMARY JUDGMENT STANDARD ...................................................................................12 ARGUMENT AND AUTHORITIES .........................................................................................13 I. The Court Should Grant Summary Judgment on the SEC’s Third Claim for Relief Because Mapp Violated Section 5 of the Securities Act .................................................. 13 A. Section 5 Imposes Strict Liability for the Offer or Sale of Unregistered Securities ................................................................................................................14 B. The Commission Has Established Its Prima Facie Case ......................................15 C. No Exemption to Registration Applies ..................................................................16 II. The Court Should Grant Summary Judgment on the SEC’s First and Second Claims Because Mapp Defrauded Investors ..................................................................................20 A. Elements of Securities Fraud .................................................................................20 Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 2 of 34 PageID #: 2153 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page ii B. Mapp Made Material Misrepresentations and Misleading Omissions .................21 i. Mapp’s Statements about Pre-Orders Were Materially Misleading and Omitted Material Facts ....................................................................................22 ii. Mapp’s Statement about Freescale’s “Order” was Materially Misleading........................................................................................................24 C. Mapp Conducted His Fraudulent Activities In Connection with the Offer and Sale of Securities ...................................................................................................24 D. Mapp Acted with Scienter .....................................................................................24 E. Mapp Violated Sections 17(a)(2) and 17(a)(3) of the Securities Act ....................26 CONCLUSION……… ................................................................................................................27 Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 3 of 34 PageID #: 2154 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page iii TABLE OF AUTHORITIES FEDERAL CASES Aaron v. SEC, 446 U.S. 680 (1980) ...............................................................................................20, 21, 26 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ...........................................................................................................13 Basic v. Levinson, 485 U.S. 224 (1988) ...........................................................................................................21 Broad v. Rockwell International Corp., 642 F.2d 929 (5th Cir.1981) ..............................................................................................25 Celotex Corp. v. Catrett, 477 U.S. 317 (1986) .....................................................................................................12, 13 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ...........................................................................................................24 Forsyth v. Barr, 19 F.3d 1527 (5th Cir. 1994) .............................................................................................13 Hanon v. Dataproducts Corp., 976 F.2d 497 (9th Cir. 1992) .............................................................................................21 Hassinger v. JP Morgan Chase & Co., 394 Fed. Appx 63 (5th Cir. 2010) .......................................................................................13 SEC v. Aaron, 605 F.2d 612 (2d Cir. 1979)...............................................................................................14 SEC v. Continental Tobacco Co., 463 F.2d 137 (5th Cir. 1972) .......................................................................................14, 16 SEC v. Curshen, 888 F. Supp. 2d 1299 (S.D. Fla. 2012) ..............................................................................15 SEC v. Farmer, 2015 WL 5838867 (S.D. Tex. Oct 7, 2015).......................................................................15 Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 4 of 34 PageID #: 2155 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page iv SEC v. Fehn, 97 F. 3d 1276 (9th Cir. 1996) ............................................................................................21 SEC v. Gann, 565 F.3d 932 (5th Cir. 2009) .......................................................................................20, 21 SEC v. Hopper, 2006 WL 778640 (S.D. Tex. Mar. 24, 2006) ...............................................................21, 26 SEC v. Murphy, 626 F.2d 633 (9th Cir.1980) ........................................................................................16, 20 SEC v. Phan, 500 F.3d 895 (9th Cir. 2007) .............................................................................................14 SEC v. Platforms Wireless International Corp., 617 F.3d 1072 (9th Cir. 2010) .....................................................................................14, 19 SEC v. Provident Royalties, LLC, 2013 WL 5314354 (N.D. Tex. Sept. 23, 2013)............................................................21, 25 SEC v. Ralston Purina Co., 346 U.S. 119 (1953) .....................................................................................................14, 16 SEC v. Seghers, 298 F. App’x 319 (5th Cir. 2008) ................................................................................20, 21 Shaw Constructors v. ICF Kaiser Eng'rs, Inc., 395 F.3d 533 (5th Cir. 2004) .............................................................................................13 Swenson v. Engelstad, 626 F.2d 421 (5th Cir. 1980) .......................................................................................14, 19 Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009) .............................................................................................13 U.S. v. Naftalin, 441 U.S. 768 (1979) ...........................................................................................................22 U.S. v. Tager, 788 F.2d 349 (6th Cir. 1986) .............................................................................................22 Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 5 of 34 PageID #: 2156 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page v FEDERAL STATUTES 15 U.S.C. § 77e(a)....................................................................................................................14, 15 15 U.S.C. § 77e(c)..........................................................................................................................14 15 U.S.C. § 77q(a) .........................................................................................................................20 15 U.S.C. § 78j(b) ..........................................................................................................................20 17 C.F.R. 230.501(a)(5) .................................................................................................................17 17 C.F.R. 230.501(a)(6) .................................................................................................................17 17 C.F.R. 230.501(e)(2) .................................................................................................................17 17 C.F.R. 230.502(a)......................................................................................................................16 17 C.F.R. 230.502(b) .....................................................................................................................18 17 C.F.R. 