The Paxton Problem
Mon May 5, 2014 3:12 pm

On Friday the Texas Tribune reported that state senator Ken Paxton, who finished first in the Republican primary for attorney general in March and will face state representative Dan Branch in the runoff on May 27, was reprimanded by the Texas State Securities Board for violating the Texas Securities Act.

Per the disciplinary order (PDF), Paxton’s violation was that on several occasions he solicited clients on behalf of investment advisors without being registered as a representative of the investment advisors in question, as state law requires. Paxton was fined $1,000 for one of those occasions—the one that happened within the past five years—and from now on, he will have to affirmatively disclose to any potential clients he’s soliciting that he is a registered investment advisor, rather than merely being registered, which he was supposed to have done in the first place.

Here  it is in layman’s terms. Two weeks ago, the Tribune’s Jay Root reported that Paxton had launched an internal review of himself to see whether he had broken any laws by failing to report a number of business relationships to the relevant legal authorities. As Root noted, Paxton had not, at that point, been accused of any wrongdoing by state authorities. He had, however, been accused of wrongdoing by David and Teri Goettsche, who, in 2009, sued Paxton, along with his business partner Fritz Mowery, for breach of fiduciary duty. Paxton had advised Teri Goettsche to invest with Mowery, according to the lawsuit, but hadn’t mentioned that he would be getting a hefty commission for his trouble. As Root reported, the news came as an unpleasant surprise:

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.” 

The couple eventually dropped their lawsuit against Mowery and Paxton. Nonetheless, the State Securities Board’s disciplinary order confirms that at the time in question, Paxton should have been registered as a representative of Mowery’s firm. The state has laws to that effect to protect Texans from being bilked or swindled.

Paxton himself has canceled a string of public appearances over the past two weeks, possibly because he’s been busy investigating himself; the campaign hasn’t said why. On Friday, after the State Securities Board issued its disciplinary order, Paxton’s campaign spokesman said he was “pleased” that the matter had been speedily resolved. They had paid a fine, he continued, that was “due to an administrative oversight.”

That’s a little hard to believe, though. Paxton got hit with a fine because of a separate incident, in 2012. The Goettsches’ lawsuit, which accused Paxton of violating the same law that the State Securities Board just disciplined him for violating, was filed in 2009. Even though that lawsuit was dropped, being sued seems like the kind of thing that would encourage an attorney to be a little more attentive to his paperwork in the future.

And Paxton, who is the leading candidate for the top legal job in Texas, has a history of not knowing what the state’s laws are, even--or especially--the ones that directly apply to him and his business dealings. 

Article III of the Texas constitution, for example, says, in part: “nor shall any member of the Legislature be interested, directly or indirectly, in any contract with the State, or any county thereof, authorized by any law passed during the term for which he was elected.” In 2008, the aforementioned Jay Root, who was then at the Associated Press, reported another interesting story. In 2006, a company called WatchGuard won a lucrative contract, worth about $10 million, with the Texas Department of Public Safety. It was a coup for the young company, which reported a huge leap in earnings a couple of years later, as Root was reporting this story. But it was fitting that WatchGuard would do well in Texas. Among the company’s early investors, Root noted, were two members of the Legislature: Paxton, who was then in the House, and Byron Cook.

This wasn’t, as it turned out, a closely held secret. On its website, the company bragged that it was held by an “influential shareholder group” including three state representatives. (The third was Bob Griggs, who served in the House from 2003-2007.) And when contacted by Root, WatchGuard’s president, Robert Vanman, cheerfully touted Paxton and Cook’s contributions to the enterprise. Cook, he said, was one of the company’s largest investors, and active on the board. Paxton was a personal friend, Vanman continued, who owned a “not insignificant” share of the company.

Paxton, though, played dumb when Root got in touch. “I didn’t even know we had contracts with the state of Texas,” he said. And when Root asked about an idea that had been suggested by a nonpartisan watchdog group—that lawmakers should be required by law to disclose investments in businesses holding state contracts—Paxton was dismissive: “I don’t see why it would help taxpayers to know that.”

Actually, it’s not at all hard to see why it might help taxpayers to know whether legislators have investments in businesses that hold state contracts. It would encourage them to take notice when a small company partly owned by sitting legislators wins a lucrative state contract. Such contracts are not necessarily sinister. Indeed, in the aforementioned case, WatchGuard was the only company that bid for the DPS contract that wasn’t disqualified, so it stands to reason that they would have won the contract. Still, other situations are less straightforward--and although the Texas Constitution is in many respects a ramshackle and unwieldy document, it is a document the attorney general of Texas is expected to understand, and uphold.

To be fair, Paxton is not the only legislator who is unfamiliar with this provision. In 2009, then-senator Steve Ogden filed a bill that would require legislators to disclose all investments in businesses with contracts with the state of Texas. This spurred a classic moment on the floor of the Texas Senate commemorated in yet another story by Jay Root, after Senator Royce West asked why there was a need for such a law:

"We can contract with the state?" West asked. "I really thought that was prohibited."

Ogden said initially he didn't think it was illegal, then told reporters later he was not aware of the constitutional ban when he brought the bill up. But the powerful lawmaker said it's still a good idea to require disclosure of such relationships. 

Making matters worse is that Paxton has repeatedly sought to present himself as a crusader for government transparency and accountability. “My biggest goal for this session is to improve the accountability and efficiency in government spending while promoting more honest, open government,” he said in 2007, in response to a questionnaire for the Coppell Gazette. Over the course of that session, he filed a couple of bills to that end. One called for government lobbyists to report how many tax dollars were spent while lobbying legislators. Another tried to tighten a 2005 law about state contracts; the existing law required contracts of $5 million or more to be posted online, but Paxton thought that the database should include all contracts of at least $10,000.

It’s also true that Paxton filed a couple of measures that year that seemed designed to reduce government transparency rather than expand it, such as the bill that sought to bar appraisal districts from disclosing property sales prices, which was supported by the Texas Real Estate Association, and eventually became law. Now, if appraisal districts want to see real estate sales data, they have to pay for access to the MLS, and if homeowners want to challenge an appraisal, they can pay for access too. Looking at that example, it would be easy to get the impression that Paxton’s commitment for transparency is intermittent, or even opportunistic. In running for attorney general, however, Paxton has continued to tout himself as a reformer. His campaign website lists “Protecting Taxpayers” as a priority issues, and elaborates: “The Attorney General plays a lead role in protecting taxpayers through investigating waste, fraud, and abuse, by reviewing and approving local bond packages, and through reviewing large state contracts. “

That would be nice. Unfortunately, there’s no reason to think Paxton would be well placed to do so if he wins. Looking over his record, he’s either surprisingly uninformed about what the state’s laws are, or surprisingly unconcerned about following them himself. Either quality would make  an unworthy potential successor to the current attorney general, Greg Abbott, who has, setting aside what you think of his political views, run a smart, ambitious and effective operation for more than a decade. Read my colleague Brian Sweany’s profile of Abbott, or my profile of Ted Cruz, who worked for Abbott as solicitor general, if you could use a reminder of what credible, conservative lawyers in the attorney general's office should sound like. By contrast, here’s Paxton: “I didn’t even know we had contracts with the state of Texas,” he told Root in 2008. If that was true, it was odd, and it's troubling in retrospect, since we now know he didn’t even bother to familiarize himself with state laws by 2009, when the Goettsches sued him, or by 2012, when he violated the state law that led to last week’s formal reprimand, or by 2014, when Jay Root once again called to ask why he was violating the laws in question. 

And again, keep in mind that Ken Paxton is the leading candidate for attorney general. 

(AP Image / Eric Gay )

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