Securities Regulation Daily Company touted yesterday's tech as competitive with the big names
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Monday, April 11, 2016

Company touted yesterday's tech as competitive with the big names

By Rodney F. Tonkovic, J.D.

A Texas-based tech company has been charged with making false claims about a new computer server. The SEC alleges that Servergy Inc. and founder William E. Mapp, III led investors to believe that a server produced by the company was especially energy-efficient in comparison with those sold by big-name manufacturers. In reality, the server used out-of-date technology and, contrary to Servergy's representations, no well-known companies had ordered it. Servergy agreed to pay a $200,000 penalty to settle the charges (SEC v. Mapp, April 11, 2016).

According to the complaint, between 2009 and 2013, Servergy raised approximately $26 million to develop what it said was a revolutionary new server. Mapp, Servergy's founder and CEO, said that this server, the Cleantech-1000 (CTS-1000), was competitive with, and consumed up to 80 percent less power than, servers produced by industry leaders like Hewlett-Packard, IBM, and Dell. In addition, Mapp claimed that well-known companies such as Amazon.com had placed orders for the CTS-1000.

Outmoded-tech. In reality, the competitors' servers were high-performance and featured 64-bit processors, while the CTS-1000 had an uncompetitive 32-bit processor that was being phased out by the industry. Also, while Mapp claimed that Servergy had received more than 2,000 pre-orders for the CTS-1000, these customers had merely expressed interest, and there were no actual sales. Mapp also claimed that the company had received an order from Amazon, but, an Amazon employee had contacted Servergy on his own, and not on behalf of Amazon, because he wanted to test the product for personal use.

Texas AG involved. The Commission also charged Texas Attorney General Ken Paxton and Caleb White, a former member of the company’s board of directors, with recruiting investors while hiding that they were being paid commissions for doing so. According to the Commission, while serving in the Texas House of Representatives, Paxton agreed to promote Servergy in return for stock, and raised $840,000 in investor funds. White allegedly raised more than $1.4 million in return for $66,000 and shares of stock. White agreed to disgorge his commission and shares, but litigation will continue against Paxton.

Company settles. The Commission has demanded a jury trial and seeks injunctions from the antifraud provisions of the securities laws, disgorgement, and civil penalties from each of the defendants. Servergy, which has cut ties with Mapp, agreed to pay a civil penalty to settle the charges.

Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office said: "We allege that Mapp deceived investors into believing that Servergy’s groundbreaking technology was generating lucrative sales to major customers when it was technologically behind its competitors and made no actual sales." Litigation against Mapp continues in the Eastern District of Texas.

The case is No. 4:16-cv-00246.

Attorneys: Matthew Gulde for the SEC.

Companies: Servergy Inc.

MainStory: TopStory FraudManipulation TexasNews

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