IN THE UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF TEXAS

SHERMAN DIVISION
:
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

:
:
:
Civ. Action No. 4:16-cv-00246

WILLIAM E. MAPP, III,

WARREN K. PAXTON, JR.,
CALEB J. WHITE, and
SERVERGY, INC.

:
ORAL ARGUMENT REQUESTED
:
Respondents.

:
:

DEFENDANT WARREN K. PAXTON, JR.S MOTION TO DISMISS

UNDER FEDERAL RULES OF CIVIL PROCEDURE 12(b)(6) AND 9(b)
AND MEMORANDUM OF LAW IN SUPPORT THEREOF
_________________________________________________

William B. Mateja
Texas Bar No. 13185350
Polsinelli PC
2950 N. Harwood
Suite 2100
Dallas, TX 75201
Tel: (214) 754-5751
Fax: (214) 397-0033
Mateja@polsinelli.com
J. Mitchell Little
Texas Bar No. 24043788
Scheef & Stone, LLP
2600 Network Blvd., Ste. 400
Frisco, TX 75034
Tel: (214) 472-2140
Fax: (214) 472-2150
Mitch.Little@solidcounsel.com

Matthew T. Martens*
(Lead Counsel)
Jaclyn N. Moyer*
Kevin Gallagher*
Wilmer Cutler Pickering Hale and Dorr LLP
1875 Pennsylvania Avenue NW
Washington, DC 20006
Tel: (202) 663-6000
Fax: (202) 663-6363
Matthew.Martens@wilmerhale.com

*Pro hac vice applications pending

MOTION TO DISMISS
Warren K. Paxton, Jr. moves to dismiss the Complaint against him pursuant to Federal
Rules of Civil Procedure 12(b)(6) and 9(b). The U.S. Securities and Exchange Commission
(SEC or Commission) alleges that Mr. Paxton engaged in fraud, in violation of Section 10(b)
of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 thereunder, and
Section 17(a) of the Securities Act of 1933 (Securities Act); touted securities in return for
undisclosed compensation from the issuer, in violation of Section 17(b) of the Securities Act;
and acted as a securities broker without registering with the Commission, in violation of Section
15(a) of the Exchange Act. Because the Complaint does not allege facts sufficient to support any
of the claims against Mr. Paxton, it must be dismissed with prejudice.
STATEMENT OF THE ISSUES PRESENTED
1.

Whether the SEC has pled its fraud claims with the particularity required by Federal Rule

of Civil Procedure 9(b).

2.

Whether the SEC has pled a duty to disclose on the part of Mr. Paxton, as required to

state a fraudulent omission claim under Section 10(b) of the Exchange Act and Section 17(a) of
the Securities Act.
3.

Whether the SEC has alleged a transfer of money or property from an investor to Mr.

Paxton, as required to state a claim under Section 17(a)(2) of the Securities Act.
4.

Whether the SEC has alleged the receipt of compensation in return for circulating a

communication covered by Section 17(b) of the Securities Act.

5.

Whether the SEC has alleged any facts suggesting that Mr. Paxton was in the business of

effecting securities transactions for the account of others so as to be a broker required to

register with the Commission under Section 15(a) of the Securities Exchange Act.

INTRODUCTION
Mr. Paxton, the sitting Attorney General for the State of Texas, has been sued by the SEC
for securities fraud in a complaint that does not allege that he made a single false or misleading
statement. Because the SEC has not alleged and cannot allege that Mr. Paxton made any false
statements, the SECs fraud claims necessarily must be premised on an allegation that Mr.
Paxton failed to disclose material information in circumstances in which he had a duty to
disclose. The Commission appears to be taking the position that when Mr. Paxton introduced
several acquaintances to an investment opportunity in a technology company known as Servergy,
Inc., he had two duties: first, to disclose that he had not performed some sort of an investigation
of the companys operations before talking to his personal acquaintances about the company;
and, second, to disclose that the companys founder had offered to compensate him for
introductions that resulted in investments.
These are novel theories that would ascribe to Mr. Paxton duties and obligations that do
not apply even to registered securities professionals, much less to individual investors like him.
The anti-fraud provisions of the federal securities laws do not create an affirmative duty to
disclose any and all material information. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27,
44 (2011) (emphasis added). And the courts have squarely rejected the notion that there is any
duty to disclose either type of information on which the Commission rests its case here. First, a
fraudulent omission case cannot be premised on a promoters failure to conduct due diligence
concerning the claims made by the company recommended to investors. See SEC v. Tambone,
597 F.3d 436, 448 (1st Cir. 2010) (en banc) ([W]e reject the SECs notion that a breach of a
duty to investigate, without more, is a breach of a duty to disclose (and, thus, should be treated as
a primary violation under Rule 10b-5(b)).). This is so for good reason. If accepted, the SECs
theory would impose a duty of due diligence upon anyone passing along an investment
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recommendation. Such a theory has no limits, potentially sweeping in stock recommendations

by magazines, television programs, friends, fellow church members, relatives, golf partners, or
even the family doctor. Second, the receipt of compensation for promoting a security, even by a
professional stock broker, does not give rise to a duty to disclose that compensation. See, e.g.,
United States v. Skelly, 442 F.3d 94, 97 (2d Cir. 2006) (Because a registered representative is
under no inherent duty to reveal his compensation, otherwise truthful statements made by him
about the merits of a particular investment are not transformed into misleading half-truths
simply by the brokers failure to reveal that he is receiving added compensation for promoting a
particular investment. (emphasis added)).
The Commission has also sued Mr. Paxton under Section 17(b) of the Securities Act,
which requires disclosure of compensation actually received in return for publishing, publicizing,
or circulating a written or recorded communication describing a security. The SECs Complaint
identifies only one written communication by Mr. Paxtona July 23, 2011 email to a potential
investor that Mr. Paxton merely forwarded at the request of Servergys founder. Complaint 85.
Even were the transmission of a single email a publication within the scope of Section 17(b)
and it is notthere is no allegation that Mr. Paxton was ever compensated for transmitting that
email. Thus, Section 17(b), by its terms, does not apply here.
Finally, the SECs claims that Mr. Paxton should have registered with the Commission
on the theory that his introduction of several acquaintances (all of whom were experienced
accredited investors) to Servergy over a three-week period almost five years ago somehow
rendered him a professional securities broker. This claim is nonsense. The broker registration
requirements apply only to those who are in the business of effecting transactions in securities
for the account of others. 15 U.S.C. 78c(a)(4). The SECs allegations do not remotely

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support the notion that Mr. Paxton effected securities transactions for other peoples accounts,
much less that he was in the business of doing so.
In short, the SECs claims against Mr. Paxton are a dramatic overreach and lack any basis
in law. The SECs claims are all the more misguided given that there is no allegation that any
Servergy investors lost any money, and the Complaint alleges that, if anything, Mr. Paxton
himself was deceived by Servergys founder. Complaint 36, 43. Mr. Paxton should not be
left to labor under a cloud of suspicion while enduring years of costly discovery to refute claims
that are meritless on their face. His motion to dismiss should be granted.
BACKGROUND1
I.

Mr. Mapp and Servergy, Inc.

