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Securities Fraud Charges Bring Texas Attorney General, Ken Paxton, to County Jail

McKINNEY, Tex. — Ken Paxton, the Texas attorney general, was arrested on felony charges Monday and booked at the county jail in this Dallas suburb after a grand jury indicted him last week for securities fraud, the start of a criminal case that could complicate and even jeopardize his tenure as the state’s top lawyer.

Mr. Paxton, 52, smiled as he stood for a booking photograph at Collin County Jail, nine months after winning election as the chief law enforcement officer of Texas.

The grand jury, whose indictments against Mr. Paxton were unsealed Monday after his booking, charged him with two counts of securities fraud and one count of acting as an investment adviser representative without being registered with the state securities board. The charges stem from accusations that Mr. Paxton, a lawyer and former legislator from McKinney, misled investors and clients while doing securities work in the years before he became attorney general.

He was at the jail briefly and was released after posting $35,000 in personal recognizance bonds. Other suspects at Collin County Jail must wear a gray towel around their chests and shoulders to hide their clothing when their booking photos are taken. Mr. Paxton posed for his in a dark suit and red tie. A spokesman for Sheriff Terry G. Box of Collin County said the judge overseeing the case had issued a court order directing that a towel not be put on Mr. Paxton.

What remains unclear is how Mr. Paxton, a Republican, will weather the charges that have put his political and legal career, and even his law license, at risk. The Texas Democratic Party called for his resignation, while some Republican leaders, including Gov. Greg Abbott, Mr. Paxton’s predecessor as attorney general, emphasized that indictments are not convictions.

“Everyone is entitled to due process under the law,” Mr. Abbott said in a statement. “As a former judge, I recognize this is the first step in a lengthy process and will respect that process as it moves forward.”

Mr. Paxton’s lawyer, Joe Kendall, a former federal judge, said in a statement that his client would plead not guilty and would demand a trial by jury.

Mr. Paxton is “looking forward to the opportunity to tell his side of the story in the courtroom” of Judge George Gallagher of District Court in Fort Worth, Mr. Kendall said, adding that his client was returning to Austin “to focus on his work on behalf of the citizens of Texas.” Mr. Kendall said he would comply with Judge Gallagher’s instructions to refrain from further comments.

Lawyers who have handled securities fraud cases said Mr. Paxton’s most serious problem appeared to be the least serious charge — a failure to register with the state securities board, a third-degree felony punishable with a sentence of two to 10 years. The reason: Mr. Paxton has already admitted that he violated state law in connection with the charge.

Last year, Mr. Paxton was reprimanded by the Texas State Securities Board for failing to register as an investment adviser representative and was fined $1,000. He signed and agreed to the board’s disciplinary order, which cited him for soliciting clients for a friend’s investment firm in 2004, 2005 and 2012 without registering with the board, a violation of the Texas Securities Act.

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The booking photo of Attorney General Ken Paxton of Texas, arrested Monday.Credit...Collin County, via Associated Press

The grand jury appeared to charge Mr. Paxton for the same 2012 case he had been reprimanded for, which involved two clients, James and Freddie Henry. The significance of failing to register was emphasized on Mr. Paxton’s own website for the attorney general’s office, on a page about investment fraud that referred to one of the themes of “investment scammers” being “the fact that they are not likely to be registered” with the securities board.

David K. Haynes, a McKinney lawyer and a former Collin County prosecutor, said, “I guess it is less than Bernie Madoff or the Enron boys, but for the attorney general of the State of Texas it doesn’t look too good.”

Mr. Paxton has been an elected official for nearly 13 years, first as a member of the Texas House of Representatives and then as a state senator before becoming attorney general. Past Texas attorneys general have turned the position into a steppingstone for higher office, including Mr. Abbott, former Gov. Mark White and Senator John Cornyn.

All three counts against Mr. Paxton are felonies, but the two counts of first-degree securities fraud carry the toughest punishment. A conviction for a first-degree felony in Texas can result in a sentence of life in prison or five to 99 years.

The indictment accuses Mr. Paxton of misleading two investors in a McKinney technology company, Servergy Inc. It states that in July 2011 he encouraged two investors to invest hundreds of thousands of dollars in the company while failing to tell them he would be compensated by the company and failing to disclose he had not personally invested in Servergy at the time. Mr. Paxton’s commission was 100,000 shares of stock.

The two investors had been Mr. Paxton’s friends, and one, Byron Cook, served with Mr. Paxton in the Texas House. Mr. Cook and the other victim named in the indictment, Joel Hochberg, an investor in start-up technology companies, joined in a lawsuit against Servergy in 2013 to force the company to provide them with basic information about the financial condition of the company. The lawsuit was dismissed after Servergy provided the information.

Terry Jacobson, a lawyer representing Mr. Cook and Mr. Hochberg in that lawsuit, said his clients remained investors in the company, but he declined to comment about the indictment and referred all questions to the two special prosecutors, Kent A. Schaffer and Brian Wice, who were appointed by a judge to handle Mr. Paxton’s case.

Michael P. Lyons, a Dallas lawyer who is not connected to the case but who focuses on securities litigation, said securities fraud of the kind Mr. Paxton is accused of is a serious white-collar offense that prosecutors often do not have the resources to make a priority. “If the allegations in the indictment should be proven to be true, he should be punished like any other citizen,” Mr. Lyons said.

Servergy at one time had only one product, a server called the Cleantech-1000 that it claimed consumed as much as 80 percent less power, cooling and space than other servers. Mr. Paxton owns at least 10,000 shares of Servergy, according to personal financial statements he filed with the Texas Ethics Commission.

Servergy has been the focus of an investigation by the federal Securities and Exchange Commission, centering on whether Servergy and its founder, Bill Mapp, made misleading statements about the company to induce investors to buy Servergy stock, according to court documents filed by the S.E.C.

Officials said any S.E.C. investigation was separate from the securities fraud charges against Mr. Paxton.

A spokeswoman for Servergy declined to say whether Mr. Mapp or Servergy executives had testified before the grand jury, citing the confidentiality of grand jury investigations. The spokeswoman, Miranda Sevcik, said any investigation into Mr. Paxton “has no impact on the current direction of the company or its investors.” She declined to comment about Mr. Paxton’s indictment.

A version of this article appears in print on  , Section A, Page 14 of the New York edition with the headline: Securities Fraud Charges Bring Texas Attorney General to County Jail. Order Reprints | Today’s Paper | Subscribe

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