I've only seen this when I a) didn't have SQL CE installed, b) my installation was messed up somehow or c) I was running vsdbcmd.exe from a 64-bit command shell. Open a 32-bit elevated command prompt and run the following
C:\Windows>dir /s System.Data.SqlServerCe.dll
You should see something like the following. Do you? If not, repair your SQL CE install.
Directory of C:\Windows\assembly\GAC_MSIL\System.Data.SqlServerCe\3.5.1.0__89845dcd8080cc91
08/04/2009 06:04 PM 271,440 System.Data.SqlServerCe.dll
Duke Kamstra - Program Manager - VSTS Database Edition (Data Dude, DBPro)