By Jay Root
The Texas Tribune
Originally published April 21, 2014
State Sen. Ken Paxton, the leading Republican candidate for attorney general, has launched an internal review of his disclosures to state regulatory authorities and the Texas Ethics Commission to determine whether he violated any laws by failing to report several business and professional relationships.
Paxton launched the review after The Texas Tribune obtained 2006 letters showing the McKinney lawmaker was being paid to solicit clients for a North Texas financial services firm at a time when he was not registered with the State Securities Board. Registration in such circumstances is typically required. Nor did Paxton ever reveal his solicitor work on the employment history section of his personal financial statements, which must be filed regularly with the Texas Ethics Commission.
Also missing from his ethics filings is any disclosure of his service on the boards of at least a half-dozen nonprofit corporations, the Tribune investigation found. Ethics laws require legislators to reveal service on corporate boards, including nonprofit ones.
Paxton’s campaign said it was taking the matter seriously but would not answer any specific questions about the alleged lapses.
“To ensure we are in full compliance, the campaign is in the process of reviewing and researching the questions raised by The Texas Tribune,” said Paxton spokesman Anthony Holm. “Sen. Paxton has always promoted transparency in government and will continue to do so.”
Ethics disclosure laws in Texas are notoriously lax and riddled with loopholes, and lawmakers who fail to adhere to them generally do not face serious sanctions. Often they amend the reports without penalty after someone complains or their failure to disclose is reported by the media — as was the case when Paxton amended one of his reports a few years ago.
Running afoul of State Securities Board regulations, on the other hand, carries potentially tougher penalties; violations can range from fines to felony prosecution. Paxton has not been accused of wrongdoing. His campaign declined to answer any questions about his employment history, details that are necessary to determine whether laws were broken.
This much is known from regulatory filings and the 2006 letters obtained by the Tribune: Paxton began working as a solicitor for companies run by his friend and business associate Frederick “Fritz” Mowery as far back as the summer of 2001. While Paxton has been associated with Mowery’s firm as a solicitor on and off for a decade or so, records show he was registered with the State Securities Board for a total of about two years.
Solicitor is the informal title for “investment adviser representative,” an official designation for people who refer investors — for a fee — to an investment adviser.
Records from the Securities Board show Paxton was registered once between July of 2003 and the end of 2004 for Mowery’s Oxford Advisors Corporation. He got registered again for Mowery Capital Management on Dec. 13 of last year, and that registration remains active.
Robert Elder, spokesman for the State Securities Board, confirmed that Paxton was not registered as a Texas investment adviser representative between Jan. 1, 2005, and mid-December of 2013. He said that he cannot discuss the hypothetical oversight of an individual solicitor or comment on whether Paxton should have been registered in other years.
The Texas Securities Act defines a solicitor, in part, as “each person or company who, for compensation, is employed, appointed, or authorized by an investment adviser to solicit clients for the investment adviser.” The law also says that unless a person is specifically exempted, he or she “may not act or render services as an investment adviser representative for a certain investment adviser in this state unless the person is registered.”
Paxton’s campaign has not said whether the senator believes state or federal securities laws required him to register when he was working as a solicitor. When asked specific questions, Holm, the campaign spokesman, referred to his written statement about the campaign’s promised review of Paxton’s disclosure obligations.
According to Elder, the Securities Board spokesman, penalties for acting as a solicitor while failing to register “can range from those administrative penalties to include suspension, up to revocations, to fines, and then things could move into, obviously, the criminal arena as well.”
“But it is all completely fact-specific,” he added, emphasizing that he was speaking in broad terms and not about any individual.
The facts in at least one case from 2006 demonstrate that Paxton was being paid at a time that he wasn’t registered with the state to do paid solicitor work.
The case involved two of Mowery’s customers — Teri and David Goettsche of Dallas. In a September 2006 letter, Mowery informed a concerned and apparently surprised Teri Goettsche that Paxton — whom she had previously retained as a lawyer on a separate matter — was being paid a 30 percent commission for referring her to Mowery’s investment firm.
“Mr. Paxton receives a percentage of Mowery Capital Management’s quarterly investment management fee for certain clients referred to us,” Mowery’s letter said. “This fee arrangement was a verbal arrangement between Mr. Paxton and us and therefore no documentation exists.”
Teri and David Goettsche later sued Mowery and Paxton, alleging that their actions helped lead the couple into a doomed real estate investment scheme with one of Mowery’s own business partners, who soon declared bankruptcy. David Goettsche entered into a separate investment arrangement with Mowery in 2005 and was later told in writing that Paxton was getting a 30 percent cut from his fees, too.
The Goettsches’ lawyer, John Sloan of Longview, said the couple lost hundreds of thousands of dollars in the failed land deal, and only found out about Paxton’s role when things started to go south in the summer of 2006. Teri Goettsche was referred to Mowery after hiring Paxton to prepare a post-nuptial agreement in 2003 and didn’t realize the lawyer-turned-politician was also getting paid as a solicitor, they said in the lawsuit.
