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Texas AG Ken Paxton Indicted on Securities Fraud Charges

Texas AG Ken Paxton Indicted on Securities Fraud Charges

Will plead not guilty

Today, Texas Attorney General Ken Paxton surrendered at the Collin County Jail to be arrested and booked on three counts of felony securities law violations. Earlier, a grand jury handed down an indictment addressing Paxton’s July 2011 efforts to sell stocks on behalf of a McKinney, Texas-based corporation while he was still a member of the Texas House of Representatives.

Paxton followed in the footsteps of fellow embattled Texas politicians Tom DeLay and Rick Perry by putting on a confident smirk for his mugshot. According to local media sources, however, Paxton avoided the press after he was booked. (I don’t blame him—the Texas Democratic Party organized a rally outside the building demanding he resign on the spot.)

The New York Times explains the charges:

The charges — two counts of first-degree securities fraud and one count of third-degree failure to register — are tied to Mr. Paxton’s work soliciting clients and investors for two companies while he was a member of the Texas House of Representatives, before he was elected attorney general in November.

In the most serious charges, first-degree securities fraud, Mr. Paxton is accused of misleading investors in a technology company, Servergy Inc., which is based in McKinney, his hometown. He is accused of encouraging the investors in 2011 to put more than $600,000 into Servergy while failing to tell them he was making a commission on their investment, and misrepresenting himself as an investor in the company, said Kent A. Schaffer, one of the two special prosecutors handling the case. The group of investors were Mr. Paxton’s friends and included a colleague in the Texas House, Representative Byron Cook.

Mr. Schaffer said Mr. Paxton’s role in misleading the investors had come to light in an investigation by members of the Texas Ranger Division. Mr. Schaffer and the other special prosecutor, Brian Wice, are Houston defense lawyers appointed by a judge to act, effectively, as district attorneys in the case.

In a statement, Mr. Paxton’s lawyer, Joe Kendall, said the judge in the case has “specifically instructed both parties to refrain from public comment on this matter, and we are honoring the Judge’s instructions.” Before the indictment, a spokesman for Mr. Paxton, Anthony Holm, was outspoken in defending Mr. Paxton. He characterized the case as a political witch hunt, suggested that an anti-Paxton blogger had engaged in jury tampering, and questioned the special prosecutors’ eagerness for news coverage and their impartiality as criminal defense lawyers.

The first degree felony charges carry a combined potential sentence of 99 years in prison; the third degree charge could tack on an additional 10 years. If convicted, Paxton would have to surrender his law license, and step down from his position as Attorney General.

Although there are similarities between Paxton’s case and that of former Governor Rick Perry—the gleeful Democrats, the arguably questionable investigative tactics—Paxton’s opponents have more red meat to chew on this time around.

From the Wall Street Journal:

Mr. Paxton was reprimanded last year by the Texas State Securities Board and paid a civil fine of $1,000 in connection with some of the alleged securities violations, which involved soliciting clients for Mowery Capital Management LLC, a firm based in McKinney, Texas. He admitted at that time that he didn’t register with the state securities board, calling it an administrative error.

But a liberal watchdog group, Texans for Public Justice, filed a complaint last year, saying the punishment was insufficient and that the 52-year-old conservative shou ld face criminal prosecution.

There’s substance, but there’s also the involvement of a progressive group known for going after Republicans with pitchforks raised high. The messaging coming out of Texas from those backing Paxton is less enthusiastic than what we saw backing Perry after his indictment. The Republican Party of Texas offered a tepid defense:

“There’s a reason why Texans have warily observed this news. Some of the outrageous events surrounding this sloppy process certainly do not typify the level of quality that Texans expect from our judicial system. Since being overwhelmingly elected by the voters of Texas, General Paxton has helped lock up child predators, investigated the odious acts of Planned Parenthood, relentlessly pushed back against an overreaching federal government, and we expect him to fight these allegations with that same zeal. Ken Paxton, like all Americans, deserves to have his say in a court of law, rather than be judged in a court of public opinion that is presided over by liberal interest groups.”

Local and statewide Tea Party groups, however, are offering a spirited defense of Paxton, and demanding more transparency in the investigative process.

We’ll keep you updated on the state of the AG’s legal battle as it progresses.

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Comments

The DeLay case is instructive. The game plan sounds very familiar. As is too often the case, the process is the punishment. Our constipated justice system assures that fallout precedes justice, which is all his enemies really want.

    gasper in reply to Daiwa. | August 3, 2015 at 6:43 pm

    Brian Wice is a co-prosecutor in the case – he was DeLay’s lawyer.

