A judge for the US District Court of the Eastern District of Texas [official website] on Thursday granted [order, PDF] a motion to dismiss the civil fraud complaint against Texas Attorney General Ken Paxton [official website]. The Securities and Exchange Commission [official website] complaint alleged that Paxton, among other things, actively recruited investors for Servergy Inc., a computer hardware company, in exchange for an undisclosed payment of 100,000 shares of common stock in the company and a 10 percent commission for each investor he brought to invest in the company. The gist of the complaint [text, PDF] is that Paxton must have disclosed that he was compensated for promoting the stock of Servergy to investors, and this failure to do so was a violation of Sections 10(b) and 17(a) and (b) of the 1934 Securities and Exchange Act (SEC Act) [PDF]. The complaint also alleged that Paxton failed to register as a broker under Section 15(a) of the SEC Act. Judge Amos Mazzant agreed with Paxton that his relationship with the group of investors he recruited did not rise to the level of a fiduciary nature, and that he had no duty to disclose his compensation or commissions to his investors. As to the allegation concerning failure to register as a broker, Paxton argued that he had no control or authority over the accounts of his investors, and consequently, does not fit the definition of a “broker.” The court agreed and stating that “Paxton was neither involved in negotiating the price or terms of the transaction nor was he performing any of the other functions of the broker-dealer.” The court concluded that the complaint failed to state a claim under the FRCP 12(b)(6) standard because “Paxton’s conduct simply does not give rise to liability under the federal securities laws as they exist today.” The state criminal charges against Paxton for securities fraud and failure to register with the state securities board are still pending [ABA Journal report], and the burden for the prosecution in the criminal case is even higher.

Mazzant had previously conditionally dismissed [JURIST report] the SEC suit against Paxton for misleading investors, giving the SEC 14 days to submit additional facts to support its claims. This decision of a full dismissal comes nearly five months after that order. Paxton was indicted [JURIST report] for securities fraud in August 2015 for recruiting investors while he was a member of the Texas House of Representatives. While he awaits the outcome of his criminal case, Paxton has continued to actively perform his role as Texas AG. In August Paxton led Texas in a multi-state challenge to federal guidelines that allowed transgender students to use the bathroom according to the gender with which they identify. Last month, a federal judge ruled in the states’ favor [JURIST report], determining that the federal government overstepped its bounds in issuing the guidelines. And in January 2016, Paxton announced [JURIST report] that daily fantasy sports websites in which players pay to participate are considered gambling and are therefore illegal in the state.