In tossing SEC’s Paxton case, judge gives sneak peek at criminal case

Jon Cassidy
Posted: Mar 03, 2017 12:34 AM
In tossing SEC’s Paxton case, judge gives sneak peek at criminal case

ONE DOWN: One securities fraud case against Attorney General Ken Paxton has been dismissed; one remains.

Federal District Judge Amos L. Mazzant III dismissed for the second time Thursday a fraud case that the Securities and Exchange Commission had brought against Attorney General Ken Paxton.

The decision was no surprise. Mazzant had ruled In October that “Paxton did not have a legal obligation to disclose his financial arrangement” with a company called Servergy, rejecting all of the SEC’s theories that there existed such a requirement in federal law.

In his final ruling Thursday, Mazzant also gave the public a sneak peek at whether state law has any such requirement, which is the question a Collin County jury will be asked in a May criminal trial. Spoiler alert: Mazzant says it doesn’t.

After conditionally dismissing the SEC’s case in October, he gave the federal lawyers a chance to refile with any new facts.

Yet even with those new facts, and under a standard where he had to assume everything the government alleged was true, Mazzant still found there was no case to be made that Paxton had broken any law.

However, in the process of producing “new facts” from the same old witnesses, the SEC lawyers may have lured Paxton’s two accusers into changing their story, which can be used at trial to impeach their credibility.

“We are now focused on Ken Paxton’s full exoneration in the state matter, where the special prosecutor’s burden is even higher and the fraud allegations in the SEC case mirror those in the state case,” Paxton attorney Bill Mateja said.

In the SEC’s second bite at the apple, Mazzant noted, the primary “new fact” it alleged was that a group of investors centered around state Rep. Byron Cook a Corsicana Republican, had an “established policy and expectation that members participating in an investment deal do so on what Cook calls an ‘equal dollar-for-dollar basis.’”

In December, Watchdog reported that claim was factually false, citing Texas Ranger investigatory reports, as each member of the group had put different amount into the investment.

Mazzant had to assume it was true, and still found it was insufficient to make Paxton liable, as the first question wasn’t whether or not the group had a policy or Paxton was aware, it was whether he had a fiduciary duty toward the members of the group, a duty that might require him to volunteer information about his compensation.

If he was a fiduciary, then the group’s policies might matter. Mazzant found that there was no formal fiduciary relationship, and that the court had no basis to create an informal one, as Paxton lacked the “control and dominance” over Cook’s affairs required by law.

Mazzant cited a case where an uncle had taken charge of all his niece’s affairs as an example of an informal fiduciary relationship. Cook, by contrast, is a grown man and a sophisticated investor.

“Even if Paxton were aware of the alleged policies, the Commission has not pleaded facts indicating that Paxton agreed to abide by them,” Mazzant wrote, citing law that a “fiduciary duty cannot be imposed unilaterally.”

Mazzant also explored the question of whether a fiduciary relationship could be created under Texas law, as that relationship might then trigger liability under federal securities law.

“Even if the Court was convinced that Texas rather than federal common law should govern the Court’s determination of whether Paxton violated federal securities laws, the Commission has not sufficiently pleaded facts supporting a fiduciary relationship under Texas law,” Mazzant wrote. “As under federal law, a fiduciary relationship ‘exists only to the extent that the parties do not deal with each other equally, either because of dominance on one side or weakness, dependence, or justifiable trust on the other.’”

“The Commission has not alleged dominance, weakness, or dependence; rather, it argues the Investment Group trusted Paxton to disclose his compensation,” he wrote. “Yet the Supreme Court of Texas has determined that fiduciary relationships do not arise from ‘mere subjective trust alone.’”

The special prosecutors pursuing Paxton haven’t laid out their case in any sort of detail. But their case, like the SEC’s, is based on claims made by Cook and his friend Joel Hochberg.

They’ll be out to convince a jury to reach a conclusion opposite from Mazzant’s determination that “Paxton has made no material misrepresentations” and he “had no plausible legal duty to disclose his compensation arrangement with investors.”

Jon Cassidy reports for the Texas Bureau of Contact him at and follow him on Twitter @jpcassidy000.