Servergy is, even today, an operational company that generates revenue through the sale

of secure, cloud-based computer data storage services. Complaint 5. The SECs Complaint
focuses on the actions of Mr. Mapp in soliciting investors in Servergy when its business had a
different focuson computer hardware. The Complaint alleges that Mr. Mapp misrepresented
to Mr. Paxton and to others both the capabilities of the companys hardware product as well as
the interest of potential customers in that technology. Id. 2-3.
Mr. Mapp and Servergy allegedly made these misrepresentations in part through WFG
Investments, Inc. (WFG), a broker-dealer registered with the Commission and that was
engaged by Servergy to assist in the offering of the companys securities. Id. 19-22, 29, 54.
WFG distributed to potential investors various written and recorded materials concerning
Servergy that contained false statements. Id. 20-21. WFG personnel also are alleged to have
made affirmative false statements to investors while promoting Servergys stock. Id. 29. It is

For purposes of this motion, we are required to accept as true any of the Commissions
well-pleaded allegations. See Bass v. Stryker Corp., 669 F.3d 501, 506 (5th Cir. 2012).
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unclear whether WFG, a professional and registered broker-dealer firm, conducted any
investigation into the claims being made by Servergy in the materials WFG distributed to its
investors or whether WFG disclosed the amount it was being compensated to promote
Servergys stock.
II.

Mr. Paxtons Introductions

Unlike WFG, Mr. Paxton is not a professional broker. Prior to serving as Attorney

General, Mr. Paxton was a Texas state representative and senator and an attorney practicing
primarily in the areas of trusts and estates and advising small businesses. Complaint 7. During
the time period covered by the Complaint, Mr. Paxton was not registered with the SEC as a
securities broker. Id. 95.
Mr. Paxton allegedly met Mr. Mapp for the first time on July 12, 2011, to discuss
Servergy. Id. 75. During that meeting, at Mr. Paxtons private law office, Mr. Mapp allegedly
offered Mr. Paxton a 10% commission on investments in Servergy by investors introduced to
the company by Mr. Paxton. Id. Mr. Mapp followed up after the meeting with an email
reiterating his offer, and Mr. Paxton responded that he would get to work. Id. 76.
The Complaint alleges that, over the course of the less than three weeks that followed,
Mr. Paxton introduced a dozen potential investors to Mr. Mapp and Servergy, five of whom
invested a total of $840,000 in the company. Id. 7, 77, 86. According to the Complaint, Mr.
Paxton was compensated with 100,000 shares of Servergy common stock for making these
introductions. Id. 7, 86, 88. The Complaint nowhere alleges that Mr. Paxton made any false
or misleading statements. Instead, the Complaint alleges that he failed to disclose to potential
investors that he had not conducted any due diligence on Servergys technology and business
prospects and that he was offered compensation to introduce investors to Servergy. Id. 78,

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79. Of the five investors allegedly introduced to Servergy by Mr. Paxton, the Complaint is
devoid of any allegations of Mr. Paxtons interactions with them, with the exception of two.
Investor 1. Investor 1 was an accredited investor and fellow state representative. Id.
80. Mr. Paxton allegedly promoted Servergy to Investor 1 on July 13, 2011, introduc[ed]
Mr. Mapp to Investor 1 on July 22, 2011, and thereafter encourage[d] Investor 1 to invest in
Servergy. Id. 80, 82. There is no allegation that Mr. Paxton made any false statement to
Investor 1. See id. Indeed, the Complaint provides no detail at all about what Mr. Paxton said
regarding Servergy, about how he promoted Servergy to Investor 1, or about how he
encourage[d] Investor 1 to invest. See id. The Complaint alleges only that Mr. Paxton did not
disclose to Investor 1 Mr. Mapps offer of compensation for successful introductions to Investor
1. Id. 81, 82. While the Complaint also implies that Investor 1 thereafter invested in
Servergy in some form, it does not specify that the investment was in Servergy securities. Id.
82. Roughly a year and a half later, when Investor 1 became nervous about that investment,
Mr. Paxton allegedly arranged and attended a meeting at which Mr. Mapp made statements
that, according to the Complaint, Mr. Paxton was unaware were untrue. Id.
Investor 2. Investor 2 invest[ed] $150,000 with Servergy. Id. 83. The Complaint
offers no explanation for how or when Investor 2 became aware of Servergy. Id. It alleges that
Mr. Paxton later persuaded that person to invest in Servergy during a telephone call on July 22,
2011, but does not allege that Mr. Paxton said anything untruthful or misleading during that call,
or otherwise. See id. Instead, the Complaint alleges only that Mr. Paxton did not disclose Mr.
Mapps offer of compensation. Id.
Apart from Investor 1 and Investor 2, there are no other allegations in the Complaint
concerning actions on the part of Mr. Paxton that led to anyone investing in Servergy. While the

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Complaint alleges that, on July 23, 2011, Mr. Paxton forwarded to a prospective investor an
email sent by Mr. Mapp, there is no allegation that the recipient of this email ever invested in
Servergy. Id. 85.2 According to the SECs Complaint, the email from Mr. Mapp included
several misrepresentations, but the SEC does not allege that Mr. Paxton was aware of any of
them. Id. And there is no allegation that Mr. Paxton was offered or received any compensation
for forwarding this email. See id.
According to the Complaint, on August 5, 2011 Servergy issued a stock certificate to
Mr. Paxton for 100,000 shares.3 Id. 86. Thereafter, the Complaint alleges, Mr. Paxton was
offered, but did not receive, an additional commission for recruiting more investors. Id. 93.
According to the Complaint, Mr. Paxton marketed the company to three additional prospective
investors, none of whom are alleged to have invested. Id. 94.
ARGUMENT
I.

The Federal Rules of Civil Procedure Compel the Court to Act as a Gatekeeper and
to Screen Out Unmeritorious Claims at the Pleading Stage
To survive a motion to dismiss, a complaint must contain sufficient factual matter,

accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). In
deciding a Rule 12(b)(6) motion, factual allegations must be enough to raise a right to relief
above the speculative level. Braswell v. Waters, No. 4:14cv50, 2015 WL 136677, at *1 (E.D.

A copy of that email is attached as Exhibit A to the Declaration of Matthew T. Martens in

Support of the Mr. Paxtons Motion to Dismiss. On a Rule 12(b)(6) motion, a district court . . .
may also consider documents attached to either a motion to dismiss or an opposition to that
motion when the documents are referred to in the pleadings and are central to a plaintiffs
claims. Brand Coupon Network, LLC v. Catalina Mktg. Corp., 748 F.3d 631, 635 (5th Cir.
2014) (internal quotation marks omitted).
3

The SEC nowhere attempts to explain why Mr. Paxton received this amount of shares
when that amount bears no mathematical relation to the dollar amount the investors Mr. Paxton
allegedly introduced invested in Servergy.
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Tex. Jan. 7, 2015) (Mazzant, J.) (internal quotation marks omitted). Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do not suffice. Iqbal,
556 U.S. at 678. Nor does a complaint suffice if it tenders naked assertion[s] devoid of
further factual enhancement.

Id. (quoting Twombly, 550 U.S. at 557).

[W]hen the

allegations in a complaint . . . [can]not raise a claim of entitlement to relief, this basic deficiency
should . . . be exposed at the point of minimum expenditure of time and money by the parties and
the court. Twombly, 550 U.S. at 558 (internal quotation marks omitted).
II.

