DALLAS — The U.S. Securities and Exchange Commission has charged Texas Attorney General Ken Paxton with fraud involving an investment scheme for a technology company called Servergy.
Paxton, the state's top law enforcement officer, is a member of the Texas Bond Review Board whose office is required to approve nearly every municipal bond deal in the state. He is also responsible for investigating cases involving fraud.
Paxton was already under indictment in Texas for violation of state securities laws.
Before he was elected attorney general, Paxton admitted acting as a financial advisor without registering with the State Securities Board or the SEC. Paxton paid a fine for the violation, and the case was later submitted to a state grand jury.
Paxton's lawyer William Mateja said Paxton denied the latest allegations.
"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," Mateja said.
The SEC accused Severgy and former chief executive officer William Mapp of selling private stock while misleading investors about the energy efficiency of its sole product. Paxton is accused of working to raise investor funds for the company without disclosing his commissions.
"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," Shamoil T. Shipchandler, director of the SEC's Fort Worth regional office, said in a news release on the complaint.
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, according to the press statement.
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 said.
The SEC also alleged that when Servergy was low on operating funds, Mapp enticed prospective investors by falsely claiming well-known companies were ordering the CTS-1000 and 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," Shipchandler said.
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, the SEC said.
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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, the SEC said. 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.
Paxton has had to replace three top staff members who have resigned over the past month. The AG's deputy press secretary Katherine Wise stepped down on Friday, following in the footsteps of communications director Allison Castle. First Assistant Attorney General Charles Roy has also departed.
Paxton hired replacements for Castle and Roy without posting the jobs. Some news outlets have questioned the legality of the hirings, pointing to a state law that requires agencies to advertise jobs if outside candidates are being considered.
