Editor’s Note: This article has been updated.
The U.S. Securities and Exchange Commission (SEC) filed a civil lawsuit against Texas Attorney General (AG) Ken Paxton and others on Monday, just one week to the day before the Texas AG will represent Texas and lead more than half the states in the nation at the U.S. Supreme Court in the executive amnesty case, the United States v. Texas. The federal government is appealing their loss in the lower district court and the U.S. Court of Appeals for the Fifth Circuit. The Attorney General of Texas told Breitbart Texas, “That’s just creative timing by the Obama administration to file a lawsuit one week before I lead a twenty-six state coalition against his illegal immigration order.”
The Lone Star State took the lead in filing the federal lawsuit in the U.S. District Court for the Southern District of Texas. Twenty-six states joined the fight. Federal district court Judge Andrew Hanen in Brownsville, Texas, issued an order preventing the DAPA (Deferred Action for Parental Accountability) from taking effect and the U.S. Court of Appeals for the Fifth Circuit affirmed Hanen’s decision. The case is set for oral argument next Monday, April 18.
As reported by Breitbart News legal editor Ken Klukowski in January, the case marks only the second time in the nation’s history that the U.S. Supreme Court will hear a challenge brought by a majority of the states against the federal government. Klukowski wrote, “As Breitbart News previously reported, after years of telling the public (in over 20 televised speeches) that no president has the authority to change immigration law to grant amnesty allowing illegal aliens to stay in this country, in November 2014, Obama decided he had such power, and announced that he was unilaterally changing the law without Congress.”
A decision in the case is anticipated to be issued before the end of June. As Klukowski noted when the Supreme Court decided to hear the case, “This case is of historic importance not only for its impact on immigration, but also its implications for the scope of presidential power under the Constitution.”
The Attorney General’s criminal and civil legal issues relate to events alleged to have occurred in Collin County prior to the AG taking office in January of 2015.
On Monday, the U.S. Securities and Exchange Commission (SEC) filed a civil lawsuit against Paxton and former officials of Servergy, Inc. saying that Paxton solicited investors without telling them that he was being paid by the company. Paxton could also face 5-99 years in prison as a result of a Collin County, Texas, grand jury indictment alleging state felony violations of the Texas Securities Act.
As reported by WFAA8-ABC last August, Servergy “has been in the crosshairs of the Securities and Exchange Commission” since 2014. Servergy is a technology company located in McKinney, Texas where Paxton lives. The media outlet reported that a lawsuit was filed by the SEC in 2014 accusing founder Bill Mapp of “possibly fraudulent statements or omissions related to Servergy’s technology and purported business relationships.”
The federal lawsuit filed on Monday names former company executive Mapp and Caleb White, a former board member. White, like Paxton, is accused of soliciting investors without disclosing that he was being paid. A press release by the SEC says that White has agreed to settle the SEC’s charges by returning $66,000 and his 20,000 shares of stock.
As reported by Breitbart Texas, a grand jury indicted Paxton in late July 2015 in connection with alleged violations of the Texas Securities Act. One of the indictments charge Paxton with “Acting as an investment adviser representative without being registered by the Texas Securities Board in violation of Texas Securities Act, Section 29(I).” The offense is a felony of the third degree and carries a potential state prison sentence from 2 to 10 years and/or up to a $10,000 fine. This charge relates to actions “on or about the 18th day of July, 2012.”
In May of 2014, the Texas State Securities Board fined then-Texas Senator Paxton $1,000. The order from the securities board “reprimanded” Paxton for acting as an investment adviser representative for one company (Mowery Capital Management, LLC, MCM) when that company was registered as an adviser with the state securities board when Paxton was not registered.
As reported by Breitbart Texas, Paxton was actually properly registered as of December 2013. As reported, whether a company must register as an adviser with a state or the SEC is an issue of how much money they manage. The Dodd-Frank Wall Street Reform and Consumer Protection Act created a rule requiring an investment adviser managing more than $100 million in client assets to register with the SEC. The act provides that any investment adviser managing less than $100 million must register with the state. Unlike state law, federal securities law only mandates the registration of an investment adviser. It does not require the registration of investment adviser representatives, or those acting as solicitors.
