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Judge tosses fraud lawsuit against Texas Attorney General Ken Paxton

A federal judge on Friday tossed out a U.S. Securities and Exchange Commission lawsuit that accused Texas Attorney General Ken Paxton of engaging in securities fraud during private business deals in 2011.

U.S. District Judge Amos Mazzant III said the SEC’s allegations were not recognized under federal securities law, and he gave the agency 14 days to amend its lawsuit if it can find “additional facts” to support claims that Paxton engaged in fraud by soliciting investors in Servergy Inc. without disclosing that the McKinney tech company was paying him to promote its stock.

“This case is not about whether Paxton had a moral obligation to disclose his financial arrangement with Servergy to potential investors,” Mazzant wrote. “This case is also not about whether Paxton had some general obligation to disclose his financial arrangement to his investor group.”

Instead, the case revolved around what federal securities law required Paxton to do, Mazzant said, concluding: “Paxton did not have a legal obligation to disclose his financial arrangement.”

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The ruling is a substantial victory for Paxton, who has been fighting fraud allegations for more than half of the 19 months he has spent as attorney general, the top lawyer for state government.

“I appreciate the judge’s thorough review and I am gratified by his dismissal of the entire case,” Paxton said.

The victory in federal civil court, however, had no immediate impact on state criminal charges that accuse Paxton of engaging in felony fraud in the same deals he made in 2011 on behalf of Servergy.

Prosecutor Brian Wice said he was confident that the criminal case will move forward. “The ruling will have no meaningful effect on our ability to prosecute Mr. Paxton,” he said.

Paxton’s legal troubles began more than a year ago, when a Collin County grand jury indicted him on criminal charges of securities fraud and failure to register with the state securities board. The SEC followed with its civil lawsuit in April.

Thus far, Paxton’s requests to toss out the criminal charges have been rejected by his trial judge and a Dallas-based appeals court. The state’s highest criminal court has not yet ruled on Paxton’s request to dismiss the case. If the Court of Criminal Appeals rejects that request, a trial could be held in Collin County as early as spring.

“Now we turn our attention to Ken’s exoneration in the state matter where the prosecutors’ burden is even higher,” said Paxton lawyer Bill Mateja. “The fraud allegations in the SEC case mirror those in the state case.”

According to statements in the SEC lawsuit, Paxton solicited friends, business associates, clients of his law firm and other members of an investment group, securing $840,000 without revealing that he was paid $100,000 worth of Servergy stock to promote the company.

The SEC asked Mazzant to order Paxton to repay “any ill-gotten gains” and levy appropriate civil fines.

However, during a Sept. 2 hearing on the case, Mazzant repeatedly expressed skepticism about the SEC’s claims, noting that its case against Paxton did not appear to follow established precedents.

In Friday’s order, Mazzant said the SEC failed to meet its burden of showing that Paxton solicited Servergy investors by lying or omitting facts with the intent to deceive, manipulate or defraud.

Mazzant rejected SEC arguments that Paxton misstated facts when he touted Servergy as a great investment without confirming Servergy’s claims that it had developed a revolutionary new computer server that was, in reality, based on outdated technology. Such statements, Mazzant said, were “mere puffery” that showed little more than optimism.

In addition, the judge rejected the SEC’s argument that Paxton had a fiduciary duty to members of his investment club — including state Rep. Byron Cook, R-Corsicana — that required him to disclose his deal with Servergy.

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