Texas AG makes 'clumsy, awkward' defense against civil charges, political scientist says

By Taryn Phaneuf | Apr 12, 2016

Civil securities fraud charges filed Monday bring everything back to the surface over Texas Attorney General Ken Paxton’s relationship with a Texas tech company that includes allegedly accepting a commission in exchange for recruiting investors.

Civil securities fraud charges filed Monday bring everything back to the surface over Texas Attorney General Ken Paxton’s relationship with a Texas tech company that allegedly included accepting an undisclosed commission in exchange for recruiting investors.

“On one hand, this isn’t completely new information,” Mark Jones, a political scientist at Rice University’s Baker Institute for Public Policy, told the SE Texas Record. “These are the violations that we saw in the Collin County case. … However, the details provided are more damning than I recall from the county indictment.”

Attorney General Ken Paxton   Photo via Office of the Texas Attorney General

U.S. Securities and Exchange Commission claimed that in 2011, Paxton, who was a state representative at the time, received 100,000 shares of Servergy stock for convincing friends, business associates, law firm clients and fellow members of an investment group to invest a total of $840,000.

The civil action alleges that Paxton didn’t tell anyone about the shares, nor did he say he hadn’t invested any of his own money. The charges go on to say that Paxton didn’t perform due diligence to confirm, clarify or correct any of Servergy’s false claims about its product.

The SEC claims states that Paxton believed the shares were a gift from the company, given to him after he met with former Servergy CEO William Mapp III at a Dairy Queen restaurant and tried to invest $100,000 of his own money.

“But, according to Paxton, Mapp refused his investment and stated, ‘I can’t take your money. God doesn’t want me to take your money.’ Consequently, Paxton claims, he later accepted the shares as a gift,” the complaint stated. “The shares were not a gift but, instead, a sales commission paid to compensate Paxton for the investors he recruited. Paxton knowingly or recklessly failed to disclose the commission to investors despite an obligation to do so.”

However, the SEC found that the McKinney-based company asked Paxton to sign an agreement implying the shares were a form of payment and it issued a tax form to Paxton for $100,000 for the 2011 tax year.

“It seems to be … a very clumsy and awkward attempt to concoct some sort of religious explanation for this tenuous position he’s in, especially when Servergy issued a 1099 for him,” Jones said.

A grand jury indicted Paxton on similar criminal charges in July. He faces two counts of first-degree state securities fraud and a third degree felony count for failing to register as an investment adviser.

Because the case doesn’t stem from Paxton’s position as attorney general or his pursuit of Republican policy, it’s unlikely he’ll elicit much sympathy from the state's Republican leaders, who will see the on-going criminal and civil cases as an “unwanted distraction,” Jones said. That makes the case fairly unique in his mind.

“Sometimes we have charges that are politically motivated or at least, if not politically motivated, have a political element to them or can be portrayed as a partisan witch hunt. This one is a clear-cut criminal, civil case. These charges have nothing to do with Paxton being a Republican,” he said.

Still, Jones anticipates Paxton will make that argument because it’s probably the only one he has.

The first-term AG will face tough competition for re-election in 2018. Whether he makes it to the election at all will depend on the outcome of the charges, Jones said. Until then, Paxton will continue to get attention as not one but two cases move forward. It may be more attention than a case like this would otherwise get, but it’s deserved.

“He is the attorney general of the second-largest state in the country. If anything’s going to be held to an equal if not higher legal standard, it’s going to be the state’s chief lawyer,” Jones said. “We’re not talking about a state legislator — we’re talking about … the person for whom the entire state, from the governor to the Speaker of the House to county judges and mayors turn to for legal advice.”

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