The trouble began in May of 2014 when the Texas State Securities Board (TSSB) issued a disciplinary order reprimanding Paxton. The Board found that Paxton solicited three clients at times when MCM was a state-registered investment adviser and Paxton was not registered as an investment adviser representative of MCM. One of these solicitations occurred in 2004, one in 2005, and one in 2012. The statute of limitations precludes an indictment for any 2004 and 2005 violation. The indictment relates to actions “on or about the 18th day of July, 2012.” Paxton urges that he had no duty to register because MCM was registered with the SEC on that date.
The TSSB commissioner also found that MCM was registered with the state securities commissioner as an investment adviser from October 1, 2004 to November 6, 2008. It determined that “MCM transitioned from state registration to federal registration” in November of 2008 and that MCM registered with the SEC on November 6, 2008. It also found that on June 25, 2012, MCM transitioned back to state registration and was in 2014 registered as an investment adviser with the securities commissioner.
The commissioner determined that Paxton “engaged in an act or practice that violates this Act or a Board rule or order.” The commissioner declined to find under sections 23.1.A(1), (2) and (4) that Paxton: “engaged in fraud;” “made an offer containing a statement that is materially misleading or is otherwise likely to deceive the public;” or had an “intent to deceive or defraud;” or had a “reckless disregard for the truth or the law.” Paxton waived the right to a hearing and consented to the commissioner’s disciplinary order.
In addition to the indictment for failing to register as a security advisor, Paxton was also indicted for securities fraud in violation of section 29(C) of the State Securities Act. Any penalty is a felony of the first degree because the alleged amount involved $100,000 or more and involves a potential prison sentence from 5 to 99 years in prison and/or up to a $10,000 fine.
The complainants in the securities fraud cases are Joel Hochberg and Texas State Representative Byron Cook. Both charge Paxton with committing a crime on or about the 26th day of July, 2011. As reported by Breitbart Texas, special prosecutors in the criminal case obtained re-worded indictments in the securities fraud charges. Paxton is charged with unlawfully and intentionally offering to sell and selling to Cook and Hochberg, securities in an amount of $100,000 or more, namely stock issued by Servergy. It states that Paxton “directly and indirectly engage[d] in fraud by intentionally failing to disclose” to Cook and Hochberg that: (1) he would be compensated by Servergy in the form of shares of stock, and (2) he was not investing his own funds in Servergy.
State Republican and Tea Party activists have cried foul in response to the indictments. Cook is a chief lieutenant for Texas House Speaker Joe Straus. Paxton ran against Straus for speaker in 2011. As reported by Breitbart Texas when the AG was booked and fingerprinted, Speaker Straus, Rep. Cook, and former Texas State Representative Dan Branch are from the establishment wing of the Republican party. Paxton is from the anti-establishment and Tea Party wing. Paxton and Branch were both candidates in the primary runoff for attorney general in 2014. It is Dan Branch that first brought up the issue of a state securities law violation by Paxton. He did so during the primary race. Hochberg has been reported by Texas Scorecard to be a long-time Cook business associate.
In July 2014, a letter calling for Paxton’s investigation was sent to the Travis County District Attorney by a left-of-center “watchdog” group. Paxton was at that time the Republican Party nominee for attorney general. This letter was a catalyst for what in 2015 would become, as reported by Breitbart Texas, an investigation of Paxton wherein two special prosecutors would be appointed.
The recent federal civil lawsuit complains of acts allegedly committed by Paxton in July 2011 when he was a state legislator. The federal lawsuit alleges that Mapp and Paxton had an agreement wherein Paxton would receive a ten percent commission for obtaining investors for the company. The SEC issued a press release on Monday about the filing of the case alleging fraud.
The SEC civil complaint asks for relief against Paxton, Mapp, White and Servergy for: (1) fraud in the offer or sale of securities in violation of section 17(a) of the Securities Act; and (2) fraud in connection with the purchase or sale of securities in violation of section 10(b) of the Exchange Act and Rule 10-b-5 thereunder. A third claim for relief as to just White and Paxton is for alleged “offers and sales of securities by an unregistered broker violation of section 15(a)(1) of the Exchange Act.” The SEC also seeks a claim of relief from Mapp, White and Servergy for offers and sales of unregistered securities in violation of section 5(a) and (c) of the Securities Act.