The SECs Fraud Claims Are Unsupported and Legally Insufficient

The SEC has brought two separate securities fraud claims against Mr. Paxton. First, the

SEC alleges that Mr. Paxton violated Section 17(a) of the Securities Act. Complaint 98.
Second, the SEC alleges that Mr. Paxton violated Section 10(b) of the Exchange Act and Rule
10b-5 thereunder. Id. 101. Both claims fail as a matter of law and should be dismissed.
To establish a prima facie case under Section 10(b) and Rule 10b-5 in an SEC
enforcement action, the Commission must prove that the defendant (1) made a material
representation or omission, or used some other fraudulent device; (2) in connection with the
offer, sale, or purchase of a security; and (3) acted with scienter.4 SEC v. Arcturus Corp., __ F.
Supp. 3d __, 2016 WL 1109255, at *14 (N.D. Tex. Mar. 21, 2016). Scienter is defined as a
mental state embracing intent to deceive, manipulate, or defraud. SEC v. Gann, 565 F.3d 932,
936 (5th Cir. 2009) (internal quotation marks omitted).
To establish a prima facie case under Section 17(a), the SEC must essentially prove the
same elements as for Section 10 and Rule 10b-5 violations, except scienter is not an element
under Section 17(a)(2) or 17(a)(3). Arcturus Corp., 2016 WL 1109255, at *14; see also SEC v.
4

In addition, the SEC must prove that the fraud was accomplished by means of interstate
commerce or the mails. See SEC v. Evolution Capital Advisors, LLC, 866 F. Supp. 2d 661, 667
(S.D. Tex. 2011).
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Evolution Capital, 866 F. Supp. 2d 661, 667 (S.D. Tex. 2011) (same). To prove that a defendant
violated Section 17(a)(2) or Section 17(a)(3), the Commission must show that the defendant
acted with negligence. Id. This means that the SEC must allege a legally-cognizable duty that
the defendant breached. See Decks Appeal v. GTE Directories Sales Corp., 81 F.3d 154, at *3
(5th Cir. 1996) (table) (no viable cause for negligence when a party fails to allege any
cognizable duty that could support a negligence claim); SEC v. Blackburn, __ F. Supp. 3d __,
2015 WL 9459976, at *10 (E.D. La. Dec. 28, 2015).
A.

The SEC Has Failed To Plead Fraud With Particularity

The linchpin of federal securities fraud claims is, naturally, fraud. Federal Rule of Civil
Procedure 9(b) . . . requires the plaintiffs in securities fraud causes to plead with particularity the
circumstances constituting the alleged fraud. Southland Sec. Corp. v. INSpire Ins. Solutions,
Inc., 365 F.3d 353, 362 (5th Cir. 2004); SEC v. Kornman, 391 F. Supp. 2d 477, 484-85 (N.D.
Tex. 2005) (applying Rule 9(b) to an SEC complaint). This Rule applies to claims under Section
10(b) and Rule 10b-5. See Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir. 2002) (A
10b-5 claim is subject to . . . Federal Rule of Civil Procedure 9(b)s requirement that fraud be
pled with particularity.). Rule 9(b) also applies to fraud claims brought under Section 17(a).
See SEC v. Shapiro, No. 4:05cv364, 2007 WL 788335, at *7 (E.D. Tex. Mar. 14, 2007)
(applying Rule 9(b) to a Section 17(a) claim). Both of the SECs fraud claimsand any theories
within those claimsare thus subject to the heightened pleading requirements of Rule 9(b).
These requirements apply with special force in this case, since the Commission is
premising its fraud claims on an omission theory. See In re Lions Gate Entmt Sec. Litig., __ F.
Supp. 3d __, 2016 WL 297722, at *17 (S.D.N.Y. Jan. 22, 2016). A defendant should not be
required to incur litigation expenses every time an aggrieved investor claims that an accurate

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statement was rendered misleading based on the absence of additional information. In re

GeoPharma, Inc. Sec. Litig., 411 F. Supp. 2d 434, 437 (S.D.N.Y. 2006).
In order [t]o satisfy Rule 9(b)s pleading requirements, the plaintiffs must specify the
statements contended to be fraudulent, identify the speaker, state when and where the statements
were made, and explain why the statements were fraudulent. Southland Sec., 365 F.3d at 362
(internal quotation marks omitted). Put simply, Rule 9(b) requires the complaint to set forth the
who, what, when, where, and how of the events at issue. Dorsey v. Portfolio Equities, Inc., 540
F.3d 333, 339 (5th Cir. 2008) (internal quotation marks omitted).
The SECs Complaint cannot meet this standard, as it is lacking in the particulars
required to plead fraud. The Complaint fails to identify a single false or misleading statement
made by Mr. Paxton. While the Complaint alleges that Mr. Paxton recruited his friends,
business associates, law firm clients, and members of an investment group to which he
belonged to invest in Servergy, Complaint 78, it does not specify when, where, or how he
recruited them, nor does it explain how such recruitment was fraudulent. Mr. Paxton is alleged
to have told prospective investors that he had met with Servergys management and determined
that it was a great company and the investment presented an interesting opportunity, id. 79,
but the Complaint does not specify when, where or how he conveyed this information to
prospective investorsmuch less claim that any part of this statement was false.5 Mr. Paxton
allegedly personally followed up with the people he introduced to Servergy to ensure they
invested, id. 84, but the Complaint does not specify when, where, or how he followed up, nor
does it shed any light on how following up is fraudulent. Finally, the Complaint alleges that
Mr. Paxton continued to market Servergy in both oral and written communications to
What is more, the statement that Servergy was a great company, Complaint 79, is
non-actionable puffery, Millcreek Assocs. L.P. v. Bear Stearns & Co., 205 F. Supp. 2d 664, 670,
682 (W.D. Tex. 2002).
5

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prospective investors until at least September 27, 2011, including inviting at least three
additional investors to attend a Servergy sales webinar and scheduling a lunch with at least one
prospective investor for the express purpose of generating interest in Servergy, id. 94, but,
again, it does not specify when, where, or with whom the webinar or the lunch took place or
allege that any statements Mr. Paxton made at these events were false. These allegations all fall
woefully short of the level of particularity needed to plead fraud. Indeed, they plead no fraud at
all.
In paragraph 79 of the Complaint, the SEC alleges that Mr. Paxton forwarded
correspondence advancing materially false claims regarding the nature of Servergys
technology and business prospects, but even here the who, what, when, where, and how of the
events at issue are all lacking. The Complaint fails to specify when or to whom he forwarded
this correspondence or identify what particular statements within them were false.

Most

importantly, the Complaint does not allege that Mr. Paxton knewas a fraud claim requires
that any statement in the correspondence that he forwarded was false. See id. 79. This absence
of any allegation of scienter on the part of Mr. Paxton requires dismissal of the fraud claims
against him. See Dawes v. Imperial Sugar Co., 975 F. Supp. 2d 666, 700 (S.D. Tex. 2013)
(dismissing securities fraud claim for failure to allege scienter).6
Even with regard to those interactions between Mr. Paxton and the two investors
(Investors 1 and 2) whom the SEC at least has made some passing attempt at describing, the
Complaint falls well short of Rule 9(b)s pleading requirements for specificity. With respect to
Investor 1, the Complaint alleges that, on or around July 13, 2011, Mr. Paxton promoted
6

