SEC Charges Texas AG Ken Paxton With Securities Fraud
Texas Attorney General Ken Paxton has been charged in federal court with allegedly misleading investors in a technology company.
The U.S. Securities and Exchange Commission filed the charges Monday in a Sherman-based court. They are similar to the allegations Paxton faces in a pending indictment handed up by a Collin County grand jury last year.
(Read more about Ken Paxton's legal battles here.)
Paxton is named in the SEC's complaint along with William Mapp, the founder and former CEO of Servergy Inc. Paxton is accused of raising hundreds of thousands of dollars for Servergy without disclosing he was making a commission. The case stems from when Paxton was a member of the Texas House — before he was elected attorney general in 2014.
"People recruiting investors have a legal obligation to disclose any compensation they are receiving to promote a stock, and we allege that Paxton and White concealed the compensation they were receiving for touting Servergy’s product," Shamoil T. Shipchandler, director of the SEC’s Fort Worth regional office, said in a news release on the complaint.
Paxton has pleaded not guilty to the three felony counts he faces in the criminal case.
Bill Mateja, an attorney for Paxton, said that Paxton's legal team has not reviewed the SEC's civil lawsuit.
"As with the criminal matter, Mr. Paxton vehemently denies the allegations in the civil lawsuit and looks forward not only to all of the facts coming out, but also to establishing his innocence in both the civil and criminal matters."
According to the SEC, Paxton persuaded five investors to put $840,000 into Servergy — and did so without attempting to confirm Mapp’s claims about the sales of its data servers and their technological capabilities. A month later, Paxton received 100,000 shares of stock in the company.
In marketing materials and investment presentations, the Servergy CEO said he had preorders for the servers from the online retailer Amazon, the semiconductor giant Freescale, and the Canadian software engineering firm Koerr. He also maintained that an independent testing laboratory had found the product needed up to 80 percent less cooling, energy and space compared with other servers on the market. All of those assertions were untrue, according to the SEC filing.
Paxton pitched the company to his “friends, business associates, law firm clients” as well as members of his investment group. Among those in the investment group who later bought shares in Servergy was Paxton's colleague in the Texas House, state Rep. Byron Cook, R-Corsicana.
“Based on prior dealings in the group, members trusted each other to consider the interests of the group as a whole and not exploit one another for a member's personal benefit. Similarly, prior experiences in the group established that the member who recommended an investment would monitor the investment going forward and represent the group's interests,” the filing states. “Despite a duty to do so, Paxton knowingly or recklessly failed to inform any member of the investment group that he was being compensated by Servergy for recruiting investors.”
The SEC said Paxton told investigators that the shares were a gift from Mapp, not necessarily a commission. According to the complaint, Paxton claimed he accepted the shares only after Mapp refused to accept an offer from Paxton to invest $100,000 of his own money in Servergy.
“I can’t take your money. God doesn’t want me to take your money,” Mapp told Paxton during a meeting at a Dairy Queen during the summer of 2011 in McKinney, according to the SEC.
In May 2014, the state securities board fined Paxton for similar conduct. At that time, Paxton, who was then running for attorney general, admitted he solicited clients for an investment firm without disclosing that he would be paid a percentage of the fees the firm collected from their business.
This is a developing story and has been updated.