Firm, Two Co-Owners Also Charged With Submitting Falsified Documents to Investors and to FINRA
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has filed a complaint against McGinn, Smith & Co., Inc., of Albany, NY, and its President and part owner, David L. Smith, charging them with securities fraud in the sale of tens of millions of dollars in unregistered securities. In addition to disciplinary sanctions, FINRA is seeking disgorgement of all ill-gotten profits and full restitution to affected investors.
The FINRA complaint also charges the firm and Smith with misuse of investor funds, supervisory deficiencies and violation of securities registration rules. Smith was also charged with misrepresenting facts in letters he sent to investors. In addition, the firm, Smith and Timothy M. McGinn, co-owner of the firm and chairman of its board, were charged with providing FINRA staff with falsified documents.
The complaint alleges that from September 2003 through November 2006, the firm and Smith sold approximately $89 million in income notes to 515 investors in four fraudulent securities offerings by four limited liability companies (LLCs) managed and controlled by Smith. FINRA also charged that the income notes, which are securities, were neither registered nor eligible for an exemption from registration.
According to the complaint, the firm falsely promised investors that their funds would be earmarked for a broad array of public and private investments. Instead, Smith misused the majority of the offering proceeds to benefit 26 business entities that he, McGinn and/or another firm owner controlled, or in which they maintained a financial interest (the "related companies"). The complaint alleges that most of the related companies were illiquid and had little or no revenues or were in poor financial condition at the time they received proceeds from the income note offerings. Smith allegedly misused approximately $51 million of investor funds, directing approximately $17 million to the related companies and approximately $34 million more to make loans to them. Approximately $22 million of those loans remain unpaid. Smith allegedly received personal loans of approximately $590,000 from the related companies that were funded by investments made in the four LLCs.
The complaint alleges that the firm and Smith failed to disclose several material facts in connection with the four offerings, including that the LLCs would be investing and making loans to the related companies, that the LLCs would be making long-term loans and that the majority of offering funds would be invested in illiquid, non-public companies. The firm and Smith also allegedly misrepresented to investors that the firm would only receive a 2 percent underwriting/commission fee. The complaint alleges that, in fact, the firm received recurring annual commissions from the inception of the offerings, totaling approximately $7.5 million – approximately 8.4 percent of the offering proceeds.
According to the complaint, the vast majority of the LLC investments were illiquid and non-performing. In 2008, Smith, acting on behalf of the LLCs, stopped all redemptions and sent two letters to investors misrepresenting that the firm and two of the related companies would waive or forgo further fees and commissions due to the poor financial condition of the income note issuers. But contrary to those representations, the complaint alleges, the firm and the two related companies subsequently took in approximately $6.7 million in fees and commissions.
The complaint further alleges that, in response to a FINRA staff request for information, the firm, Smith and McGinn provided falsified documents, submitting backdated promissory notes for personal loans they and others previously received from two of the Related Entities.
Under FINRA rules, a firm or individual named in a complaint can file a response and request a hearing before a FINRA disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations, and payment of restitution. The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, uninterested persons may wish to contact the respondents before drawing any conclusions regarding the allegations in the complaint.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2009, members of the public used this service to conduct 18.5 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
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