A lawyer who previously served as the chief litigation counsel in the enforcement division at the Securities and Exchange Commission (SEC), filed a motion to dismiss the SEC civil lawsuit against Texas Attorney General Ken Paxton on Thursday. He writes, “In short, the SEC’s claims against Mr. Paxton are a dramatic overreach and lack any basis in law.”
The 29-page pleading filed by Paxton’s defense urges that the SEC does not claim that Paxton ever lied or made a misrepresentation, and that no one has alleged they lost money in any of the transactions involving Paxton. The motion also states that the SEC’s argument that Paxton failed to disclose that he could receive a commission for touting securities, and that he had not investigated the company, runs counter to decades of case law precedent that has never required such discussions or actions.
Paxton’s lead counsel in the civil SEC case served as the Chief Litigation Counsel for the Division of Enforcement at the SEC, and he clerked for U.S. Supreme Court Justice William H. Rehnquist. He also served as lead counsel for the SEC in its highest-profile enforcement case arising out of the 2008 financial crisis – the case against former Goldman Sachs Vice President Fabrice Tourre.
Ken Paxton has hired Matthew T. Martens to represent him in the civil securities fraud lawsuit filed by the SEC. Martens filed a motion explaining why the federal lawsuit against Paxton must be dismissed with prejudice.
The SEC filed the lawsuit against the Texas AG one week to the day before he was to lead a coalition of 26 states at the U.S. Supreme Court in the executive amnesty case against President Obama. As reported by Breitbart News, the case is historic because this is only the second time in U.S. history where America’s highest court will decide a challenge (led by Texas), brought by a majority of states against the federal government. It is also historic in that it involves the scope of presidential power under the Constitution.
The brief filed by lead counsel Martens, Dallas lawyer William B. Mateja, and Frisco lawyer J. Mitchell Little, notes that the federal complaint for securities fraud “does not allege that [Paxton] made a single false or misleading statement.” The complaint does however, accuse Servergy’s co-founder and then-CEO and Chairman William E. Mapp, III, of leading investors to believe that a “revolutionary new server” “was in high demand.” It states that he falsely claimed that notable companies like Amazon.com and Freescale Semiconductors had pre-ordered the product. This is just one of the misrepresentations alleged by the SEC against Mapp in the complaint.
Defense counsel contends that because the SEC has not alleged that Paxton made any false statements, the SEC must have based its fraud claims on the premise that “Paxton failed to disclose material information in circumstances in which he had a duty to disclose.”
They urge that because the SEC “appears to be taking the position that when Mr. Paxton introduced several acquaintances to an investment opportunity in a technology company known as Servergy, Inc., he had two duties.” Specifically, that he had the duty “to disclose that he had not performed some sort of an investigation of the company’s operations before talking to his personal acquaintances about the company; and second, to disclose that the company’s founder had offered to compensate him for introductions that resulted in investments.” These “novel” “obligations” do not even apply to registered securities professionals, “much less to individual investors like him,” they argue.
The anti-fraud provisions of federal securities law “do not create an affirmative duty to disclose any and all material information.” Moreover, they write, “the courts have squarely rejected the notion that there is any duty to disclose either type of information on which the Commission rests its case here.” Defense counsel argues that there is a good reason for this rationale, i.e., if a court were to accept the SEC’s new theory, it “would impose a duty of due diligence upon anyone passing along an investment recommendation.” Moreover, receiving compensation “for promoting a security, even by a professional stock broker, does not give rise to a duty to disclose that compensation.”
The claim that Paxton’s “introduction of several acquaintances (all of who were experienced accredited investors) to Servergy over a three-week period almost five years ago somehow rendered him a professional securities broker” is “nonsense,” they write. The broker registration requirements apply only to individuals who are “in the business of effecting transactions in securities for the account of others.”
Martens, Paxton’s lead counsel, managed the SEC’s enforcement litigation unit. The unit included 40 lawyers in the SEC’s headquarters in Washington, and lawyers in all of its eleven regional offices. He supervised the only three litigated Foreign Corrupt Practices Act (FCPA) cases ever tried to date. He counseled commissioners in complex SEC enforcement matters and former SEC Chairman Mary Schapiro told Reuters, Martens has “this extraordinary ability to, in a very cogent, concise, logical way, pull all the information together that was necessary for us to make a decision.”
Martens began his legal career as a law clerk for Judge David B. Sentelle of the U.S. Court of Appeals for the D.C. Circuit. He is a former assistant U.S. attorney who has also served as chief of staff and counsel in the criminal division at the U.S. Department of Justice (DOJ). Martens is also a Certified Public Accountant (CPA). He is affiliated with the firm of WilmerHale in Washington, D.C.
Paxton’s other counsel includes William Mateja, a white collar trial lawyer who focuses on securities enforcement and healthcare fraud. His other lawyer, Mitch Little, counsels individuals and business organizations in the area of securities fraud.
The motion to dismiss was filed in U.S. District Court in the Eastern District of Texas, Sherman Division. It is attached below.
As reported by Breitbart Texas, the Texas AG has also been hit with criminal indictments. There are two first degree counts alleging securities fraud, and a third degree felony for failing to register as a securities adviser with the Texas State Securities Board. The indictments relate to actions and events in Collin County involving the same company and the same parties as are the basis of the SEC civil action. All of the alleged actions occurred prior to Paxton taking office in January of 2015. As reported by Breitbart Texas, issues relating to Paxton’s alleged failure to register as a securities adviser were raised by Dan Branch, Paxton’s opponent during the Republican primary for attorney general.
Paxton pleaded not guilty to the indictments that many have called a political witch-hunt because of the players involved. Rep. Bryon Cook (R-Corsicana) and businessman Joel Hochberg are complainants in the Collin County indictments. Cook is chairman of the powerful State Affairs Committee and is said by opponents to be a close lieutenant to Texas House Speaker Joe Straus. Hochberg is a close business associate of Chairman Cook. Paxton ran against Straus as speaker before he was a Texas state senator.
The Collin County judge over Paxton’s criminal case recused himself after his wife created a media and legal stir when she allegedly leaked secret grand jury information about indictments against Paxton, as has been reported by Breitbart Texas. Judge Chris Oldner recused himself after Cissy Collier Oldner was reported to be engaging in communications about indictments that were still sealed. Judge Oldner decided not to run again in Collin County but chose instead to run for a spot on the Texas Court of Criminal Appeals. He came in last place in the Republican primary race and garnered only 20.80 percent of the vote in his hometown county. Paxton’s home is also in Collin County.
Oldner is facing the State Commission on Judicial Conduct on two complaints. The first complaint accuses Oldner of judicial misconduct for disparaging the defense in a pending criminal case, and remaining on the case through both grand jury indictments when he had a duty to recuse himself sooner. A second complaint accuses the judge of violating the canons of judicial ethics for “proactive comments to the news media that he has an agenda to punish Ken Paxton and sought to add fuel to the fire with these most recent remarks.”
Lana Shadwick is a writer and legal analyst for Breitbart Texas. She has served as a prosecutor and associate judge in Texas. Follow her on Twitter @LanaShadwick2.
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