Paxton No Stranger to Controversial Deals

Texas Attorney General Ken Paxton and his allies are claiming he’s the victim of a political witch hunt, but the substance of his reported indictment and a long history of controversial business deals suggest otherwise.

Even before Paxton admitted he violated civil securities laws last year — or faced a subsequent criminal investigation this year — he had come under fire from watchdogs and political opponents for allegedly crossing ethical lines in his private businesses and failing to disclose all of his dealings on personal financial statements.

And the scrutiny hasn't been centered on Paxton's political activism but rather on his personal finances — everything from his interest in a company with a big state contract to allegations that he illegally peddled investments to unsuspecting clients and investors.

Paxton’s supporters have sought to portray the indictment as just the latest effort to stunt the rise of a Tea Party favorite. They have also drawn comparisons to the pending indictment against former Gov. Rick Perry, whose team has feverishly spun that case as political witch hunt.

But in Perry’s case, the charge relates to an alleged abuse of his authority as governor of Texas. According to news reports, Paxton has been indicted on charges that stem from alleged securities violations — improperly steering people into investments while failing to disclose his own financial involvement.

Also, Perry was indicted by a grand jury in liberal Travis County, where Republicans have complained for years they can’t get a fair shake. Paxton was indicted by a grand jury in bedrock Republican territory — his home base of Collin County.

“These are very different cases. With Perry it was an ambiguous indictment of a legitimate political act of a governor in a line-item veto. We could argue plausibly that this was a political vendetta because he did only what every other governor does,” said Cal Jillson, a political science professor at Southern Methodist University. “That simply doesn’t work in the Paxton case. These are actual crimes that are being alleged. Felony crimes of financial misbehavior.”

Kent Schaffer, one of two special prosecutors who took the Paxton case to the grand jury, told The New York Times that the indictment includes three felony counts — two alleging first-degree securities fraud and another alleging a third-degree charge that he failed to register as a securities agent.

The indictment, which local news outlets say will be unsealed Monday, reportedly includes allegations that Paxton encouraged others to invest more than $600,000 in a company called Servergy Inc. without informing them he was making a commission and while misrepresenting himself as a fellow investor.

More than a year ago, a Texas Tribune investigation revealed that Paxton had been working as an investment advisor representative without registering as state securities law requires, and that he failed to notify clients about his paid work. The investigation found he had also failed to report some of his business activities to the Texas Ethics Commission.

Paxton eventually amended several of his personal financial statements and then later admitted he violated the Texas Securities Act stemming from his unregistered work soliciting investment clients for a friend and business partner at Mowery Capital Management. He paid a $1,000 civil fine and his campaign chalked it up to an “administrative oversight.”

But now he reportedly faces criminal charges stemming from the same investment referral work.

The civil and criminal trouble over the alleged securities violation added to a long history of controversial business dealings. In 2008, The Associated Press reported that Paxton failed to disclose a lucrative investment in a company known as Watchguard Video, which provides video recording technology to state and local law enforcement — a client list that includes the state of Texas.

Paxton's judgment was questioned during the 2014 GOP primary after it was revealed that he invested in an energy deal, which ensnared other members of the Legislature, offered by an businessman who claimed to been part of an expedition that found Noah’s Ark. Current and former elected officials were also lured into making investments in Servergy, which is now part of the sealed indictment, according to published reports.

Elsewhere, The Dallas Morning News reported in May 2014 that Paxton was listed as co-owner and had served as general counsel of an Allen-area football team that didn’t show up on his ethics disclosures. Paxton’s campaign said at the time that the private transaction granting him ownership had not been fully executed.

Paxton’s Democratic opponent from 2014, attorney Sam Houston, said when the November election rolled around there was a cloud of controversy hanging over the Republican nominee. By then, Paxton had already easily defeated state Rep. Dan Branch, R-Dallas, who had made Paxton's alleged ethical lapses the centerpiece of his primary runoff.

“Dan Branch and I both talked about a pattern in the election. So I don’t think this is anything surprising or new,” Houston said. “I hate to say I told you so because that doesn’t make me feel better, but we were saying that it was likely that once he was elected that he could be indicted and sure enough, it’s happened. It’s just been even more counts than I even thought would happen.”

Paxton’s business record is about to draw a harsher spotlight than ever before, with an indictment expected to be unsealed Monday that alleges first-degree felony securities fraud. If he is convicted, the charge comes with a punishment of five to 99 years or life in prison.

"I would expect Mr. Paxton and his legal team to fight these charges vigorously," said David Owens, a former Tarrant County prosecutor who now practices law in Fort Worth. "This is his political career, this is his job, and in fact, this is his life."

Politically, the business headaches appear to have had little effect on Paxton so far.

“Real human beings who don’t follow this every day, they don’t really care about it,” said Jonathan Neerman, a former chairman of the Dallas County GOP who supported Branch. “This is a highly technical issue.”

Over the weekend, few elected officials were scrambling to defend Paxton, especially among the highest-ranking Republicans in the state. That stood in contrast with the period after Perry was indicted on abuse-of-power charges about a year ago, when national political figures from both sides of the aisle expressed doubts about those allegations.

Representatives for Gov. Greg Abbott, who was mingling with GOP mega-donors in California when the news broke Saturday, did not respond to a request for comment on Paxton's indictment. A spokesman for Lt. Gov. Dan Patrick did not have an immediate comment.

The indictment could especially put U.S. Sen. Ted Cruz in a tough position. Cruz never formally endorsed Paxton in the attorney general's race but left no doubt he supported the Tea Party favorite, appearing at fundraisers for him and playing a starring role in a commercial.

As word of the indictment spread, it was Tea Party activists who were the most willing to speak out about it. Writing for Empower Texans, an influential conservative group, its general counsel Tony McDonald questioned whether the investigations of Paxton had ties to the leadership of House Speaker Joe Straus.

Saying House leaders' "motives are obvious," McDonald wrote hours before word of the indictment spread: "Paxton rose to statewide prominence when he challenged Straus for the speakership in 2011. Further, the three are still stinging from Paxton’s defeat of their ally and Straus’s boyhood friend, Dan Branch, in the 2014 primary for Attorney General."

Those voters who have sided with Paxton through the controversy, Jillson said, need to "blink hard twice and ask themselves what they were thinking."

Some conservatives are taking a less defensive approach to Paxton's legal troubles, though. North Texas Tea Party activist Mike Openshaw wrote on Facebook that Paxton should "step aside" if the reports about his indictment were true.

"Texas conservatives need to maintain a higher standard," Openshaw wrote. "We aren't Democrats."

Disclosure: Southern Methodist University was a corporate sponsor of The Texas Tribune in 2013. A complete list of Tribune donors and sponsors can be viewed here.