The federal complaint states that in July 2011, Paxton “raised $840,000 for Servergy … in exchange for an undisclosed payment of 100,000 shares of Servergy common stock.” It also alleges that Mapp met with Paxton in July 2011 and offered to pay Paxton a ten percent commission for any investors he recruited. The complaint also alleges that during the Commission’s investigation, Paxton claimed the shares were a gift from Mapp and that he offered to invest $100,000 of his own money in Servergy but that Mapp refused. The SEC also claims that Mapp asked Paxton to sign an agreement saying the shares were given in exchange for services and that Servergy issued Paxton a Form-1099 in the amount of $100,000 for the 2011 tax year. It accuses him of “knowingly or recklessly fail[ing] to inform the individuals he recruited that he was being compensated to promote Servergy to investors.”
Mapp, the CEO and co-founder of the company, is accused of leading Servergy’s fundraising efforts between November 2009 and January 2013. The complaint filed Monday states that he raised more than $6 million and made “material misrepresentations and omissions about the state of Servergy’s technology and business prospects” to prospective investors during in-person presentations and webinars.
The complaint also states that Paxton “also forwarded, and was included on, correspondence advancing materially false claims regarding the nature of Servergy’s technology and business prospects.” It adds, “While Paxton possessed no technical expertise and did not know whether any of Servergy’s claims were true, he conducted no due diligence to confirm, clarify, or correct Servergy’s claims.” The SEC seeks a judicial finding that “each of the civil defendants committed the violations alleged in this Complaint,” and asks the court to permanently enjoin them from directly or indirectly violating enumerated sections of the Securities Act and Exchange Act.
Houston lawyer Phillip Hilder, one of the attorneys who represents the AG told Breitbart Texas, “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.”
Hilder, who represented Enron whistleblower Sherron Watkins added, “While it is not surprising that the SEC filed this identical civil lawsuit, because it happens almost all of the time, it is surprising that the SEC chose to file this civil lawsuit nearly a year after the Collin County special prosecutors filed their criminal case, particularly where the civil lawsuit mirrors the criminal case. The timing is also questionable since there are writs before the Court of Appeals that if successful, would throw out the criminal charges. The timing of the SEC suit appears to be an attempt to adversely influence the Court.”
Paxton has appealed the denial of his four pretrial writ applications in his criminal case. Paxton is seeking to overturn the trial court’s denial of his pretrial writs on the grounds:
- Section 29(I) is not a statute under which he can be charged because it does not regulate the conduct of representatives of federally filed investment advisers.
- Section 29(I) is also unconstitutionally vague on its face as a matter of law because the Act fails to give notice of what conduct constitutes rendering services as an investment adviser representative and allows for arbitrary enforcement because “investment adviser representative” is either undefined or subject to two conflicting, incompatible definitions.
- Section 29(I) is also unconstitutionally overbroad and vague on its face as a matter of law because it unconstitutionally regulates free commercial speech and fails to give a person fair notice of what conduct is prohibited by the statute and it allows for arbitrary enforcement because “solicit” is undefined.
- All three indictments were returned by a grand jury of volunteers improperly selected in violation of Chapter 19 of the Texas Code of Criminal Procedure in a manner that destroyed its intended randomness. Paxton alleges that the grand jury impaneled by Judge Chris Oldner was improperly selected because the judge “violated the custom, tradition, and text of Texas law” by impaneling only those with “willingness to serve” and thus “improperly added an additional qualification for grand jury service not found in law.”
Oral argument will be held at the 5th Court of Appeals in Dallas on May 12th in the AG’s criminal appellate case.
Lana Shadwick is a writer and legal analyst for Breitbart Texas. She has served as a prosecutor and associate judge. Follow her on Twitter @LanaShadwick2
April 2016 SEC Complaint Involving AG Ken Paxton