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A woefully unprepared prosecutor for the Obama Administration’s Securities and Exchange Commission exposed in federal court the frailty of the politically driven charges against Texas Attorney General Ken Paxton.

Following a complaint mirroring the trumped up allegations levied by State Rep. Byron Cook (R-Corsicana), the SEC accused Paxton of misleading “investors” (the very wealthy Cook and one of his business partners). The SEC argues that Paxton committed securities fraud by failing to disclose to Cook that he received a commission.

A hearing Friday in Sherman centered around Paxton’s Motion to Dismiss the SEC civil charges, and was presided over by Judge Amos Mazzant, II.

The defense focused on legal precedent from both the 9th and 2nd federal circuits in which those courts of appeals found registered brokers have “no duty” under the law to “disclose transactional commissions” they stand to earn from investments they solicit.

According to the long-standing court precedent, if a registered broker solicits investors and receives a commission – just as Paxton did – they would not be required to disclose their commission to investors. Nor would “failure to disclose” be considered misleading or fraudulent under existing law or SEC regulations.

In other words, if the SEC levied identical charges against a registered broker, they would have no case. The only difference is that Paxton is not a registered broker.

Paxton’s team argued the SEC is asking the court to hold him to a stricter standard than registered brokers.

Notably, the SEC acknowledged no similar case exists where an individual has been found guilty of securities violations simply for failing to disclose their commission to investors. Although that alone does not automatically clear Paxton, it certainly hurt the SEC’s case.

Paxton’s attorneys, however, did cite a similar case in SEC v Kramer. Kramer was an unregistered individual who promoted securities to investors over a number of years and received transactional commissions for investors he brought in. In that case, the SEC did not even charge Kramer with fraud.

When asked by the judge how the failure to disclose a commission was different in Paxton’s case – when compared to Kramer – the SEC could not answer. They also failed to cite any case with a similar fact pattern where the SEC treated an individual similarly to Paxton.

In an extended exchange with SEC’s lead counsel, the judge asked, “[In regards to the question troubling the court] are we trying to stretch [existing] securities laws [to apply them] to this case?”

The judge concluded, saying he thought the SEC was trying to place “a very large square peg into a round hole.”

Paxton’s defense team offered more compelling arguments and demonstrated better knowledge of securities law than the SEC’s own counsel. The judge closed the hearing stating he would work to issue a decision on the motion to dismiss in the next thirty days.