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In Ken Paxton Case, SEC Lawyers Face Skeptical Judge at Hearing

A federal judge considering whether to dismiss the civil fraud case against Texas Attorney General Ken Paxton suggested that the Securities and Exchange Commission was trying to fit a "square peg into a round hole," basing its case on precedents that do not back up their arguments.

Texas Attorney General Ken Paxton entered a federal courthouse in Sherman on Sept. 2, 2016. Paxton's lawyers argued in a hearing that the federal civil fraud case against him should be dismissed.

SHERMAN — Lawyers for the U.S. Securities and Exchange Commission received skeptical treatment Friday from a federal judge who is considering whether to dismiss the civil fraud case against Attorney General Ken Paxton

From the outset, U.S. District Judge Amos L. Mazzant III noted that the SEC's case against Paxton was unlike those he usually sees from the commission. Mazzant came across as less than persuaded by one of its central arguments. At one point, Mazzant suggested the SEC was trying to fit a "square peg into a round hole," basing its case on precedents that do not back up their arguments. 

"The court's hard-pressed to find a case that fits into the allegation the SEC is making," Mazzant said, "and that troubles the court."  

The judge did not rule immediately at the end of the 90-minute hearing inside a Sherman courtroom. He said he instead plans to issue a decision in 30 days. 

The SEC case stems from allegations that Paxton misled investors in a company from before his time as attorney general. Paxton is accused of persuading a group of people to invest in the company, a technology startup known as Servergy, without disclosing that he was receiving a commission. 

Paxton's legal troubles began more than a year ago, when a Collin County grand jury indicted him on criminal charges of securities fraud and failure to register with the state securities board. His lawyers have so far been unsuccessful in seeking dismissal of that case and are waiting to see whether the state's highest criminal court agrees to review it, a last resort before trial.

The SEC announced its case against Paxton in April, also charging Servergy director Caleb White and CEO William Mapp. At the time, White settled with the SEC and Mapp has since expressed an openness to doing so. Paxton is not interested in settling, according to court documents. 

Largely at issue Friday was whether Paxton committed securities fraud by simply leaving out information in his dealing with investors, not necessarily making misleading statements. Paxton lawyer Matthew Martens argued that the attorney general's actions did not amount to fraud, leaning heavily on the argument that every court that has previously looked at the issue has rejected the SEC's argument. Meanwhile, SEC lawyer Matthew Gulde asked Mazzant to look more broadly at Paxton's actions as a "pattern of conduct" in which he acted as a "secret broker" and had at least two duties to tell investors he was being compensated. 

"It doesn't matter what we call it," Gulde said. "It is a secret quid pro quo that needs to be disclosed." 

They sparred less extensively over another charge in the case involving Paxton's failure to register as a securities broker. Paxton's side argued that his action did not meet any definition of the term, while SEC lawyers countered that they were downplaying how active of a role Paxton had in recruiting investors. "Mr. Paxton is not someone who's walking into this blindly," Gulde said. 

Mazzant often appeared more sympathetic to Paxton's arguments, suggesting that Gulde was reaching to find case law to support the SEC's case — at least with the current facts alleged. "I don't know how we get there," Mazzant said at one point. 

Paxton made brief remarks to reporters after the hearing, saying he appreciates the "opportunity to begin presenting my side of the case."

"I certainly appreciate the judge taking the time that he took," Paxton told reporters. "Obviously he was well-prepared. I appreciate his efforts to examine the case."

Paxton's lawyers appeared encouraged by the hearing. Martens told reporters that Mazzant "clearly came prepared, asked a lot of good questions and at the end of the day, we think that, as the judge observed, this appears to be a case of the SEC trying to fit a square peg into a round hole." 

Bill Mateja, Paxton's lead attorney fighting the criminal charges, also expressed confidence. Asked whether Friday's hearing augured well for Paxton's chances in the state case, Mateja made clear there is a difference between state and federal proceedings. But he promised that the "same arguments that we made here today — you're going to be seeing those arguments in the state case as well." 

The stakes in the state case are arguably higher. If convicted, Paxton faces five to 99 years in prison, while the SEC is seeking from Paxton any "ill-gotten gains or unjust enrichment." 

See more of our coverage of Attorney General Ken Paxton's case:

  • Texas Attorney General Ken Paxton is appealing the securities fraud charges against him to the state's highest criminal court, in one last bid to dismiss the case before it goes to trial.
  • Embattled Texas Attorney General Ken Paxton's office assisted with a federal probe involving a major donor who gave the indicted Paxton a $100,000 gift last year to offset his growing legal bill.

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Courts Criminal justice Ken Paxton