An experienced insurance agent lost his license because he sold something he knew nothing about. Insurance agents and brokers should limit themselves to that which they know: insurance. When they deal in securities without a securities license, agents may find themselves in hot water with the department of insurance and may even face criminal prosecution. In Mark Griffin Meyer, Appellant v. Texas Dept. of Insurance, No. 03-10-00642-CV (Tex.App. Dist. 3 11/23/2011), an agent lost his license because he sold securities mislabeled 9-month loans and short-term leases, all because he fell for a sales pitch, lied to his clients and made promises he could not fulfill. The Texas Dept. of Insurance (TDI) took his license and he appealed the decision.

Prior to the revocation order, Meyer had held a Texas general life, accident and health insurance license for approximately two decades. Although Meyer had once focused his business on selling health and life policies to small business owners, over time he had come to trade primarily in insurance products serving the investment needs of clients who were at or near retirement age.

In 1997, Meyer met a businessman named Michael Kelly, who claimed to own several hotels in and near Cancun, Mexico and numerous other Mexican and Panamanian properties and businesses. Kelly was in the process of recruiting agents in the U.S. to sell a non-insurance investment product known as a "9-month note" offered through a Kelly entity, the Yucatan Investment Corp., ostensibly to finance various Kelly business endeavors. As the product’s name suggests, the 9-month note was an unsecured promissory note that paid investors 10.75 percent in interest over a period of 9 months. Before agreeing to do business with Kelly, according to Meyer, a business associate ran a background check on Kelly that revealed no cause for concern. Meyer further claimed that he visited Kelly in Mexico, stayed in a hotel that Kelly purported to own and became assured of Kelly’s business acumen, good character, and great wealth. Meyer began marketing the 9-month note to his insurance clients. For his services in selling the note to his clients, Meyer was paid commissions of between 12 and 14 percent.

Related: Read Zalma's previous column "No Duty Benefit Consult."

Sales of the 9-month note by Kelly’s U.S. sales agents attracted the attention of regulatory authorities in at least four states other than Texas, who initiated investigations as to whether the 9-month note was a security that had not been registered as required by law. In response to these regulatory actions, Kelly agreed to remove the product from the market. In its stead, a succession of Kelly entities (these included "Resort Holdings International," "Yucatan Resorts" and companies with variations on such names) began offering an investment product known as a "universal lease." Simply described, the universal lease was at least facially similar to a timeshare, entitling an investor to the right to use or sublet a Cancun-area hotel room—in properties that Kelly or his companies purported to own—for specified periods each year.

Learn from your mistakes

Meyer, even after one Kelly scheme proved to be illegal, did not learn from his mistake in selling the 9-month notes and began selling the universal lease to his clients in 1999, after attending a Kelly-run training program in Mexico and being assured by securities counsel employed by Kelly that the new product fully complied with applicable legal requirements.

Meyer sold the universal lease product exclusively from 1999 until 2003, when he exhausted his personal client base. Meyer succeeded in persuading most of his clients who had purchased the 9-month note to roll their interests into the universal lease. For his efforts, Meyer earned commissions on his initial universal lease sales of between 12 and 18 percent, an additional 12 percent "renewal" commission for each client who remained invested in the product for more than 2 years, and further commissions on sales by "down line" sales agents whom Meyer recruited to sell the product. In total, Meyer was ultimately found to have received approximately $1.1 million in commissions from universal lease sales over approximately 7 years. Furthermore, Meyer would later testify that he invested approximately $125,000 in earned sales commission into universal lease purchases for himself.

Read another column "Fired Up"by Barry Zalma.

Although Meyer’s clients apparently received timely monthly payments on their universal lease investments as late as 2004, the payments, as in all Ponzi-type schemes, would and did eventually slow and ultimately ceased altogether. These events, and unsuccessful attempts by investors to liquidate their investments—including elderly individuals who had invested retirement savings in the product—prompted federal and state investigations into possible wrongdoing by Kelly, Meyer and more than 200 other sales agents who had marketed the universal lease throughout the U.S.

The TDI Commissioner concluded, and the parties do not dispute, that a ground for taking the license of Meyer was the existence of "fraudulent . . . acts or practices" that TDI established with proof of each element of common-law fraud:

1. A "material" representation was made

2. The representation was false

3. Scienter as to the falsity of the representation at the time it was made, which may be satisfied with proof either that the speaker

a. Had knowledge of the falsity, or

b. Acted recklessly without knowledge of the truth and as a positive assertion;

4. The speaker made the representation with the intent that the other party should act upon it

5. The party acted in reliance on the representation

6. The party thereby suffered injury.

To meet its burden, TDI staff relied on proof that Meyer had made essentially two sets of representations to his clients that had proved to be false. First, as Meyer himself acknowledged in testimony, he assured his clients that if they invested in the universal lease product, signed the servicing agreement, agreed to grant the management company an option to purchase the lease and kept the funds invested for at least 2 years, they would have the right to withdraw their funds without penalty at any time. To establish the contemporaneous falsity of these statements, staff introduced copies of the universal lease and the servicing agreement. On the face of each document, neither conferred on investors a right to withdraw their funds as Meyer had stated. To the contrary, the universal lease stated that repurchase of the lease was in the discretion of the Kelly entity, not the investor.

Second, TDI staff emphasized evidence that Meyer had given his clients assurances that they were "virtually guaranteed" to garner returns of 10 or 11 percent if they invested in the universal lease and signed the servicing agreement. Two of Meyer’s clients who had invested in the universal lease, Catherine Niggli and Terry Goolsby, also testified during the hearing. In addition to confirming that Meyer had made the representations to them, they testified that they had relied upon the statements when making their investments, that the statements were integral to their investment decisions, and that they had subsequently incurred injury when the monthly payments ceased and they were unable to liquidate their investments as Meyer had promised.

Related: Read the column "False Statement Voids Policy" by Barry Zalma.

Each of Meyer’s issues is focused primarily on TDI’s theory that Meyer acted recklessly with respect to the truth of his representations concerning likely returns from universal leases by failing to "adequately" or "sufficiently" investigate the nature and soundness of the product before marketing it to his clients. The court noted, however, that the commissioner’s revocation order is also supported by findings relating to a narrower theory of recklessness-based fraud predicated on the inconsistencies between Meyer’s representations regarding his client’s rights to cash out their universal lease investments and the actual text of the contracts that governs those rights.

Meyer’s substantial-evidence challenge focused solely on the commissioner’s underlying findings of falsity and recklessness. At least with respect to the findings concerning Meyer’s representations regarding his clients’ rights to cash out their universal lease investments, those challenges are without merit. Similarly, the court refused Meyer’s claim of deficiencies in the hearing notice. These allegations, which provided Meyer with notice of the controlling facts of the case, were sufficient to satisfy the government code’s requirements.

It is a shame that an experienced and successful insurance agent fell prey to high commissions and a $1.1 million payday and forgot that his profession is one of utmost good faith. Selling investment products with pitches that made representations to his elderly clients that were not supported by the contracts he sold, Meyer sold his soul and destroyed his ability to earn an honest living in the future. He also faces criminal prosecution along with Kelly and the sub-agents.

He proved the adage that when something appears to be too good to be true, it usually is—and when you sell something that is too good to be true by lying to your customers, you will lose your license to sell insurance and may find yourself a resident of the "gray bar hotel."