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Texas Attorney General Faces Federal Securities Fraud Lawsuit

Alex Constantine - May 8, 2016

HOUSTON — Attorney General Ken Paxton of Texas, who was indicted last year on state securities fraud charges, faced a new round of legal troubles on Monday after federal regulators accused him of misleading investors in a technology company.

The civil claims filed in Federal District Court by the Securities and Exchange Commission mirrored the criminal charges Mr. Paxton already faces in state court.

Both cases stem from investment-related work before he was elected attorney general in 2014 but while he was a member of the Texas House of Representatives.

Mr. Paxton, a Republican, has repeatedly said he did nothing wrong.

Mr. Paxton, the state’s chief law enforcement officer, was arrested last year on felony charges. A grand jury in Collin County near Dallas charged him with two counts of securities fraud and one count of acting as an investment adviser representative without being registered with the state.

That case and the federal one involve Mr. Paxton’s work in 2011 promoting and recruiting investors for a technology company, Servergy Inc. Federal officials accused Mr. Paxton of encouraging and pressuring investors to invest in Servergy while failing to disclose that he was being compensated by the company. The investors included several of Mr. Paxton’s friends and a fellow lawmaker.

Court documents filed by the S.E.C. claim that Mr. Paxton raised $840,000 from the investors and received 100,000 shares of stock in return, but never disclosed his commissions. Mr. Paxton told investigators that he accepted the shares as a gift from the company’s founder, but the S.E.C. claimed that the stock was actually a sales commission he failed to disclose.

A former Servergy director, Caleb White, was accused of raising more than $1.4 million for Servergy and receiving $66,000 and 20,000 shares while never disclosing 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 White concealed the compensation they were receiving for touting Servergy’s product,” Shamoil T. Shipchandler, the director of the S.E.C.’s Fort Worth office, said in a statement.

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?”

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