© 2016 The Texas Lawbook.
By Mark Curriden
(Oct. 21) – The U.S. Securities and Exchange Commission filed new, amended charges Friday afternoon accusing Texas Attorney General Ken Paxton of securities fraud.
The SEC filed a 41-page amended and redlined complaint in the U.S. District Court in the Eastern District of Texas that it believes addresses the legal concerns raised earlier by a federal judge who dismissed the government’s original case.
“Paxton falsely characterized, omitted key information, or refused to disclose information about his receipt of Servergy stock on at least four separate occasions: (a) to his investment group; (b) in his tax filings; (c) in his mandated political disclosures; and (d) in testimony before the Commission,” the new SEC complaint states.
Paxton, who also faces state criminal charges, has repeatedly denied all wrongdoing.
“We are disappointed by the SEC’s decision to continue this case, given the Court’s opinion and the clear infirmities the Court found with the Commission’s original complaint,” said Bill Mateja, a partner at Polsinelli who represents Paxton. “We will evaluate the revised complaint and respond accordingly.”
U.S. District Judge Amos L. Mazzant III ruled two weeks ago that the SEC failed to present the evidence that Paxton had a legal obligation to disclose to those he was soliciting to invest in a technology start up called Severgy that he was getting a commission for his efforts.
But Judge Mazzant gave the SEC 14 days to file a new case that addressed his concerns.
The SEC believes it did exactly that Friday.
“Paxton knew he was required to disclose any compensation he was receiving or expected to receive for recommending investment in Servergy to the group,” the SEC states. “Indeed, Paxton’s conduct established his awareness of the group’s practices and expectations, as he informed [Severgy founder and CEO William] Mapp that he intended to act as the group’s point person in connection with Servergy.
“Additionally, because of the investment group’s express policies, which Paxton knew, as well as their shared understanding and expectations, the members of the investment group, including Paxton, formed a formal fiduciary relationship, by agreement or otherwise, and an informal fiduciary relationship of trust and confidence,” the SEC states.
The result, according to the SEC, is that all members of the investment group owed each other the duty of good faith and fair dealing, at least as to personal benefit, and were obliged to disclose when one member would personally benefit from the investment of other members.
“Despite having a duty to disclose his compensation based on his formal and informal fiduciary relationships and an obligation to tell the entire truth when he undertook to solicit investments in Servergy, Paxton knowingly or recklessly failed to disclose that he was being compensated to induce investments in Servergy,” the SEC claims.
Paxton’s failure to disclose his compensation to other investors was “misleading in light of the policies and established practices of the investment group.”
“Paxton’s representations were misleading, especially in light of the circumstances in which they were made—to his friends, trusted co-investors, law firm clients, and new acquaintances that knew him as an elected official—because they implied that he had undertaken some level of diligence, or at least had Paxton would not personally benefit from their investments,” the SEC states.
The SEC points to an investor who it claims said “Paxton’s failure to disclose the personal benefit he stood to, and did, receive from Servergy misled him into believing that no such compensation plan was in place,” the federal agency states in court records.”
The SEC also points to a second investor who claims that he “did not know Paxton was being compensated by Servergy for any other investors he brought to the table.”
The SEC states that the had the investor “known of the secret commission agreement, he would have been skeptical of the proposed Servergy investment and would have questioned Paxton’s motive for bringing the investment opportunity into the group.”
“Paxton’s conduct, practice, and course of business operated as a fraud and deceit on [those two investors],” the SEC claims.
The SEC states that its investigation found that Paxton received 100,000 shares of Servergy stock in exchange for successfully soliciting investors. Servergy recorded the stock issuance to Paxton as payment for “services” and issued Paxton a Form-1099 in the amount of $100,000 for the 2011 tax year, characterizing the payment as non-employment compensation.
Paxton claimed the shares as income related to legal services on his 2011 Form 1040. Paxton also claimed legal services income from MCM in 2011, the SEC states.
The SEC claims that Paxton completed and signed a subscription agreement on August 23, 2011 in which he claimed he had paid $100,000 in exchange for the shares he received in Servergy, though his stock certificate is dated August 5, 2011 and he has admitted that he never invested money in Servergy.
On October 28, 2011, Mapp sent Paxton a revised subscription agreement indicating that Paxton was receiving his shares as a Servergy service provider rather than for cash consideration. Though he said he would, Paxton never executed the corrected subscription agreement, the SEC alleges.
The SEC claims that a lawyer representing some of Servergy investors sent a letter to Paxton on August 12, 2014, requesting information about his arrangement with Servergy:
“We have learned that you or an entity that you control or are affiliated with acquired 100,000 shares of Servergy, Inc. stock in exchange for working for Servergy in an ‘advisory’ capacity. We would like to obtain a copy of the agreement or agreements pursuant to which you acquired your stock in Servergy.”
Paxton never responded to this request, the SEC states.
Three months later, the attorney for three investors again asked Paxton – this time via certified mail with returned receipt – to reveal any agreement under which he acquired his stock in Servergy, the SEC states.
“Paxton continued to ignore these requests, and though he admits receiving them, has never responded to the efforts of investors,” the SEC states.
“As an elected official, Paxton was at all times required by Texas Government Code § 572.001 to disclose beneficial interests, income, and gifts. Paxton was required in 2011, 2012, and years since to disclose, among other things, sources of occupational income; the name, category, and number of shares of stock held in any business entity; and gifts over $250,” the SEC claims. “On his Personal Financial Statement for the year 2011, filed with the Texas Ethics Commission on April 23, 2012, Paxton disclosed his ownership of Servergy stock in the ‘Stock’ section, but did not identify the shares in either the ‘Sources of Occupational Income’ or ‘Gift’ sections.
The lawyers leading the SEC’s case against Paxton are Matthew J. Guide, Jessica B. Magee, Timothy L. Evans and Samantha S. Martin.
© 2016 The Texas Lawbook. Content of The Texas Lawbook is controlled and protected by specific licensing agreements with our subscribers and under federal copyright laws. Any distribution of this content without the consent of The Texas Lawbook is prohibited.
If you see any inaccuracy in any article in The Texas Lawbook, please contact us. Our goal is content that is 100% true and accurate. Thank you.