McGinn Smith case draws mixed reaction from Capital Region financial community

PHOTOGRAPHER: Ameerah Cetawayo

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Investor Rick Kastraveckas wishes the $50,000 he gave McGinn Smith & Co. years ago was still in his hands.

“But unfortunately, it’s not,” said Kastraveckas, 58. “Have I seen any income on it? No.”

Albany-based investment firm McGinn Smith is accused of investor fraud, deception and taking money from investors to fund a sex-themed cruise business and the luxuries of life instead of giving back investment returns, causing significant losses to those who trusted the company with their money.

Kastraveckas, an Amsterdam resident, said he is taking news of the allegations against McGinn Smith personally. He said he’s a cousin of Lynn A. Smith, 64, the wife of David L. Smith, the 65-year-old Saratoga Springs resident who is McGinn Smith’s president and part owner. Timothy M. McGinn, 62, of Niskayuna, is chairman, secretary and treasurer of McGinn Smith.

“That’s why it was kind of shocking,” said Kastraveckas, who made contact with his cousin Thursday. “She said everything is a lie.”

But Kastraveckas admitted he doesn’t know what is really going on.

Since 2004, he has asked for his money back on a number of occasions but was told economic factors made returning his money unfeasible.

Family ties notwithstanding, he remains frustrated.

“I’m looking to see if there’s a class-action suit and if it is I will join it,” Kastraveckas said.

Efforts to reach McGinn Smith this week have been unsuccessful, as the company has remained silent about the allegations.

The U.S. Securities and Exchange Commission filed a complaint Tuesday against McGinn Smith, seeking a court order to freeze the company’s assets. The SEC’s complaint came a day after the Financial Industry Regulatory Authority filed a complaint accusing McGinn Smith of selling tens of millions of dollars in unregistered securities between September 2003 and November 2006.

Authorities estimate at least 900 investors are owed at least $84 million, though they say the full extent of fraud is unknown. The SEC said McGinn Smith raised about $120 million from investors in more than 25 debt offerings that were not registered with the SEC as per securities laws.

Internal e-mails “reveal a constant need to raise millions of dollars, a growing desperation to make payroll, meet interest payments and assuage investors complaining of a Ponzi scheme, in order to keep their house of cards from collapsing,” the SEC said in its complaint.

“We have been living on the edge for some time and Tim’s deals have kept us alive by fronting our profit. However, the $200,000+ that we are losing every month is just too difficult to keep pace with,” David Smith said in an e-mail dated Feb. 24, 2009.

Professionals in the Capital Region’s financial services sector had mixed reactions to the McGinn Smith case, with some still in amazement and others lumping it with the larger allegations against the entire financial industry making national headlines.

“As one who is in the business and has also worked down in New York City, it is rather shocking to hear about an alleged Ponzi scheme in our own backyard in the Capital Region,” said Abigail Doolittle, director of marketing and sales for Johnson Illington Advisors in Albany, a portfolio management services firm. “It also shows you that what you hear about in places far away and seems impossible can in fact happen in your own area. This is just as amazing to me as it is to anyone else.”

David Pollitzer, president of the investment advisory and mutual fund management firm Fenimore Asset Management in Cobleskill, said it’s too early to tell what will happen to McGinn Smith and it would be premature to judge.

“They’ll have their opportunity to respond to all the claims against them,” he said.

“You always hear about the bad apples, but you’re not going to hear about the 99.9 percent who are responsible and well-serving types of professionals,” Pollitzer added.

Ross Miller, a professor of finance at the University at Albany, said the McGinn Smith case isn’t the first Capital Region financial scandal and it will likely not be the last.

“It’s just one more of a series of things that has been happening lately. It wasn’t particularly shocking. In terms of scope it’s smaller than a lot of other things going on,” Miller said, referring to cases with Goldman Sachs and Lehman Brothers, companies that also are alleged to have engaged in securities fraud or questionable accounting practices. “Every day there are reminders on a much larger level that we don’t have all of our financial problems behind us yet.”

Miller went back to the late 1990s to cite another local case of financial fraud.

The late Albert Lawrence, who headed insurance conglomerate The Lawrence Group, was in court during the summer of 1999 denying he misallocated $32 million in policyholder funds to pay off debts from other business entities that had sought Chapter 11 bankruptcy protection two years earlier.

Miller, the co-author of the 2002 best-seller “What Went Wrong With Enron,” said fraud is something that takes an unusual event to uncover.

The fact that McGinn Smith’s investments weren’t SEC-registered are not an immediate warning sign, he argued, because such securities are more sophisticated, attracting individuals of high net worth who may have the resources to detect improprieties themselves.

“You find the top people in the financial world tend to own non-registered securities. When things are registered, the SEC does not have a very good record of protecting investors even then. It’s not an automatic red flag,” Miller said.

But a non-registered investment is a sign that an investor will have a very difficult time unloading the security if they need to sell, he explained.

Doolittle said for much of the general public, the McGinn Smith case will fly under the radar, but for those who pay attention to business headlines in media, the case may shake confidence a bit.

“It may be another worry that investors locally may take into account. Those who are looking to work with new investment advisers will probably take extra care and in some ways that is good. The positive thing is that other investors can attempt to protect themselves,” Doolittle said.