Paxton linked to firm in probe
AG is an investor in company under SEC investigation
AUSTIN — Attorney General Ken Paxton has been linked to a Dallasarea technology firm that federal authorities have investigated for possibly defrauding its stockholders, including prominent state lawmakers who sued the company after investing hundreds of thousands of dollars, according to federal and state court records.
The U.S. Securities and Exchange Commission began investigating Servergy, a privately held technology firm based in the former state senator’s hometown of McKinney in 2013. It first subpoenaed the company in October 2013. Additional subpoenas were issued in May and September 2014.
In October 2014, Servergy attorneys updated the SEC on search terms they were using to respond to the agency’s request for documents, which included Paxton’s name. But SEC officials said the company ultimately had failed to comply with the agency’s requests.
The SEC then filed suit against Servergy in December 2014 in federal
court in Dallas to compel the production of records in a probe of “possible misstatements and omissions related to Servergy’s purported business relationships and technology,” according to an agency press release at the time.
Paxton, the state’s newly elected attorney general and a former state senator, reported in personal financial disclosure forms filed in June for the calendar year 2014 that he owned at least 10,000 shares of stock in Servergy, which was founded by Paxton donor and tea party supporter Bill Mapp.
A source familiar with the transaction said Paxton at one time held at least 100,000 Servergy shares, each worth $1.
Anthony Holm, Paxton’s spokesman, did not return calls or emails Tuesday seeking comment. Tim Newman, an attorney for Servergy, also could not be reached for comment by phone.
Felony charge sought
News of Paxton’s relationship with Servergy comes a week after a special prosecutor charged with heading up a probe into Paxton’s alleged violation of state securities laws, Kent Schaffer, said he believed he had “substantial evidence” to secure a first-degree felony indictment.
Special prosecutor Brian Wice, Schaffer’s partner, declined Tuesday to comment on whether Paxton’s involvement with Servergy was tied in any way to their investigation into Paxton’s alleged violations of state securities laws. Wice declined to provide any other details of the case he and Kent Schaffer will present to a Collin County grand jury this month.
“I’m going to respectfully decline to comment,” Wice said.
In April 2014, as he was running for attorney general, Paxton admitted to repeatedly soliciting clients for a friend’s investment firm without being properly registered with the state, a violation of state securities laws that earned him a $1,000 fine and reprimand from the State Securities Board. A criminal complaint was later filed and the case was transferred to Collin County, where District Attorney Greg Willis recused himself due to his personal and extended business relationship with Paxton.
After the recusal, Judge Scott Becker appointed Schaffer and Wice as special prosecutors to assist in the “investigation and, if warranted, the prosecution of Ken Paxton for the securities law complaints currently under investigation by the Texas Rangers.”
The probe was expanded in May to include “any and all offenses arising out of Ken Paxton’s alleged violations of the Texas Securities Act.”
News report in May
The Houston Chronicle first reported in May that sources confirmed the probe into the attorney general turned up allegations of fraud in connection with how Paxton solicited clients, including several high-profile Republicans.
The SEC’s interest in Servergy, according to the SEC, began after company executives told investors it was creating a computer server called the Cleantech-1000 that would consume up to 80 percent less power, cooling, and space compared to others on the market. The company also said it had received preorders for the server from Amazon.com and Freescale Semiconductor.
In filing suit against Servergy in December to force the production of documents, agency attorneys expressed obvious frustration after Servergy principals for months refused to respond to three separate subpoenas from the federal agency. Servergy raised approximately $26 million from selling stock to private investors between 2009 and 2013, according to the SEC.
“While we appreciate your assurances of cooperation, certain of the requests at issue have been outstanding for over a year,” Samantha Martin, a staff attorney for the SEC, wrote Servergy principals in a November 2014 letter, according to documents supporting the SEC’s subpoenas. “Additionally, the staff concludes that Servergy’s unreasonable approach to identifying documents is contributing to the withholding of documents critical to our investigation.”
A list of hundreds of investors and other interested parties were also included in the subpoena documents. Paxton and his law office email were included in a list introduced by the SEC in court marked “Selected Emails.”
At the same time the SEC was beginning its investigation, a group of Servergy investors, including House State Affairs Chairman Byron Cook, R-Corsicana, and former state Rep. Bob Griggs, sued the company in District Court in Collin County for “refusing to acknowledge the plaintiffs’ right to inspect the books and records of Servergy (and) further trying to unilaterally dictate what the phrase ‘books and records’ actually means.”
The suit was dismissed last year, after the company produced documents responsive to the plaintiffs’ requests, attorney Terry Jacobson told the Chronicle last month. He would not comment further about Paxton’s involvement in the investment. Reached for comment late Tuesday, Cook referred the Chronicle back to Jacobson.
Grand jury this month
Wice and Schaffer will present their evidence to the grand jury this month. Schaffer said last week the amount of money involved in the case he and Wice will present to the grand jury will be “substantially higher than $100,000.” Securities fraud violations over that figure amount to a first-degree felony under state law. If convicted, Paxton could face a sentence of five years to life in prison and a fine of not more than $10,000.
J.C. Sanford, a Servergy investor and friend of its founder Mapp, told the Chronicle on Tuesday he trusted the company to eventually make good on its promise to produce the Cleantech-1000.
He would not comment on how much stock he owned or who alerted him to the investment opportunity.
“Bill Mapp is one of the hardest working guys I’ve ever known,” said Sanford, of Dallas. “Tell the government to leave him alone.”