- Associated Press - Sunday, May 17, 2015

AUSTIN, Texas (AP) - Before being elected Texas attorney general, Ken Paxton earned thousands of dollars by referring his private legal clients to a financial adviser now accused of “unethical and fraudulent conduct” by the state, according to court records.

Paxton agreed to steer at least six clients - twice as many as previously reported - to Frederick “Fritz” Mowery, the head of McKinney-based Mowery Capital Management, and the pair would split the management fees as long as the clients remained with Mowery, the Dallas Morning News reported (https://bit.ly/1GhwvA3 ).

State regulators fined Paxton $1,000 last year for soliciting investment clients without registering, and he previously admitted that he violated state securities law by failing to register as an agent for Mowery.

Failing to register can also be a third-degree felony under state law. Complaints by a watchdog group have led to a Texas Rangers investigation and appointment of special prosecutors, the newspaper reported.

Most of the clients say they were not told of the fee referral arrangement with Mowery, who declared bankruptcy in 2005. Paxton’s spokesman, Anthony Holm, told the newspaper that the attorney general was unaware of the bankruptcy and believed that Mowery had disclosed the arrangement to the clients and the state.

“He was very confident any necessary filings were made,” he said.

During a five-day administrative hearing in early March, the Texas State Securities Board alleged that Mowery engaged in misrepresentations, conflicts of interest and breach of fiduciary duties. When the paper contacted Mowery, he deferred to his lawyer, who declined to comment about the allegations.

The allegations include that Mowery used a high-cost brokerage firm for his clients’ equity trades, and also had a separate business arrangement with that firm that paid him more than $1 million over seven years. The state contends the arrangement was a conflict of interest that could have cost his clients thousands of dollars in fees. Sanctions, if any, are expected to be handed down this summer.

After being questioned by state securities officials, Mowery sent letters in April 2014 to clients referred by Paxton, according to court transcripts obtained by the Morning News. The letters, which clients were asked to sign, disclosed the fee arrangement with Paxton. But the letters were back-dated to years earlier, when the clients first hired Mowery, the newspaper reported. The securities board was sharply critical of the practice.

Mowery’s fees were a percentage of how much a client invested. Calculations based on those disclosures show that Paxton received payments amounting to hundreds to thousands of dollars annually.

Holm, Paxton’s spokesman, said that once Paxton learned from reporters during his campaign for attorney general that there were no filings, he went to the State Securities Board, “self-disclosed and proactively reported it.”


Information from: The Dallas Morning News, https://www.dallasnews.com

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