Investment firm Unity Resources scored a significant victory Thursday in a hotly contested securities fraud litigation when the Fifth District Court of Appeals in Dallas agreed that a lower court erred in not allowing the company to name Texas Attorney General Ken Paxton as a “designated responsible third party” in the case.
Lawyers for Unity claim that Paxton, prior to being elected state attorney general, was a manager, member and legal counsel for the company and that he “knew about, reviewed and approved” the alleged fraudulent conduct at the heart of the litigation.
The lawsuit, brought by Calco Land Development, claims that Unity and some of its managers committed securities fraud and breach of fiduciary duty in 2014 and 2015. But Calco’s lawyers at Scheef & Stone convinced the Collin County trial judge that Paxton should not be designated as a responsible third party because they, the plaintiffs, made no allegations of fraud against him.
The Dallas appeals court, in an 11 to 1 decision written by Justice Leslie Osborne, ruled that Unity met the legal requirements for designating Paxton as a responsible third party and that the Collin County court “abused its discretion” in not allowing Unity to do so.
Unity lawyers, in their arguments to the appeals court, said that Paxton “demonstrated a lack of diligence and competence” in providing legal advice to the business on corporate governance issues, “specifically including the propriety of and disclosures regarding” the critical issues in this securities fraud case.
Paxton, according to court documents submitted by Unity, “therefore caused or contributed to causing the harm for which plaintiff seeks recovery.”
In a 12-page dissent, Justice David Schenck rejected the decision that “the trial court’s order does – or could – constitute error, much less an abuse of discretion” that warranted mandamus relief.
“It is unclear to me why the Court would choose this case to convene en banc, to make new law concerning third-party-designation practice in the face of explicit, contrary statutory directives, or to empower windmill-tilting defendants to delay and obstruct the course of proceedings in the trial court with mandamus actions that have no potential to reduce that defendant’s ultimate responsibility to the plaintiff,” Justice Schenck wrote.
Scheef & Stone is not representing Paxton in this case, but the firm has represented Paxton in other matters, including securities charges brought by the U.S. Securities and Exchange Commission against Paxton – allegations that were later tossed by a federal judge.
Carrington Coleman is representing Unity.
Paxton is currently under indictment for state securities law violations related to the Calco-Unity dispute. He has pleaded not guilty. In addition, federal prosecutors in the Western District of Texas are investigating Paxton and his office.
Lawyers for Unity want Paxton’s testimony because they say it will show that the company depended on his advice as a lawyer and manager. By being able to blame Paxton for part of the fraud, Unity hopes to avoid paying a large damage fee.
The Unity case is likely to be appealed to the Texas Supreme Court. The state justices currently have a separate appeal in this case pending over whether lawyers for Unity may question Paxton under oath in a deposition about his role and conduct in the alleged financial fraud.