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Securities and Exchange Commission v. Mapp

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

November 9, 2017

SECURITIES AND EXCHANGE COMMISSION
v.
WILLIAM E. MAPP, III

          MEMORANDUM OPINION AND ORDER

          AMOS L. MAZZANT UNITED STATES DISTRICT JUDGE

         Pending before the Court is William E. Mapp, III's for Judgment on the Pleadings under Federal Rules of Civil Procedure 12(c) (Dkt. #112). Having considered the relevant pleadings, the Court finds that the motion should be denied in part and granted in part.

         BACKGROUND

         Servergy, Inc. (“Servergy”) is a computer hardware company that develops secure, cloud-based data storage servers. From November 2009 to September 2013, Servergy raised investor funds through 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 competitions 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 (“CIM”) describing the offering and subscription agreement.

         In total, 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.

         Between February 2013 and September 2013, Servergy engaged broker-dealer WFG Investments, Inc. (“WFG”) to raise an additional $20 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. Servergy's Private Placement Memorandum (“PPM”) was drafted specifically for this offering.

         Servergy never filed a registration statement for any of its offerings of securities and purported to only accept investments from accredited investors. 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 pitched a possible sale to Freescale Semiconductor, Inc. (“Freescale). At the time, Servergy had just over $5, 000 in its bank accounts. Around the same time, Mapp solicited a prospective investor through emails sent on July 26, 2012, and July 30, 2012. In those emails, Mapp mentioned the possibility of an order from Freescale. Shortly after receiving Mapp's second email, the investor wired $40, 000 to Servergy. After Servergy received the $40, 000 investment, it was able to meets its rent and payroll obligations for the month. Ultimately, Freescale never purchased or ordered a single CTS-1000.

         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 did not obligate customers to purchase the CTS-1000. Soon after, Koerr, Inc. (“Koerr”), a potential customer, 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 2012 for 1, 000 units.

         In preparation for the WFG Offering, Servergy drafted the PPM dated February 14, 2013. With regard to Servergy's pre-orders, the PPM claimed that the company has received over “25 orders totaling over 1, 500 units with planned delivery in late 2013.” Mapp participated in the drafting of the PPM.

         In connection with the WFG Offering, Mapp conducted a live presentation regarding Servergy on or about February 14, 2013 (“WFG Presentation”), which was recorded and made available to WFG financial advisors for use in soliciting prospective investors. During the presentation, Mapp claimed that Servergy had received pre-orders for over 2, 000 CTS-1000 unites and the company would begin to turn a profit after selling only 600 units.

         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, which still listing the same pre-order demand until the WFG Offering closed in September 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.

         The PPM also claimed that the CTS-1000 was an enterprise-grade general purpose server that would directly compete with the top server makers like IBM, Dell, and Hewlett Packard. It further claimed that the CTS-1000 consumed up to 80% less power than other servers, and included the following chart:

Model

Servergy CTS100

IBM PS701

Cisco B200 M2

Dell

PowerEdge

M160X

HP ProLiant BL420

CPU

8-Core

8-Core

8-Core

8-Core

8-Core

Hard Drive

4 x ITB

1 x 300GB

2 x 146GB

1 x 1TB

2 x 1TB

RAM

32GB

32GB

192GB

96GB

32GB

Power Supply Quantity x Watts / server(s) = Watts per server

130W for each

server = 130W/server

4 x 2980W /

14 servers

= 851W/server

4 x 2500W /

8 servers

= 1250W/server

6 x 2700W /

16 servers

= 1012W/server

6 x 2400W /

8 servers

= 1800W/server

Dimensions

8.75 in W x 1.75 in H x 14.00 in D

9.65 in W x 1.14 in H x 17.55 in D

16.5 in W x 1.95 in H x 24.40 in D

15.2 in W x 2.00 in H x 19.20 in D

7.11 in W x 2.18 in H x 20.37 in D

U Size

1/4 of 1U

9U

6U

10U

10U

Weight

9.0lbs

9.6lbs

25.0lbs

24.5lbs

14.0lbs

Ethernet

2 x 10 Gb 2 x 1 Gb

Dual Port 1GbE

Dual Port 10GbE

Dual Port 1GbE

Dual Port 1GbE

Price

Up To $9, 500

no enclosure

required

Up $13, 000 enclosure

$13, 000 enclosure

$12, 000 enclosure

$30, 000 Enclosure

Enclosure Price

Not required. $0

Up To $10, 779

Up To $8, 000

Up To $5, 000

Up To $30, 517


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