Former Texas AG, Computer Company Charged by SEC With Fraud

A former Texas Attorney General and state representative combined with others at a computer firm to promote the shares of the company which claimed to compete with Dell, Apple and others. About $26 million in stock was sold through private placements. The firm’s product and competitors were not, however, as advertised. SEC v. Mapp, Civil Action No. 4:16-cv-00246 (E.D. Tx. Filed April 11, 2016).

Defendant Servergy, Inc. is a Texas based company. The computer hardware firm had one product, the CTS-1000. Since the events here the firm has rebranded itself, focusing on cloud-based data storage services. It has also reconstituted its board of directors.

During the period of this action William Mapp, III, a co-founder of the firm, and a defendant, served as CEO and President. Defendant Warren Paxton, at one time the Texas Attorney General and also a state senator was paid 1,000 shares of firm stock to solicit investors. He is also an investment adviser who was indicted on state securities fraud charges. Defendant Caleb White was a purported independent director who owns an insurance sales firm. He was paid commissions to solicit investors from the company.

Servergy funded its operations from late 2009 through early fall 2013 by raising $26 million from the sale of its unregistered shares. Mr. Mapp was the primary fund raiser for the company. He identified prospective investors through referrals and offered a 10% commission for the introduction of new investors to the company. Once a potential investor was identified, Mr. Mapp followed-up with presentations. In those presentations he claimed that the CTS-1000 was more energy efficient than a Dell server while asserting that the products were comparable. The claims were false.

In 2013 broker-dealer WFG Investments raised an additional $20 million for the company, offering 10 million shares at $2. Mr. Mapp assisted with creating a PPM and materials for investor presentations. Those materials contained material omissions and misrepresentations. For example, they asserted that there were pre-orders for the CTS-1000. Those orders supposedly included one from Amazon. There were no such orders. The PPM also falsely stated that the CTS-1000 was a revolutionary new server that could replace “power-hungry” servers found in top data centers and that it was an enterprise grade general purpose server that would compete with IBM, Dell, and Hewlett Packard. In fact the CTS-1000 was a 32 bit processor, not 64 like the others. The materials also misrepresented the power consumption of the machine.

Over a two year period beginning in early 2012 Mr. White raised about $1.4 million from over 150 individuals. He was paid $66,000 in commissions. The solicitations were made through three joint ventures he formed and managed. In his solicitations he made misrepresentations. He also failed to disclose that he was being paid commissions. Mr. White was not a registered broker. After joining the board of directors Mr. White continued to recruit investors.

Finally, in July 2011 Mr. Paxton raised about $840,000 for Servergy. He promoted the company and recruited investors in exchange for an undisclosed payment of 100,000 shares of common stock. He failed to disclose that fact to the investors he solicited. The complaint alleges violations of Securities Act Sections 5(a), 5(c), 17(a) and 17(b) and Exchange Act Sections 10(b) and 15(a).

Servergy and Mr. White settled with the Commission. The firm was permanently enjoined from future violations of Securities Act Section 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). It will also pay a penalty of $200,000. Mr. White was permanently enjoined from future violations of the Sections cited in the complaint. In addition, he was directed to pay $66,000 in disgorgement to the SEC and 20,000 shares of stock to the company. See Lit. Rel. No. 23515 (April 11, 2016).

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