230.502(b)(2)(B)(3) .......................................................................................................18 17 C.F.R. 230.506(b) .....................................................................................................................18 17 C.F.R. 230.506(b)(2)(ii) ............................................................................................................19 17 C.F.R. 230.506(c)(2)(i) .............................................................................................................17 17 C.F.R. 230.506(c)(2)(ii) ............................................................................................................18 17 C.F.R. 240.10b-5 .......................................................................................................................20 Fed. R. Civ. P. 56 ...........................................................................................................................12 Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 6 of 34 PageID #: 2157 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 1 Pursuant to FED. R. CIV. P. 56, Plaintiff Securities and Exchange Commission (“Plaintiff” or “Commission”) moves for Summary Judgment against Defendant William E. Mapp, III (“Mapp” or “Bill Mapp”)1 on all claims against him and submits the following Brief in Support.2 INTRODUCTION Between November 2009 and September 2013, Bill Mapp was the CEO and primary fundraiser for the company he co-founded, Servergy, Inc. (“Servergy”). At the time, Servergy was a computer hardware company attempting to develop and market a single product: the Cleantech-1000 server (“CTS-1000”). According to Mapp and Servergy, the CTS-1000 represented revolutionary gains in energy efficiency, consuming up to 80% less power than other servers. As part of Servergy’s fundraising efforts, Mapp mislead investors about the market’s interest in the CTS-1000, about Servergy’s business relationships, and about technical comparisons between the CTS-1000 and other servers. While the Commission intends to prove all of Mapp’s fraudulent conduct at trial, there are currently sufficient undisputed facts for the Court to conclude, as a matter of law, that Mapp violated the antifraud and securities-registration provisions of the securities laws. Mapp repeatedly misled the public about the comparative capabilities of Servergy’s CTS-1000 server. For the purposes of this Motion, however, Plaintiff will show that the facts demonstrating Mapp’s lies and misleading omissions to the public about Servergy’s business relationships are not subject to any genuine dispute. Similarly, there is no doubt that Mapp offered and sold unregistered securities in violation of the federal securities 1 Bill Mapp’s son, William Mapp IV, will be called “Will Mapp” in this document. 2 All evidentiary citations are to Plaintiff’s Statement of Undisputed Facts (“SOF”) filed concurrently with this Motion, and fully incorporated herein. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 7 of 34 PageID #: 2158 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 2 laws. As set forth below, the Commission requests the Court to enter Summary Judgment as to all three claims the SEC alleges against Mapp.3 STATEMENT OF UNDISPUTED MATERIAL FACTS I. SERVERGY’S CTS-1000 1. At all relevant times, Servergy was a Nevada corporation with its principal place of business in McKinney, Texas. From 2009 through 2013, Servergy was a computer hardware company with a single product, the CTS-1000, which it claimed consumed up to 80% less power than other servers. (Ex. 3, PPM, App. 018; Ex. 4, Bill Mapp testimony, 208:14-20, App. 085). 2. Bill Mapp was a founder, the Chief Executive Officer, and Chairman of Servergy from 2009 to 2014. (Ex. 1, Hahn Decl., ¶ 3, App. 002; Ex. 3 at p. 49, App. 064; Dkt. 111 at p. 1). 3. Mapp and Servergy marketed the CTS-1000 as a smaller, more efficient server that could replace servers from competitors such as IBM, Cisco, Dell, and HP. (Ex. 3 at p. 27, App. 043). 4. Though Mapp and Servergy touted pre-orders for thousands of units of its CTS- 1000, Servergy sold a total of four units. (Ex. 3 at p. 39, App. 054; Ex. 4, Bill Mapp Tr., p.116- 117, App. 081-082). Those four units were sold after the securities offerings described below. (Ex. 5, Lance Smith Tr., p. 207, App. 093). II. From November 2009 Through September 2013, Mapp Engaged in an Unregistered Offering 5. From November 2009 through March 2013, Servergy sold common stock to 135 investors in ten different states, raising approximately $6 million. (Ex. 6, Mapp’s Response to 3 Because the SEC has demonstrated that Mapp violated the securities laws in his offer and sale of Servergy’s stock, this Court should order Mapp to disgorge his illegal gains from those violations. If the Court grants this motion, the SEC will file a subsequent motion for remedies to address the relief sought against Mapp. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 8 of 34 PageID #: 2159 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 3 SEC’s RFA No. 20, App. 102; Ex. 7, Investor List, App. 116-129; Ex. 1, App. 001-005)4. Then, between March 2013 and October 2013, Servergy engaged broker-dealer WFG Investments, Inc. (“WFG”) to raise an additional $19.4 million for the company by offering up to 10,000,000 shares of Servergy common stock at a price of $2.00 per share (the “WFG Offering”). (Ex. 1 at ¶ 9, App. 004; Ex. 3, App. 009, et seq.; Dkt. 43, Mapp’s Answer to Amended Complaint at ¶ 19). In total, more than 200 investors located in at least 30 states purchased Servergy securities for a combined amount of over $26 million. (Ex. 1 at ¶ 4, App. 002-003). 6. Ostensibly, Servergy separated its multi-year fundraising into four separate offerings: (1) an offering titled “Series A” from November 2009 to April 2010 that raised approximately $800,000; (2) an offering titled “Series B” from April 2010 to August 2011 that brought in approximately $3.6 million; (3) an offering titled “Series C” that raised approximately $1.7 million between December 2011 and March 2013; and (4) the WFG Offering. (Ex. 7, App. 116-129; Ex. 8, 2009 CIM, App. 130-206; Ex. 4, Bill Mapp Tr. at 56, 106-107, 123, App. 076, 079, 083; Ex. 9, 2011 CIM, App. 207-257; Ex. 10, 2012 CIM App. 258-315; Ex. 3; Ex. 1 at ¶¶ 6- 10, App. 004). These offerings were separate in name only, as Mapp offered Servergy securities continuously with only short breaks in between. (B. Mapp Tr. at 122 – 123, App. 083). All Servergy offering proceeds were used for the same general purpose – funding the development and commercialization of the CTS-1000 – and involved the same kind of consideration – cash. (Ex. 8 at p. 4, App. 140; Ex. 9, App. 217; Ex. 10 at p. 3, App. 268; Ex. 3 at p. 5, App. 021; Ex. 4, Bill Mapp Tr. at 56, App. 076). 7. Servergy never filed a registration statement for any of its offerings of securities. (Ex. 3 at p. ii, App. 012; Ex. 9 at p. ii, App. 209; Ex. 10 at p. ii, App. 260). Rather, Servergy 4 Servergy produced its investor list to the Commission in Excel spreadsheet format, Bates labeled SERVERGY-2- 00457. (App. 116-129). For ease of use, this Appendix includes a version of that spreadsheet with only three columns printed. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 9 of 34 PageID #: 2160 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 4 filed Forms D with the Commission on March 18 and November 17, 2011, May 10, 2012, and February 14 and April 16, 2013, all claiming exemptions from registration under Rule 506 of Regulation D. (Ex. 11, Form D Filings, App. 316-348) III. Mapp Offered and Sold Servergy Securities from November 2009 Through September 2013 8. Mapp was Servergy’s primary fundraiser during the pre-WFG offerings. (Ex. 12, Will Mapp Tr. at 68, App. 351; Ex. 13, Vihar Rai Tr. at 35, App. 361). He relied on word-of- mouth to identify investors, and offered to compensate others who successfully recruited investors. (Ex. 14, Bill Mapp Tr. at 571, App. 370; Ex. 15, Caleb White Tr. at 157, App. 378; Ex. 5, Lance Smith Tr. at 91-92, App. 092). Once investors expressed interest in Servergy, they could attend investor presentations hosted by Mapp in-person or virtually through webinars. (Dkt. 43, ¶ 16). Mapp also provided the investors a Confidential Information Memorandum (“CIM”) describing the offering and a subscription agreement. (Dkt 43, ¶ 17). As Servergy’s Chief Executive Officer, Mapp had signatory authority on all Servergy accounts. (Ex. 1 at ¶ 5, App. 2). 