To the extent that the SECs Section 17(a)(2) and 17(a)(3) claims are instead premised on
a negligence theory, the SEC has failed to allege a legal duty to conduct due diligence on Mr.
Mapps statements contained in a forwarded email, nor did Mr. Paxton have such a duty. See
infra Part II.B.1.
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Servergy to a fellow state representative who participated in the investment group with Paxton
and others (Investor 1), recommend[ed] Servergy to Investor 1 and introduce[ed] him to
Mapp on July 22, 2011, and then followed up with Investor 1 to further encourage his
investment in Servergy. Complaint 80, 82. While these allegations put forth a when,
how, and to whom, they still are missing the crucial element of a fraudulent statement claim:
the false statement itself. The terms promoted, recommended, and followed up suggest
conversations took place, but they are devoid of any specificity and certainly do not, without
more, connote any falsity.7
The allegations concerning Investor 2 are similarly deficient. The Complaint alleges that
Mr. Paxton placed an unscheduled and unsolicited late night call to Investor 2 on July 22, 2011
in which he persuaded Investor 2 to change his mind by claiming Servergy presented a great
investment opportunity for which the offering price would double if Investor 2 did not invest by
July 30, 2011. Complaint 83. For the first time, the Complaint alleges an actual statement
great investmentmade by Mr. Paxton in connection with a when, where, how, and to
whom. But calling something a great investment is mere puffery. See Carlucci v. Han, 886
F. Supp. 2d 497, 524 (E.D. Va. 2012) (calling something a great investment is nonactionable puffery and the sort of opinion and exaggeration that is immaterial as a matter of
law); Marini v. Adamo, 995 F. Supp. 2d 155, 190 n.23 (E.D.N.Y. 2014) (calling a hotel a great

To the extent the SECs theory is that Mr. Paxton failed to perform due diligence on false
statements made by Mr. Mappwhich is a legally flawed theory in any event, see infra Part
II.B.1there is no mention of false statements to Investor 1 by Mr. Mapp before the investment
by Investor 1, and false statements by Mr. Mapp after the investment cannot have been made in
connection with the purchase or sale of securities. See Arst v. Stifel, Nicolaus & Co., Inc., 86
F.3d 973, 977 (10th Cir. 1996) (holding that an allegedly deceptive practice [that] occurred
after the sale could not have had an impact on [Plaintiffs] decision to sell his shares and thus
was not in connection with the purchase or sale of a security [under] 10(b)); Town North
Bank, N.A. v. Shay Fin. Servs., Inc., No. 3:11-CV-3125-L, 2014 WL 4851558, at *25 (N.D. Tex.
Sept. 30, 2014) (dismissing securities fraud claim based on post-sale misstatements or
omissions).
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investment which would make quick money is mere puffery (internal quotation marks
omitted)). Puffery is not actionable in a securities fraud action, as such statements are deemed
immaterial as a matter of law. See Southland, 365 F.3d at 372 (defining puffery as statements
of the vague and optimistic type that cannot support a securities fraud action . . . and contain no
concrete factual or material misrepresentation); In re Fleming Cos. Inc. Sec. & Derivative Litig.,
No. MDL-1530, 2004 WL 5278716, at *9 (E.D. Tex. June 16, 2004) (Vague, loose optimistic
allegations that amount to little more than corporate cheerleading are puffery . . . and are not
actionable under federal securities law).8
Apart from the insufficient allegations concerning the interactions with Investors 1 and 2,
the SEC alleges that, on or about July 23, 2011, Mr. Paxton forwarded one of Mapps
solicitation emails directly to a prospective investor and personally offered to answer any of the
individuals questions. Complaint 85. But there is no allegation that Paxton made any factual
representations in forwarding this email to the recipient. And to the extent the SEC is relying on
the alleged falsity of the underlying email from Mr. Mapp as a false statement made by Mr.
Paxton, see id. (In the underlying communication Paxton forwarded, Mapp pressured the
prospective investor to purchase Servergy common stock within a week and falsely claimed
Servergys technology was 3rd party validated by world class testing lab and resulted in 80%
savings for power, cooling and space costs.), there is no allegation that Mr. Paxton knew that
anything Mr. Mapp said in the underlying email was false, if it indeed was. In fact, the
Complaint admits that Mr. Paxton did not know of any falsity. See id. Absent an allegation of

It is unclear if the SEC also is alleging that Mr. Paxtons representation to Investor 1 that
the offering price would double if Investor 2 did not invest by July 30, 2011, Complaint 83,
was a false statement. Importantly, the Commission fails to allege that the offering price would
not have doubled if Investor 2 did not invest by July 30, 2011, and the burden is on the SEC,
both to specify the statements contended to be fraudulent and explain why the statements
were fraudulent. Southland Sec., 365 F.3d at 362.
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scienter on the part of the Mr. Paxton, the SECs securities fraud claims against him cannot
stand. See Dawes, 975 F. Supp. at 700.9
B.

The SECs Theories Of Fraud By Omission Are Legally Flawed

The Commission appears to be premising its fraud by omission case against Mr. Paxton
on two allegations: (i) that he did not disclose to investors that he had not conducted any due
diligence on Mr. Mapps claims concerning Servergy; and (ii) that he did not disclose to
investors that he had been offered compensation for making introductions to the company. As a
general rule, federal securities fraud claims cannot be based on a failure to disclose even material
information. The Supreme Court repeatedly has explained that the anti-fraud provisions of the
federal securities laws do not create an affirmative duty to disclose any and all material
information. Matrixx Initiatives, 563 U.S. at 44. Accordingly, a defendant does not commit
securities fraud merely by failing to disclose all nonpublic information in [his] possession. Ind.
Elec. Workers Pension Trust Funds IBEW v. Shaw Grp., Inc., 537 F.3d 527, 541 (5th Cir. 2008)
(internal quotation marks omitted). Stated another way, [w]hen an allegation of fraud is based
upon nondisclosure, there can be no fraud absent a duty to speak. Cent. Bank of Denver, N.A. v.
First Interstate Bank of Denver, N.A., 511 U.S. 164, 174 (1994) (internal quotation marks
omitted); see also Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988) (Silence, absent a duty
to disclose, is not misleading under Rule 10b-5.); Regents of the Univ. of Cal. v. Credit Suisse
First Bos. (USA) Inc., 482 F.3d 372, 384 (5th Cir. 2007) ([D]eception within the meaning of
10(b) requires that a defendant fail to satisfy a duty to disclose material information.);
McNamara v. Bre-X Minerals Ltd., 57 F. Supp. 2d 396, 416 (E.D. Tex. 1999) (Silence is
actionable under the federal securities laws only if the defendant had a duty to speak.).

See supra n.7.

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A duty to speak sufficient to support a fraudulent omissions claim under either Section
17(a) or Section 10(b) and Rule 10b-5 arises only in certain limited circumstances:

A half-truth. A defendant has a duty to speak completely when he has made a

statement that would be misleading by omission (i.e., a half-truth). See 15 U.S.C.
77q(a)(2) (unlawful to obtain money by means of any omission to state a material fact
necessary in order to make the statements made, in light of the circumstances under
which they were made, not misleading); 17 C.F.R. 240.10b-5(b) (unlawful to omit to
state a material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading); Stratte-McClure v.
Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015) (duty to speak when the defendant has
made a statement that would otherwise be inaccurate, incomplete, or misleading).

A statutory or regulatory obligation. A defendant has a duty to speak when there is a

statute or regulation requiring disclosure. Stratte-McClure, 776 F.3d at 101; Benzon v.
Morgan Stanley Distribs., Inc., 420 F.3d 598, 612 (6th Cir. 2005) (same); Oran v.
Stafford, 226 F.3d 275, 285 (3d Cir. 2000) (Alito, J.) (same).

