An experienced insurance agent lost his license because he soldsomething he knew nothing about. Insurance agents and brokersshould limit themselves to that which they know: insurance. Whenthey deal in securities without a securities license, agents mayfind themselves in hot water with the department of insurance andmay even face criminal prosecution. In Mark Griffin Meyer, Appellant v. Texas Dept. ofInsurance, No. 03-10-00642-CV (Tex.App. Dist. 311/23/2011), an agent lost his license because he sold securitiesmislabeled 9-month loans and short-term leases, all because he fellfor a sales pitch, lied to his clients and made promises he couldnot fulfill. The Texas Dept. of Insurance (TDI) took his licenseand he appealed the decision.

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

In 1997, Meyer met a businessman named Michael Kelly, whoclaimed to own several hotels in and near Cancun, Mexico andnumerous other Mexican and Panamanian properties and businesses.Kelly was in the process of recruiting agents in the U.S. to sell anon-insurance investment product known as a "9-month note" offeredthrough a Kelly entity, the Yucatan Investment Corp., ostensibly tofinance various Kelly business endeavors. As the product’s namesuggests, the 9-month note was an unsecured promissory note thatpaid investors 10.75 percent in interest over a period of 9 months.Before agreeing to do business with Kelly, according to Meyer, abusiness associate ran a background check on Kelly that revealed nocause for concern. Meyer further claimed that he visited Kelly inMexico, stayed in a hotel that Kelly purported to own and becameassured of Kelly’s business acumen, good character, and greatwealth. Meyer began marketing the 9-month note to his insuranceclients. For his services in selling the note to his clients, Meyerwas paid commissions of between 12 and 14 percent.

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

Sales of the 9-month note by Kelly’s U.S. sales agents attractedthe attention of regulatory authorities in at least four statesother than Texas, who initiated investigations as to whether the9-month note was a security that had not been registered asrequired by law. In response to these regulatory actions, Kellyagreed to remove the product from the market. In its stead, asuccession of Kelly entities (these included "Resort HoldingsInternational," "Yucatan Resorts" and companies with variations onsuch names) began offering an investment product known as a"universal lease." Simply described, the universal lease was atleast facially similar to a timeshare, entitling an investor to theright to use or sublet a Cancun-area hotel room—in properties thatKelly or his companies purported to own—for specified periods eachyear.

Learn from your mistakes

Meyer, even after one Kelly scheme proved to be illegal, did notlearn from his mistake in selling the 9-month notes and beganselling the universal lease to his clients in 1999, after attendinga Kelly-run training program in Mexico and being assured bysecurities counsel employed by Kelly that the new product fullycomplied with applicable legal requirements.

Meyer sold the universal lease productexclusively from 1999 until 2003, when he exhausted his personalclient base. Meyer succeeded in persuading most of his clients whohad purchased the 9-month note to roll their interests into theuniversal lease. For his efforts, Meyer earned commissions on hisinitial universal lease sales of between 12 and 18 percent, anadditional 12 percent "renewal" commission for each client whoremained invested in the product for more than 2 years, and furthercommissions on sales by "down line" sales agents whom Meyerrecruited to sell the product. In total, Meyer was ultimately foundto have received approximately $1.1 million in commissions fromuniversal lease sales over approximately 7 years. Furthermore,Meyer would later testify that he invested approximately $125,000in earned sales commission into universal lease purchases forhimself.

Readanother column "Fired Up"by Barry Zalma.

Although Meyer’s clients apparently received timely monthlypayments on their universal lease investments as late as 2004, thepayments, as in all Ponzi-type schemes, would and did eventuallyslow and ultimately ceased altogether. These events, andunsuccessful attempts by investors to liquidate theirinvestments—including elderly individuals who had investedretirement savings in the product—prompted federal and stateinvestigations into possible wrongdoing by Kelly, Meyer and morethan 200 other sales agents who had marketed the universal leasethroughout 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 withproof of each element of common-law fraud:

1. A "material" representation wasmade

2. The representation was false

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

a. Had knowledge of the falsity,or

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

4. The speaker made therepresentation with the intent that the other party should act uponit

5. The party acted in reliance on therepresentation

6. The party thereby sufferedinjury.

To meet its burden, TDI staff relied on proofthat Meyer had made essentially two sets of representations to hisclients that had proved to be false. First, as Meyer himselfacknowledged in testimony, he assured his clients that if theyinvested in the universal lease product, signed the servicingagreement, agreed to grant the management company an option topurchase the lease and kept the funds invested for at least 2years, they would have the right to withdraw their funds withoutpenalty at any time. To establish the contemporaneous falsity ofthese statements, staff introduced copies of the universal leaseand the servicing agreement. On the face of each document, neitherconferred on investors a right to withdraw their funds as Meyer hadstated. To the contrary, the universal lease stated that repurchaseof the lease was in the discretion of the Kelly entity, not theinvestor.

Second, TDI staff emphasized evidence that Meyer had given hisclients assurances that they were "virtually guaranteed" to garnerreturns of 10 or 11 percent if they invested in the universal leaseand signed the servicing agreement. Two of Meyer’s clients who hadinvested in the universal lease, Catherine Niggli and TerryGoolsby, also testified during the hearing. In addition toconfirming that Meyer had made the representations to them, theytestified that they had relied upon the statements when makingtheir investments, that the statements were integral to theirinvestment decisions, and that they had subsequently incurredinjury when the monthly payments ceased and they were unable toliquidate their investments as Meyer had promised.

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

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

Meyer’s substantial-evidence challenge focused solely on thecommissioner’s underlying findings of falsity and recklessness. Atleast with respect to the findings concerning Meyer’srepresentations regarding his clients’ rights to cash out theiruniversal lease investments, those challenges are without merit.Similarly, the court refused Meyer’s claim of deficiencies in thehearing notice. These allegations, which provided Meyer with noticeof the controlling facts of the case, were sufficient to satisfythe government code’s requirements.

It is a shame that an experienced and successful insurance agentfell prey to high commissions and a $1.1 million payday and forgotthat his profession is one of utmost good faith. Selling investmentproducts with pitches that made representations to his elderlyclients that were not supported by the contracts he sold, Meyersold his soul and destroyed his ability to earn an honest living inthe future. He also faces criminal prosecution along with Kelly andthe sub-agents.

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