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Texas Ranger files: Paxton case based on an assumption

By   /   December 20, 2016  /   News  /   No Comments

Part 12 of 17 in the series The Problematic Paxton Prosecution
Attorney General's Office

WHEN YOU ASSUME: The case against Texas Attorney General Ken Paxton is based on an “assumption” by a political enemy.

The criminal case against Attorney General Ken Paxton is based on an assumption, according to investigatory records of the Texas Rangers.

It’s an assumption that state Rep. Byron Cook (R–Corsicana) says he made about Paxton before investing $300,000 in a company called Servergy. Three of his friends say they made the same assumption, according to files obtained by Watchdog.org.

These four friends – Cook, Joel Hochberg, Bill Sandford, and Bob Griggs – have been investing together for decades. Cook and Sandford started going in on deals together 30 years ago; Hochberg joined them 20 years ago.

Those four had Cook’s attorney, Terry Jacobson, shop a complaint about Paxton to the Securities and Exchange Commission and the Travis County District Attorney’s office, among others, before Paxton had even taken office as attorney general.

The first complaint, in early 2014, had been “submitted by someone who was associated with a political opponent of Paxton who was seeking office in the 2014 Republican primary election,” according to the Rangers’ reports.

Paxton’s opponent that year was Rep. Dan Branch (R-Highland Park), who was, like Cook, a member of the state House leadership team that Paxton had challenged two years prior in a failed run for speaker.

As a matter of policy, the Travis County District Attorney refused to investigate the complaint during the primary, owing to its obvious political motivation.

The Cook complaint was dubious, too – an apparent civil dispute in which the supposed victim hadn’t even filed a lawsuit.

For more than a year, the complaints were tossed like a hot potato from one jurisdiction to another. The last toss was from Collin County District Attorney Greg Willis, an old friend of Paxton’s who couldn’t afford the perception that he was doing special favors.

Willis asked the Texas Rangers, a division of the Department of Public Safety, to investigate on April 14, 2015. In July, two well-paid special prosecutors and a judge who later recused himself got Paxton indicted on state criminal charges. The SEC jumped on the dogpile in April 2016 with a lawsuit against Paxton.

The Rangers’ first interview, on April 17, 2015, was with Jacobson, who said he was representing the four investors.

Although deception is a key element in any fraud case, none of the four claimed Paxton misled them – about getting Servergy stock, about putting his own money into the company, or anything else.

Rather, “Jacobson said the four investors assumed Paxton was also investing in Servergy based on past investments with Paxton,” Ranger Stacy McNeal wrote.

However, it was Cook who turned Hochberg, Sandford, and Griggs onto the Servergy opportunity, according to the records. It was Servergy CEO Bill Mapp who gave the presentation on the investment, not Paxton.

Sandford and Griggs, by their own admission, never even talked to Paxton about Servergy.

Their discussions about whether to invest were with Cook, who “was committed to investing in Servergy,” according to Sandford. Nobody claims that what Paxton was doing with his money even entered into the discussion.

For one thing, Cook is a wealthy and sophisticated investor with hundreds of distinct holdings valued at “$25,000 or more” on his Personal Financial Statement.

For another, Paxton had little history with the group.

“Paxton was not a part of the group,” the investigator noted after interviewing Sandford. “Paxton was someone Cook had introduced to the group as a prospect.”

Paxton had put some money into just three of the group’s deals, after they were underway, members said.

That didn’t stop them from joining Cook in the complaint.

Sandford and Griggs’ story is that they assumed Paxton was investing in Servergy, and this was so encouraging to them that they put their own money into the company, but if they had known that their assumption was wrong, they might not have invested.

Just having the wrong idea isn’t a crime, of course. The fraud in securities fraud law comes when somebody puts that wrong idea in your head with some sort of writing or talking.

An incorrect thought

So Sandford and Griggs were cut from the narrative before it was made public. The prosecutors would need somebody who had actually talked to Paxton about the investment.

Still, even with Cook and Hochberg, those special prosecutors are going to have earn the $1 million-plus they’re making by persuading a jury to embrace a novel theory of fraud: Paxton should go to prison not for anything untrue he said or implied, but for an incorrect thought by others about what he was doing with his own money, a pure assumption, which existed only in somebody else’s head.

The absurdity of requiring people to guess about what others are thinking is the big reason that a federal judge threw out the SEC’s case against Paxton in October. The commission’s lawyers hadn’t identified any actual law that Paxton might have broken, Judge Amos Mazzant ruled.

As SEC attorney Samantha Martin told the Rangers, “Paxton did not conduct any due diligence nor did he make any overt statements.”

In other words, he didn’t know enough about the company to offer any half-true descriptions of its prospects or technology, and Mazzant said the law is clear that a bit of rah-rah language in sales doesn’t amount to deception (i.e. “you said it was good but it turned out to be bad” does not equal a fraud case).

Yet that’s the linchpin of the state criminal case. “Hochberg recalled Paxton making statements such as (sic) Servergy was a good deal, don’t let it go, I suggest you don’t delay and you need to invest now,” the Ranger investigator wrote.

Did Paxton tell him he was investing?

“Hochberg said he believed Paxton was involved in the Servergy investment due to his knowledge of the company,” the investigator wrote.

Cook, who used to be Paxton’s friend when he was in the state legislature, says he also thought Paxton was investing, “based upon past business ventures with Paxton not on any direct statements made by Paxton,” according to the investigation.

Cook said he invested because he believed a larger tech company would buy the company within three to five years, but also said he wouldn’t have invested if he’d known Paxton was getting shares in Servergy.

