Sequoia Voting Systems' CEO, Jack Blaine, Sent Deceptive Letter to Windy City Officials Following 'Evasive' and 'Troublesome' Testimony on his Company's Control by Smartmatic, a Chavez-tied E-Voting Firm

Documents Reveal Officials Sought to Ensure Venezuelan Company's Divestiture of Sequoia Was 'Not a Sham Transaction Designed to Fool Regulators'; Recent Reporting by The BRAD BLOG Reveals That it Was...

Brad Friedman Byon 5/21/2008, 11:02am PT

-- by Brad Friedman

The CEO and President of one of America's largest voting machine companies, Sequoia Voting Systems, gave both deceptive, and carefully selective, answers in his reply to a letter sent earlier this year from two high-ranking officials in Chicago, according to documents recently obtained during an ongoing investigation by The BRAD BLOG.

Sequoia's chief executive, Jack Blaine, repeated knowingly false answers, at least three different times, in his January 18 response to Chicago Alderman Edward M. Burke and the Chair of Chicago's Board of Election Commissioners Langdon D. Neal. The pair had written to the company on January 11, expressing concerns about the truth behind Sequoia's claims that they had completely divested from their purportedly "former" parent company, Smartmatic, the Venezuelan-run firm with direct ties to Hugo Chavez and his government.

Last year, as media reports revealed the true extent of Smartmatic's shadowy foreign ownership --- and with it, the direct control of some 20% of U.S. elections --- the firm came under close scrutiny by federal investigators from Treasury Department, the FBI and the IRS. In November of last year, Sequoia announced that it had "completely" divested from Smartmatic in a management team-led buyout, thus ending an official review by Treasury's Committee on Foreign Investment in the United States (CFIUS).

But in January, the officials from the Windy City --- where Sequoia holds one of the company's most lucrative contracts --- had continuing concerns about whether the sale was legitimate, or simply a dodge to avoid scrutiny by federal investigators. They were right to be concerned.

In their letter, Burke and Neale requested written responses from Sequoia after what was described as "evasive" and "troublesome" sworn testimony from Blaine the previous year, following "malfunctions of Sequoia voting machines during primary elections held on March 21, 2006."

In his testimony before a Chicago City Council joint committee in April of 2006, Blaine had claimed he didn't know the specific details of the financial arrangement that existed between Sequoia Voting Systems, Inc., and the Smartmatic Corporation, despite being president of both companies at the time. He did, however, manage to admit to the joint committee that at least 15 Venezuelan nationals were flown in to assist in the tabulation of votes in the troubled March '06 election and that the Venezuelans had access to Sequoia's source code. Blaine also conceded that it was "possible" that Chavez' government could hold an interest in the company, but that he wasn't certain because the ownership of Smartmatic was concealed in an off-shore trust.

In their series of follow-up questions to Blaine in January 2008, Alderman Burke noted that "the entire Smartmatic episode has served as a reminder of how important it is to know and trust who is counting the votes in our elections."

"It is therefore important," he continued, "to confirm that the sale of Sequoia by Smartmatic is not a sham transaction designed to fool regulators and to further confirm that Smartmatic and the government of Venezuela have no ability to influence or control the new owners of Sequoia."

Blaine's written responses to the officials, sent to Neale the following week, were dishonest, misleading, and even cleverly evasive on at least one crucially important point. His answers also contradict details recently exposed in a series of investigative exclusives by The BRAD BLOG, revealing several startling facts about the true ownership and control of Sequoia.

Moreover, after we broke the news in April, concerning the attempted hostile takeover of Sequoia by competitor Hart InterCivic, Blaine appeared to joke with employees during a confidential company-wide "town hall" teleconference about "the line" he used with yet another Chicago official, Cook County Clerk David Orr. "He accepted it completely," Blaine told employees, as he underscored the importance of keeping details of the attempted takeover confidential, and how he was being less than forthcoming about it with the company's customers...

