SEC case against Texas AG Paxton faces hurdle

By Jon Cassidy

Watchdog.org

If there’s anybody who knows less about the vagaries of securities law than a state judge, it’s a Collin County grand jury.

Federal judges, on the other hand, deal with securities law often, which makes a hearing in Sherman on Friday an important bellwether in the legal saga that has overshadowed Ken Paxton’s term as attorney general.

Federal District Judge Amos L. Mazzant, III will hear oral arguments on whether to dismiss a lawsuit the Securities and Exchange Commission filed against Paxton in April.

The federal case revolves around the same events that led to Paxton’s indictment by a Collin County grand jury that was instructed and closely overseen by District Judge Chris Oldner, whose conduct and public comments on the case have drawn three complaints with the State Commission on Judicial Conduct.

Paxton’s role was to invite several people to a 2011 meeting to consider a pitch from Bill Mapp, the CEO of a company called Servergy, who began exaggerating about his product in 2012 and 2013, as his need for cash to keep his company afloat grew desperate.

Paxton is accused of forwarding an email with promotional material, of telling one potential investor that he thought Servergy was a “great company,” of failing to do the investors’ homework for them in checking out the company’s claims, and of failing to volunteer that he either was going to or had received 100,000 shares of company stock.

There’s no specific requirement in state or federal law that explicitly requires that disclosure; it is a new and untested theory formulated by the special prosecutors who are making millions bringing the case.

The SEC has called Servergy’s core product “obsolete” — an overstatement for a product that has willing purchasers, but likely closer to the truth than Mapp’s claims of revolutionary capabilities — but the SEC also says Mapp was misleading Paxton, too. In other words, Paxton wasn’t “in on” any scheme to hype a bad product; indeed, the only benefit he received was company stock.

This creates a problem for Paxton’s accusers: if they really think he was part of a fraud, of getting investors to part with money in exchange for worthless paper, why did he take his payoff in paper?

Actually, none of his accusers have brought allegations that rise to the level of this everyday sense of fraud; they don’t allege even a single dishonest statement by Paxton.

Both cases depend on much more technical definitions of fraud in state and federal law, which happen to follow very similar contours here.

That’s one reason the hearing Friday is important. If Mazzant thinks the federal case is junk, it means the state case is likely junk, too.

When the indictment was unsealed, securities experts were surprised a criminal case was being built on nothing more than an apparent registration violation and a “strange” legal theory.

At the state level, registration violations are almost always handled with small fines by civil administrators, which is one reason state judges aren’t well versed in the area.

The SEC attorneys, of course, have no financial incentive to bring their case; political incentives are another matter.

Shamoil Shipchandler, the head of the SEC Fort Worth office that brought the suit, donated to President Barack Obama’s 2008 campaign, and to a Democratic Senate candidate.

Mazzant, however, has bipartisan credibility, having been appointed to judgeships both by Obama and by former Gov. Rick Perry.

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