Texas Attorney General Paxton Gets SEC Fraud Suit Tossed

Updated on
  • Judge finds he had no legal obligation on investor disclosure
  • Agency given chance to submit additional facts to revive case

Texas Attorney General Ken Paxton convinced a judge he shouldn’t have to face a U.S. Securities and Exchange Commission fraud lawsuit over his solicitation of investors for a friends’ technology company.

U.S. District Judge Amos L. Mazzant III in Sherman, Texas, on Friday ordered conditional dismissal of the SEC’s lawsuit, saying the agency didn’t allege sufficient facts to support its claims. The judge gave the SEC 14 days to submit “additional facts” before he decides whether to order final dismissal.

The SEC accused Paxton of misleading investors in Servergy Inc., a startup purporting to make a new computer network server. Paxton, 53, was accused of recruiting a group of friends, business associates, law firm clients and others to invest a total of $840,000 without disclosing that he was receiving a commission.

The judge concluded Paxton didn’t have a “legal obligation” to disclose his financial arrangement.

“This case is not about whether Paxton had a moral obligation to disclose his financial arrangement with Servergy to potential investors,” Mazzant wrote. “This case is also not about whether Paxton had some general obligation to disclose his financial arrangement to his investor group.”

Paxton still faces criminal charges in state court over his work for Servergy while he was a state legislator. A grand jury in Collin County, north of Dallas, indicted him last year on charges of securities fraud and failing to register as a securities adviser.

For more on the criminal charges against Paxton, click here.

Paxton said in a statement he was grateful for the dismissal of the SEC case.

“Now we turn our attention to Ken’s exoneration in the state matter where the prosecutor’s burden is even higher,” Bill Mateja, a lawyer for Paxton, said in the statement. “The fraud allegations in the SEC case mirror those in the state case.”

The Republican, elected attorney general in November 2014, has said he didn’t commit any crime and the prosecution is politically motivated. If convicted on all counts in the criminal case, Paxton could face a sentence of five years to 99 years in prison.

Paxton’s lawyers argued in the SEC lawsuit that he didn’t have a duty to disclose to investors that he was receiving a commission or that he didn’t investigate the company’s operations before touting it as an investment.

SEC lawyers contended their lawsuit was “neither dramatic nor overreaching.” Paxton met with Servergy’s chief executive officer in 2011 and reached an agreement to recruit investors. He received 100,000 shares in Servergy stock as compensation, the SEC said.

The SEC’s Washington press office and an agency lawyer based in Fort Worth, Texas, didn’t immediately respond to phone messages seeking comment on the ruling.

The SEC case is Securities and Exchange Commission v. Mapp, 16-cv-00246, U.S. District Court, Eastern District of Texas (Sherman). The criminal cases are Texas v. Paxton, 416-81913-2015; 416-81914-2015; 416-81915-2015; 416th Judicial District of Collin County, Texas (McKinney).