Lawyers for Texas Attorney General Ken Paxton have filed a motion asking a federal judge to stop the U.S. Securities and Exchange Commission’s (SEC) continued harassment and fishing expedition where there is no evidence.
In October, a federal judge conditionally dismissed the civil securities fraud lawsuit against the attorney general writing, “the Complaint has not alleged facts sufficient to support a plausible claim under Sections 17(a) and 17(b) of the Securities Act or Sections 10(b) and 15(a) of the Exchange Act.”
Federal regulators complain that Paxton raised $840,000 for Servergy, a high-tech startup, without telling investors that he was being paid. They alleged Paxton, who was not attorney general at the time, was paid 100,000 shares for bringing on investors in 2011.
The SEC responded to the dismissal issue by asking the judge to give them an opportunity to amend their complaint. The judge responded, “While this request does not satisfy the requirements of Federal Rule of Civil Procedure 15, the Court is inclined to allow the Commission to plead additional facts, if any, before it grants the motion and dismisses the Commission’s claims against Paxton.” He granted the federal lawyers “leave to amend its allegations against Paxton to the extent that it has additional facts that might support a claim under the statutes alleged in the Complaint.” Any amendment to the complaint was due to be filed within 14 days of the October 7th order. The Judge also ordered that “the Commission must place any new facts not previously alleged in the original Complaint in bold typeface.”
Lawyers for the SEC amended their complaint and alleged that Paxton owed a fiduciary duty to an “investment group” comprised of four investors and that they had certain “established purpose, policies, and practices.”
During the oral argument on the motion to dismiss, the Obama appointee, Judge Amos L. Mazzant, III told the federal government, “Not that they get to go on a fishing expedition to find additional facts. So I’m not going to go down that path.” Now Paxton’s lawyers argue that when the SEC pleaded for an opportunity to conduct discovery to substantiate its allegations, the Court made clear that would not be permitted.
Paxton lawyer’s urge that the federal government continues to try to fish for evidence to support their lawsuit so that the judge will not enter a final dismissal order.
Paxton responded to the 15 third-party subpoenas served by the SEC by filing a motion for protective order. In it the lawyers for Paxton urge:
Prior to the filing of this action, the SEC interviewed only two Servergy investors purportedly solicited by Mr. Paxton—Investors 1 and 2. Accordingly, neither of the SEC’s complaints contained any particularized allegations concerning a fraud perpetrated by Mr. Paxton on any other investors. Even the SEC’s Amended Complaint only vaguely refers to other investors, but offers no particularized allegations concerning any false statements made to them or any duty to disclose owed to them. As for the two Servergy investors on whom the SEC has rested its complaints against Mr. Paxton, discovery to date has already raised grave concerns about the veracity of their claims. No sooner had Mr. Paxton identified those credibility issues in filings with this Court than the SEC began attempting to recast its case by subpoenaing fifteen individuals or entities whom it never interviewed and from whom it never subpoenaed documents prior to filing this lawsuit. But given the SEC’s lack of investigation, Mr. Paxton’s interactions, if any, with these newly subpoenaed investors cannot, as a matter of logic, have been the basis for the SEC’s complaints against Mr. Paxton.
What is more, even the SEC’s Amended Complaint contains no legally adequate allegations with regard to these other investors.
The 15 individuals and entities served by the federal government are: John Brochu; Gene Carr; Christopher Cowman; Tim Curren; Steve Davis; Brad Dean; Dave Gorman; Brandon Pogue; Mark Scruggs; S3 Management Group, LLC; S3 Sleep Investments, LLC; Simple Sleep Services, LLC; Brandon Waghorne; John Waghorne; and Jacob Watters.
The motion for protective order asks the Court to “prevent the SEC from, at this late date, using the federal discovery process to investigate potential fraud claims it never investigated prior to filing as to investors not alleged with particularity in either complaint.”
Breitbart Texas reported in April that the SEC filed a civil securities fraud lawsuit against Paxton and former executives of Servergy, Inc. just one week to the day before Paxton was to represent the Lone Star State and half the states in their executive amnesty order fight at the U.S. Supreme Court. As reported by Breitbart News, the case was historic because it was only the second time in U.S. history where the U.S. Supreme Court was to decide a challenge brought by a majority of states against the federal government. It was also historic in that it involved the scope of presidential power under the U.S. Constitution.
The motion to dismiss the SEC’s case against Paxton urged that the complaint for securities fraud “does not allege that [Paxton] made a single false or misleading statement.” The federal pleading did accuse Servergy’s co-founder and then-CEO and Chairman William E. Mapp, III, of leading investors to believe that a “revolutionary new server” “was in high demand.” It stated that Mapp falsely claimed that notable companies like Amazon.com and Freescale Semiconductors had pre-ordered the product.
In June, Breitbart Texas reported, that Paxton’s lawyers, including Matthew T. Martens who had previously served as the chief litigation counsel in the enforcement division at the SEC, filed a motion to dismiss the SEC civil lawsuit with prejudice. The motion stated, “In short, the SEC’s claims against Mr. Paxton are a dramatic overreach and lack any basis in law.”
The 29-page pleading also urged that no one had alleged they had lost money in any of the transactions involving Paxton. The motion to dismiss also stated that the SEC’s argument that Paxton failed to disclose that he could receive a commission for touting securities, and that he had not investigated the company, ran counter to decades of case law precedent that has never required such discussions or actions.
In the order dismissing the case against Paxton, Judge Mazzant opined, “This case is not about whether Paxton had a moral obligation to disclose his financial arrangement with Servergy to potential investors. This case is also not about whether Paxton had some general obligation to disclose his financial arrangement to his investor group. The only issue before the Court is to determine whether the facts as pleaded give rise to a plausible claim under federal securities laws. With that limitation in mind, the Court has determined that under the facts pleaded by the Commission, Paxton did not have a legal obligation to disclose his financial arrangement.”
As reported by Breitbart Texas, issues relating to Paxton’s securities law issues were raised by Dan Branch, Paxton’s opponent during the Republican primary for attorney general. Paxton is also facing a criminal securities fraud trial in May. Paxton pleaded not guilty to the indictments that many have called a political witch-hunt because of the players involved. Rep. Bryon Cook (R-Corsicana) and businessman Joel Hochberg are complainants in the Collin County indictments. Cook is chairman of the powerful State Affairs Committee and is said by opponents to be a close lieutenant to Texas House Speaker Joe Straus. Hochberg is a close business associate of Chairman Cook. Paxton ran against Straus as speaker before he was a Texas state senator.