E-mails in 2009 from an Albany-based firm accused of investor fraud show a culture of high-pressure sales, cash flow shortages and a pattern of complaints from investors worried they were part of a Ponzi scheme.
The e-mails were part of a complaint filed by the U.S. Securities and Exchange Commission earlier this week, seeking to freeze the assets of McGinn, Smith & Co and all of its entities.
The SEC also said more than $120 million in debt offerings were sold to hundreds of investors through four funds and at least 18 trusts created by the firm, but much of the money was used for personal expenses at country clubs, luxury vehicles and a venture operating a sexually themed cruise boat business called You Only Live Once, or YOLO.
“Contrary to their representations to investors, McGinn and Smith used much of the money raised in these offerings to make prohibited investments in their other businesses or make unsecured loans to financially support them. They also misused investor funds to pay exorbitant commission and transaction fees to their affiliated entities and make interest payments to investors in the other entities,” the SEC said.
Niskayuna resident Timothy McGinn, who also has a residence in Florida, is chairman of the firm. David Smith, of Saratoga Springs, was identified as president.
William F. Lex of Lex and Smith Associates, a broker for McGinn Smith, sent several e-mails to leaders at McGinn Smith, including one March 17, 2009, complaining that the selling terms had changed and clients were becoming worried they would not receive payments due from trusts, some of which were identified as “TDM.”
“When the TDM was given to the sales force to sell about 20 months ago, we were not told that investors could only redeem if a new client took them out. My clients continue to ask me if they’ve bought into a Ponzi Scheme and I’ve tried to reassure them that that is not the case. This current situation is not helping me to build confidence with clients who have hundreds of thousands of dollars in McGinn, Smith investments,” Lex wrote.
Smith responded to Lex saying the world had changed, and the available lines of credit and financing alternatives were not as available as when deals were first initiated.
“Refinancing is not a Ponzi scheme, but rather how most of the world operates, particularly in difficult times,” Smith said.
Brokers like Lex began forwarding clients directly to McGinn and Smith, something Smith later criticized by saying, “Lex’s response was an in-your-face response to my e-mails to him. This is a guy that gets 85 percent payout and when the heat is on he shuffles his customer off to us [me] to avoid the expected confrontation. I will not be taking his clients’ calls,” Smith wrote.
Smith’s direct responses to clients via e-mail were full of expletives in some cases, including one to an investor seeking clarification on his account in which he said “[Obscenity] you. I am way too busy and under great pressure. We purposefully make the accounting confusing so that you never really know where you are. Not as devious as Bernie M, but fairly efficient,” Smith wrote.
Another e-mail from Lex came in April 7, 2009, specifically about a client who had been calling for two months accusing McGinn Smith of running a Ponzi Scheme. Lex said he was paying off some accounts with his personal funds.
“I’ve even taken Dave’s prior suggestion and bought some of it myself to help with the log jam, but I am having a hard time putting off a new client who agreed to a two-week extension when we are now almost 8 weeks out,” Lex wrote.
On April 15, 2009, McGinn received a letter from attorney Francis X. Taney from the firm Franklin Ingersoll Rooney in Philadelphia, Pa., demanding his client’s money be returned.
By the mid-summer, in an e-mail dated July 15, 2009, Lex asked Timothy McGinn and David Smith about redeeming a $25,000 note for an investor that had already invested in other McGinn funds, identified as FII, TAIN, and FAIN.
“He renewed his $75,000 note and I don’t want to be embarrassed and have him lose confidence in the McGinn Smith deals. He is a candidate for more investments unless he loses confidence,” Lex wrote. “He invested in this alarm deal and renewed this investment despite having $300,000 tied up in FIIN, TAIN and FAIN [100,000] in each. Let’s not blow it. We need to maintain investor confidence in McGinn Smith Deals!”
Timothy McGinn sent an e-mail to David Smith on Oct. 6, 2009 expressing concern that investors owed $745,000 in certificate investments could not be compensated on time since the “pace of replacement sales is very slow. In a nutshell, I don’t know when these certificates will be redeemed.”
E-mails also reveal McGinn Smith had trouble paying its brokers at times.
Lex e-mailed David Smith on Oct. 6 saying: “I take serious issue with the cessation of my trailer commissions. If I am short revenue on a monthly basis, I dip into my pocket so that all of my debts are paid. I expect nothing less of McGinn, Smith and I strongly request my trailer commissions be paid on Oct. 15, 2009 and monthly until I am paid in full.
“Without these commissions, I am going to have to eliminate support staff and not be able to service the McGinn Smith business. Please advise immediately if McGinn, Smith will do the right thing.”
Despite writing about delays in raising capital and cash flow shortages that produced a backup in interest payments, Timothy McGinn still expressed optimism in an e-mail dated Oct. 19.
“We look forward to working through these challenging times,” McGinn wrote.
Documents obtained by the SEC show the extent to which money was tight. Four of McGinn’s main trust accounts had account balances ranging from $0 to $320.83. An income statement from Sept. 30 showed the firm’s four debt investment funds had generated a total net loss of $24 million.
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