That which has been seen cannot be unseen. That phrase is usually used when talking about porn or a murder scene. I have an image in my head I cannot remove. It involves AG Ken Paxton. But first we must learn a new word for many of us. The word is “disgorge.” The word means to vomit, spew out, expel, spit … you get the image. In the legal world it also means to yield, to surrender. I’m thinking about the pie-eating contest in Stephen King’s Stand By Me!
How does this relate to AG Paxton? Let’s explore the latest SEC charge that includes 111 points. It lays out the events of some bad actors and how they were intertwined. Bill Mapp is one of them, and is pretty much described as a snake oil salesman. Mapp is the head guy at Servergy, a company that received $150,000 in rent subsidy from the McKinney EDC, and for which the City got nothing in return. If you were to go to the Servergy offices, which I did, and turn too quickly, you walk directly into the MEDC/MCDC offices next door.
But this story starts in 2011 with a meeting between Bill Mapp and Ken Paxton in the then- state representative’s McKinney law office. Why would a snake oil salesman even approach Paxton to help find investors’ money for a tech company? My guess is it would have to be due to Mr. Paxton’s reputation for being in the investor promotion business. Perhaps it was also due to an “investment club” of which Paxton was a member. An offer is made to Paxton to promote the company and to raise money. Paxton likes the opportunity and says “I will get to work.”
The work involves Paxton organizing and inviting seven prospective investors to Servergy’s offices for an investment pitch. Paxton was there and also introduced Mapp to five additional prospects by telephone or email that same day. So, now we have twelve recruits. Among the people Paxton recruited were his friends, business associates, law firm clients and members of an investment group to which Paxton belonged. None were told that Paxton was doing this for a commission.
Paxton is a lawyer, the profession that invented the words and concept of “due diligence.” Prospective investors were told by Paxton that he had met with Servergy’s management and determined that it was a great company. However, he apparently didn’t inquire too deeply to even see their manufacturing plant or if it even existed. He didn’t ask anybody he knew about the “advanced” servers being of 32-bit technology instead of the 64-bit standard the industry had already moved to.
Another state representative (Investor 1) was apparently part of the investment group. The way the investment group worked, the members trusted each other to consider the interests of the group as a whole and not exploit one another for personal benefit. Also, if a member recommended an investment, it was understood that the person carried the responsibility to monitor the investment going forward. As time passed, Servergy’s claims were not coming to fruition, and Investor 1 grew worried about his investment.
So Paxton gets Investor 1 an audience with Bill Mapp. So the snake oil salesman becomes a snake charmer. The SEC documents actually say Mapp “lulled” Investor 1 with false claims Servergy was flush with with purchase orders. The cobra head is swaying, and the eyes are getting very sleepy. You would think that at this point Paxton would have heeded the red flag and started asking his own questions. He didn’t. Also, Investor 1 had no clue that Paxton was getting paid to promote the company and raise money.
Investor 2 was another investor of Paxton’s investment group. In this case, Paxton used pressure tactics to persuade Investor 2 to make a hasty decision to invest in Servergy. Investor 2 was not intending to invest in Servergy and had a travel related conflict that prevented him from making the investment decision deadline.
Now get this: Paxton without any technical or market knowledge calls Investor 2 late in the night persuading the person to change his mind, hyping the opportunity, and claiming the great opportunity was going to double in price if he did not decide in 8 days. So Investor 2, not knowing that Paxton was earning a commission, forks over $150,000!
Paxton kept on soliciting investors. He forwarded Mapp’s promotional materials, including claims from Mapp that Servergy’s technology was third-party tested and validated by a world class testing lab and that there was an 80% savings in power, cooling and space costs. Paxton did nothing to determine if Mapp’s claims were true.
How much money did Paxton raise? By the deadline, five of the twelve prospective investors became real investors. The kind that write checks for $840,000. For Paxton’s successful efforts, Servergy issued a stock certificate for 100,000 shares of stock. For the 2011 tax year, Servergy issued a 1099 to Paxton for $100,000.
Did Paxton ever put any of his own money into Servergy. Hold on, that’s another gem in the story. Mapp and Paxton meet at the “City Club” of McKinney where all big deals are brokered: the Dairy Queen. According to Paxton, he went to the meeting intending to invest $100,000 of his own money into Servergy. But the SEC documents record that Mapp refused Paxton’s money. Then comes a classic line, one that Hollywood might write: “I can’t take your money. God doesn’t want me to take your money.”
Brings a tear to your eye, doesn’t it?
But wait a minute. There were five investors that coughed up the $840,000. Only two apparently came forward to claim damages. Who are the other three members of the investment group? Why would anybody put up that kind of money, learn it was all a sham, and then not go for Paxton’s jugular? These must be really good friends of Paxton’s. With plenty of money. Enough that $150,000 is chump change. Or maybe they have been in or are now in other deals with Paxton.
Who is Investor 3, Investor 4 and Investor 5? That has got to be a better story than the one in this blog. The first two have actually been named in other news stories. I think the other three are in hiding and praying their fraternity doesn’t get into the public spotlight. This is penny-ante poker for the McKinney Underground doing real estate deals.
Okay, after 111 points were made, the SEC gets to the relief they are seeking. This is where we need to glove up and bring in the hazardous material clothing. Maybe a fire truck to help with the wash down.
The SEC is ordering Mapp and Paxton to disgorge any ill-gotten gains or unjust enrichment realized resulting from the conducted alleged in the Complaint.
It will be an epic scene. LFM