A fiduciary relationship. Some, but not all, courts have held that a duty to speak may
arise from a fiduciary relationship. See In re Enron Corp. Sec., Derivative & ERISA
Litig., 610 F. Supp. 3d 600, 648 (S.D. Tex. 2009).10

None of these narrow circumstances are implicated by either of the Commissions fraudulent
omission theories.
1.

The Complaint Does Not Allege that Mr. Paxton Had Any Duty to
Conduct Due Diligence or to Make Any Disclosures Concerning Due
Diligence

While the SECs Complaint repeatedly alleges that Mr. Paxton failed to conduct due
diligence on Servergys claims regarding its technology and business prospects, see Complaint
79, 82, 85, it nowhere alleges that Mr. Paxton had any duty to do so, much less that he had a
duty to disclose that he had not done so. Even if the SEC had alleged such a duty, however, the
10

The appellate courts are divided on whether this circumstance can form the basis for a
fraudulent omissions claim. Compare United States v. Schiff, 602 F.3d 152, 162-63 (3d Cir.
2010) (rejecting argument that omissions theory of fraud can be premised on a fiduciary duty to
disclose, holding that [t]his argument reaches too far, is not supported by the language of
10(b) and Rule 10b-5, and the legal support for [the] fiduciary duty theory is also weak),
with SEC v. Dorozkho, 574 F.3d 42, 49 (2d Cir. 2009) (holding that nondisclosure in breach of a
fiduciary duty satisfies 10(b)s requirement [of] a deceptive device or contrivance (internal
quotation marks omitted; alterations in original)).
- 15 -

courts have rejected the notion that a failure, even by securities professionals, to conduct due
diligence on a recommended company gives rise to fraudulent omissions liability. See Tambone,
597 F.3d at 448 ([W]e reject the SECs notion that a breach of a duty to investigate, without
more, is a breach of a duty to disclose.); Schiff, 602 F.3d at 167 (holding that the plain
language of 10(b) and corresponding Rule 10b-5 do not contemplate the general failure to
rectify misstatements of others).11
2.

Mr. Paxton Did Not Have a Duty to Disclose the Offer of Compensation

The Commission also charges that Mr. Paxton failed to disclose that he was offered
compensation by Mr. Mapp for successfully recruiting Servergy investors. See Complaint 81,
88, 96.

Its Complaint summarily alleges that Mr. Paxton had a duty to disclose that

compensation arrangement. See id. 78, (Despite a duty to do so), 81 (Despite a duty to do
so), 88 (despite an obligation to do so), 96 (despite an obligation to do so). But such
conclusory statements are not sufficient to survive a motion to dismiss. Twombly, 550 U.S. at
555; Carroll v. Fort James Corp., 470 F.3d 1171, 1174 (5th Cir. 2006) (affirming dismissal of
fraudulent omissions case that only offered conclusory allegations that such a duty [of
disclosure] existed).

A plaintiff must allege factual matter sufficient to make a claim

plausible. Iqbal, 556 U.S. at 678. In other words, the SEC must allege facts evidencing the
existence of a duty to disclose. See Carroll, 470 F.3d at 1174 (affirming dismissal of fraudulent
omissions case for failure to plead facts that, if true, would give rise to a duty of disclosure).

11

Although Mr. Paxton is not a securities broker, as discussed infra Part IV, even if he were
a broker no duty to investigate would attach to him. See Brown v. J.P. Turner & Co., No. 1:09CV-2649-JEC, 2011 WL 1882522, at *4 (N.D. Ga. May 17, 2011) (dismissing Section 10(b)
claim, observing that Plaintiffs do not cite any authority to suggest that a broker has the . . . duty
. . . to ensure the accuracy of investment materials). Even an investment advisor is not required
to conduct an independent investigation as to the accuracy of the statements made in an offering
memorandum when there is nothing that is obviously suspicious about th[e] statements [made
within it]. Gabriel Capital, L.P. v. Natwest Fin., Inc., 137 F. Supp. 2d 251, 262 (S.D.N.Y.
2000).
- 16 -

And because the existence of a duty to disclose is central to the SECs fraud claim, Rule 9(b)
requires that the alleged facts evidencing that duty be pled with particularity. See id. But the
SECs Complaint contains no particularized factual allegations that would plausibly suggest that
Mr. Paxton had a duty to disclose the compensation allegedly offered to him. The SEC has not
alleged (i) that Mr. Paxton made any statement amounting to a half-truth, (ii) that any statute
or regulation required Mr. Paxton to disclose Mapps offer of compensation, or (iii) that Mr.
Paxton was in a fiduciary relationship with any investor.
First, the Complaint fails to identify any statement by Mr. Paxton that was misleading as
a result of a failure to disclose his compensation.

Investment recommendations, even by

securities professionals, are not rendered misleading by a failure to disclose compensation

arrangements. See Skelly, 442 F.3d at 97 (Because a registered representative is under no
inherent duty to reveal his compensation, otherwise truthful statements made by him about the
merits of a particular investment are not transformed into misleading half-truths simply by the
brokers failure to reveal that he is receiving added compensation for promoting a particular
investment.); see also United States v. Laurienti, 611 F.3d 530, 543 (9th Cir. 2010) (holding
that, as a general rule, there is no support for a duty [by a broker] to disclose commissions);
Benzon, 420 F.3d at 611-12 (rejecting argument that brokers have a duty to disclose
compensation arrangements that incentivize sales of certain securities). And the Complaint does
not allege with particularity any other statement by Mr. Paxton that could be deemed misleading
by omission of his compensation. See Kunzweiler v. Zero.Net, Inc., No. 3:00-CV-2553-P, 2002
WL 1461732, at *11 (N.D. Tex. July 3, 2002) ([T]he Court must determine whether the alleged
material omissions could have rendered any identified affirmative statement or statements made
by the defendants misleading under any set of facts. Plaintiff has not identified any statement

- 17 -

made by any of the defendants that would be rendered not misleading if the above-statements
were disclosed. Therefore, these alleged omissions are not properly pled because there was no
duty to disclose the information.).
Second, and unsurprisingly, the SEC has failed to identify any statute or regulation that
required disclosure of the compensation allegedly offered to Mr. Paxton. As explained in further
detail below, Section 17(b) did not, under the facts alleged here, require disclosure of the
compensation allegedly received by Mr. Paxton. See infra Part III. Section 17(b) applies only to
written or recorded communications describing a security, and even then only when those
communications are published or circulated in return for compensation. Id. The Complaint
identifies only one written communicationa July 23, 2011 emailand the Complaint makes
clear that Mr. Paxton did not receive any compensation for sending that email. Id.
Third, as noted above, some courts have recognized a duty to disclose compensation
arrangements in a fiduciary or similar relationship. See Laurienti, 611 F.3d at 540, 543 (holding
that there is no support for a duty to disclose commissions outside a . . . fiduciary relationship or
a similar relationship of trust and confidence). Even assuming this theory is legally viable,12 the
SECs Complaint does not plead factual matter plausibly suggesting the existence of such a
relationship between Mr. Paxton and any of the investors to whom he introduced Servergy. With
regard to ten of the twelve investors allegedly introduced to Servergy by Mr. Paxton, the
Complaint alleges only that they were friends or business associates. Complaint 78.
Neither friendship nor a business relationship is sufficient to suggest a fiduciary-like
relationship. See 37 Am. Jur. 2d Fraud & Deceit 37 ([T]hat the parties are friends or prior
business associates, or have trust and confidence in each others integrity, does not automatically
establish a confidential relationship, as required for a fiduciary relationship to arise under the
12

See supra n.11.