      Ragspierre in reply to gasper. | August 3, 2015 at 7:22 pm

      I actually know Wice. He taught some trial advocacy classes at U of H when I was there, and worked at the Trial Advocacy Institute.

      He is VERY, VERY good.

        gasper in reply to Ragspierre. | August 3, 2015 at 8:23 pm

        When I looked up both prosecutors their credentials appear to be outstanding. My first reaction was: Paxton needs to be very, very concerned.

    Estragon in reply to Daiwa. | August 4, 2015 at 1:16 am

    There is no Ronnie Earle involved in this one.

    The charges may be typically overstated, looking for a plea on lesser counts, but I expect any conviction more serious than a licensing violation would cost him the AG job immediately, so he may have to risk the longer sentences.

    Milhouse in reply to Daiwa. | August 4, 2015 at 3:42 am

    This is nothing like the DeLay or Perry cases. In those cases there was no dispute about the facts; the indictments depended on fantastical interpretations of the law, turning standard practices into crimes. In this case, if the prosecutors’ facts are correct then Paxton did a bad thing and deserves to be prosecuted. His defense will be that he didn’t do what’s alleged, not that it’s legal and normal conduct.

Dunno about the warp and woof here.

If he’s dirty, I want him punished. Just like I want every dirty Obami punished.

I want the rule of law to mean something. And I don’t care about which tribe one belongs to.

    Daiwa in reply to Ragspierre. | August 3, 2015 at 6:12 pm

    If he’s dirty, I want him punished, too. But he doesn’t need to be for his enemies to bring him down politically. Big Game Hunters don’t all hang out just in Zimbabwe.

    The reality of today’s justice system, however, is you are deemed guilty until proven innocent, and might-as-well-have-been-guilty even when proven so.

      Ragspierre in reply to Daiwa. | August 3, 2015 at 7:04 pm

      I have to disagree somewhat.

      If we go after dirty pols, someone is going to squeal like a stuck pig about it being “political”. Just like going after a black pol will tend to draw a protest of “ray-cisssss”.

      One of the things we’ve lost track of, IMNHO, is letting the chips fall where they may in honor of the rule of law. If it IS political, there should be hell to pay.

      At least these accusations are plausible, where the Perry ones simply were not.

        Daiwa in reply to Ragspierre. | August 3, 2015 at 7:52 pm

        We agree more than disagree. I’m a let-the-chips-fall-where-they-may guy, too – all politicians, regardless of party, are more than capable of committing crimes. The terms ‘politician’ and ‘thief’ are nearly synonyms any more. The dilemma these days is that too often the chips fall before the facts can be adjudicated. I make no claim as to Paxton’s guilt or innocence – I have zip knowledge with which to even arrive at a piss-poor opinion.

        That one of DeLay’s defense attorneys is a co-prosecutor lends some weight to the charges in my mind. But that’s it: a little weight.

    Estragon in reply to Ragspierre. | August 4, 2015 at 1:20 am

    Absolutely agreed. Like the GOP congressmen in NY and IL who’ve been forced to resign, we need to root out the corruption wherever we find it.

    But the difference is stark: when a Republican is guilty or strongly appears to be, as in Nixon or Duke Cunningham or Bob Cey, we are in the forefront of condemning him. Democrats stand by their Rostenkowskis and Blagos and Clintons and Jeffersons and Mel Reynolds until the verdict comes in and sentence comes down.

DINORightMarie | August 3, 2015 at 5:14 pm

Sounds a LOT like what they pulled with Tom DeLay. He was acquitted – eventually, but his career in politics is done. And that was the leftists’ plan all along.

I predict this is just a piece of the strategy to turn Texas blue – to oust any R’s that may be vulnerable, may be a threat, may be in their way in general.

Leftists on the warpath? I think so.

    Milhouse in reply to DINORightMarie. | August 4, 2015 at 3:45 am

    No, it sounds nothing like what happened to DeLay. These are serious charges; they may not hold up, but they don’t depend on partisan twisting of the law. This is not Travis County.

