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SEC accuses Texas Attorney General Ken Paxton of fraud

Dramatically increasing the legal jeopardy faced by Texas Attorney General Ken Paxton, federal regulators on Monday accused the high-profile Republican of defrauding investors in a McKinney tech company while he was a member of the Texas House.

The accusations, contained in a federal lawsuit by the U.S. Securities and Exchange Commission, were based on the same acts that last year led to state criminal charges against Paxton — revealing more details about the private business deals than had been previously known.

According to the SEC, Paxton recruited investors for Servergy Inc. in 2011 without disclosing that the company was paying him to drum up support and without trying to confirm Servergy’s claims that it had developed a revolutionary new server that was, in reality, based on outdated technology.

Paxton targeted friends, business associates, clients of his law firm and other members of an investment group, securing $840,000 from five investors without revealing that he was paid $100,000 worth of Servergy stock to promote the company, the SEC said.

When confronted by federal regulators, the SEC alleged, Paxton said the stock was a gift from Servergy’s then-Chairman William Mapp — even though Servergy recorded the stock as payment for “services” and even though Paxton and Mapp exchanged multiple emails discussing paying Paxton in cash or stock for successfully referring investors to Servery.

“The shares were not a gift but, instead, a sales commission paid to compensate Paxton for the investors he recruited,” the SEC alleged.

The SEC also accused Mapp of fraud, saying he lied when he told potential investors that Servergy’s “CTS-1000” server used 80 percent less power than other servers and was positioned to compete with industry leaders when, in reality, the product “was based on outdated technology that was being phased out of the industry,” the lawsuit said.

The lawsuit also accused Caleb White, a Tyler businessman, of failing to disclose commissions he received for referring investors to Servergy.

The SEC asked the federal court in Sherman to sustain the fraud allegations and order Paxton, Mapp and White to repay “any ill-gotten gains” — with interest. The SEC also sought “appropriate” civil fines against the three men.

Bill Mateja, a lawyer for Paxton, said his client had done nothing wrong.

“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, but also to establishing his innocence in both the civil and criminal matters,” Mateja said.

Last August, a Collin County grand jury handed up indictments accusing Paxton of two felony counts of fraud for failing to tell potential Servergy investors that he was being paid by the company. Paxton also was charged with failing to register with the State Securities Board.

Paxton has asked a state appeals court to dismiss charges. The Dallas-based 5th Court of Appeals will hear oral arguments in the case May 12.

According to the SEC lawsuit, Paxton recruited a member of the Texas House to invest in Servergy in 2011. Although the lawsuit did not name the member, identifying him as “Investor 1,” the state charges revealed that Rep. Byron Cook, R-Corsicana, had invested in the tech firm.

“As time passed and Mapp’s representations about product shipment failed to come to fruition, Investor 1 grew worried about his investment,” the lawsuit said.

Paxton responded in early 2013 by organizing and attending a meeting with Mapp and the House member. During the meeting, the SEC said, “Mapp lulled Investor 1 with false claims that the company was flush with purchase orders. Paxton did nothing to determine whether Mapp’s claims were true.”

Monday’s SEC action prompted the Texas Democratic Party to renew calls for Paxton to step down as the state’s top legal officer.

“Enough is enough,” Deputy Executive Director Emmanuel Garcia said. “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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