Facing possible prison time over accusations that he defrauded investors in 2011, Texas Attorney General Ken Paxton insists that he is the victim of a politically motivated witch hunt because he dares to run his powerful agency based on conservative Christian values.
Paxton places most of the blame for his legal troubles on a vendetta by a friend-turned-adversary, with some cutthroat politics in Collin County, where the criminal charges originated, thrown into the mix.
Prosecutor Brian Wice isn’t buying it, calling the assertion “as predictable as it is untrue.”
The information behind Paxton’s criminal charges, Wice said, was collected by the Texas Rangers, a legendary law enforcement organization that is frequently called upon to investigate politically sensitive matters.
The judge who appointed Wice and Kent Schaffer as special prosecutors is, like Paxton, a Republican.
The grand jury that indicted Paxton last summer is from Collin County, a Republican stronghold north of Dallas where Paxton has lived for years.
The judge who oversaw that grand jury is a Republican. So is the trial judge who denied Paxton’s request to toss out the criminal charges. So is every member of the state appeals court that upheld the charges in June.
“Politics played absolutely no role in the investigation and prosecution of Mr. Paxton,” said Wice, a Houston defense lawyer who led the appeal that freed Tom DeLay, once among the most powerful Republicans in the U.S. House, from criminal convictions over political donations.
Paxton stands accused of two counts of felony securities fraud for soliciting investors in Servergy Inc. without disclosing that the McKinney tech company agreed to pay him to hawk its stock.
Looking at the same business deals behind the criminal charges, the U.S. Securities and Exchange Commission filed a lawsuit in April that also accused Paxton of fraud, saying he “exploited personal and business relationships with prospective investors for profit,” plied them with misleading half-truths and failed to disclose that his stock tips were “bought and paid for” by Servergy.
Paxton’s credibility as the state government’s top lawyer has been damaged by the accusations, even as he continues to raise money for a 2018 re-election campaign, raking in $945,000 in the first half of 2016.
“Don’t believe the attacks on me,” Paxton said in a video his campaign distributed in May. “They aren’t true, and I am going to fight them.”
Paxton assured Texans that he will continue to serve as a man of faith, and he expressed confidence that the public will see that the charges against him “are, at their roots, politically motivated.”
Internal GOP rift
Paxton blamed much of his legal problems on a Republican rift between conservatives like him and moderates like those who supported former state Rep. Dan Branch, his GOP primary opponent in the 2014 attorney general’s race. Then he singled out one GOP legislator.
“It’s not a coincidence that the chief witness against me in these charges is a political adversary of mine,” Paxton said in the video.
That witness/adversary is state Rep. Byron Cook, a Corsicana Republican who endorsed Branch in 2014 and who the grand jury named as a victim of Paxton’s allegedly fraudulent representation of Servergy. Cook also was known as “Investor 1” in the SEC lawsuit against Paxton.
Cook and Paxton both started in the Texas House in 2003 and became friends, with Paxton living in Cook’s Austin apartment, and later a house Cook purchased in Austin, during their first two legislative sessions.
They also belonged to the same investment club, and Paxton supporters say that Paxton brought Cook, an experienced investor, into several lucrative deals before approaching Cook about investing in Servergy in the summer of 2011.
Cook, who can expect to be called as a witness if the criminal and civil cases against Paxton go to trial, declined to answer questions about his dealings with Paxton, who went on to the Texas Senate in 2013 and became attorney general in 2015.
Those who know Cook say the Servergy deal fractured his friendship with Paxton.
Paxton’s supporters, however, say the friendship had already been strained as Cook established himself as a leading moderate and Paxton as a conservative — culminating in Paxton’s unsuccessful bid to unseat House Speaker Joe Straus, a Cook ally, in 2011.
Paxton supporters question why Cook waited four years to air his grievances about the Servergy deal, suggesting it was payback by GOP moderates who strove to marginalize Paxton in the Legislature — particularly after he challenged Straus — and were unhappy he became attorney general over Branch.
Wice disagrees, saying the Texas Rangers began by investigating whether Paxton broke state law by failing to register with the State Securities Board — a third-degree felony for which he was later indicted. Allegations of fraud were uncovered later, he said.
“The Rangers followed the evidence wherever it led them,” Wice said. “It eventually led them to Byron Cook, and not the other way around.”
‘I will get to work’
Whatever the genesis, Cook’s allegations play a large role in the criminal and civil cases against Paxton.
The criminal indictments are bare bones, accusing Paxton of receiving 100,000 shares of Servergy stock that he didn’t disclose to two Servergy investors — Cook and Joel Hochberg, a Florida man who also was part of the investment group with Cook and Paxton.
