SEC Fraud Suit Adds to Texas AG’s Legal Woes

     SHERMAN, Texas (CN) – The U.S. Securities and Exchange Commission sued embattled Texas Attorney General Ken Paxton on Monday on securities fraud claims related to a felony criminal case that could send him to prison for life if convicted.
     The SEC sued Paxton, R-McKinney, Servergy Inc., co-founder William E. Mapp and former director Caleb J. White in Federal Court. The agency claims that Mapp lied in 2013 when he told investors that Servergy’s server products were in high demand, had been pre-ordered by known companies including Amazon.com and Freescale Semiconductors and consumed up to 80 percent less power than competitors.
     “As part of its fundraising efforts, Servergy paid Caleb J. White and Warren K. Paxton commissions to promote the company to potential investors,” the 26-page complaint states. “Neither White nor Paxton disclosed their arrangements to prospective investors.”
     At the time a member of the Texas House of Representatives, Paxton raised over $480,000 from investors for Servergy and was given 100,000 shares of stock, the complaint states. One unidentified investor was allegedly a fellow state representative who considered Paxton a personal friend who “based on their friendship and membership in the investment group, believed Paxton was also investing” in the company.
     The SEC says the investor later “grew worried” about his investment after product shipments failed to materialize, resulting in a 2013 meeting with Paxton and Mapp where Mapp “lulled” the investor with false claims of more purchase orders.
     “Paxton did nothing to determine whether Mapp’s claims were true,” the complaint states. “Investor 1 would not have invested in Servergy had he known Paxton was being paid to promote the company.”
     Shamoil T. Shipchandler, director of the SEC’s Fort Worth Regional Office, said investor recruiters are legally bound to disclose compensation they are receiving to promote a stock.
     “We allege that Paxton and White concealed the compensation they were receiving for touting Servergy’s product,” Shipchandler said Monday.
     The SEC’s civil suit closely mirrors allegations made against Paxton in a three-count indictment by a grand jury in Collin County last year. He is charged with two first-degree felony counts of securities fraud and a third-degree felony count of failing to register with the Texas State Securities Board. If convicted, Paxten faces up to life in state prison.
     Paxton’s attorney, William Mateja with Polsinelli in Dallas, said he is not surprised the SEC filed an “identical” civil lawsuit because “it happens almost all of the time.” Mateja said what did surprise him is that the agency chose to sue a year after the criminal case was filed in Collin County.
     “While neither Mr. Paxton nor his legal team have reviewed the civil lawsuit yet, we understand that the civil lawsuit revolves around the same allegations charged in the Collin County criminal matter,” Mateja said in a statement Monday. “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.”
     Paxton’s legal problems began when the Texas State Securities Board fined him $1,000 in 2014 after he admitted he had solicited clients for a friend’s investment firm, Mowery Capital Management, without being registered as an investment adviser while he was a state senator. Paxton paid the fine and was reprimanded.
     But that case led to a Texas Rangers investigation that resulted in the Collin County indictment. State District Judge George Gallagher rejected Paxton’s four applications for habeas corpus and six motions to quash in December, paving the way to trial.

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