The Rangers interviewed three other investors that Paxton introduced to Servergy, and two other potential investors who decided not to put up any money, and none of them accuses Paxton of misleading them or failing to clear up mistaken assumptions.

Their own due diligence

Paul Pogue, whom Paxton invited to invest, brought a computer guy and an accountant to hear Mapp’s presentation, and decided not to invest because he didn’t believe the product could do what Mapp claimed.

He was right, incidentally. Servergy’s lone product has turned out to be a very ordinary server.

Tim Curren, whose wife knew Paxton from college, decided he didn’t know enough to invest in the company.

Three other investors invited by Paxton put up money.

John Waghorne and Chris Cowman both said they thought investors had the responsibility of doing their own due diligence.

Waghorne, who attended a presentation at Servergy, didn’t discuss the company with Paxton. He told investigators he thought a finder’s fee would be “standard procedure,” but hadn’t given the matter any thought.

Cowman said he would invest again, and called the prosecution “politically motivated” and a “witch hunt.”

David Gorman, a friend of Waghorne’s, said he was “not satisfied” with the investment “but understood there were no guarantees.”

If he had known Paxton was getting compensation, he “would still have to determine if it was a good investment but probably would not have invested” but “he did not believe he was misled.”

A group thing

There is some unavoidable 20/20 hindsight involved in the assessment, as Servergy has turned out to be a money-losing dud, with a basic product and big problems with the SEC.

Out of the seven investors linked to Paxton, who put up a total of $840,000, only Cook and his friend Hochberg a) blame Paxton for Servergy and b) actually talked to Paxton about the company.

This explains the strange direction that the SEC case against Paxton took last week, when Paxton’s legal team all but accused the SEC of coaching Cook and Hochberg into changing their stories.

Mazzant tossed the SEC’s case in October, pointing out that the SEC hadn’t “allege[d] any express policy in Paxton’s investment club regarding disclosing compensation when promoting stocks.”

But he allowed the commission a short window to refile the case with any new evidence it had.

The SEC refiled the case, coming back with a new claim about an “express policy,” but no new witnesses to support that claim. And when you’ve got a new, just-so story, but the same old witnesses, it raises an obvious question.

Paxton attorney Matthew T. Martens wanted to know where the new story came from, demanding that the SEC produce its records of interviewing Cook and Hochberg.

The SEC refused, saying that “showing the direction that we steered [the witness] with our questions would give away our strategy.”

“One wonders why the SEC was steering the witnesses in any direction, rather than simply gathering the facts,” Martens wrote.

From the investigatory records, it becomes clear why the SEC doesn’t have any other witnesses it can turn to.

It’s got Cook and Hochberg, and a bunch of stuff they said, which a federal judge has determined does not demonstrate fraud.

The SEC’s new claim is that Cook and his friends had:

“established policy and expectation that members participating in an investment deal do so on what Investor 1 (Cook) calls an ‘equal dollar-for-dollar basis,’ in which everyone takes the same risk and receives the same benefit and that no one member makes money or otherwise benefits off of the investment of another member. Hence, there was an expectation that if one member of the group was going to benefit from a deal, he would disclose that benefit.”

Since this supposed policy doesn’t exist on any paper in the record, and the SEC has only listed two witnesses, Martens writes that “the only possible source for this supposed ‘established policy’ (other than ‘anticipated testimony’) is the non-privileged interviews of Messrs. Cook and Hochberg.”

Needless to say, nowhere in the reports of the Texas Rangers investigation do Cook or any of his friends say anything about group policies that Paxton is supposed to have violated. But now the SEC says “Paxton was expressly aware of” them, because Cook “expressly told Paxton that members participating in an investment deal take the same risk and receive the same benefit.”

Yet the SEC knows it’s untrue that the investors all took the same risk, matching dollar for dollar on investments. In this deal, Griggs put up $90,000, Sandford put up $100,000, Hochberg did $150,000, and Cook put in $300,000. Paxton, of course, didn’t participate in the investment.

‘No formal group’

It’s not just the Rangers’ records that are casting doubt on the new story. Cook’s lawyer is, too.

After a Paxton supporter named Charles Loper III sued Cook and Hochberg last month, alleging securities fraud over an oil rights deal that also involved Paxton, Martens subpoenaed some of Cook’s financial records involving the investment group.

Terry Jacobson, the same Cook lawyer who first complained to the Texas Rangers and the Travis County District Attorney about Paxton, sent Martens an email Dec. 2 explaining that it would be hard to identify all of the group’s investments, as there “was no formal group that existed.”

“Instead, there was an ad hoc arrangement where, from time to time, good friends might invest in the same transaction—or were at least offered the opportunity to invest in the same transaction. The persons who invested differed from transaction to transaction, and the length of time they had invested all differed from person to person. Mr. Hochberg and Mr. Cook go back 25 or so years. Other people were involved at different times. General Paxton’s involvement was more recent. At various times, people who participated in a transaction or transactions might include Mr. Cook, Mr. Hochberg, Mr. Griggs, Mr. Sandford, General Paxton and perhaps a host of other people. It differed from transaction to transaction.”

That all squares with what they told the Rangers, but it contradicts the SEC’s new line of attack.

Cook intends to avoid answering questions under oath until after Paxton’s trial this spring is over. His attorneys have filed for a legislative continuance, a perk lawmakers enjoy that allows them to automatically block all action on litigation they’re involved in for six months or more when the Legislature is in session.

Contact Jon Cassidy at [email protected] or @jpcassidy000.

Part of 17 in the series The Problematic Paxton Prosecution

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Jon Cassidy was a former Houston-based reporter for Watchdog.org.