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Texas AG Paxton Faces New SEC Fraud Suit

DALLAS (CN) — Undeterred by a federal judge's dismissal two weeks ago, the SEC on Friday filed an amended securities fraud complaint with four charges against Texas Attorney General Ken Paxton.

The SEC sued Paxton in April, claiming he did not tell prospective investors in McKinney-based Servergy Inc. that he was paid commissions to promote the computer server company. That lawsuit, like the first amended complaint filed Friday, also named Servergy, its former CEO William E. Mapp III, and "purported independent director" Caleb J. White as defendants.

In dismissing that complaint on Oct. 7, U.S. District Judge Amos Mazzant ruled that Paxton "did not have a legal obligation to disclose his financial arrangements" and found no plausible claim under federal securities laws.

The SEC claims Paxton raised more than $480,000 for the company and was given 100,000 shares of stock while he was a member of the Texas House of Representatives.

"Paxton characterized this payment at various times as an investment for which he paid $100,000, as compensation for legal services, and as a gift in order to disguise or conceal its true nature from the investors that he recruited, from federal regulators, and from the public," the 40-page amended complaint states. "In reality, Paxton's undisclosed arrangement with Servergy violated the explicit expectations of some investors and a duty he owed to others he solicited."

The SEC says Paxton "did nothing" to determine whether Servergy founder Mapp's claims to a worried investor that the company had more purchase orders were true. It disputed Paxton's claims that his statements were "mere puffery" and did not trigger a duty to disclose.

Paxton's attorney, Matthew Martens with Wilmer Hale in Washington, D.C., said he would "respond accordingly" after evaluating the amended complaint.

"We are disappointed by the SEC's decision to continue this case, given the court's opinion and the clear infirmities the court found with the commission's original complaint," Martens said Friday.

The securities fraud allegations against Paxton came to the public's attention when a Collin County grand jury indicted him in August 2015 on two first-degree felony counts of securities fraud and a third-degree felony count of failing to register with the Texas State Securities Board.

The allegations in the state criminal case closely mirror those in the SEC's federal civil case. If convicted of the criminal charges, Paxton faces up to 99 years in state prison.

The Texas Court of Criminal Appeals on Oct. 12 rejected Paxton's last-ditch appeal to avoid trial, denying his petition for discretionary review of a trial judge's refusal to dismiss in December. The Texas Court of Criminal Appeals is the state's highest court of criminal appeals.

The state's en banc Fifth Court of Appeals in Dallas rejected Paxton's first appeal in June.

The SEC's first amended complaint contains five charges: two counts of securities fraud against all four defendants; a third count of securities fraud against Mapp, White and Servergy; an anti-touting count against White and Paxton; and operating as an unregistered broker against White and Paxton.

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