Paxton prevails on civil charges
State AG still faces trials in criminal court
AUSTIN — A federal judge tossed out civil securities fraud charges against Ken Paxton for the second time Thursday, giving the Texas attorney general a major win as he braces for high-stakes criminal trials on similar charges that have the potential to unravel his political career.
While Paxton’s victory in federal civil court has no official bearing on the state criminal case, it hints at the likely arguments the embattled politician will lean on when his criminal trial begins May 1.
While the criminal case requires a higher standard of proof, one of the prosecutors involved said Thursday’s dismissal would have no bearing on the state’s case because it involves different laws.
“That has no relevance at all,” special prosecutor Kent Schaffer said of the dismissal of the SEC claims.
U.S. District Judge Amos Mazzant dismissed the charges against Paxton Thursday, ruling the attorney general had “no plausible legal duty” to disclose to investors he
would make a commission off of their purchase of stock in a North Texas tech company.
This is the second time Mazzant has dismissed charges brought by the U.S. Securities and Exchange Commission against Paxton, who was charged with two counts of securities fraud and one count of failing to register with the state. After the first dismissal, Mazzant gave the SEC a chance to amend its complaint and try again.
He dismissed the case with prejudice Thursday, which means the SEC cannot bring an action on the same claim again.
“The question before the Court is not whether Paxton should have disclosed his compensation arrangement, but whether Paxton had a legal duty under federal securities law to disclose,” Mazzant said in his ruling.
He touched on the ethical undertones of the case, but said “it is not the province of the Court to stretch federal securities laws beyond their scope to prescribe liability based on moral considerations or policy concerns.”
Paxton chided the SEC for bringing the charges, calling the case a “travesty” and calling for the federal agency to be held accountable.
“I have maintained all along this whole saga is a political witch hunt,” the attorney general said. “Today’s ruling to dismiss the charges with prejudice confirms that these charges were baseless when the SEC initially brought them and they were without merit when the SEC re-filed them.”
First case simplest to try
The win gives Paxton momentum as he heads to criminal court where the standard of proof is higher than in civil court. Paxton, a Republican and first-term attorney general, faces similar charges in state criminal court and is expected to go to trial May 1 on a third-degree felony charge he failed to register as an investment advisor. Paxton was reprimanded and fined $1,000 in 2014 for failing to register with the state for soliciting clients for Mowery Capital Management LLC. He paid the fine without contest and prosecutors say the case will be the simplest to try.
A second trial is expected to follow, with the state’s special prosecutors trying Paxton on two first-degree felony securities fraud charges. The heavier charges allege Paxton committed securities fraud when he recruited investors without disclosing he was making a commission. He raised $840,000 in investments in Servergy, a tech company that paid him 100,000 shares of stock valued at $1 for recruiting investors. If found guilty, Paxton could face up to 99 years in prison and thousands of dollars in fines.
Paxton has tried to get the criminal case thrown out. Unlike in federal court, state district and appellate courts have refused to dismiss the criminal case.
The federal court’s decision to trash the civil case “doesn’t affect the criminal case one bit,” said Schaffer, a Houston defense lawyer appointed as a special prosecutor who will try Paxton in Collin County this spring. “We’ve alleged fraud and a material omission. If that omission is one that led to the victims investing in this company, then that would be fraudulent” under state law, Schaffer said. “It’s a different law, it’s a different court.”
Aggressive securities law
While the charges are similar, the linchpin to the state criminal case could be whether Paxton truly was an investment advisor, said James Spindler, a law and business professor at the University of Texas at Austin.
Texas has a “very aggressive” securities law which makes it easy to nail a person for failing to register as an investment advisor if paid for financial advice, he said.
“The relationship between an investment advisor and a client is one of trust,” Spindler said. If Paxton is found not to have been
an investment advisor, his alleged failure to disclose that he would profit from convincing people to buy stock would not amount to fraud, Spindler said.
Another difference between the cases is a jury, not a judge, will decide Paxton’s criminal case.
The special prosecutors have argued Paxton’s team has “tainted” the jury pool by flooding Collin County with various media in favor of the attorney general, but the judge has said he will try to seat a jury before deciding whether to change the trial’s location. Critics say they look forward to a jury deciding Paxton’s fate.
“Ken Paxton may have slipped the snare in federal civil court, but he remains in deep trouble, and a prison cell may be waiting for him on state criminal felony fraud charges,” said Matt Angle, director of the Lone Star Project, a left-leaning political action committee. “Paxton knows that facing a jury who hears how he swindled honest Texans out of their money could mean big trouble for him.”