Coverage: Texas Attorney General Ken Paxton faces fraud charges

Regulators with the Securities and Exchange Commission charged Texas Attorney General Ken Paxton for allegedly committing securities fraud.

In 2014, Paxton faced state securities fraud charges, which ultimately resulted in a $1,000 fine.

Brian M. Rosenthal of the Houston Chronicle had the day’s news:

Federal regulators on Monday sued Texas Attorney General Ken Paxton for allegedly committing securities fraud, the same charge he is fighting in a state criminal court.

The civil lawsuit, filed Monday in an East Texas federal court by the U.S. Securities and Exchange Commission, alleges that Paxton raised nearly $1 million for a Collin County technology startup without disclosing to the investors that he was being compensated to promote the company.

The firm, Servergy, Inc., also was named in the complaint, as were former company officials William Mapp and Caleb White. Servergy and White already have settled their cases by paying a combined $260,000 in penalties, according to the SEC.

A Paxton lawyer indicated the attorney general would not be settling.

“Mr. Paxton vehemently denies the allegations in the civil lawsuit and looks forward not only to all of the facts coming out, but also to establishing his innocence in both the civil and criminal matters,” said the lawyer, Bill Mateja.

Leif Reigstad of the Houston Press laid out more details of the case:

According to a press release announcing federal charges against Paxton and others, the SEC claims former Servergy CEO William Mapp sold millions of dollars in company stock by exaggerating his product’s merits. As for Amazon’s supposed interest in the company’s servers, the press release states: “In reality, an Amazon employee had merely contacted Servergy because he wanted to test the product in his free time for personal use.”

While serving in the Texas House of Representatives, the press release says, Paxton allegedly reached an agreement with Mapp to promote the company to potential investors in return for shares of stock. According to the complaint, Paxton raised $840,000 in investor funds for Servergy and received 100,000 shares of stock in return, but never disclosed his commissions to prospective investors while recruiting them.

“People recruiting investors have a legal obligation to disclose any compensation they are receiving to promote a stock, and we allege that Paxton [and the former board of directors member] concealed the compensation they were receiving for touting Servergy’s product,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.

Manny Fernandez of The New York Times explained how these charges are not Paxton’s first run-in with law enforcement:

Mr. Paxton was one of four defendants named in the lawsuit. Two, Servergy and its founder, William E. Mapp III, were accused of bolstering stock sales with false claims about the company’s only product, a computer server that federal officials described as “supposedly revolutionary” for its energy efficiency. Federal officials claimed in court documents that Mr. Paxton had no technical expertise about the server and “conducted no due diligence to confirm, clarify or correct Servergy’s claims.”

The company, which has cut ties with Mr. Mapp, agreed to pay $200,000 to settle the claims, and another defendant, Mr. White, also reached a settlement. Mr. Paxton and Mr. Mapp have not settled, and the case now proceeds in federal court.

In a statement, Mr. Paxton’s lawyer, Bill Mateja, said neither Mr. Paxton nor his legal team had reviewed the complaint filed on Monday. “As with the criminal matter, Mr. Paxton vehemently denies the allegations in the civil lawsuit and looks forward not only to all of the facts coming out,” Mr. Mateja said, “but also to establishing his innocence in both the civil and criminal matters.”

Mr. Paxton was reprimanded in 2014 by the Texas State Securities Board for failing to register as a representative of an investment adviser. He was fined $1,000 but faced no criminal prosecution.

In recent weeks, Mr. Paxton was the subject of a separate investigation over a Collin County real estate transaction, but a grand jury declined to take any action.

Texas Democrats on Monday repeated their calls for Mr. Paxton to step down.

“Enough is enough,” said Emmanuel Garcia, the deputy executive director of the Texas Democratic Party. “How many more investigations, criminal charges and lawsuits need to be filed before Republican Ken Paxton takes responsibility for his lawlessness and resigns?”