LYING ABOUT SMARTMATIC'S CONTROL OF SEQUOIA

In November of last year, as a federal investigation by the Treasury Department's CFIUS was closing in on the true provenance of Smartmatic's shadowy ownership, and after a failed attempt to find an outside buyer for the company, Blaine and several other Sequoia and/or Smartmatic executives formed SVS Holdings, Inc., and proceeded to purchase Sequoia from the parent company.

However, a recent series of exclusive BRAD BLOG investigative reports has revealed that the sale, which succeeded in moving CFIUS to end their official review of the matter, was not what it seemed to be.

Recent court documents unearthed and published by The BRAD BLOG, detailing the terms of the attempted hostile takeover of Sequoia by competitor Hart InterCivic, make clear that Smartmatic still retains the intellectual property (IP) rights over Sequoia's popular, if oft-failed e-voting systems, as well as licensing control of the software used in their voting machines and tabulators.

The April 2008 opinion [PDF] by Delaware's Court of Chancery Vice Chancellor Stephen P. Lamb also disclosed an element of the confidential agreement struck between CFIUS and Smartmatic last year, which had apparently disallowed even "indirect" control over Sequoia Voting Systems, Inc., by the Venezuelan firm.

However, as we reported in late April, statements made by Blaine himself, during a confidential, company-wide teleconference convened to explain the attempted hostile takeover in the wake of our report, confirmed that Sequoia has no claim to the IP rights of voting systems bearing the name Sequoia, including those electronic systems recently purchased by Cook County and the Chicago Board of Elections. Rather, it is Smartmatic that retains control of those rights, as the software itself is used by Sequoia under a continuing licensing agreement with the off-shore company which continues to supply the hardware and software used in Venezuelan elections under Chavez.

Blaine's January '08 letter [PDF], in response to Alderman Burke and Chairman Neal's letter [PDF] earlier that month, claims --- at least three times --- that his management-led buy-out team had "completely eliminated" Smartmatic's "ownership, control and operational rights of any kind in Sequoia."

"Any rumors or speculation to the contrary are wrong and unfounded," Blaine wrote to the Chicago officials.

Blaine's thrice-repeated line was the same one, word for word, used by Sequoia in their official announcement of "new corporate ownership" in November of 2007 as they appeared to be breaking away from Smartmatic. In describing the general details of the financial arrangement, the press release used what would become Blaine's Chicago boiler plate explanation, that the deal "completely eliminates Smartmatic's ownership, control and operational rights of any kind in Sequoia."

But our reporting to date --- and Blaine's curious failure to respond at all to one key question from Burke, while offering answers, accurate or otherwise, to all the others --- demonstrates that Blaine blatantly misled the Chicago officials in response to their well-merited concerns.

"IT DOESN'T MATTER WHETHER WE HAVE THE IP OR NOT"

During the April 11th, 2008 conference call which Blaine convened to explain the attempted Hart takeover to his employees, after we broke the story, he was confronted with a question from an employee about one of the details in our report. The employee asked about the ownership of the Intellectual Property (IP) rights of the voting systems sold in the United States by Sequoia.

"It doesn't matter whether you have the IP rights, or you don't have the IP rights," Blaine explained on the call that he'd repeatedly stressed should remain confidential. His comments were in direct contradiction to both what he'd told the Chicago officials in January and what his company had been representing to election officials and in courtrooms across the country.

"We have the source code, and we have the right to modify it any way we want to modify it," he explained to the employee, concerning the company's ongoing licensing agreement with Smartmatic. "So it doesn't matter really whether we have the IP or not."

He then went on to claim that he didn't care all that much about those IP rights during his negotiations the previous year with Smartmatic.

"I didn't particularly want the IP...As we've discussed in the past, I believe we've really come across the perfect time to change our portfolio going forward. And it's not gonna be dependent on the Smartmatic technology, or the IP or anything else. It's gonna be dependent on what we collectively believe the market, and what the future standards, will require."

While intending to "maintain" existing voting systems they'd sold, now in use across the United States, he was more interested in selling the company's new line of voting machines, "codenamed: System Nine," as he elucidated to his underlings.

The admission was quite a departure from his repeated written claims to Chicago's Alderman and Chair of their Election Commission, that "Smartmatic has no ownership, control and operational rights of any kind in Sequoia."