But in two court filings, the SEC provided much more detail about the allegations:
• Meeting in Paxton’s McKinney law office on July 12, 2011, Servergy founder and Chairman William Mapp III offered to pay Paxton a 10 percent commission for investors he recruited. Mapp followed up with an email offering to pay Paxton with Servergy stock or a combination of cash and stock. Paxton’s emailed reply said, “I will get to work.”
• Paxton approached Cook one day later to tout Servergy as an investment. Paxton later set up, and attended, a meeting with Mapp, Cook and other investors about a week later.
• Paxton used “pressure tactics” on Hochberg — identified as Investor 2 — with an unsolicited late-night phone call shortly before Hochberg was to leave on vacation. Based on Paxton’s warning that the share price was about rise, the investor changed his mind about passing on Servergy and instead plunked down $150,000, the SEC said.
• Paxton also solicited friends, business associates and law firm clients, securing $840,000 in investments from five of 12 people he approached within 16 days of his first meeting with Mapp.
• Paxton received 100,000 shares of private Servergy stock, worth $1 each, on Aug. 5, 2011, and over the next two months, Mapp sent Paxton emails offering continued payments for his recruiting efforts.
• Servergy later issued Paxton a tax statement reporting $100,000 in income and recorded the stock transaction as payment for services.
According to the SEC, Cook and Hochberg said they wouldn’t have invested in Servergy had they known that Paxton was being compensated by the company.
Duty to disclose?
The state and federal cases against Paxton hinge on one question: Did he commit a crime, or break securities regulations, by failing to disclose a financial arrangement with Servergy?
Chris Cowman, who invested $100,000 after Paxton pitched Servergy to him, believes Paxton did nothing wrong. Cowman said that, as an experienced investor, it was his responsibility to fully investigate Servergy before signing on, no matter how he learned about the company.
“I could care less one way or the other on that,” he said of Paxton’s deal with Servergy. “I get presented with multiple investment opportunities. It’s my job, and the job of my team, to do the due diligence.”
Cowman said that Paxton retains his confidence as a friend, fellow investor and lawyer who has handled Cowman’s business deals for years.
“I’ve done other investments with Ken that have been absolutely successful,” Cowman said, adding that he isn’t ready to write off the deal for Servergy’s private stock as a loss, noting that the company is still in business.
If anyone is to blame, Cowman said, it’s Mapp — who also was accused of fraud by the SEC, which said that the former Servergy chief falsely claimed his company had several contracts to sell a revolutionary new server that was, in reality, based on outdated technology.
Paxton’s lawyers say he didn’t have a duty to disclose his alleged compensation agreement with Servergy, particularly to experienced investors who wouldn’t have relied solely on Paxton’s perspective.
In a motion to dismiss the SEC’s lawsuit, defense lawyers said a “fundamental tenet” of commercial law doesn’t require middlemen who make stock tips to disclose financial incentives. In addition, a middleman like Paxton cannot be liable for fraud unless he lies or tells misleading half-truths. Paxton not only said nothing false to potential investors, he was himself misled by Mapp, the lawyers said.
“As we said in our brief, Ken Paxton disclosed everything he had a duty to disclose,” defense lawyer Bill Mateja said.
The SEC disagrees, saying that because Paxton was supposed to be representing the investment group’s interests, the payments “created a conflict that triggered his duty to disclose” that he wasn’t a disinterested party offering investment advice.
A federal judge in Sherman will hold a hearing Aug. 18 on Paxton’s motion to throw out the SEC’s lawsuit.
Paxton’s lawyers have raised numerous questions about how his case was handled in the early stages, particularly related to state District Judge Chris Oldner, a Collin County Republican who was in charge of the grand jury that indicted Paxton before stepping aside after it was revealed that his wife was publicly discussing the indictments before they were made public.
Defense lawyers have asked that Paxton’s criminal charges be thrown out, saying Oldner improperly seated the grand jury by calling for volunteers, violated grand jury secrecy by discussing the indictments with his wife and showed bias by needlessly issuing an arrest warrant for Paxton before he was to turn himself in.
Supporters say Paxton’s treatment was indicative of Collin County’s penchant for payback from old guard Republicans against conservatives and tea party stalwarts.
Yet the charges against Paxton were approved by Collin County citizens who sat on the grand jury in a case that was presented by appointed prosecutors from Houston, and Paxton’s trial judge rejected his request to throw out the charges based on Oldner’s actions
Two courts have thus far rejected Paxton’s request to throw out the charges based on a number of factors, including the actions of Oldner, who has defended his conduct as legal and proper.
On the criminal case, a Dallas-based appeals court recently upheld Paxton’s criminal charges, and defense lawyers say they likely will file one last appeal to get the charges dismissed before trial. The Court of Criminal Appeals, with eight Republicans and one Democrat, could have the final say on whether to dismiss the charges.
If unsuccessful, a criminal trial could be held as early as spring 2017.