9. In connection with the WFG offering, Mapp conducted a live presentation touting Servergy on or before March 5, 2013 (“WFG Presentation”), which was recorded and made available to WFG financial advisors for use in soliciting prospective investors. (Ex. 4, Bill Mapp Tr. 253-254, App. 086; Ex. 16, Series C Roadshow powerpoint, App. 388-421; Ex. 17, audio upload record, App. 423; Ex. 18, WFG transcript at pp. 39-40, App. 428). 10. Mapp additionally solicited investment in Servergy through WFG during a presentation on March 26, 2013 at the Hotel Palomar in Dallas, Texas. (Ex. 19, App. 431). In the invitation to this “Servergy Client Presentation & Reception,” WFG personnel repeated Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 10 of 34 PageID #: 2161 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 5 claims about Servergy’s business that Mapp made during the WFG Presentation. (Id., also Ex. 18 at p. 11, App. 427). IV. Some of Servergy’s Investors Were Unaccredited and Unsophisticated 11. Servergy purported to only accept investments from accredited investors. (Dkt. 43 at ¶ 71). To that end, Servergy’s subscription agreement required investors to certify that they: (1) were accredited; (2) had the knowledge and experience in financial and business matters to be capable of evaluating the investment; and (3) were able to bear a total loss of their investment. (Ex. 20, Subscription Agreement at pp. 7, 9-10, App. 441-444; Ex. 6 at No. 41, App. 104). 12. Over $1.4 million of the $6 million raised during the November 2009 – March 2013 period is attributable to the efforts of Caleb White, the owner of an insurance firm named Sound Harbor Financial, P.C. (Ex. 15, Caleb White Tr. 27-28, 158-159, App. 376, 378) After meeting Mapp in November 2009, White solicited more than 150 individuals who invested with Servergy between April 2010 and April 2012. (Ex. 15, Caleb White Tr. at 158-159, App. 378). In return, Servergy paid White approximately $66,000 for his services. (Ex. 1, ¶ 4, App. 003). Because White’s investors were unable or unwilling to invest the minimum amount Servergy required for a direct investment, White formed and managed three successive joint ventures titled Dominion Join Venture Group 1 – 3, respectively (“Dominion JVs”) to acquire Servergy securities. (Ex. 15, Caleb White Tr. at 156-157, App. 377-378; Ex. 21 July 21, 2010 email chain, App. 446-449). Investing in the Dominion JVs allowed White’s investors – who were not capable of investing the $50,000 minimum for a direct investment in Servergy – to acquire an equity stake in Servergy for as little as $1,000. (Ex. 15, Caleb White Tr. 202-203, App. 383; Ex. 21, App. 446-449). Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 11 of 34 PageID #: 2162 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 6 13. Although White and another Dominion JV investor represented on Servergy’s subscription agreements that the Dominion JVs were entities in which all of the equity owners were accredited, this was not the case. (Ex. 22, Dominion JV 1 Subscription Agreement at p. 10, App. 461; Ex. 23, Dominion JV 2 Subscription Agreement at p. 10, App. 475; Ex. 24, Dominion JV 3 Subscription Agreement at p. 10, App. 489). 14. White – who personally invested $500 in the first Dominion JV before he was appointed to Servergy’s Board in 2011 – admitted that he personally did not meet the financial requirements to be an accredited investor or know the definition of an accredited investor when he solicited investors for Servergy. (Ex. 15, Caleb White Tr. at 155-156; 170-171; 183-185, App. 377, 379, 381-382). 15. White required Dominion JV investors to sign separate subscription agreements with the joint ventures. Those subscription agreements indicate that at least some investors were not accredited and had never invested in a private company. (See, e.g., Exs. 25-27, App.492- 531). 16. White’s email communications with investors indicate that they were unsophisticated and could not afford risky investments. For example, some invested only $1,000 and some had no investment experience (including a 19-year old investor). (Ex. 28, July 21, 2010 email chain, App. 532-534; Ex. 29, February 22, 2011 email chain, App. 535-537; Ex. 30, June 2, 2011 email chain, App. 538-541; Ex. 55, Dominion Investor List, App. 684-693). 17. For his part, Mapp knew or should have known that some of the Dominion JV investors were not accredited. For instance, when White told Bill Mapp he had investors who wanted to invest directly in Servergy – as opposed to the Dominion JVs – Bill Mapp reminded White of the “inky caveat” that Servergy could only accept direct investments from accredited Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 12 of 34 PageID #: 2163 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 7 investors. But Mapp gave no such warning regarding Dominion JV investors. (Ex. 31, July 8, 2010 email chain, App. 543; Ex. 32, July 12, 2010 email chain, App. 550). Further, an unaccredited investor from whom Servergy rejected a direct investment informed Mapp via email that he planned on making an investment through a Dominion JV. (Ex. 33, March 25, 2011 email chain, App. 551-553; Ex. 34, March 28, 2011 email chain, App. 554-558). That unaccredited investor ended up making an investment through a Dominion JV. (Ex. 55, App. 690). Also, Mapp was aware that some of the Dominion JV investors could only afford to invest $1,000 – $2,000 and White believed that having a single, accredited Dominion JV investor sign Servergy’s subscription agreement would satisfy the requirements of Servergy’s subscription agreement as to the JV entity. (Ex. 21, App. 446-449; Ex. 15, Caleb White Tr. at 179-180, App. 380). V. Fundraising Efforts Allowed Mapp to Increase His Salary 18. Although Bill Mapp’s original employment agreement with Servergy called for him to receive a salary of $250,000 per year, he took much smaller amounts in the years before Servergy’s fundraising efforts became successful, taking as little as $10,000 in 2009. (Ex. 4, Bill Mapp Tr. at 72:3-73:24, App. 077-078). After the WFG fundraising efforts, Bill Mapp began to make more salary from Servergy. “I didn’t really kick in the full salary that was in my, quote, agreement until after we were fully funded through [WFG],” Mapp testified. (Id., 73:22-24, App. 078). 19. Mapp’s salary for 2012 was $118,429.33. His salary for 2013 increased after the WFG offering to $212,443.52. (Ex. 1 at ¶ 12, App. 004). Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 13 of 34 PageID #: 2164 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 8 VI. Servergy’s Pre-Order Program 20. In Fall 2012, Mapp attempted to implement a “pre-order” program patterned on the process used by companies such as Tesla Motors. (Ex. 35, August 18, 2012 email, App. 560; Ex. 36, August 31, 2012 email chain, App. 561-564). 21. In August 2012, Mapp devised a system that would require a potential customer to deposit with Servergy a refundable “Pre-Order Payment” to hold that customer’s place in line for the CTS-1000. (Exs. 37-38, App. 565-578). 