Additionally, the Delaware court documents also revealed that Smartmatic had succeeded in including an interesting non-compete provision in their negotiations to sell Sequoia to Hart. The proposed agreement would bar Hart from competing with Smartmatic for elections business in a number of foreign countries.

"Hart promises not to compete with Smartmatic in Latin America, the Philippines, and Belgium," Vice Chancellor Lamb wrote in describing the proposed Hart/Smartmatic agreement. "In return, Smartmatic promises to grant Hart a license to use its intellectual property found in Sequoia's machines."

The written opinion from Lamb further underscores the control Smartmatic retains over Sequoia, and which they will likely continue to retain whether or not Hart is successful in its takeover attempt.

The management team that had purchased Sequoia, Blaine's SVS Holdings, Inc., has the right in its original contract to match the deal from Hart. Sources at both companies confirm that Sequoia/SVS is attempting to do exactly that, and may even be successful (we hope to have more, in the near future, on the attempts by Sequoia/SVS to save themselves, and the extraordinary financial measures and risks they are currently undertaking to try and do so.)

So whether SVS Holdings or Hart InterCivic wrestles some of the company away from Smartmatic, which currently holds a $2 million loan note from SVS' original "purchase" of the company, the Venezuelan Chavez-tied firm will still have control over software licensing rights and intellectual property rights for the voting systems used in some 20% of U.S. elections. Smartmatic also has the continuing right to determine where Sequoia may or may not do business outside of the U.S.

All in direct contradiction to claims that last years "new corporate ownership" had "completely eliminate[d] Smartmatic's ownership, control and operational rights of any kind in Sequoia."

For its part, Hart InterCivic, a direct competitor of Sequoia's which Blaine told his employees on the conference call currently maintains control of some 8% of the election industry in the U.S., has troubles of its own. The firm is facing a company whistleblower's federal fraud lawsuit unsealed last March.

No matter what, it seems, those who've gone into business with Sequoia will be saddled with Smartmatic whether they know it, or like it, or not. And worse, they may possibly even be forced to do business with a company facing a federal false claims lawsuit to boot.

* * *

As if Blaine's thrice-stated written deception to the two Chicago officials wasn't blatant enough, he appears to have attempted to fool the officials regarding these same points in one other curious point in his written reply.

The January 11, 2008, letter from Alderman Burke and Chairman Neal had requested Blaine answer and/or produce supporting documents in response to a series of bulleted questions.

Most of those questions were re-typed in Blaine's response, and numbered, (eg. "Ald. Burke Question #1") preceding each answer offered in response by Blaine.

But one question/request --- which would have been #5 --- was completely skipped by Blaine in his responses. Given his sequential numbering of the previously un-numbered questions, the "oversight" was easy to miss, since question #6 became numbered as question #5 and so on. Only close comparison with the original reveals that Blaine disappeared one of the questions entirely.

The question/request which Blaine failed to even address in his response:

Please list any license, royalty and/or other intellectual property agreements between Sequoia and Smartmatic and/or their affiliates.

Given what we now know, it's little wonder Blaine conveniently "forgot" to respond to that request.

Alderman Burke's spokesman Donal Quinlan told The BRAD BLOG that while their office is "likely to comment on this matter in the future," they are choosing to "not comment at the moment" as they further look into the matter.

Repeated requests for comment from Chairman Neal's office went unanswered.

DECEIVING THE COOK COUNTY CLERK TOO

It wouldn't be the last time Blaine felt it necessary to be less than forthcoming with officials from Chicago and/or Cook County, IL, where they maintain one of the company's largest contracts, struck in 2006.

On the heels of The BRAD BLOG's original exclusive report disclosing the attempted Hart takeover, Cook County Clerk David Orr apparently expressed concern about the company's current and/or future ownership in a conversation with the Sequoia CEO and President.

At the end of the "town hall" teleconference explaining the shake-up to his employees, Blaine bragged of "the line" that he had used to ease Orr's concerns during a discussion earlier that day.

"I apologize again that we didn't do this earlier," Blaine told the employees on the call, adding, ironically enough, "I'm a big believer in communicating, but our hands were tied until we finally got to go through this, and got some agreements from the other side to, to uh, allow this to occur."

