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Securities and Exchange Commission v. Mapp

United States District Court, E.D. Texas, Sherman Division

November 8, 2017




         Pending before the Court are Plaintiff Securities and Exchange Commission's Motion for Summary Judgment (Dkt. #113) and Defendant William E. Mapp, III's Partial Motion for Summary Judgment (Dkt. #116). Having considered the relevant pleadings and evidence, the Court finds that Plaintiff's motion should be denied in part and granted in part. The Court further finds that Defendant's motion should be denied in part and granted in part.


         Servergy, Inc. (“Servergy”) is a computer hardware company that develops secure, cloud-based data storage servers. From November 2009 to September 2013, Servergy raised approximately $26 million in private securities offerings to develop what it claimed was a revolutionary new server, the CTS-1000. William E. Mapp, III (“Mapp”), Servergy's co-founder and then-CEO, was responsible for the fundraising campaign and had signatory authority over Servergy's bank accounts. 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.

         As Servergy's primary fundraiser, Mapp identified prospective investors through word-of-mouth referrals and offered compensation to individuals for introducing new investors to the company. Once investors expressed interest in Servergy, they could attend investor presentations hosted by Mapp in-person or virtually through webinars. Mapp also provided the investors a Confidential Information Memorandum describing the offering and subscription agreement.

         From November 2009 through October 2013, more than 200 investors located in at least 30 states purchased Servergy securities for a combined amount of over $26 million. Over $1.4 million of the $6 million raised during the period of November 2009 through March 2013 is attributable to the efforts of Caleb White (“White”), the owner of an insurance firm named Sound Harbor Financial, P.C. After meeting Mapp in November 2009, White solicited more than 150 individuals who invested with Servergy between April 2010 and April 2012. In return, Servergy paid White approximately $66, 000 for his services. White was appointed to Servergy's board of directors on September 28, 2011.

         Because White's investors were unable or unwilling to invest the minimum amount Servergy required for a direct investment, White formed and managed the three successive joint ventures, Dominion Joint Venture Group No. 1, 2, and 3 (collectively the “Dominion JVs”) to acquire Servergy securities. Investing in the Dominion JVs allowed White's investors-who may not be 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.

         Servergy separated its multi-year fundraising into four separate offerings:

(1) Series A was offered between approximately November 2009 and April 2010 and raised approximately $800, 000. Investors in this offering purchased Servergy stock at $0.25 a share. The purpose of the Series A offering was to raise pre-production funds, which were ultimately used for “engineering, design, development, fab, assembly and testing of Servergy's Rev 1 Pre-Production Units, as well building a strategic ecosystem and infrastructure of people, process and technology.” Dominion JV 1 invested approximately $78, 000 in this offering on April 18, 2010.
(2) Series B was offered between approximately April 2010 and August 2011 and raised approximately $3.6 million. Investors in this offering purchased Servergy stock at $1.00 a share. Series B funds were used “to build Rev 2 and 3 Pre-Production Units and further build the management team and necessary infrastructure.” Dominion JV 2 invested in this offering.
(3) Series C was offered between December 2011 and March 2013 that raised approximately $1.7 million. Investors in this offering purchased Servergy stock at $2.00 a share. The purpose of this offering was to raise the funds needed for the CTS-1000 to become “production ready.” Becoming “production ready” included ensuring the product design was ready for production, validating software and hardware, and manufacturing production-ready units for consumer beta testing. Dominion JV 3 invested approximately $184, 852 in this offering.
(4) 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”). The purpose of the WFG Offering was to raise funds specifically to bring the CTS-1000 to market, including beginning production, and to develop other products to be sold by Servergy. Funds were used, for example, to address product-build issues and to ultimately manufacture units to be sold to customers. Servergy's Private Placement Memorandum, drafted specifically for this offering, makes clear that the purpose of the offering is to bring the CTS-1000 to market. None of the Dominion JVs invested in this offering.

         Servergy never filed a registration statement for any of its offerings of securities. Rather, Servergy filed Form Ds with the SEC, all claiming exemptions from registration under Rule 506 of Regulation D.

         Servergy purported to only accept investments from accredited investors. 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. Although White and other Dominion JV investors 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.

         In late July 2012, before Servergy raised money with WFG, Servergy had only $5, 101 in its bank accounts. Around the same time, Mapp solicited a prospective investment from David Mayeux (“Mayeux”). In emails sent to Mayeux on July 26, 2012, and July 30, 2012, Mapp mentioned the possibility of an order from Freescale Semiconductor, Inc. (“Freescale). Shortly after receiving Mapp's second email, Mayeux wired $40, 000 to Servergy. After Servergy received the Mayeux's $40, 000 investment, it immediately paid $12, 139 for rent and approximately $24, 250 for payroll expenses. By the following day, Servergy had approximately $10, 024 remaining in its bank accounts.

         In Fall 2012, Mapp attempted to implement a “pre-order” system that would require a potential customer to deposit with Servergy a refundable deposit to reserve future CTS-1000 units. After initially failing to create much demand, Mapp removed the deposit requirement from the pre-order system. Thus, Servergy pre-orders would not require any deposit from customers. Soon after, Koerr, Inc. (“Koerr”), a Canadian company that provided instrumentation, electrical, and automation services to the oil and gas industry, 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.

         On October 19, 2012, Mapp sent an email to investors announcing Servergy's pre-order sales model. 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). By early 2013, Servergy claimed to have received pre-orders for more than 1, 500 CTS-1000 units.

         In preparation for the WFG Offering, Servergy drafted Private Placement Memorandum (“PPM”) dated February 14, 2013. With regard to Servergy's pre-orders, the PPM claimed that

Servergy has received significant interest from various U.S. 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.

(Dkt. #113, Exhibit 3 at p. 39). Mapp participated in the drafting of the PPM.

         In connection with the WFG Offering, Mapp conducted a live presentation regarding 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. During the presentation, Mapp stated Servergy had “two thousand plus and growing” pre-orders for the CTS-1000. 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.

         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. On March 10, 2013, Koerr's CTO informed Mapp that Koerr was not interested in a 32-bit system and withdrew its pre-order.

         Mapp and Servergy continued to use same PPM through September 2013, which still listed the same pre-order demand. Mapp also sent personalized PPMs to specifically targeted investors, which contained the same claims about pre-orders. Using these PPMs, Servergy raised nearly $20 million after March 10, 2013.

         In September 2013, Servergy issued a Supplement to its PPM, which amended the February 14, 2013 PPM to include, among other things, positive business updates such as patent claims issued and manufacturing agreements. The Supplement did not amend the section on pre-orders.

         On October 21, 2016, the Securities and Exchange Commission (“SEC”) filed its Amended Complaint, against Mapp, Warren K. Paxton, Jr. (“Paxton”), Servergy, and White, asserting various violations of federal securities laws (Dkt. #40). The SEC specifically claims that Mapp violated Sections 5(a) and 5(c), 17(a) of the Securities Act and Sections 10(b) of the Exchange Act and Rule 10b-5 thereunder. On April 15, 2016, the Court entered final judgment against Servergy and White, dismissing them from the case (Dkt. #8; Dkt. #9). On June 9, 2017, Paxton filed a Motion to Dismiss under Federal Rules of Civil Procedure 12(b)(6) and 9(b) (Dkt. #44). On March 2, 2017, the Court granted Paxton's motion to dismiss (Dkt. #96). On September 29, 2017, the SEC filed its Motion for Summary Judgment (Dkt. #113). On the same day, Mapp filed his ...

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