By Janet Elliott
AUSTIN – Texas Securities Commissioner John Morgan brings 27 years of experience fighting securities fraud to his new position, taking over the agency at a critical time as oversight of hundreds of investment advisers shifts from federal to state regulators.
Morgan, who in December became the state’s seventh securities commissioner, has seen the agency evolve since he signed on fresh out of Texas Tech University School of Law because he thought it would be fun to chase down con artists.
“We are fortunate that Commissioner Morgan returned to the agency to take on the role of commissioner during this challenging time. His wealth of experience, integrity and calm leadership are invaluable during this era of increased oversight responsibility and budget constraints,” says Board Chair Beth Ann Blackwood, a Dallas attorney.
The State Securities Board registers securities offered or sold in Texas and oversees firms and individuals selling securities or providing investment advice. It also enforces the Securities Act through criminal, civil and administrative actions.
In a recent interview, Morgan discussed how he will set priorities for the new registrants, some of which have never been inspected. He also talked about the law signed by President Obama April 5 that makes it easier for startups to solicit investors over the Internet, called “crowdfunding.”
Congress in late March passed the Jumpstarting Our Business Startups Act, or JOBS Act, making it easier for startups to raise capital without running afoul of federal and state regulations. Morgan joined other state securities commissioners in warning about the potential for abuse.
“If there’s no registration of the intermediary, there’s no regulation of the underlying security, then there’s nothing an agency could do except watch it,” Morgan says. Without the power to look at the company’s records without a subpoena, the agency loses its ability to act quickly to shut down a fundraising operation.
“By that time, a lot of money may have been raised and a lot of money may have been stolen,” Morgan says.
It was a different Congress in 2010 that passed the Dodd-Frank Wall Street Reform Act, which gave states oversight of investment advisers managing up to $100 million in assets. Previously, states registered advisers who managed up to $25 million.
The effect of what is being called “The Switch” on Morgan’s agency is profound. The number of registered investment advisers will jump by 736, or 61 percent, to a total of 1,936. Assets under management are expected to increase from $18 billion to $58 billion.
Last year, the Securities Board told the Legislature that it would need 10 new examiners in order to keep its schedule of inspecting advisers every five years. Lawmakers, facing a budget shortfall, gave the agency only five new employees for a total of 23 examiners, and those would only be approved if the agency raised more revenue.
“We brought in about $180 million last year, our budget is a little over $6 million,” says Morgan. “We’re a net contributor and always have been.”
Morgan hopes to be able to hire and train the new staff this summer. He knows that many of the firms being registered haven’t ever been inspected by the perennially short-staffed Securities and Exchange Commission, so he wants to get to those firms first.
“I don’t think state inspections will be more rigorous. They may be more frequent,” says Morgan. “We make unannounced inspections, which is maybe another difference.”
When the agency started its inspection program in the early 1990s, inspectors would walk up to what was supposed to be a firm full of registered agents and “we’d see a bunch of people running out the back door,” says Morgan. “That told us that it was not a good idea to call before we came.”
Carol Mattick, a San Antonio business and securities lawyer, says some of the firms that have operated under the SEC’s radar will benefit from the new regulatory structure. But she wonders whether resources that could go to help firms comply with the laws instead will be used to police the bad actors.
“The State Securities Board is about to get experience with a lot of bigger advisers. They are about to get on the state level more of the kind of thing that institutional investors do on Wall Street,” says Mattick.
Morgan says the agency uses a risk matrix to decide which advisers to inspect, and those who have not been inspected by the SEC in many years will be a priority. He says one newly registered firm told the agency it has never been inspected in its 17 years in business.
Advisers domiciled in Texas and those managing the most assets go to the top of the list. Inspectors also pay attention to public advertising of investment opportunities and the targeting of a specific population, such as a group of teachers or a church congregation.
“Those can spread really rapidly,” Morgan says.
As it carries out its new oversight authority, the Securities Board also is seeing an increase in enforcement actions, which include investigations, agreed settlements and civil and criminal cases. After more than doubling to 2,318 in 2009, they fell slightly to 1,674 in 2011.
The bear market made some investors easy prey for those who promised higher returns. Others believed they were investing in the state’s booming oil and gas industry, fertile ground for scam artists since 1923 when Texas passed a comprehensive securities law aimed at a spate of troublesome oil-company securities that had been issued in 1918-1919.
“Over time there are technological developments or new discoveries made that help hype (energy products) a little bit. For example, in the 1990s horizontal drilling was being used by promoters to help sell investments. Now as different gas fields are discovered that is used as part of the sales pitch,” says Morgan.
One recent scheme involved a company called Greenway Energy Partners, which raised about $800,000 from investors for a proposed biodiesel plant in Hunt County. Five men were indicted by a Collin County grand jury on charges including securities fraud, money laundering and theft. One of the five pleaded guilty in February 2011 to a felony theft charge and was sentenced to eight years in prison; the other four cases have not been resolved.
When the Securities Board wants to bring a criminal prosecution, it partners with local district attorneys. Collin County is a popular venue because the D.A.’s office has been willing to work with the agency and because of the likelihood of finding a victim in that large urban county.
Under Crawford, the Securities Board boosted its efforts at educating the public about investment strategies and risks. Thousands of copies of a booklet prepared for the military have been shipped to Fort Hood and other bases. A new webinar is designed to help Texas teachers, who generally don’t get Social Security and often look for investments to supplement their pensions.
While some may fall victim to investment fraud because they are greedy, Morgan says many are senior citizens, living on fixed incomes and relying on certificates of deposit or other conservative investments to make ends meet.
“It’s been a real oddity to me, over the last 27 years, that no matter how tough the prison sentences have been – and we’ve gotten some amazing prison sentences of 99 years, 25 years, 14 years – no matter how many you do and how much you publicize there are always people willing to step up and attempt to defraud the public and risk getting caught,” says Morgan. “There is no shortage of con men out there right now.”
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