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law.). With regard to the other two investors (Investors 1 and 2), the Complaint alleges only
that they were, along with Mr. Paxton, members of an investment group who trusted each
other to consider the interests of the group as a whole and not exploit one another for a members
personal benefit. Complaint 81. This is the closest the Commission comes to implying that
Mr. Paxton was in a fiduciary relationship with any investor.
However, it takes a very particular set of facts to create a fiduciary relationship: At the
heart of a fiduciary relationship lies reliance, and de facto control and dominance. United
States v. Chestman, 947 F.2d 551, 568 (2d Cir. 1991) (internal quotation marks omitted). The
relation exists when confidence is reposed on one side and there is resulting superiority and
influence on the other.

Id. (internal quotation marks omitted). A fiduciary relationship

involves discretionary authority and dependency; one person depends on anotherthe

fiduciaryto serve his interests.

Id.

The SEC alleges nothing close to this kind of a

relationship. While the Complaint alleges that the members of the undescribed investment group
of which Investors 1 and 2 trusted each other, [m]ere subjective trust alone is not enough to
transform arms-length dealing into a fiduciary relationship because [b]usinessmen generally do
trust one another. Welk v. Simpkins, 402 F. Appx 15, 20 (5th Cir. 2010); see also id. (The fact
that a business relationship has been cordial and of long duration is not by itself evidence of a
[fiduciary] relationship.).

Indeed, the mere fact that one party trusts another does not

transform a business arrangement into a fiduciary relationship because subjective trust is

insufficient to create a fiduciary relationship. 37 Am. Jur. 2d Fraud & Deceit 37.
In other words, it is not sufficient simply to allege that the parties trusted each other. A
complaint must allege factual matter suggesting reliance, de facto control, dominance, and
superiority of influence. See Chestman, 947 F.2d at 568. Nothing approaching that has been

- 19 -

alleged here. The SECs Complaint provides no description of the investment group or its
prior dealings. See Complaint 81. Nor does the Complaint contain any allegation that this
group made joint investments, that a member of the group exercised discretionary authority with
regard to the purchase or sale of securities for another, or anything else that would give rise to a
fiduciary-like duty.

The Complaints single sentence alleging generic trus[t] among the

groups members based on unspecified prior dealings satisfies neither Iqbals nor Rule 9(b)s
pleading requirements.13 See Town North Bank, N.A. v. Shay Fin. Servs., Inc., No. 3:11-CV3125-L, 2014 WL 4851558, at *18, *27 (N.D. Tex. Sept. 30, 2014) (dismissing securities fraud
claim, holding that allegations of subjective trust and personal relationships were insufficient
to establish fiduciary duty needed to create a duty to disclose).
C.

The SECs Section 17(a)(2) Claim Is Flawed For An Additional Reason

The SEC has brought its Section 17(a) claim under all three subsections of that provision.
See Complaint 98. Section 17(a)(2) of the Securities Act prohibits a person from obtaining
money or property by means of fraud. 15 U.S.C. 77q(a)(2). Accordingly, [a] violation of
Section 17(a)(2) requires a causal link between a misrepresentation and the acquisition of
money or property. In the Matter of Harding Advisory LLC, SEC Release No. 734, 2015 WL
137642, at *58 (ALJ Jan. 12, 2015). That is, the misrepresentation must be at least relevant to,
if not the cause of, the transfer of money or property to [the defendant]. Id.; see also SEC v.
Tambone, 550 F.3d 106, 125 (1st Cir. 2008) (noting that the SEC must allege that the defendant
obtained money or property to state a claim under Section 17(a)(2)), rehg en banc granted,
While it is true that the SEC also alleges that prior experiences in the group established
that the member who recommended an investment would monitor the investment going forward
and represent the groups interests, Complaint 81, this allegation cannot be the basis for a
fiduciary relationship in a securities fraud claim. Both Section 17(a) of the Securities Act and
Section 10(b) of the Exchange Act proscribe conduct related to the actual purchase or sale of
securities. See 15 U.S.C. 77q(a) (in the offer or sale of securities); id. 78j(b) (in
connection with the purchase or sale of any security). Thus, the alleged fiduciary-like duty
must relate to the purchase of securities, not post-purchase monitoring.
13

- 20 -

opinion withdrawn, 573 F.3d 54 (1st Cir. 2009), opinion reinstated in relevant part on rehg, 597
F.3d 436 (1st Cir. 2010) (en banc). In particular, there must be a transfer of money or property
from an investor to the defendant. In the Matter of Flannery, SEC Release No. 3981, 2014 WL
7145625, at *25 (SEC Dec. 14, 2014) (emphasis added), revd on other grounds, 810 F.3d 1 (1st
Cir. 2015).
Nowhere does the SECs Complaint allege a transfer of any money or property from
Servergy investors to Mr. Paxton. Most of the investors allegedly contacted by Mr. Paxton did
not even invest in Servergy. See Complaint 86 (only five of twelve potential investors actually
invested). And of the five investors who did allegedly invest in Servergy, none of them are
alleged to have transferred money or property, directly or indirectly, to Mr. Paxton. Thus, the
SECs Section 17(a) claim, to the extent it is premised on subsection (2) of that provision, fails
for this additional, independent reason.
III.

The SECs Section 17(b) Claim Fails Because Mr. Paxton Did Not Receive
Consideration for Publishing, Publicizing, or Circulating Any Communications
Beyond its fraud claims, the SEC alleges that Mr. Paxton published, gave publicity to,

and circulated communications describing a security for consideration received or to be received,

directly or indirectly, from an issuer, without fully disclosing the receipt of such consideration
and the amount thereof in violation of Section 17(b) of the Securities Act. Complaint 107.
By its terms, Section 17(b) applies only to compensation received (i) as a quid pro quo (ii) for a
communication describing a security (iii) that is published or circulated by the means of
interstate commerce. See 15 U.S.C. 77q(b); see also United States v. Amick, 439 F.2d 352, 365
(7th Cir. 1971) (finding violation where defendant published the article in return for the promise
of payment); SEC v. Liberty Capital Grp., Inc., 75 F. Supp. 2d 1160, 1162 (W.D. Wash. 1999)
(Section 17(b) claim requires a quid pro quo).
- 21 -

It is not entirely clear on which communications, Complaint 107, the SEC intends to
premise its Section 17(b) claim. To the extent the SEC is basing the claim on Mr. Paxtons
telephone call with Investor 2, that is not a publicized communication covered by Section 17(b).
And the Complaint does not allege that Mr. Paxton received any consideration for forwarding the
July 23, 2011 email to a prospective investor. No other communication by Mr. Paxton described
in the Complaint involved the use of interstate commerce. Accordingly, the Section 17(b) claim
fails as a matter of law.
A.

