The disciplinary case against an associate of Attorney General Ken Paxton is collapsing after two administrative law judges found that investigators from the Texas State Securities Board failed to prove most of their case.
The case against investment advisor Fritz Mowery and his company, Mowery Capital Management, overlaps with one of the three charges brought against Paxton.
The judges rejected the investigators’ case that Mowery had breached his fiduciary duty to his clients. They agreed Mowery should be fined for two disclosure failures in his state paperwork, and a failed attempt to backdate two other disclosure forms.
“Much of this proceeding could have been avoided” if Mowery had made those disclosures, the judges found. In all, “the evidence did not show any actual harm to MCM’s clients or the public.”
One of three felony charges against Paxton is that he referred a client to Mowery without registering with the state as a financial adviser. That requirement had kicked in three weeks prior to the alleged referral, when Mowery switched his own registration from the federal to the state level.
Special prosecutors in the Paxton case had to get a grand jury to re-indict Paxton on the other two charges this week after botching their first attempt.
Under the prosecution’s revised theory, Paxton sold stock in a tech company to two men “by intentionally failing to disclose” he would be compensated with the same stock. The prosecutors have not explained their theory of how that would have misled investors, which is a required element under state law.
The questions of whether Paxton did anything wrong — and how bad any violations might be — will affect both the case against him and his political future. The answers to those questions depend on both the narrow issue of whether legal lines were crossed and the broader issue of Paxton’s honesty with his clients — in particular, whether anyone was cheated by him or his associates.
Investigators from the Securities Board found plenty of squirrelly and deceptive behavior by Mowery, from backdating disclosure forms, to introducing doubtful evidence, to failing to disclose a 2005 bankruptcy and running a letter to his investors on his website that was found to have been plagiarized.
But their main case fell short. The theory was that Mowery had breached his clients’ trust by partnering with a broker-dealer who was charging exorbitant rates on every trade, and then sending money back to Mowery for research and other advice under a contract that hadn’t been disclosed on the company brochure.
Mowery’s partner charged $51 per trade, while the same transaction at TD Ameritrade or Schwab might cost somewhere in the range of $8-17. In effect, the services from these discount brokers were so much cheaper that regulators thought not using them amounted to a crime.
However, Mowery’s side was able to show they had listed the relationship on a draft of the brochure, and later deleted it in consultation with a state regulator, who may have made a mistake.
Mowery also benefited from testimony of 11 of his clients, many of whom said they knew and approved of the $51 rate.
One client testified he’d found management fees elsewhere ended up costing more than Mowery charged, and MCM had “always made a good return on his investments.”
The investigators lodged multiple criticisms of how Mowery conducted his business, but the judges found the “clients are the ones who can ultimately decide if doing business with MCM is in their best interest” and “a harsh critique of how MCM conducts its business does not equate to fraud.”
Under state law, administrative law judges have authority to establish the factual record of the case, and then make a recommendation on a final judgment to the commissioner of the securities board, whose decision is coming at the end of the month.
Some of the dates contained in this record will be interesting to Paxton’s defenders, who suspect the case is politically motivated.
According to investigators, the securities board’s “inspections and compliance division initiated a routine inspection and examination of MCM” on April 9, 2014, less than two weeks before Paxton’s disclosure troubles blew up amid his primary contest with Rep. Dan Branch in the race for attorney general.
On April 18, 2014, Paxton and Mowery contacted the securities board to disclose that Paxton had solicited clients for Mowery when he hadn’t been registered, likely prompted by a story that was about to break. That led the securities board to impose a $1,000 fine on Paxton on May 2.
On April 21, 2014, the Texas Tribune broke the news of Paxton’s impending troubles, reporting that Paxton had launched a review of his disclosure forms “after The Texas Tribune obtained 2006 letters showing the McKinney lawmaker was being paid to solicit clients.”
The 2006 letter was Mowery’s disclosure to his clients David and Teri Goettsche that Paxton had received a fee for referring them back in December 2003, at a time he was registered.
Nearly six years after Paxton referred the Goettsches to Mowery, they sued Paxton, arguing not that they’d lost money, but that they objected to the structure of a venture in which they’d invested. The lawsuit was dismissed right away, but David Goettsche was featured in a Branch ad attacking Paxton.
Contact Jon Cassidy at [email protected] or @jpcassidy000.
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