The special prosecutors pursuing Attorney General Ken Paxton obtained a criminal indictment of Paxton using a document that they themselves had described as “falsified” and “backdated.”
That document, according to special prosecutors Brian Wice and Kent Schaffer, establishes the date of Paxton’s alleged crime as July 18, 2012.
The date is important because this failure-to-register charge has a three-year statute of limitations. Paxton was indicted on July 7, 2015. If his referral of a client to investment advisor Fritz Mowery took place before that date in 2012, the charge won’t hold up.
There’s paperwork establishing that Paxton made his recommendation by June 26, 2012, at the latest, but the prosecutors have come up with a legal theory that the solicitation extended for several weeks after the conversation between Paxton and his client, until July 18, 2012.
However, the document supporting that theory is known to be fraudulent. Mowery drew it up in April 2014, after regulators started an investigation that nearly cost him his license.
Mowery drew up at least four letters disclosing the commissions he was paying to Paxton and others, and mailed them to his clients for their signatures.
He backdated some of the letters by years. The one that ended up in the Paxton case had the date left blank, but the Texas State Securities Board concluded that Mowery had “intended to mislead” investigators.
Wice himself told a grand jury that it was “falsified” and “backdated.” However, it wasn’t until sealed court records were made public recently that it became clear that this falsified record was the key document supposedly establishing July 18 as the date of the crime.
Neither Wice nor Schaffer responded to questions.
The original deception was discovered almost immediately, and Mowery claimed full responsibility for it. Paxton said he didn’t know about the documents. Still, Wice argued to the grand jury that he found the timing suspicious.
In his PowerPoint presentation to the grand jury that indicted Paxton, a copy of which was recently unsealed, the prosecutor suggests that Paxton was in on the trickery. One bullet point states, “What Paxton and his attorney did not disclose to (sic) was that the disclosure documents had been falsified.”
In more recent records, Wice admits that he has no proof that Paxton knew of Mowery’s deception. The question “is yet to be litigated,” he writes.
The PowerPoint doesn’t mention that the phony documents had been submitted in Mowery’s case, not Paxton’s.
Client James Henry, has testified that he trusts both Paxton and Mowery, as the returns on his investments have beaten the market. He also said he doesn’t remember if either man told him that Paxton was receiving a commission, “because it wouldn’t have been that important to me.”
The presentation also makes no mention of the fact that James Henry and his wife Freddy signed a letter of authorization dated June 26, 2012, allowing Paxton and Mowery to “discuss any and all business related matters.”
The grand jury was told that Paxton’s registration requirement kicked in on June 25 and that he made a referral on July 18. There’s no sign in the deck of slides of a story more complicated than that.
The registration requirements for Paxton were in flux during this period, as a change in federal law required Mowery to move his registration from the Securities and Exchange Commission to state regulators.
As long as Mowery was under the SEC’s jurisdiction, Paxton had no obligation to register as an investment advisor representative.
In 2012, Mowery transitioned back to state registration. His state paperwork was approved by the TSSB on June 25, 2012, but his federal registration didn’t expire until Oct. 12.
Paxton’s attorneys argue that he wouldn’t have had to register during the overlapping period, but the courts haven’t yet sorted that out.
A timeline of events shows how the “fabricated” document fits in.
Sometime in June in 2012, the Henrys visited Paxton, an estate lawyer, to ask him to set up a living trust.
“In the course of that conversation, I asked him if he had any recommendations for me as to a financial advisor,” James Henry testified at a hearing.
Neither he nor Paxton remembers the exact date of the conversation. Mowery has said it was on June 14.
On June 25, the TSSB approved Mowery’s paperwork, triggering a paperwork requirement for any of his representatives. Mowery would have needed to file Paxton’s registration in the TSSB’s system, because, as Deputy Securities Commissioner Ronak Patel told investigators, “individuals can’t access it to make filings on their own behalf.”
On June 26, 2012, the Henrys signed their letter of authorization so that Paxton and Mowery could discuss their “business and personal accounts at Mowery Capital Management.”
On July 7, 2012, nothing happened, but it marks the boundary of the statute of limitations, counted from the indictment three years later.
On July 18, 2012, the Henrys “entered into” an investment advisory agreement with Mowery, according to the investigatory records of the Texas Rangers. This agreement, however, is not the document that the special prosecutors are relying on for their date.
In a legal brief that was only unsealed in December, Wice makes his argument that the solicitation wasn’t over when the Henrys agreed to it around June 26.
“It was only after Mr. and Mrs. Henry agreed in a July 18, 2012 letter to compensate Paxton was this offense complete within the statute of limitations.”
His emphasis is on compensation, as Texas law defines “investment advisor representative” as a “person or company who, for compensation, is employed, appointed, or authorized by an investment adviser to solicit clients for the investment adviser.”
Now, Paxton and Mowery had agreed on terms of compensation in a July 28, 2006 memo. That would just leave the question of when he solicited the clients.
But Wice argued that it’s not until the clients agree to pay him that we can consider Paxton to have acted “for compensation.”
“Nothing in the June 26, 2012 letter triggered any action on Paxton’s part resulting in his acting as an investment advisor representative ‘for compensation,’” Wice argued.
The potential problem with his theory is that there is no July 18, 2012 letter where the Henrys agree to compensate Paxton. The letter in which the Henrys acknowledge Paxton’s compensation is the undated letter from April 2014, the one meant to look like it was from July 2012.
Jon Cassidy can be reached at [email protected].