Section 17(b) Does Not Apply to the Telephone Call to Investor 2

Section 17(b) applies only to a public distribution of written or otherwise recorded

communications. It is of course a truism that statutory construction begins with the ordinary,
contemporary, common meaning of the words of the statute. Buzek v. Pepsi Bottling Grp.,
Inc., 501 F. Supp. 2d 876, 800 (S.D. Tex. 2007) (quoting Williams v. Taylor, 529 U.S. 420, 432
(2000)). Section 17(b) of the Securities Act makes it unlawful for a person, by the use of means
of interstate commerce, to publish, give publicity to, or circulate any notice, circular,
advertisement, newspaper, article, letter, investment service, or communication which . . .
describes [a] security for a consideration received or to be received . . . from an issuer . . .
without fully disclosing the receipt, whether past or prospective, of such consideration. 15
U.S.C. 77q(b).
As the terms are ordinarily and commonly used, publish[ing], giv[ing] publicity to, and
circulat[ing] are all actions one does publicly; the terms connote a wide dissemination of a
communication to the public. See Websters New International Dictionary 2005 (2d ed. 1934)14
(defining publish as [t]o make public announcement of or [t]o bring before the public, as
14

This particular dictionary, which was published at the time the federal securities laws
were first enacted, has been used by the Supreme Court in determining the meaning of those
laws. See Janus Capital Grp., Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011).
- 22 -

for sale or distribution); id. (defining publicity as [q]uality or stature of being public, or open
to knowledge or observation of a community); id. at 488 (defining circulate as to pass . . .
from person to person, as in a social circle, or from hand to hand). No one in common parlance
refers to a single, person-to-person telephone call as publishing, giving publicity to, or
circulating a communication. See Bond v. United States, 134 S. Ct. 2077, 2090 (2014) (rejecting
governments statutory interpretation, reasoning that no speaker in natural parlance would use
the statutory term at issue to describe the defendants conduct). To the extent that Congress
wished to reach an oral statement made to a single person, it demonstrated elsewhere in the
Securities Act that it knew how to do so plainly. See 15 U.S.C. 77w (unlawful to make . . .
any representation contrary to statute); id. 77l(a)(2) (unlawful to offer or sell securities by
means of a[n] . . . oral communication, which includes an untrue statement); id. 77x (unlawful
if person makes any untrue statement).
In the same vein, Section 17(b) is limited to the publication or circulation of written or
recorded communications, as evidenced by the specification of communications to which it
applies: a notice, circular, advertisement, newspaper, article, letter, investment service, or
communication. The fact that communication is found at the end of this list of tangible
communications strongly suggests that communication too refers to a tangible communication.
See Yates v. United States, 135 S. Ct. 1074, 1085 (2015) (courts must rely on the principle of
noscitur a sociisa word is known by the company it keepsto avoid ascribing to one word a
meaning so broad that it is inconsistent with its accompanying words, thus giving unintended
breadth to the Acts of Congress (internal quotation marks omitted)).15 This reading of Section

15

In Yates, the Supreme Court rejected the governments effort to interpret the term
tangible object, as used in an obstruction of justice statute, to include a fish, reasoning that,
because that term was included in a list (record, document, or tangible object), it was meant to
- 23 -

17(b) is confirmed by the legislative history of the Securities Act, which clearly explains that
Section 17(b) was particularly designed to meet the evils of the tipster sheet as well as articles
in newspaper or periodicals that purport to give an unbiased opinion but which opinions in
reality are bought and paid for. Comm. on Interstate & Foreign Commerce, H.R. Rep. No. 85,
73d Cong., 1st Sess., at 24 (1933).
Thus, both the text and legislative history of Section 17(b) make clear that the statute
requires both public dissemination and a written or recorded communication. Not surprisingly
then, case law exclusively reads Section 17(b) in this way. See, e.g., Amick, 439 F.2d at 365
(finding violation where defendant published the article in return for the promise of payment);
Liberty Capital, 75 F. Supp. 2d at 1161-62 (SEC adequately pled violation where it claimed that
defendant violated Section 17(b) by publishing favorable accounts of publicly-traded companies
in a newsletter and on the Internet); Ginsburg v. Agora, Inc., 915 F. Supp. 733, 736 (D. Md.
1995) (noting that Defendants, as authors and publishers of an investment newsletter, are
certainly within the class of persons potentially liable under Section 17(b)).16
Because Section 17(b) requires both public dissemination and a written or recorded
communication, this claim against Mr. Paxton cannot be premised on the single, private, one-onone telephone call between him and Investor 2. The decision in SEC v. Gorsek, 222 F. Supp. 2d
1099 (C.D. Ill. 2001), is illuminating in this regard. In that case, the defendant company
refer to objects one can use to record or preserve information, not all objects in the physical
world. 135 S. Ct. at 1081.
16

To the extent there is any remaining doubt as to the reach of Section 17(b), the rule of
lenity requires that that ambiguity be resolved in favor of Mr. Paxton. See United States v.
Bustillos-Pena, 612 F.3d 863, 868-69 (5th Cir. 2010) (applying rule of lenity to ambiguous
provision). Violations of Section 17(b) can be prosecuted criminally, see 15 U.S.C. 77x, and
the rule of lenity applies in the civil context when interpreting statutes that also have criminal
applications, see Leocal v. Ashcroft, 543 U.S. 1, 11-12 n.8 (2004) (Because we must interpret
the statute consistently, whether we encounter its application in a criminal or noncriminal
context, the rule of lenity applies.).
- 24 -

provided written reports to clients and arranged for conference calls between the client and the
owner of the company. Id. at 1103. Despite the fact that the company owner regularly
answered phone calls from investors or brokers and held conference calls where he
interviewed a corporate executive, id., the court focused solely on the written reports in ruling
on the Section 17(b) claim.17 The court held that an abundance of evidence demonstrates that
[the defendants] produced a notice, circular, advertisement, newspaper, article, letter,
investment service, or communication which . . . describes a security because the company
produced profiles on behalf of its issuer-clients. Id. at 1105. The court did not mention the
telephone calls in its analysis; its ruling was predicated entirely on the written reports, consistent
both with the statutory text and its legislative history. Similarly, the Section 17(b) claim against
Mr. Paxton cannot be premised on the single telephone call with Investor 2.
B.

The SEC Has Not Alleged Compensation For Forwarding the July 23rd Email

The only written or recorded communication that is alleged in the Complaint is the July
23, 2011 email from Mr. Mapp that Mr. Paxton forwarded to a prospective investor. See id. 85.
That single email was not published, publicized, or circulated, as those terms are ordinarily used.
See supra Part III.A. But even if it was, the email implicates Section 17(b) only if Mr. Paxton
received undisclosed consideration for publishing or circulating it. 15 U.S.C. 77q(b) (requiring
disclosure where there is a receipt of consideration for publishing or circulating a
communication); Liberty Capital, 75 F. Supp. 2d at 1162 (requiring a quid pro quo in a Section
17(b) case). The SEC has pled itself out of this element by alleging that the Servergy shares Mr.
Paxton received were a sales commission paid for his successful efforts at recruiting five
17

In the statement of facts, the court explicitly described the written reports in a way that
linked them to the Section 17(b) claim. See Gorsek, 222 F. Supp. 2d at 1103 (The profiles
promoted the stock of the issuer and were published and disseminated in interstate commerce
without disclosing the amount of compensation or the type of compensation.). The court did
not link the telephone calls to Section 17(b) in a similar way.
- 25 -

individuals to invest in Servergy. Complaint 86, 88. In the case of the July 23, 2011 email,
there is no allegation that the recipient of the email ever invested in Servergy. See id. 85.
Absent such an investment, Mr. Paxton, who allegedly received a sales commission only for
actual investments, was not compensated for forwarding the email to that recipient.18
IV.