According to state and federal court records, Mowery declared bankruptcy a little more than a month after David Goettsche and Mowery jointly signed a brokerage account agreement. Paxton received referral fees for David Goettsche as well, letters from Mowery indicate.
“They were shocked that this Paxton guy was getting a kickback. They just thought he was doing them a favor,” Sloan said. “He saw an opportunity for himself to profit and did.”
Reached by phone, Fritz Mowery, the president of Mowery Capital, declined to discuss Paxton’s work for the firm, the bankruptcy filing or any details of the lawsuit.
“We just don’t talk to reporters,” Mowery said before hanging up the phone.
Paxton’s campaign also declined to answer the Tribune’s questions about the Goettsche lawsuit. It is not clear whether Paxton knew that Mowery — deep in credit card debt, according to the personal bankruptcy filing — was on the verge of going broke while he was being paid to refer clients to him. According to Sloan, the Goettsches decided to drop the suit after realizing they had signed a binding arbitration agreement that limited their legal options. Mowery and Paxton denied the allegations in their responses to the court.
But the lawsuit lived on as a political issue in the first-round GOP primary for attorney general, when candidate Barry Smitherman attempted to use it against Paxton in a negative TV ad. When asked about the lawsuit by Fort Worth talk show host Mark Davis in February, Paxton called it a “frivolous lawsuit” and said the plaintiffs had “a history of suing a lot of people,” a claim Sloan denied.
Sloan called the attack from Paxton “slander” and said it motivated him to speak out about the North Texas Republican. Sloan gave the Tribune copies of the letters that Mowery wrote to his clients. He removed their names and addresses from the letters but confirmed they were sent to the Goettsches.
Mowery and Paxton have deep ties to each other. Besides getting client referrals from Paxton since as far back as the early 2000s, Mowery’s firm set up shop last summer in the same McKinney office building in which Paxton has an ownership interest. They also serve on a nonprofit together — one that isn’t disclosed in Paxton’s Texas Ethics Commission filings — and Mowery and his company have given more than $10,000 in campaign contributions to Paxton over his career in state politics, records show.
The solicitor work is not the only professional activity Paxton has kept off of his ethics filings. Paxton currently is or previously was a director of at least a half-dozen nonprofit corporations that do not appear on his ethics reports, according to business records on file at the office of the Texas Secretary of State. Some of the nonprofits were active for only a short period, and very little is known about them.
Paxton has disclosed some of his nonprofit board positions, but he has done so inconsistently. According to the Texas Ethics Commission guidelines, all nonprofit and for-profit board and executive positions must be listed on personal financial statements. While nonprofits are generally set up as charitable or public service-oriented organizations, government watchdogs say public disclosure of them provides a check against abuse and allows voters to more thoroughly vet their elected representatives.
Among Paxton’s undisclosed nonprofits are the Collin County Student Aviation Initiative, on whose board Paxton and Mowery jointly serve. It trains students for careers in aviation, according to a description of it on one of Paxton’s biographies.
He has also served on the board of the Sacra Script Ministries, a Bible study organization, and the Amazon Friendly Coalition, which was set up to promote what the organizers considered to be rainforest-friendly products from the Amazon region of South America, such as palm oil, according to one of Paxton’s fellow directors on the board.
That director, Richard Ihasz of Irving, is also president of Edible Oil Services Inc., a for-profit Texas company that shared an Irving address with the Amazon Friendly Coalition and imports organic palm oil from Brazil, records show.
The coalition raised $250,000 for the project, according to state and federal tax records. It was disbanded in 2010, and the money was returned to the donors, Ihasz said. He declined to identify the donors and said Paxton handled the tax filings.
“You need to call Ken; he was the guy who organized that,” Ihasz said. “He was the attorney. Anything like that, that was him.”
Paxton faces the same ethics disclosure requirements in the race for attorney general as he did running for the state Senate. But the stakes are higher and the spotlight is brighter now as Paxton faces off against state Rep. Dan Branch, R-Dallas, in a May 27 runoff to be the state’s top attorney.
Whoever wins will settle most disputes over government transparency in Texas, because the attorney general’s office decides what records state and local government entities in Texas must release — or withhold from the public — under freedom-of-information laws. The State Securities Board also refers criminal cases, such as violations of the securities registration and disclosure rules, to the attorney general’s office when warranted.
This isn’t the first time Paxton has failed to disclose a business interest. The lawmaker did not reveal his interest in a lucrative state contract on 2007 ethics disclosures until The Associated Press reported on it in 2008. At the time, he blamed the lapse on a technical snafu and promptly corrected it.
Joe Larsen, a board member of the Freedom of Information Foundation of Texas and chairman of the group’s review committee, said he was not familiar with Paxton’s track record on transparency. But he said that “the history of one’s personal transparency is absolutely indicative of how objective a person would be in deciding other transparency issues.”
“I consider it extremely important that the attorney general have an approach to government whereby transparency is recognized for the important conservative ideal that it is,” Larsen said. “There is no way to have limited government unless you know what your government is doing.”