© 2016 The Texas Lawbook.
By Mark Curriden
(Nov. 4) – Lawyers for Texas Attorney General Ken Paxton asked a federal judge to dismiss recent charges of securities fraud filed against their client by the U.S. Securities and Exchange Commission.
In court documents filed Friday, Paxton’s lawyers argue that the SEC’s newest allegations must be thrown out because they do “not alleged sufficient facts to support its theory that Mr. Paxton had a legal duty to disclose any sales commission arrangement.”
Instead, Paxton’s lawyers state that the SEC’s most recent charges “simply repeats in more verbose form the legally insufficient allegations.”
A federal judge dismissed the SEC’s original case against Paxton earlier this year.
The SEC last month filed new charges that the regulatory agency argues addresses the legal concerns of the judge.
The SEC’s Fort Worth Regional Office says that “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.”
But Paxton’s lawyers argue that the SEC’s modified lawsuit does not meet legal requirements for a securities fraud charge.
“With the Commission’s case hanging by a thread, one of the SEC’s witnesses has stepped forward now claiming that there was some ‘express policy’ among members of an investment group to whom Mr. Paxton promoted the Servergy investment—not that they would disclose any compensation arrangements to each other, but merely that they would not ‘benefit’ off of one another’s investments,” Paxton’s motion to dismiss states.
“At this stage, both Mr. Paxton and the Court must assume that this belated allegation is true,” defense lawyers argue. “But this newly-minted allegation does nothing to rescue the SEC’s case from its still-fundamental flaw—namely, the absence of any legally cognizable duty to disclose.
“First, the Amended Complaint does not allege facts sufficient to transform a ‘policy,’ express or otherwise, among members of an investment group into a legally enforceable fiduciary duty to disclose on the part of Mr. Paxton,” the motion argues. “A fiduciary duty does not arise from mere subjective trust in another person, but rather from entrusting another with control of one’s money, property, or affairs.
Paxton’s lawyers argue that an “express policy” among members of an investment group “is not a talisman that can alone give rise to a fiduciary duty in the absence of allegations of reliance, dominance, or control.”
The motion to dismiss points out that the SEC’s original complaint contained no such allegations and the amended complaint “does nothing to cure that flaw.”
“To the contrary, the amended complaint now makes clear that the investment group existed for decades before any involvement by Mr. Paxton,” defense lawyers argue.
Paxton’s attorneys state that the SEC makes “no allegation that Mr. Paxton agreed to abide by what he was told about the group, much less that he agreed to disclose anything to its members. The absence of an alleged agreement is alone fatal to the SEC’s fraud claim, as a fiduciary duty giving rise to a duty to disclose ‘cannot be imposed unilaterally.’”
“In sum, even were all of the allegations in the newly-amended complaint are true—and they are not—none of that would cure the fundamental defect still remaining in the SEC’s case, namely that it has not alleged sufficient facts to support its theory that Mr. Paxton had a legal duty to disclose any sales commission arrangement,” Paxton’s lawyers argue in the motion to dismiss.
“Given that this flaw in the SEC’s theory of the case persists notwithstanding the second opportunity the [SEC] had to plead its case, Mr. Paxton should not be subjected to onerous discovery parsing through the minutia of the amended complaint when its allegations, even if ultimately proven, do not make out the duty to disclose requisite to state a securities fraud claim,” Paxton’s lawyers state. “The commission, to date, has been unable to cite a single example where a court has recognized such a disclosure duty.”
Paxton’s lawyers state that “is not a coincidence.”
“Mr. Paxton’s case should not be used to manufacture such a duty ex post facto. The Court should again dismiss the Commission’s complaint, this time with prejudice,” Paxton argues.
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