Texas Attorney General Ken Paxton Faces Civil Lawsuit From SEC For Securities Fraud

Texas Attorney General Ken Paxton is being accused by federal regulators of deceiving investors in a technology company. Last year, Paxton was indicted by the state for three criminal charges involving securities fraud.

On Monday, the Securities and Exchange Commission (SEC) filed a civil claim against the AG in Federal District Court. The charges against him involve investment-related activity while he was a member of the Texas House of Representatives prior to being elected attorney general.

In 2015, a Collin County grand jury charged Paxton with two counts of securities fraud as well as one count of acting as an unregistered investment adviser. Both the civil and criminal cases involve work Paxton did to promote and find investors for a technology company named Servergy Inc.

According to federal documents, the Texas attorney general encouraged and pressured five investors to put money into Servergy. Allegedly, Paxton made false claims about the sales of the company’s product, a computer server, and its technical capabilities.

As reported by the New York Times, William E. Mapp III, Servergy’s founder, is also named in the SEC’s lawsuit. Mapp is accused of encouraging stock sales by exaggerating the ability of the company’s computer server product.

Marketing materials published by Servergy stated online retailer Amazon, the semiconductor company Freescale, and a software engineering firm named Koerr had all put in preorders for computer servers. The company also stated that an independent testing laboratory concluded that the product used significantly less energy and space when compared to other data servers.

In the court filing, the SEC contends that Paxton did not have the knowledge to fully understand how the product worked and failed to confirm, clarify, or correct the product statements made by Mapp and the company.

The Texas AG endorsed the company to several friends, colleagues, business associates, and members of an investment club. According to the SEC, Paxton collected approximately $840,000 from investors and received 100,000 shares of stock in return. However, he never told the investors about his commissions.

Paxton said he did nothing wrong and the shares were a gift from Servergy’s founder, not a commission. Paxton only took the shares after Mapp refused to let the attorney general invest his own money into the company.

Another man, Caleb White, allegedly brought in over $1.4 million in share purchases and received $66,000 and 20,000 shares as commissions but failed to disclose this to investors. White was also a former Servergy director and has made an undisclosed settlement with the SEC.

“People recruiting investors have a legal obligation to disclose any compensation they are receiving to promote a stock, and we allege that Paxton and White concealed the compensation they were receiving for touting Servergy’s product,” said Shamoil T. Shipchandler, the director of the SEC’s Fort Worth office.

The company has agreed to pay $200,000 to settle claims, but neither Mapp nor Paxton have settled, so the case now moves to a federal court. Mapp has since parted ways with Servergy.

“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 attorney, Bill Mateja, said.

Two years ago, the Texas State Securities Board fined Paxton $1,000 for failing to register as an investment adviser. At the time, Paxton was running for the Texas attorney general’s position and did not face any criminal charges.

Texas Attorney General Ken Paxton pleaded not guilty to the three felony counts he is charged with in the criminal case. While he says he did nothing wrong, the SEC filed a civil complaint against Paxton with the belief he may have used his position in state government to violate the trust of those close to him for personal gain.

[Photo by Jae S. Lee/The Dallas Morning News Via AP, Pool]