22. On September 20, 2012, Bill Mapp informed his son and Caleb White that Servergy pre-orders would not require any deposit from customers. (Ex. 39, September 20, 2012 email with attachment, App. 579-584). The updated Servergy CTS-1000 Pre-Order Agreement Form now stated, “No Pre-order Payment is required until Servergy is ready to place the manufacturing order and a Pre-Order Call is issued; at which time all pre-orders must be finalized.” (Id. at App. 582). VII. Servergy Falsely Touts Koerr “Pre-Orders” 23. Koerr, Inc. is a Canadian company that provided instrumentation, electrical, and automation services to the oil and gas industry.5 In Fall 2012, Koerr was interested in using Servergy’s CTS-1000 server in some of its products, and signed a non-binding pre-order agreement form on October 18, 2012 for 1,000 units. (Ex. 2, Kyle Chase Decl. at ¶ 6, App. 007). 24. On October 19, 2012, Bill Mapp sent an email announcing Servergy’s pre-order model to investors. In the same email, he also announced that Servergy “received a signed pre- order agreement today for 1,000 units . . . .” and was discussing a “2013 roll out schedule” with the potential purchaser (Koerr). (Ex. 40, October 19, 2012 email, App. 586-587). 5 Koerr, Inc. was also known as “KSB.” (Ex. 5, Lance Smith Tr. at 218:14-19, App. 094; Ex. 2 at ¶ 2, App. 007). This Brief will use “Koerr” when referring to that company. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 14 of 34 PageID #: 2165 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 9 25. By early 2013, Servergy claimed to have received pre-orders for more than 1,500 CTS-1000 units, including Koerr’s purported 1,000 pre-ordered units. (Ex. 12, Will Mapp Tr. at 237:12-15, App. 355; Ex. 14, Bill Mapp Tr., 308:16 et seq., App. 368). 26. Servergy touted its pre-orders in a private placement memorandum dated February 14, 2013 (“PPM”), claiming that Servergy has received significant interest from various US Fortune 500 and Global 1000 companies for its Cleantech Server ®. Since announcing in the Fall of 2012 that Servergy is taking pre-orders the company has received over 25 orders totaling over 1,500 units with planned delivery in late 2013. (Ex. 3 at p. 39, App. 054). Bill Mapp participated in the drafting of the PPM. (Ex. 4, Bill Mapp Tr. at 112:13-21, App. 080). 27. Around the same time, on or before March 5, 2013, during a presentation to WFG investment advisors, Mapp personally hailed Servergy’s “two thousand plus and growing” pre- orders for the CTS-1000. (Ex. 18 at 11:8-10, App. 427). He quantified the financial impact of Servergy’s pre-orders as “about $20 million” and noted that $20 million was equal to the amount of investment money being raised by Servergy at the time. (Id.). 28. During the first quarter of 2013, however, after receiving and examining an actual CTS-1000 unit for testing, Koerr’s chief technology officer (“CTO”) discovered that the CTS- 1000 was not built on 64-bit architecture, contrary to his assumptions throughout Koerr’s discussions with Servergy. (Ex. 2 at ¶¶ 7-9, App. 007-009). 29. Koerr’s CTO then informed Will Mapp that Koerr was not interested in a 32-bit system. (Ex. 2 at ¶ 10, App. 10; Ex. 12, Will Mapp Tr. at 108:16-22, 237:16-25, App. 352, 355; Ex. 13, Vihar Rai Tr. at 211:10-17, App. 362). On March 10, 2013, Will Mapp informed his father, Bill Mapp, (copying Jack Smith and Vihar Rai) that he [j]ust got off the phone with Kyle Chase CTO for Koerr, and that [sic] said they Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 15 of 34 PageID #: 2166 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 10 are in the final stages of developing the software stack. They are using Dell servers for there [sic] initial goto market platform, but they are still committed and excited to use a Servergy server once we have a 64-bit platform to sell. (Ex. 41, March 10, 2013 email, App. 597). 30. Servergy did not have in 2013 (or ever) a 64-bit server to sell. Over a year later, during testimony on April 2, 2014, when asked what Servergy was currently doing with its money, Bill Mapp told investigators that Servergy was “actually going in development for our next generation 64-bit product.” (Ex. 4, Bill Mapp Tr. at 201:4-5, App. 084). Jack Smith testified that, as of August 6, 2014, Servergy was in development of a 64-bit system that it hoped to bring to the market “Q4 [2014] Q1 [2015], somewhere in time period.” (Ex. 42, Jack Smith Tr. at 50:8-12, App. 600). 31. Mapp and Servergy continued to use PPMs touting the Koerr pre-orders through October 2013, despite Mapp’s explicit awareness that Koerr was not interested in Servergy’s current 32-bit server. (Ex. 6 at No. 37, App. 104). Using these PPMs, Servergy raised nearly $20 million after March 10, 2013. (Ex. 1 at ¶ 9, App. 004). 32. In an invitation for a March 26, 2013 “Servergy Client Presentation & Reception” event for “WFG Financial Advisors and Accredited Investors” at the Hotel Palomar in Dallas, which featured Bill Mapp as a speaker, WFG personnel repeated Mapp’s claim about 2,000 pre- orders. (Ex. 43, March 18, 2013 email chain, App. 604-606). WFG personnel discussed amending the language of the invitation regarding pre-orders to match the PPM’s claim of 1,500 pre-orders. (Id.) 33. Mapp also delivered personalized PPMs for specifically targeted investors, again after March 10, 2013 and containing the same claims about pre-orders that Mapp knew to be Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 16 of 34 PageID #: 2167 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 11 false. (See, e.g., Ex. 44, excerpts of Woodall PPM, App. 608-610; Ex. 45, May 23, 2013 email, App. 611-615). 34. In September 2013, Servergy issued a Supplement to its PPM offering securities through WFG. (Ex. 46, PPM Supplement, App. 616-634).6 The September Supplement amended its February 14, 2013 PPM to include, among other things, positive business updates such as “patent claims issued” and manufacturing agreements. (Id. at pp. 12-14, App. 628-630). The supplement to the PPM neither amended the section on pre-orders nor gave any indication that 1,000 of Servergy’s pre-orders had evaporated or that Servergy’s relationship with Koerr had changed in any way. (Id.) 35. Mapp personally directed that certain information be added to the Supplement and had sign-off authority on its contents before it was published. (Ex. 47, August 19, 2013 email, App. 636; Ex. 48, June 24, 2013 email chain, App. 637-639). VIII. Freescale and Servergy’s “First Order” 36. In late July 2012, before Servergy raised money with WFG and had only $5,101 in the bank, Mapp solicited prospective investment by touting an alleged order from Freescale Semiconductor, Inc. (Ex. 1 at ¶ 14, App. 005). 37. Mapp touted the alleged Freescale order in emails sent to an investor on July 26, 2012 and July 30, 2012. (Ex. 50, July 26, 2012 email chain, App. 643-646). In the first email, Mapp forwarded to the investor Servergy’s agenda for a meeting with Freescale and predicted “our first sale on the way with extremely HUGE potential (just one of the initial targets = 4,000 servers X $8,500 = $34,000,000.00, not a bad start and valuation, whatever EBITDA multiple you use).” (Id.) 6 Although Servergy finalized its PPM Supplement on September 5, 2013 the Supplement bears the date, July 31, 2013, on its front page. (Ex. 49, September 5, 2013 email chain, App. 640-642). Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 17 of 34 PageID #: 2168 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 12 38. Four days later, in the second email to the same investor, Mapp went beyond merely predicting a sale to claiming that Servergy would “keep you posted on exciting developments as we start gearing-up to get ‘production ready’ and head into production on our first order from http//www.freescale.com, with more on the way.” (Ex. 51, July 30 email chain, App. 647-649). Shortly after receiving Mapp’s second email, the investor wired $40,000 to Servergy. (Ex. 1 at ¶¶ 13-14, App. 005). 39. After Servergy received the investor’s $40,000 on July 30, 2012, it immediately paid $12,139 for rent and approximately $24,250 for payroll expenses. By the following day (July 31, 2012), Servergy had approximately $10,024 left in its bank accounts. (Ex. 1 at ¶ 14, App. 005). 