Federal judge questions SEC in Texas AG's fraud case

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SHERMAN, Texas -- Attorney General Ken Paxton was in federal court Friday in Sherman, but he wasn't representing the state, instead he was defending himself from accusations by the Federal government that he defrauded investors.

U.S. District Judge Amos Mazzant didn't seem easily convinced by the arguments that Attorney General Ken Paxton committed securities fraud. At the heart of the federal government's case is whether Paxton had a duty to tell people he was being paid by the company he was telling them to invest in.

"Just waiting... I expect to win," Paxton said.

That was how confident Paxton was last month that the U.S. Securities and Exchange Commission's case against him would be thrown out.

Paxton admits he recruited 12 people to invest $840,000 to Severgy, a tech company that never got off the ground.

His lawyer, Matt Martens, said he had no duty to tell those people he was also getting paid in Severgy stock.

"The arguments that we made are that the law actually cuts in our favor and as a result, we've moved to have the claims dismissed, and we await the ruling on that decision," Martens said.

Martens said no one has ever been charged with fraud under these circumstances before.

With no similar case to look to, Mazzant said he is trying to determine if Paxton had the duty to disclose.

Mazzant asked for proof that Paxton misled investors or that he was directly involved in the investments, but the SEC did not have any specific examples.

"As the judge observed, we think this is a case of the SEC trying to fit a square peg into a round hole," Martens said.

The SEC lawyers declined an interview, but in the hearing, they said Paxton acted as a "secret broker," trying to sell worthless stock to "friends and business associates" by telling "half-truths."

The judge said in federal court, it doesn't matter whether Paxton did something morally wrong by not telling investors he was being paid, but it's a question of whether that broke any laws.

The judge said he plans to make a decision if they will go through with the fraud case in the next 30 days.