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SEC Says Texas AG Paxton Can’t Wriggle Away

SHERMAN, Texas (CN) — Texas Attorney General Ken Paxton cannot dodge a federal securities fraud lawsuit stemming from state criminal charges against him because the civil claims were properly pleaded, the Securities and Exchange Commission told a federal court this week.

The SEC on Tuesday filed a 38-page response in opposition to a motion to dismiss, saying the civil claims against Paxton were pleaded with "ample particularity."

Paxton sought dismissal in June, saying the two fraud claims against him were "unsupported and legally insufficient" and should be tossed because they are "woefully short on the level or particularity" needed to allege fraud.

The SEC disagrees.

"(T)he complaint amply alleges Paxton's conduct in detail, from his initial meeting with former Servergy CEO [William E.] Mapp in July 2011 and their express agreement that Paxton would recruit investors for pay, through Paxton's proactive efforts to solicit investors, his success in doing so, and his August 2011 receipt of payment and continued solicitation efforts thereafter," the response states.

"The charges against Paxton are neither dramatic nor overreaching, but rather well-pleaded assertions of long-standing federal securities laws."

The SEC sued Paxton, R-McKinney, Servergy Inc., co-founder Mapp and former director Caleb J. White in Federal Court in April. It claims 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 and Freescale Semiconductors, and consumed up to 80 percent less power than competitors.

Paxton is accused of raising more than $480,000 from investors for Servergy and being given 100,000 shares of stock while he was a member of the Texas House of Representatives.

The SEC says Paxton "had a duty to disclose" his pay arrangement and that failure to disclose it violated federal securities laws.

"Paxton assumed the duty to speak the whole truth when he set out to proactively promote Servergy stock to investors," the response states. "As Paxton knew, the whole truth included the fact that he was being paid by Servergy to promote its stock and was not disinterested. Paxton assumed a duty to disclose he was being paid to promote Servergy's securities and recruit investors when he elected to share material facts with investors. The complaint identifies material statements Paxton made to investors he solicited."

The SEC disputes Paxton's claim that his statements to investors "were mere puffery" and therefore unable to trigger a duty to disclose.

"But he points exclusively to cases involving either known sales commissions (as opposed to the secret payment in this case) or statements made by the issuer, whose incentive to tout itself is obvious," the response states. "Notably, Paxton cites no case like this one, in which a defendant 'affirmatively create[d] an impression of a state of affairs that differ[ed] in a material way from the one that actually exist[ed].'"

The SEC's civil suit closely mirrors allegations against Paxton in a three-count felony securities fraud indictment issued by a grand jury in Collin County last year. He faces up to life in state prison if convicted.

Paxton has blamed both cases against him on political enemies and President Barack Obama.

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