40. In reality, Servergy had only recently pitched Freescale on a possible sale and Freescale had not ordered a CTS-1000 in July 2012. (Ex. 12, Will Mapp Tr. at pp. 166-169, App. 353). Internally, in a contemporaneous August 3, 2012 weekly report, Servergy employee Dan Schell noted that, as to the “Freescale Data center strategy,” Servergy was still merely “awaiting response from Freescale at this time on both their specifications and on their reaction to our proposal.” (Ex. 52, Weekly Report at p. 3, App. 653). Servergy’s hopes for a Freescale order never materialized into an actual order from the major company. (Ex. 14, Bill Mapp Tr. at 432-434, App. 369; Ex. 13; Ex. 42). SUMMARY JUDGMENT STANDARD Summary judgment, “upon all or any part of [a] claim,” is appropriate where there is no genuine dispute as to any material fact regarding that portion of the claim. FED. R. Civ. P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 18 of 34 PageID #: 2169 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 13 The Commission, as the movant, bears the initial burden of identifying the evidence that demonstrates the absence of any material fact. See Celotex, 477 U.S. at 323. Once that burden is met, the defendants cannot rest on mere denials, conclusory statements, or evidence that is merely colorable or not significantly probative to defeat the motion. See Celotex Corp., 477 U.S. at 324; Forsyth v. Barr, 19 F.3d 1527, 1533 (5th Cir. 1994) (“Needless to say, unsubstantiated assertions are not competent summary judgment evidence.”). Instead, they must submit significant probative evidence to show that material, triable issues of fact remain. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). “The mere scintilla of evidence in support of the [nonmoving party’s] position will be insufficient.” Anderson, 477 U.S. at 252. “On cross motions for summary judgment, the court reviews each motion independently, viewing the evidence and inferences in the light most favorable to the non-moving party.” Hassinger v. JP Morgan Chase & Co., 394 Fed. Appx. 63, 65 (5th Cir. 2010); see also Tidewater Inc. v. United States, 565 F.3d 299, 302 (5th Cir. 2009). “If there is no genuine issue and one of the parties is entitled to prevail as a matter of law, [this] court may render summary judgment.” Shaw Constructors v. ICF Kaiser Eng’rs, Inc., 395 F.3d 533, 539 (5th Cir. 2004). In short, the Court must enter summary judgment if, under the governing law, there is only one reasonable conclusion. See Anderson, 477 U.S. at 250. ARGUMENT AND AUTHORITIES I. The Court Should Grant Summary Judgment on the SEC’s Third Claim for Relief Because Mapp Violated Section 5 of the Securities Act. Mapp violated Section 5 of the Securities Act by raising more than $26 million by offering and selling Servergy common stock to more than 200 investors located in thirty different states – some of whom were unaccredited and unsophisticated – without a registration statement being filed or in effect and when no exemption from registration applied. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 19 of 34 PageID #: 2170 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 14 A. Section 5 Imposes Strict Liability for the Offer or Sale of Unregistered Securities. Sections 5(a) and (c) of the Securities Act prohibit the offer or sale of unregistered securities in interstate commerce unless an exemption is established. 15 U.S.C. § 77e(a), (c); SEC v. Continental Tobacco Co., 463 F.2d 137, 155 (5th Cir. 1972). The registration statement is “central to the [Securities] Act’s comprehensive scheme for protecting public investors.” SEC v. Aaron, 605 F.2d 612, 618 (2d Cir. 1979), vacated on other grounds, 446 U.S. 680 (1980). Exemptions to registration are therefore narrowly construed. Id. at 618; Continental Tobacco Co., 463 F.2d at 155. The Securities Act imposes strict liability for violations of Section 5, and no showing of negligence or scienter is required. Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir. 1980). To establish a prima facie case for a Section 5 violation, the Commission must show only that the defendant, directly or indirectly: (1) sold or offered to sell securities; (2) through the use of interstate transportation or communication; and (3) when no registration statement was in effect as to the transaction. Id. at 425; Continental Tobacco Co., 463 F.2d at 155-156. Once the Commission establishes these elements, the burden of proof shifts to the defendant to prove the securities offered or sold qualified for a registration exemption. SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953); Continental Tobacco Co., 463 F.2d at 156. If the defendant fails to put forth evidence to support its burden to raise a genuine issue of material fact, the Commission is entitled to summary judgment on its Section 5 claims. See, e.g., SEC v. Platforms Wireless International Corp., 617 F.3d 1072, 1092 (9th Cir. 2010) (affirming summary judgment in favor of the Commission as to Section 5 claim where defendants failed to establish exemption); SEC v. Phan, 500 F.3d 895, 907 (9th Cir. 2007) (affirming district court’s granting of summary judgment on Section 5 claims where SEC made prima facie case that Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 20 of 34 PageID #: 2171 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 15 defendants misused Form S-8 for capital raising); SEC v. Curshen, 888 F.Supp.2d 1299, (S.D. Fla. 2012) (granting summary judgment on Section 5 claims where SEC made prima facie case that defendants sold unregistered shares in connection with a pump-and-dump scheme); SEC v. Farmer, No. 4:14-CV-2345, 2015 WL 5838867, *18 (S.D. Tex. Oct. 7, 2015) (granting SEC summary judgment on Section 5 claims where SEC made prima facie case that unregistered company shares placed with defendant were sold to investors). B. The Commission Has Established Its Prima Facie Case. There is no dispute that the SEC has proven all elements required to establish that Mapp violated Sections 5(a) and 5(c), namely that Mapp offered and sold Servergy securities through the use of interstate commerce when no registration was in effect or filed. 15 U.S.C. § 77e(a), (c). As the company’s primary fundraiser and CEO with signatory authority on all of Servergy’s accounts, there is no question that Mapp was a necessary participant in the offer and sale of Servergy’s common stock from 2009 through 2013. (SOF ¶ 8). Specifically, Mapp persuaded investors to purchase Servergy common stock during initial offerings by hosting in-person or virtual investor presentations for prospective investors, providing prospective investors with CIMs and subscription agreements, and accepting more than $6 million for Servergy in exchange for shares of the company’s common stock. (Id. ). Further, in connection with his offer and sale of securities between March 2013 and October 2013, Mapp touted Servergy stock in an investor presentation on or before March 5, 2013 (“WFG Presentation”), which was recorded and made available to WFG’s investment advisors across the country and accepting more than $20 million from investors in exchange for Servergy’s common stock. (SOF ¶ 9, 27). The other two elements needed to prove a Section 5 violation are also easily demonstrated here. First, Servergy never filed a registration statement for any of its offerings of Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 21 of 34 PageID #: 2172 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 16 securities. (SOF ¶ 7). Second, it cannot be disputed that the offers and sales at issue were made through interstate commerce, because Servergy stock was offered and sold to investors in numerous states, their funds were remitted from multiple states, and Mapp used the mail, emails, and telephones to communicate with investors and prospective investors in multiple states. (SOF ¶ 5). C. No Exemption to Registration Applies. Because the SEC