The Securities and Exchange Commission thought it had a big name case when it charged William E. Mapp III and his buddy Ken Paxton, the Texas attorney general, for allegedly misleading investors.
But last December a jury said the prosecution was more bluster than substance, that Mapp had only made a minor mistake. The SEC’s charges against Paxton’s were dismissed completely.
The SEC accused Mapp in April 2016 of misleading investors about the viability of the technology at Servergy, where he was CEO, when he was raising funds to develop and lying about pre-orders for it. Paxton, a former member of Servergy’s board of directors, was accused of not disclosing to investors he was being compensated for his fundraising efforts.
Servergy was also charged and immediately fired Mapp and agreed to pay a $200,000 penalty to settle the agency’s charges.
Despite the big SEC’s big buildup for the case, the jury found that Mapp had “merely negligently violated the securities law” and did not “engage in intentional or reckless illegal conduct.” On July 28, 2018, the judge awarded only $22,500, even though the SEC had asked for $711,000, according to the judge’s decision.
When deciding on the smaller penalty, the judge took into consideration that Mapp had been working instead as an Uber driver since 2016. He was no longer in any position to violate securities laws, according to the judge, since he was longer an officer or even an employee of Servergy, a start-up computer hardware company that Mapp co-founded in San Jose, California, in 2009.
“The SEC dragged me through the mud for years,” Mapp told MarketWatch in an interview. “I am unemployable and we even had to move in with my daughter. Anyone who searches on my name hits the news about the charges and doesn’t read enough to find out I was vindicated.”
The SEC’s press release after the jury verdict, however, was triumphant, despite having lost the case for all charges except the least serious one:
“We are gratified by the jury’s verdict finding William E. Mapp III liable for misleading Servergy investors about the company’s business prospects. Corporate officers owe shareholders nothing less than the full truth, and we vigorously pursue executives who mislead people,” the SEC said.
An SEC spokeswoman did not respond to a request for comment on the case.
Mapp became an enemy of the SEC when in April 2016 it accused him of making false claims about pre-orders for a computer server his company was developing while Paxton was recruiting new investors for Servergy.
Mapp’s fundraising was via the SEC’s Form D private placement process which is restricted to accredited investors, and exempted from the traditional securities filing requirements.
The SEC’s complaint against Mapp centered on his use of an outdated, inaccurate private placement memorandum that continued to highlight non-binding pre-orders that were eventually not valid. Servergy raised nearly $20 million after Mapp had learned in March 10, 2013, that at least one big pre-order had been canceled.
The jury found last December that the marketing materials encouraged investors to invest under false pretenses, touting a computer server, the CTS-1000, that Mapp said was superior to competitors’ technology. By misleading investors, Servergy was able to raise more money than it would have raised had the materials been truthful, the SEC alleged.
From November 2009 to September 2013, Mapp raised approximately $26 million via private securities offerings to develop the server, which he said was smaller and more energy efficient and could replace servers from competitors such as IBM, Cisco, Dell, and HP.
As the primary officer responsible for the fundraising, Mapp identified prospective investors through word-of-mouth referrals and offered a 10% bounty to individuals who introduced new investors to the company, like Paxton, according to the SEC’s complaint.
“I was flabbergasted when the SEC charged me,” Mapp told MarketWatch in an interview. “I never made a move without getting signoff from experienced counsel.”
What would he tell other small business owners who are tempted to raise money from private investors?
“Don’t even get involved. I don’t even know what I could have done differently to avoid this trouble. Maybe Mark Cuban was right. They are more concerned with winning than finding the truth,” said Mapp.
Mapp is referring to a case in 2013 when a jury found the billionaire owner of the Dallas Mavericks Mark Cuban not guilty for insider trading in a big public loss for the SEC.
Members of an Alabama investors club who said they invested $2.8 million in Servergy in 2013 sued the company, Mapp and other executives in 2016. Investors have also filed complaints against brokers at WFG Investments, Inc., who raised an additional $19.4 million for Servergy. WFG filed bankruptcy in September 2017.
Mapp, who is 58, devoted the last ten years of his career to promoting a company that never got off the ground technology that is no longer state of the art.
He is no longer driving for Uber because he had to give up his car. His wife is facing health challenges and significant medical expenses that are causing a further strain. He told MarketWatch that he calls job recruiters but they don’t call back, perhaps scared off by what they find when they search his name.
“The SEC’s charges against me were trumped up but my family is still living with the impact of ordeal every day,” Mapp told MarketWatch. “We lost everything. The SEC’s effort to ruin me is still inflicting collateral damage on my family.”
Mapp’s legacy is mired in scandal, and getting past it is not helped by the fact that a criminal case against Paxton is still pending in Texas. A federal judge threw out the SEC’s charges against Paxton, too, in March 2017, a dismissing the case “with prejudice” which means the SEC cannot refile it. Paxton is running for reelection as Texas attorney general in November. However his case is unlikely to go to trial before Election Day.
Paxton issued a statement at the time the SEC’s charges were dismissed saying that the “whole saga is a political witch hunt. Someone needs to hold the SEC accountable for this travesty.”