Wednesday, October 4, 2023
Courthouse News Service
Wednesday, October 4, 2023 | Back issues
Courthouse News Service Courthouse News Service

Texas Attorney General Fights SEC Case

SHERMAN, Texas (CN) — Texas Attorney Ken Paxton asked a federal judge on Friday to dismiss the SEC's second lawsuit accusing him of ripping off investors in a tech company, saying it lacks legal basis.

The SEC sued Paxton in April, claiming he did not tell investors in McKinney-based Servergy, a computer server company, that he was paid commissions to promote the company.

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

The SEC filed an amended complaint three weeks later. It claims Paxton raised more than $480,000 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 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."

In his 35-page motion to dismiss, Paxton again claims that the SEC has failed to plead any misstatements he made and that the changes the SEC made fail to support a fraud claim.

"In its ruling on Mr. Paxton's first motion to dismiss, the court held that the alleged statements by Mr. Paxton referring to Servergy as a 'great company,' a 'great investment' and an 'interesting investment opportunity' were 'puffing statements that are immaterial as a matter of law' and cannot support a securities fraud action,'" the motion states.

"The amended complaint simply repeats those allegations and then adds argument that these puffery statements 'implied that [Mr. Paxton] had undertaken some level of diligence.' ... In any event, immaterial puffery cannot, as a matter of law, create the implication for which amended complaint argues." (Brackets, but not ellipsis, in original.)

Paxton says the SEC has again failed to plead facts giving rise to a duty to defend, that a defendant "does not commit securities fraud merely by failing to disclose all nonpublic material information in [his] possession." (Brackets in original, citing Ind. Elec. Workers' Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 541 (5th Cir. 2008).)

Paxton's attorney, Matthew Martens with Wilmer Hale in Washington, D.C., told Courthouse News on Friday that the court found that the SEC's original complaint "had no legal basis."

"Our motion to dismiss filed today explains why the SEC's new complaint fares no better," Martens said in a statement. "The reason is simple: Mr. Paxton did not commit securities fraud."

Paxton's legal troubles began in August 2015 when a Collin County grand jury indicted him 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.

Paxton's criminal defense attorney, Bill Mateja with Polsinelli in Dallas, said Friday: "The SEC's 'do-over' illustrates the weakness of its case and begs the question: If their new information is so significant, why are we now just hearing about it?"

Follow @davejourno
Categories / Uncategorized

Read the Top 8

Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.