has established a prima facie Section 5 violation, Mapp bears the burden of establishing that Servergy was entitled to some exemption from the registration requirements. SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953); Continental Tobacco Co., 463 F.2d at 156. According to Servergy’s Forms D filed with the Commission, the company claimed exemptions under Rule 506 of Regulation D. (SOF ¶ 7). But the undisputed facts demonstrate that Servergy was not entitled to the exemptions provided by Rule 506 of Regulation D or any other exemptions. As a preliminary matter, Servergy’s Series A – C offerings and the WFG offering should all be considered as a single offering under the principle of integration. Under Rule 502(a) of the Securities Act, the factors considered for an integration of offerings include: (1) a single plan of financing; (2) the same class of securities; (3) offerings made around the same time period; (4) the same kind of consideration; and (5) proceeds used for the same general purpose. (17 C.F.R. §230.502(a)). Servergy’s offering of shares of its common stock should be integrated because they were all part of a continuous offering from November 2009 through September 2013, involved the same kind of consideration – cash – and the proceeds were used for the same general purpose of funding the development of the CTS-1000. (SOF ¶ 6). See SEC v. Murphy, 626 F.2d 633, 645–46 (9th Cir.1980) (concluding that offerings of limited partnership sales in Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 22 of 34 PageID #: 2173 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 17 certain cable television systems should be integrated when the offerings were all part of one financing plan and purchased with the same type of consideration). Although there was a small increment of time in between the Series B and Series C offerings, this fact does not outweigh the other factors which weigh overwhelmingly in favor of integration. See Id. at 646 (holding that integration applied to offerings that spanned over 30 years despite multi-year gaps because the timing factor was heavily outweighed by the remaining considerations). There are two exemptions available under Rule 506 of Regulation D – neither of which is applicable in this case. For an offering to be exempted under Rule 506(c), all investors must be accredited. 17 C.F.R. 230.506(c)(2)(i). An “accredited investor” is defined as any natural person, at the time of investment, whose individual or joint net worth exceeds $1,000,000, or whose individual income exceeds $200,000 or joint income exceeds $300,000 for each of the two most recent years. See 17 C.F.R. 230.501(a)(5)-(6). Additionally, Rule 501(e)(2) requires that each beneficial owner of entities such as the Dominion JVs, which were organized specifically to acquire Servergy securities, be accredited for the purposes of complying with a Regulation D exemption. 17 C.F.R. 230.501(e)(2). But not even Caleb White – who formed the Dominion JVs – was accredited when he invested in Servergy through Dominion JV 1. (SOF ¶ 14). Further, Mapp did not investigate whether the Dominion JV investors were accredited. Mapp knew the following: (1) an unaccredited investor from whom Servergy rejected a direct investment had informed Mapp via email that he planned on making an investment through a Dominion JV; (2) some of the Dominion JV investors could only afford to invest $1,000 – $2,000; and (3) White believed that having a single, accredited Dominion JV investor sign Servergy’s subscription agreement would satisfy the requirements of Servergy’s subscription Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 23 of 34 PageID #: 2174 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 18 agreements as to the JV entity. (SOF ¶ 17). Furthermore, the only steps Servergy took to assure that its investors were accredited was to have the investors self-certify to the fact, which is insufficient. (SOF ¶¶ 12-17). See 17 C.F.R. 230.506(c)(2)(ii) (providing examples of reasonable steps to verify accreditation such as reviewing IRS forms, bank statements, consumer reports or obtaining a written confirmation from a registered broker-dealer, registered investment adviser, attorney or public accountant). Likewise, the exemption provided by Rule 506(b) of Regulation D is also unavailable. Although Rule 506(b) allows for up to 35 unaccredited investors, it also requires the issuer to provide them certain types of information. 17 C.F.R. 230.506(b); 17 C.F.R. 230.502(b). For an offering over $7.5 million, such as this one, Servergy was required to provide, within a reasonable time before the sale of the securities, an audited financial statement or balance sheet to the unaccredited investors. 17 C.F.R. 230.502(b)(2)(B)(3). But Servergy only obtained an audited balance sheet for the years 2009 and 2010 on April 28, 2011 and an audited balance sheet for years 2011 and 2012 on February 4, 2014. (Ex. 53, April 28, 2011 Audit, App. 656- 668; Ex. 54, 2011-2012 Audit Report, App. 669-683). Thus, Servergy did not provide – and could not have provided – an audited balance sheet to any of the unaccredited investors in the first Dominion JV when they invested on April 18, 2010 or to the successive unaccredited Dominion JV investors that all invested prior to February 4, 2014. Additionally, the exemption provided by Rule 506(b) of Regulation D is also unavailable because the unaccredited Dominion JV investors were not sophisticated. To be eligible for the exemption, each unaccredited investor must either alone or with his representatives have such knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment, or the issuer must reasonably believe that the Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 24 of 34 PageID #: 2175 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 19 purchasers are sophisticated. 17 C.F.R. § 230.506(b)(2)(ii). But the undisputed facts show that some of the Dominion JV investors that were unaccredited had never invested in a private company or – as was the case with one 19-year old investor – had no investment experience of any kind. (SOF ¶ 16). The Dominion JV investors were not sophisticated and Mapp relied solely on Caleb White to vet them; in fact, had Mapp asked for the Dominion JV subscription agreements, he would have known that some investors were ineligible. (SOF ¶¶ 14-17). Although Servergy only claimed an exemption under Regulation D, the undisputed facts also show that no other exemptions apply to the company’s offering of securities. For instance, Section 4(a)(2) exempts from registration “transactions by an issuer not involving any public offering.” SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072 at 1090 (9th Cir. 2010). This exemption applies to a transaction that is “a limited distribution to highly sophisticated investors, rather than a general distribution to the public.” Id. The Fifth Circuit has identified four reference points for evaluating whether an offering is non-public: (1) the number of offerees and their relationship to each other and the issuer; (2) the number of units offered; (3) the size of the offering; and (4) the manner of the offering. Swenson v. Engelstad, 626 F.2d 421, 425 (5th Cir. 1980). The undisputed facts establish that Servergy sold millions of shares of its common stock more than 200 investors located in over thirty different states – a large portion of whom were identified through the recruitment efforts of White or WFG registered representatives and had no relationship to each other. (SOF ¶ 5). Further, the Dominion JVs served as vehicles for White to recruit more than 150 investors, some of whom were unsophisticated and unaccredited, and neither Servergy nor White had provided the necessary financial and other disclosures regarding the investment. (SOF ¶¶ 12-16). Additionally, most of the investors had no prior relationship with Servergy or Mapp prior to investing. Thus, these