It's not clear from his comments whether the "other side" referred to is Hart or Smartmatic. Given VP of Communications & External Affairs Michelle Shafer's refusal to respond to queries from The BRAD BLOG, since we originally broke this story, and the secretive and litigious nature of Sequoia and Blaine, as witnessed by their various recent attempts (see here and here, for example) to keep information from the public, it's amusing to hear his claims that he's "a big believer in communicating."

Following Shafer's lack of response to a request for comment prior to our original story, she sent out an email memo to all employees within minutes after we published our story, "as a reminder" to "direct any and all calls from the media, and the like" to her. Yet she has still failed to respond to any of our inquiries since then.

Blaine followed his comments with another reminder to employees to keep details of the phone call, and the attempted buy-out "in the family," before quickly clarifying: "I mean within the Sequoia family, not necessarily your real family. And, uh, limit who talks to the customers and somewhat what we say...actually we can't talk about everything I said here today with customers."

He then explained "the line" he gave to Cook County Clerk Orr in response to his concerns earlier that day.

"Basically, the line I used with David Orr today for example, when he called --- and he accepted it completely --- was, uh yes, the rumor's true, but the present ownership is uh, plans to uh, retain control. But I didn't know for sure what the outcome would be."

In response to details, and quotes from that phone call, Orr's spokeswoman, Courtney Greve, declined specific comment to The BRAD BLOG, stating for the record only: "Since we were not privy to that conference call, we decline to comment." She confirmed, however, that her office is following these developments, and our coverage of them, closely.

LOCAL ELECTION INTEGRITY ADVOCATES CONCERNED

The news of Blaine's latest prevarications came as little surprise to Election Integrity advocates from the Illinois Ballot Integrity Project (IBIP). The non-partisan, non-profit election watchdogs have tussled with various Illinois election officials on both the right and left for years. They've challenged both the wisdom and legality of a number of their decisions on administrative election procedures, voting and tabulation equipment and questionable contracts with private vendors in a number of state counties.

IBIP has been informing officials about Sequoia-related concerns for years. In early 2006 the chair of their Suburban Cook County Chapter, Robert Wilson wrote about the "daunting task" of "tracking the ownership of Smartmatic" from one international holding firm in one country, to another investment firm in yet another country.

The latest revelations were predictably disturbing to Melissa Urda, IBIP's state chair.

"If Sequoia's ties to Venezuela were basically hidden from Chicago officials, what other aspects of the voting machines, like software security, have been concealed from us?" she commented via email.

"Again, and again election reformists ask the question: how are we to trust that these machines are correctly interpreting and tallying the intent of the voter, and the answer is, of course, we can't," Urda decried.

For now, neither she nor the voters of Chicago and Cook County have a choice. They're stuck with Sequoia until something changes.

FENDING OFF THE TAKEOVER...AND CFIUS

In the past several weeks, Sequoia/SVS has been taking extraordinary measures in their efforts to raise the initial $7 million needed to match Hart's takeover offer to Smartmatic.

Payments to some vendors have been withheld, bond deadlines have been missed (such as in New York, where the company's huge new $100 million contract now may be perilously in question), and certain accounts receivable from a number of clients across the country, including Cook County, IL, have been leveraged without advance notice to the customers --- to the surprise and consternation of several of them --- as part of a scheme to help the cash-poor Sequoia raise the hard funds needed to match Hart's offer in hopes of fending off the takeover.

Hart has been temporarily sidelined from the tussle, as Sequoia/SVS and Smartmatic, continue their rather contentious negotiations. Among the recent stumbling blocks, according to sources: attempts by Sequoia/SVS to find a way to break away, once and for all, from their continuing direct and/or indirect control by Smartmatic.

That, despite Blaine's repeated assertions to Chicago officials, in his deceptive letter of January 2008, that "all terms and conditions of the [Smartmatic/Sequoia divestiture] transaction were reviewed and approved by CFIUS."

Well then there's nothing to worry about here right? If you believe that, then apparently you don't know Jack.

The story will continue. Stay tuned...

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