Biased reporting about smirks. Neither Delay nor Perry had smirks just normal smiles. Paxton does seem to be smirking however. Delay was phony charges and the prosecutor had to present to a second grand jury because he couldn’t get the first grand jury to indict. The charges were all thrown out as phone eventually. Perry also faces phone charges. One thrown out already, and the second remaining charge will be thrown out, it is just a question of whether the Texas Court Of Criminal Appeals (highest court in Texas for criminal stuff) will throw it out before or after trial. It is absolutely clear that no law can criminalize an act of the governor that is provided for in the Texas Constitution.

Paxton on the other hand is a bit different. The investment he was peddling went bad. The people he got to invest were all republicans. They sued the company that was invested in for fraud.

I think the question on Paxton here for me is looking at the last X number of people accused by Texas Securities Board of doing something similar to what Paxton did, how many of those actually faced criminal charges. If very few to none, then this smells to high heaven. If many of them, then Paxton may be in trouble. He may be in trouble anyway because the “they are singling me out for punishment defense” doesn’t work. However, if they are singling him out for criminal charges it would show it is all the criminalization of politics versus something about justice.

    Milhouse in reply to Gary Britt. | August 4, 2015 at 3:46 am

    Delay was phony charges and the prosecutor had to present to a second grand jury because he couldn’t get the first grand jury to indict.

    You mean a third grand jury, because the first two no-billed him.

      Milhouse in reply to Milhouse. | August 4, 2015 at 12:12 pm

      OK, who’s the dzhokhar who downvoted that? How could anyone possibly object to it?

        healthguyfsu in reply to Milhouse. | August 4, 2015 at 12:24 pm

        Are downvotes really that big of a deal? Half of the “hotter” controversial articles get a fresh run of troll downzingers daily.

          Milhouse in reply to healthguyfsu. | August 4, 2015 at 3:35 pm

          Yeah, but there’s absolutely nothing controversial about that comment, and there seem to be some people with a vendetta against me, who automatically downvote whatever I write, no matter how obviously true.

        Ragspierre in reply to Milhouse. | August 4, 2015 at 1:39 pm

        T’weren’t me, Milhouse. I gave you the “up-twinkle” you got there.

        When you’re right, you’re right.

        Barry in reply to Milhouse. | August 4, 2015 at 9:54 pm

        I gave you an upvote as well, just to counter those nasty people downvoting you.

        We’re keeping score…

        Phillep Harding in reply to Milhouse. | August 5, 2015 at 4:29 pm

        Beats me. I’d really like to see the up/down vote disclose “who” so I can see if it’s someone whose opinion I respect, or some idiot troll.

I’m going to wait until we have a bit more information on this one before I make any serious, substantive commentary on it.

Regardless of how good Brian Wice is as an attorney, he can only work with what he’s got in terms of the law. The question of if Paxton can be ~successfully~ prosecuted will turn on the exact (and I do mean EXACT) nature of what he did and the representations that he made. IF Paxton didn’t meet the minimum FINRA number of clients necessary to require “registration” as a securities dealer then it doesn’t matter who he sold what to OR that he earned a commission.

Having been a licensed, registered securities advisor (I formerly held a Series 7, a Series 66, and Life and Accident & Health Insurance licenses in Michigan), this is something that I would expect the “special prosecutors” to be very, very wary about.

Sometimes investments go bad. The prosecutors need to differentiate between a “fraud” and a “business failure,” lest they tread heavily on an entire market of sales of investment products or small-investor companies that seek “angel investors” as initial or short-term funding options.

https://www.sec.gov/litigation/litreleases/2014/lr23152.htm

A couple of points –
1) investor fraud in the private placement sector is unfortunately all too common.
2) As a CPA, I see a lot of egregous case which I have reported to the SEC.
3) the SEC release (with the link above) indicates $26m in money raised. Without better information, it would indicate that a lot of the money was raised in a boilerroom operation. That would explain the SEC’s involvement.

On the other hand, the charge is that he sold the investment to friends who would be sophisitcated enough investors to understand the financial risks.
As Chuck SKinner noted above, selling to family and friends typically falls outside the boiler room operation and more into the angel investor territory.
I agree with Chuck Skinner that I need more information to reach a conclusion.

I will note that this is unlikely to be a Ronny Earl/Travis county type indictment.

Orwellington | August 4, 2015 at 4:16 pm

Re: Smirk. It would appear that Mr. Paxton has suffered some nerve damage on the right side of his face, which lets his eye and mouth droop a bit on that side. No smirk intended, but I expect the press will lead with The Smirk in every sentence they write about Paxton, because why let a good smirk go to waste.

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