Federal securities regulators hit Texas attorney general Ken Paxton with fraud charges Monday. Paxton faces civil charges for allegedly recruiting investors for a high-tech startup without disclosing the company was paying him.
The alleged violations happened before Paxton became attorney general. The SEC claims Paxton raised 840-thousand dollars in investment funds for Servergy and, in return, Servergy gave him 100-thousand shares of stock. Paxton, a Republican, is already under felony criminal indictment in Texas over allegations that he defrauded wealthy investors in the company in 2011.
In a statement this afternoon, Paxton’s attorney said the attorney general “vehemently denies the allegations.”
Here’s attorney Bill Mateja’s full statement:
“Texas Attorney General Ken Paxton understands that, earlier today, the SEC filed a civil lawsuit against him in connection with a company called Servergy, Inc. While neither Mr. Paxton nor his legal team have reviewed the civil lawsuit yet, we understand that the civil lawsuit revolves around the same allegations charged in the Collin County criminal matter. Like the criminal matter, Mr. Paxton vehemently denies the allegations in the civil lawsuit and looks forward to not only all of the facts coming out, but also to establishing his innocence in both the civil and criminal matters. While it isn’t surprising that the SEC filed this identical civil lawsuit, because it happens almost all of the time, it is surprising that the SEC chose to file this civil lawsuit nearly a year after the Collin County Special Prosecutors filed their criminal case, particularly where the civil lawsuit mirrors the criminal case.”
Here’s the full press release from the SEC:
SEC: Company Misled Investors About Energy-Efficient Technology
FOR IMMEDIATE RELEASE
2016-65
Washington D.C., April 11, 2016 — The Securities and Exchange Commission today announced fraud charges against a Texas-based technology company and its founder accused of boosting stock sales with false claims about a supposedly revolutionary computer server and big-name customers purportedly placing orders to buy it.
Also charged in the SEC’s complaint is Texas Attorney General Ken Paxton and a former member of the company’s board of directors for allegedly recruiting investors while hiding they were being compensated to promote the company’s stock.
The SEC alleges that Servergy Inc. and William E. Mapp III sold $26 million worth of company stock in private offerings while misleading investors to believe that the Cleantech CTS-1000 server (the company’s sole product) was especially energy-efficient. They said it could replace “power-hungry” servers found in top data centers and compete directly with top server makers like IBM, Dell, and Hewlett Packard. However, neither Mapp nor Servergy informed investors that those companies were manufacturing high-performance servers with 64-bit processors while the CTS-1000 had a less powerful 32-bit processor that was being phased out of the industry and could not in reality compete against those companies.
The SEC further alleges that when Servergy was low on operating funds, Mapp enticed prospective investors by falsely claiming well-known companies were ordering the CTS-1000, and he specifically mentioned an order purportedly received from Amazon. In reality, an Amazon employee had merely contacted Servergy because he wanted to test the product in his free time for personal use.
Servergy has since cut ties with Mapp, who served as CEO. The company agreed to pay a $200,000 penalty to settle the SEC’s charges. The litigation continues against Mapp in U.S. District Court for the Eastern District of Texas.
“We allege that Mapp deceived investors into believing that Servergy’s groundbreaking technology was generating lucrative sales to major customers when it was technologically behind its competitors and made no actual sales,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.
While serving in the Texas House of Representatives, Paxton allegedly reached an agreement with Mapp to promote Servergy to prospective investors in return for shares of Servergy stock. According to the SEC’s complaint, Paxton raised $840,000 in investor funds for Servergy and received 100,000 shares of stock in return, but never disclosed his commissions to prospective investors while recruiting them. Similarly, former Servergy director Caleb White allegedly raised more than $1.4 million for Servergy and received $66,000 and 20,000 shares of Servergy stock while never disclosing these commissions to investors. White has agreed to settle the SEC’s charges by paying $66,000 in disgorgement and returning his shares of Servergy stock to the company. The SEC’s litigation continues against Paxton.
“People recruiting investors have a legal obligation to disclose any compensation they are receiving to promote a stock, and we allege that Paxton and White concealed the compensation they were receiving for touting Servergy’s product,” Mr. Shipchandler said.
The SEC’s complaint charges Servergy, Mapp, Paxton, and White with violating Sections 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Servergy, Mapp, and White also allegedly violated Sections 5(a) and (c) of the Securities Act, and Paxton and White allegedly violated Section 17(b) of the Securities Act and Section 15(a) of the Exchange Act.
Servergy and White neither admitted nor denied the SEC’s charges in their settlements.
The SEC’s investigation was conducted by Samantha S. Martin and Carol J. Hahn and supervised by Jessica B. Magee and David L. Peavler in the Fort Worth office. The SEC’s litigation will be led by Matthew J. Gulde and Ms. Magee.
Here’s the response from Texas Democrats:
Texas Democratic Party Deputy Executive Director Emmanuel Garcia issued the following statement:
“Enough is enough. How many more investigations, criminal charges, and lawsuits need to be filed before Republican Ken Paxton takes responsibility for his lawlessness and resigns?
“First, we learned Ken Paxton was swindling his investors and fellow Texans. Then, he ran afoul of the Texas Rangers. All along, Paxton sought out white-collar treatment from Texas courts. He is already facing over 99 years in jail for felony fraud. But the lawlessness is not over, today, the U.S. Securities and Exchange Commission filed a new civil securities fraud lawsuit against the Republican.
“Texas Democrats know that no politician should ever be above the law. We renew our call for Ken Paxton to spare Texas further embarrassment, take responsibility, and step down.”
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We will have more on this story tonight at 7 on Capital Tonight.