Ken Paxton’s Legal Battles, Explained
The embattled AG was charged by the SEC on Monday, which may have given casual observers déjà vu.
Texas Attorney General Ken Paxton makes a lot of headlines, but they’re rarely the sort that make his constituents proud. Mostly, he gets in the national news for being indicted by a grand jury in Collin County, urging county clerks to break the law, and—most recently—three more charges, issued on Monday, by the SEC for securities fraud. It can be hard to keep track of all of this, given that “Ken Paxton indicted” was a headline back in the fall, so the new charges feel a little bit like déjà vu. So we’ve put together a handy guide to what’s up with the embattled attorney general, for Texans who want to better understand the charges the state’s chief advisor counsel faces.
Why was Ken Paxton charged?
Both the federal charges that came down on Monday and the state charges he was indicted for in the fall—more on those in a minute—stem from business dealings that Paxton had before he was elected to his current position. Specifically, these charges are for securities fraud related to investors Paxton recruited for a tech company back in 2011, when he was a member of the Texas House of Representatives. The New York Times summarizes the charges he faces at both the state and federal level:
That case and the federal one involve Mr. Paxton’s work in 2011 promoting and recruiting investors for a technology company, Servergy Inc. Federal officials accused Mr. Paxton of encouraging and pressuring investors to invest in Servergy while failing to disclose that he was being compensated by the company. The investors included several of Mr. Paxton’s friends and a fellow lawmaker.
Court documents filed by the S.E.C. claim that Mr. Paxton raised $840,000 from the investors and received 100,000 shares of stock in return, but never disclosed his commissions. Mr. Paxton told investigators that he accepted the shares as a gift from the company’s founder, but the S.E.C. claimed that the stock was actually a sales commission he failed to disclose.
Was he actually breaking the law?
That’s for a court to decide, obviously. Paxton says he solicited investors on behalf of former Servergy CEO William Mapp III (who was also indicted). Mapp had donated to Paxton’s campaign, and the charge claims that Paxton “used pressure tactics” on his behalf, including calling a potential investor who decided to pass on the opportunity late at night to try to get him to change his mind by telling him that the price was about to go up.
Paxton disputes that the 100,000 shares of Servergy he received were compensation for services rendered, though. Instead, the charge claims, he told the SEC that the shares were a gift offered to him by Mapp, who was told by God not to take money from Paxton for his investment in a meeting at a McKinney Dairy Queen.
“According to Paxton, Mapp refused his investment and stated, ‘I can’t take your money. God doesn’t want me to take your money.’ Consequently, Paxton claimed, he later accepted the shares as a gift,” the SEC complaint stated. “The shares were not a gift but, instead, a sales commission paid to compensate Paxton for the investors he recruited. Paxton knowingly or recklessly failed to disclose the commission to investors despite an obligation to do so.”
So the SEC’s charge claims that Paxton was working for Servergy without disclosing that to investors, and Paxton claims that he was encouraging investment in a company that he planned to invest in, but which later gave him shares as a gift?
That’s part of it. We should note that Paxton was fined by the Texas State Securities Board in 2014 for failing to disclose that he had been paid to solicit investment clients on behalf of a firm that was paying him a commission—Paxton described that as an “administrative oversight” and paid a thousand dollars, so he’s admitted that he’s engaged in similar behavior in the past.
The SEC also claims that, after meeting with Servergy, Paxton was offered a 10 percent commission from the company, and when that offer was made to him in writing, Paxton wrote back, “I will get to work,” scheduling meetings with a number of investors shortly thereafter. The stock issued to Paxton is identified in Servergy’s own records as “payment” for “services,” according to the filing.
This is the bulk of the case against Paxton, but it’s not the entirety of it. The charge also implicates Paxton in the fraud charges against former Servergy CEO Mapp, who faces the most dramatic charges of lying to investors by claiming that the company had bulk pre-orders from Amazon and Freescale when they did not. Some of those investors were people who were recruited by Paxton, and phrases like “Paxton did nothing to determine whether Mapp’s claims were true” appear several times throughout the filing. Similar charges against Mapp stem from claims that Servergy’s product—computer servers—were especially energy efficient and cutting edge, which does not appear to have been the case. Paxton is associated with those claims, too, in the filing. “While Paxton possessed no technical expertise and did not know whether any of Servergy’s claims were true, he conducted no due diligence to confirm, clarify, or correct Servergy’s claims,” the document states.
How does this differ from the charges made against Paxton last fall?
Those were criminal charges in Texas; these are civil charges. The criminal charges are felony counts—which could potentially mean jail time. Civil charges from the SEC are a lawsuit, which means that the penalties are more limited. If the federal government wants to go after Paxton on criminal charges, those charges will come from the Justice Department and the FBI, not the Securities Exchange Commission.
Otherwise, though, they’re pretty similar. The SEC’s charge contains more information than was available in his Collin County indictment, but the nature of the claims against Paxton are about the same.
Are these charges politically motivated?
Ken Paxton would certainly like you to think so. After the initial indictments came down last year, his spokesman said as much. That’s not the most compelling argument in Collin County, though, which is one of the more conservative counties in Texas (according to the Baker Institute, Collin County is the sixth most conservative in the state). For their part, the prosecutors in Collin County say that the accusation of political motivation “recycles the usual sound bites, culled from the play book of any public official whose conduct places them in the cross-hairs of a grand-jury investigation.”
The fact that the SEC’s charges have nothing to do with Paxton’s role as attorney general, or his work as a politician generally, also make the “politically motivated” claim harder to argue. Paxton is a Republican, but he’s not charged with doing anything political—he’s charged with defrauding investors while working as a part-time legislator. He may say that the charges are politically motivated, but it’s hard to see how that explanation holds up.
So voters must be pretty mad, huh?
Well, it’s not like these accusations are new. Paxton didn’t campaign on cleaning house on corruption, only to have stories of potential wrongdoing come out once he was swept into office. Voters were well aware that Paxton could face felony charges not only before he was elected to his office, but before he even won the primary runoff for the GOP. (The idea of a Democrat defeating Paxton in a general election in 2014 was far-fetched, felony indictment pending or no.)
So some voters may be upset, embarrassed, or otherwise bothered by the fact that their attorney general faces criminal and civil charges. But they shouldn’t be surprised. Our own Erica Greider has explained that, as a result, we kind of have the leadership in the attorney general’s office that we deserve—we knew what we were getting, and we voted for it anyway.