relationships were not of a nature to Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 25 of 34 PageID #: 2176 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 20 “afford them access to or disclosure of the sort of information about the issuer that registration reveals.” See, e.g., Murphy, 626 F.2d at 647 (holding that the private placement exemption may apply only “if all the offerees have relationships with the issuer affording them access to or disclosure of the sort of information about the issuer that registration reveals”). Consequently, the Section 4(a)(2) exemption for a limited private distribution also does not apply. For all these reasons, the Court should grant summary judgment for the Commission on its Section 5 claim against Mapp. II. The Court Should Grant Summary Judgment on the SEC’s First and Second Claims Because Mapp Defrauded Investors As alleged in the Complaint, Mapp misrepresented key aspects of Servergy’s business accomplishments and relationships in order to encourage the public to invest in his company. Because there is no genuine issue of material fact regarding many facets of Mapp’s fraud, the Court should grant the SEC’s motion on its first and second claims for relief pursuant to Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. A. Elements of Securities Fraud Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), prohibits fraud in the offer or sale of securities, and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, prohibit fraud in connection with the purchase or sale of any security. To establish liability under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5, the SEC must prove by a preponderance of the evidence: (i) a material misrepresentation, omission of a material fact, or other fraudulent device; (ii) in connection with the purchase, offer, or sale of a security; (iii) with the requisite mental state. See Aaron v. SEC, 446 U.S. 680, 695 (1980); SEC v. Gann, 565 F. 3d 932, 936 (5th Cir. 2009); SEC v. Seghers, 298 F. App’x 319, 328 (5th Cir. 2008). Violations of Section 17(a)(1), Section 10(b), Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 26 of 34 PageID #: 2177 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 21 and Rule 10b-5 require a showing of scienter. See Aaron, 446 U.S. at 697. Violations of Sections 17(a)(2) and (a)(3) require, at most, a showing of negligence.7 See SEC v. Hopper, 2006 WL 778640 at *9 (S.D. Tex. Mar. 24, 2006). As demonstrated below, there is no genuine issue of material fact that Mapp violated Section 10(b), and Rule 10b-5 thereunder, and Section 17(a) by making material misstatements and omissions. B. Mapp Made Material Misrepresentations and Misleading Omissions “[T]he standard for misrepresentation is whether the information disclosed, understood as a whole, would mislead a reasonable potential investor. [And a] statement or omitted fact is material if there is a substantial likelihood that a reasonable investor would consider the information important in making a decision to invest.” SEC v. Provident Royalties, LLC, 2013 WL 5314354, at *4 (N.D. Tex. Sept. 23, 2013) (quoting SEC v. Seghers, 298 F. App’x 319, 328 (5th Cir. 2008)); see SEC v. Gann, 565 F.3d 932, 937 n.17 (5th Cir.2009). Phrased another way, “[a]n omitted fact is material if disclosure of the omitted fact would have “significantly altered the total mix of information made available.” Basic v. Levinson, 485 U.S. 224, 232 (1988). As such, the antifraud provisions of the securities statutes and regulations impose a “‘duty to disclose material facts that are necessary to make disclosed statements, whether mandatory or volunteered, not misleading.’” SEC v. Fehn, 97 F.3d 1276, 1290 n.12 (9th Cir. 1996) (quoting Hanon v. Dataproducts Corp., 976 F.2d 497, 504 (9th Cir. 1992)). To the extent fraud is committed on an intermediary, such as a broker, materiality is evaluated from that person’s perspective, and not from the perspective of a reasonable investor. 7 The Supreme Court has never addressed whether negligence is necessary to prove a violation of Sections 17(a)(2) and (a)(3). In fact, the Court has suggested that, at least under Section 17(a)(3), the focus is only on the “effect of particular conduct on members of the investing public, rather than upon the culpability of the person responsible” for the conduct. Aaron, 446 U.S. at 696-97. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 27 of 34 PageID #: 2178 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 22 U.S. v. Tager, 788 F.2d 349, 354-55 (6th Cir. 1986) (affirming convictions for securities, wire, and mail fraud on the ground, in part, that misrepresentations to a broker about the defendant’s financial situation designed to transfer risk were material); see also U.S. v. Naftalin, 441 U.S. 768 (1979) (Section 17(a) of the Securities Act held to cover fraud against brokers). i. Mapp’s Statements about Pre-Orders Were Materially Misleading and Omitted Material Facts As the Statement of Facts above demonstrates, Bill Mapp told lies and made misleading omissions that are undisputed. The goal of these lies and omissions was to create the appearance of commercial success for Servergy’s CTS-1000 server where none actually existed. Bill Mapp repeatedly misled the public about the success of Servergy’s pre-order program. (SOF ¶¶ 30-35). However, it was only after it removed the deposit requirement from its pre- orders that Servergy was able to secure an expression of interest – with no obligation to purchase – from Koerr Services, Inc. Koerr was actually interested in the CTS-1000 server in late 2012 and early 2013 (when it believed the CTS-1000 was a 64-bit machine). (SOF ¶¶ 22-23, 28). But in March 2013, Koerr’s CTO, Kyle Chase, made it unequivocally clear to Servergy that Koerr would not buy a 32-bit server like the CTS-1000 because it was incompatible with Koerr’s products. (SOF ¶ 29). Chase had actually thought that the CTS-1000 was a 64-bit machine all along. (SOF ¶¶ 28). Because his son explicitly told him this fact on March 10, 2012, Bill Mapp knew that Koerr was only interested in a 64-bit server. (SOF ¶ 29). Nevertheless, Servergy continued to tout that “the company has received over 25 orders totaling over 1,500 units with planned delivery in late 2013.” (SOF ¶¶ 26, 31). Because it is undisputed that two-thirds of these units (1,000) were the Koerr pre-order, the PPM was materially misleading. Mapp drafted this misleading PPM and personally shared it with potential investors via email. (SOF ¶¶ 26, 33). Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 28 of 34 PageID #: 2179 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 23 As Servergy’s CEO, Mapp clearly had the ability – and the continuing opportunity – to correct this misstatement for the next seven months while he raised $20 million using the misleading PPM. In fact, Mapp had a perfect opportunity when Servergy, under Mapp’s direction, supplemented the PPM in September 2013. (SOF ¶¶ 34, 35). Mapp’s PPM Supplement not only failed to amend the patently misleading claim of “over 25 orders totaling over 1,500 units with planned delivery in late 2013,” but it actively touted other business developments that Mapp and Servergy deemed positive. Despite touting the pre-orders, Mapp never addressed any aspect of the impact of Koerr’s 64-bit requirement publicly. (Id.). Thus, Mapp’s continued use of a knowingly misleading PPM also represented a repeated omission of facts that drastically altered the “total mix” of information available to investors. The fact that the majority – fully two-thirds – of Servergy’s claimed pre-orders had evaporated was certainly material to investors. Notably, as far as CTS-1000 sales are concerned, Servergy’s PPM focuses almost exclusively on things that might happen. Indeed, the statement about pre-orders stood out as a claim about something good that had already happened: orders had been made. The fact that the majority of Servergy’s claimed pre-orders did not exist after March 10, 2013 highlights the materiality of Mapp’s misrepresentation. Mapp and Servergy did not just exaggerate the number of pre-orders, but they falsely tripled the number of Servergy’s actual pre-orders. This was undoubtedly information that a reasonable investor would consider important in making a decision to invest in Servergy. The continued use of false PPMs and Mapp’s failure to correct the PPM’s false statements – including the failure to address issue in the PPM Supplement – significantly altered the total mix of information and materially misled potential Servergy investors. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 29 of 34 PageID #: 2180 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 24 ii. Mapp’s Statement about Freescale’s “Order” was Materially Misleading In July 2012, when his company was in dire financial condition – literally unable to meet rent and payroll expenses – Mapp’s material misrepresentation about a Freescale “order” kept Servergy afloat. (SOF ¶¶ 36-40). As described above, Mapp took the news of a meeting with Freescale Semiconductor and spun it into news of an order from a major company. (Id.). On the same day that he told an investor this “news,” that investor put in an additional $40,000, almost all of which was spent the very next day on Servergy’s rent and payroll. (SOF ¶ 39). Internally, at the time, Servergy described its opportunity with Freescale as a mere “proposal” that Freescale was considering. (SOF ¶ 40). Mapp’s deceit – referring to a “proposal” as an “order” – allowed Servergy to cut paychecks and pay the rent in July 2012. Considering that this “order” would have been Servergy’s first actual sale and that the resulting investment kept the company afloat, there is no question that his misrepresentation was material. C. Mapp Conducted His Fraudulent Activities In Connection with the Offer and Sale of Securities The securities at issue in this case are the shares of Servergy. Mapp’s fraudulent conduct in this case misled the public in the offer or sale – and in connection with the purchase or sale – of Servergy stock. Mapp and Servergy raised more than $20 million based on these false claims about pre-orders, and raised $40,000 at a critical time for the company by fabricating a non- existent “order” from a major company where none actually existed. (SOF ¶¶ 26, 31, 39). There is no question that the second element of securities fraud is satisfied in this case. D. Mapp Acted with Scienter The element of scienter is defined as a “mental state embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). In the Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 30 of 34 PageID #: 2181 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 25 Fifth Circuit, scienter is established by a showing that the defendants acted intentionally or with severe recklessness. See Broad v. Rockwell Int’l Corp., 642 F. 2d 929 (5th Cir.) en banc, cert. denied 454 U.S. 965 (1981); SEC v. Provident Royalties, LLC, No. 3:09-CV-01238-L, 2013 WL 5314354, *5 (N.D. Tex. Sep. 23, 2013) (Lindsay, J.) (severe recklessness includes “highly unreasonable omissions or misrepresentations that constitute an extreme departure from the standards of ordinary care” particularly where omissions or misrepresentations “present a danger of misleading buyers” that “is so obvious” that the defendant “must have been aware of it”). Bill Mapp acted with the intent to deceive Servergy investors. He knew that the Koerr order had evaporated – as far as a 32-bit machine was concerned, and Servergy had no 64-bit server – and he continued touting pre-sales shipping in 2013 anyway, raising $20 million dollars for his company. (SOF ¶ 31.) Setting aside his obvious long-term incentive to keep his company afloat, the immediate personal impact that Servergy’s fundraising had on Mapp was substantial. Bill Mapp testified that in 2009, he made from $10,000 to $20,000 for his work for Servergy. (SOF ¶ 18.) As fundraising efforts improved at Servergy, so did Mapp’s salary. Indeed, Mapp admitted that the WFG Offering enabled him to take a full salary, something that he had not been able to do in the history of his company. (Id.) Mapp was able to multiply his personal salary on the strength of investments secured from people who had been given PPMs with Mapp’s false pre-order claims. Moreover, at a particularly precarious financial juncture for Servergy, Mapp was able to raise an additional $40,000 from a previous investor. (SOF ¶ 38.) He obtained this money, and was able to cover Servergy’s monthly payroll obligations, after touting an “order” from Freescale Semiconductor as though an order already existed. No such order ever existed, but Mapp was able to keep Servergy afloat for another month on the basis of that representation. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 31 of 34 PageID #: 2182 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 26 Mapp knew that his claims about the Koerr “pre-orders” and the Freescale “order” were false when he used them to raise millions of dollars. He had ample opportunity to amend his representations to more accurately inform investors. The fact that he refused to do so, especially given his involvement in supplementing the PPM, was intentional, or at the very least reckless, and supports a finding of scienter in this case. E. Mapp Violated Sections 17(a)(2) and 17(a)(3) of the Securities Act The Complaint also alleges that Mapp violated Sections 17(a)(2) and (a)(3) of the Securities Act. These provisions require, at most, a showing of negligence. See, e.g., SEC v. Hopper, 2006 WL 778640 at *9 (S.D. Tex. Mar. 24 2006). The Supreme Court, however, has suggested that, at least under Section 17(a)(3), the focus is only on the “effect of particular conduct on members of the investing public, rather than upon the culpability of the person responsible” for the conduct. Aaron, 446 U.S. at 696-97. While the SEC believes the evidence strongly supports that Mapp acted with scienter, there is no doubt that he at least acted negligently. The effect of his conduct on members of the investing public justifies a finding that he violated, at a minimum, Sections 17(a)(2) and 17(a)(3) of the Securities Act. After Servergy took more than $20 million from them, Servergy’s investors were left holding shares of a company that had vastly smaller potential than the investors had been led to believe by Mapp’s knowingly inflated pre-order claims. In fact, Servergy never successfully brought the CTS-1000 to the market. The effect on members of the investing public is undisputed and enormous. Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 32 of 34 PageID #: 2183 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 27 CONCLUSION For the foregoing reasons, the Court should grant the Commission’s motion for summary judgment and grant Plaintiff such other relief as it may be entitled. A proposed Order is attached to this motion. Dated: September 29, 2017 Respectfully submitted, s/Matthew J. Gulde Matthew J. Gulde Illinois Bar No. 6272325 Timothy L. Evans Texas Bar No. 24065211 Jessica B. Magee Texas Bar No. 24037757 United States Securities and Exchange Commission Burnett Plaza, Suite 1900 801 Cherry Street, Unit 18 Fort Worth, TX 76102 Telephone: (817) 978-1410 (MJG) Facsimile: (817) 978-4927 guldem@sec.gov Attorneys for Plaintiff Securities and Exchange Commission Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 33 of 34 PageID #: 2184 SEC v. Mapp PLAINTIFF’S BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Page 28 CERTIFICATE OF SERVICE I hereby certify that on September 29, 2017, I electronically filed the foregoing document with the Clerk of the Court using the CM/ECF system, which will send notification of the filing to all counsel who have registered with the Court. s/Matthew J. Gulde Matthew J. Gulde Case 4:16-cv-00246-ALM Document 113 Filed 09/29/17 Page 34 of 34 PageID #: 2185