SHERMAN (SE Texas Record) – The U.S. Securities and Exchange Commission's charges filed in federal court Monday, April 11, against Texas' embattled Attorney General Ken Paxton are the latest in a political drama only days shy of being in its third year.
The SEC complaint, filed in U.S. District Court for the Eastern District of Texas, alleges Paxton, 53 and a McKinney resident, mislead investors in a technology company, Servergy. Paxton is alleged to have raised hundreds of thousands of dollars for Servergy while never disclosing he would receive a commission.
Paxton's history with the company goes back as far as 2003, according to complaint, which also says the SEC allegations cover a period when he was a member of the Texas House. Paxton was elected Attorney General in 2014.
In July of 2011, Paxton recruited his friends, business associates, law firm clients, and members of an investment group to which he belonged, a recruiting effort for which he received 100,000 shares of Servergy stock, the complaint said. "Despite a duty to do so, Paxton knowingly or recklessly failed to inform the individuals he recruited that he was being compensated to promote Servergy to investors," the complaint said.
"Paxton told prospective investors that he had met with Servergy's management and determined that it was a great company and the investment presented an interesting opportunity. He also forwarded, and was included on, correspondence advancing materially false claims regarding the nature of Servergy's technology and business prospects. While Paxton possessed no technical expertise and did not know whether any of Servergy's claims were true, he conducted no due diligence to confirm, clarify, or correct Servergy's claims."
The complaint also refers to other legal entanglements Paxton has suffered in the last couple of years. These include the May 2, 2014 $1,000 fine levied by the Texas State Securities Board after Paxton for MCM, Servergy's predecessor, despite not being registered as a MCM investment advisor representative. In that disciplinary order, Paxton didn't disclose to his clients that he would receive 30 percent of asset management fees MCM collected, the complaint said.
In another case, a Collin County grand jury indicted Paxton July 28 on two counts of first degree state securities fraud and one third degree felony count of failing to register as an investment adviser representative. Those charges arose from the same conduct that lead to the TSSB's disciplinary order.
Monday's SEC allegations are similar to those Paxton faces in Collin County. Paxton has maintained his innocence in the Collin County indictment.
Paxton's political drama really began in late April of 2014. Then Texas State Sen. Paxton, a leading Republican candidate for the state's attorney general office, announced an internal review of his disclosures to Texas regulatory authorities and the state's ethics Commission. That review was launched after The Texas Tribune obtained 2006 letters showing that revealed Paxton was paid to solicit clients for a North Texas financial services firm, despite not being registered with the State Securities Board.
Also named in the SEC complaint filed Monday is William Mapp, Servergy's founder and former CEO. The complaint alleges Paxton signed up five investors who put $840,000 into Servergy and that Paxton never confirmed Mapp’s claims about data sales and technological capabilities. Paxton received 100,000 shares of stock in Servergy stock the following month.
“Based on prior dealings in the group, members trusted each other to consider the interests of the group as a whole and not exploit one another for a member's personal benefit," the complaint said. "Similarly, prior experiences in the group established that the member who recommended an investment would monitor the investment going forward and represent the group's interests. Despite a duty to do so, Paxton knowingly or recklessly failed to inform any member of the investment group that he was being compensated by Servergy for recruiting investors.”