Mr. Paxton Is Not a Broker

Finally, the SEC alleges that Mr. Paxton engaged in securities transactions as an

unregistered broker in violation of Section 15(a)(1) of the Exchange Act. See Complaint 110.
Section 15(a)(1) states that it is unlawful for any broker . . . to make use of the mails or any
means or instrumentality of interstate commerce to effect any transactions in, or to induce or
attempt to induce the purchase or sale of, any security . . . unless such broker . . . is registered.
15 U.S.C. 78o(a)(1). Section 15(a) thus proscribes both effecting transactions in securities and
inducing or attempting to induce purchases or sales of securities. Id. But, as the text of Section
15(a) makes clear, either type of action is unlawful only if the actor first fits within the statutory
definition of a broker. Id. (providing that it is unlawful for any broker to take certain actions
without first registering with the Commission). The Exchange Act defines a broker as a
person engaged in the business of effecting transactions in securities for the account of others.
Id. 78c(a)(4). In other words, even if the SECs theory is that Mr. Paxton induced or attempted
to induce purchases of Servergy stock by potential investors, such conduct would necessitate
registration on Mr. Paxtons part only if he were a brokerthat is, a person (a) in the business

18

To the extent the SEC is relying on the written communications to prospective

investors alleged in Paragraph 94, this allegation fails for the same reason as the July 23, 2011
email. Nowhere in the allegation does the SEC claim that the recipient(s) of the written
communications invested in Servergy and, thus, that Mr. Paxton received any compensation for
those written communications. See Complaint 94 (Paxton continued to market Servergy in
both oral and written communications to prospective investors until at least September 27, 2011
and invited at least three additional investors to attend a Servergy sales webinar and scheduling
a lunch with at least one prospective investor for the express purpose of generating interest in
Servergy (emphasis added)).
- 26 -

(b) of effecting transactions in securities (c) for the account of others. And the Supreme Courts
decisions in Twombly and Iqbal require alleged factual matter on these points.
The SECs Complaint contains no allegations suggesting that Mr. Paxton effected any
transactions for the account of others, much less that he was in the business of doing so. This
statutory language, which speaks of acting for the account of others, 15 U.S.C. 78c(a)(4),
requires allegations that Mr. Paxton was acting as an agent for investors. That is the core of what
it means to be a broker. See, e.g., Merrill Lynch Pierce Fenner & Smith, Inc. v. Cheng, 901
F.3d 1124, 1128 (D.C. Cir. 1990) (A broker is an agent who owes his principal duty to act only
as authorized.); 12 Am. Jur. 2d Brokers 2 (A broker is an agent who acts as an intermediary
between prospective buyers and sellers.); 15 U.S.C. 77d(a)(4) (referring to brokers
transactions executed upon customers orders). The SECs failure to allege such an agency
relationship between Mr. Paxton and any investors is fatal to the Commissions Section 15(a)
claim. See SEC v. Kramer, 778 F. Supp. 2d 1320, 1339 (M.D. Fla. 2011) (rejecting the SECs
unregistered broker claim given that [n]o evidence shows that [the defendant] possessed
authority over the accounts of others).
Nor does the Complaint allege factual matter to support the notion that Mr. Paxton was
effect[ing] any securities transactions. See SEC v. M & A West, Inc., No. C-01-3376, 2005
WL 1514101, at *9 (N.D. Cal. June 20, 2005) (Although [the defendant] was in the business of
facilitating securities transactions among other persons, the Commission cites no authority for
the proposition that this equates to effecting transactions in securities for the account of others.
(emphasis in original)). The Complaint is remarkable in the allegations it lacks: there is no
allegation that Mr. Paxton handled cash for purchases, accepted orders, entered trades, handled
securities, had authority over anyones account, or did anything that would make him an

- 27 -

agent/broker. While the Complaint alleges that Mr. Paxton introduced a handful of friends and
business associates to Mr. Mapp and his company, [m]erely bringing together parties to
transactions, even those involving the purchase and sale of securities, is not enough to warrant
broker registration under Section 15(a). Apex Global Partners, Inc. v. Kaye/Bassman Intl
Corp., No. 3:09-cv-637-M, 2009 WL 2777869, at *3 (N.D. Tex. Aug. 31, 2009).
The only plausible inference from the SECs allegations is that Mr. Paxton was what the
law calls a finder (whom need not register with the SEC), not a broker. The distinction
drawn between the broker and the finder or middleman is that the latter bring[s] the parties
together with no involvement on [his] part in negotiating the price or any of the other terms of
the transaction. SEC v. Offill, No. 3:07-cv-1643-D, 2012 WL 246061, at *7 (N.D. Tex. Jan. 26,
2012) (internal quotation marks omitted). A finder will be performing the functions of a
broker-dealer triggering registration requirements, if activities include: analyzing the financial
needs of an issuer, recommending or designing financing methods, involvement in negotiations,
discussion of details of securities transactions, making investment recommendations, and prior
involvement in the sale of securities. Id. (internal quotation marks omitted). The Complaint
does not allege Mr. Paxtons participation in any of these activities.
Finally, the Complaint fails to allege any facts from which one could plausibly infer that
Mr. Paxton, even if he effected securities transactions for the account of others, was engaged in
the business of doing so. See 15 U.S.C. 78c(a)(4) (defining a broker as someone engaged in
the business of effecting transactions in securities for the account of others (emphasis added)).
The Complaint alleges that Mr. Paxton, for a commission, introduced a dozen potential investors
to Mr. Mapp over the course of twenty days one summer five years ago. Complaint 7, 86.
There is no allegation that Mr. Paxton ever promoted another company before or after those few

- 28 -

weeks in the summer of 2011. These allegations fall well short of raising any plausible inference
that Mr. Paxton was in the business of effecting securities transactions for others. See Kramer,
778 F. Supp. 2d at 1331-33, 1339 (rejecting the SECs unregistered broker claim where, in return
for a commission, the defendant promoted securities over the course of two years).
CONCLUSION
For the foregoing reasons, Mr. Paxton respectfully requests that this Court dismiss with
prejudice the SECs Complaint against him for failure to state a claim and to plead fraud with
particularity.

Dated: June 9, 2016

Respectfully submitted,

/s/ William B. Mateja

William B. Mateja
Texas Bar No. 13185350
Polsinelli LLP
2950 N. Harwood
Suite 2100
Dallas, TX 75201
Tel: (214) 754-5751
Fax: (214) 397-0033
Mateja@polsinelli.com

Matthew T. Martens*
(Lead Counsel)
D.C. Bar No. 1019099
Jaclyn N. Moyer*
D.C. Bar No. 492284
Kevin Gallagher*
D.C. Bar No. 1031415
Wilmer Cutler Pickering Hale and Dorr LLP
1875 Pennsylvania Ave. NW
Washington, DC 20006
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Tel: (202) 663-6000

Fax: (202) 663-6363
Matthew.Martens@wilmerhale.com
*Pro hac vice applications pending

J. Mitchell Little
Texas Bar No. 24043788
Scheef & Stone, LLP
2600 Network Blvd., Ste. 400
Frisco, TX 75034
Tel: (214) 472-2140
Fax: (214) 472-2150
Mitch.Little@solidcounsel.com
Attorneys for Defendant Warren K. Paxton, Jr.

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CERTIFICATE OF SERVICE
I hereby certify that on June 9, 2016, I electronically filed the foregoing with the Clerk of
the Court through the CM/ECF system, which will send notices of electronic filing to all counsel
of record.

/s/ William B. Mateja

Attorney

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