Finance fraud charges expand against partners

Former Albany brokers Timothy McGinn, right, and David Smith exit the federal courthouse in Albany in this Gazette file photo from October 2012.

Federal prosecutors have accused business partners Timothy McGinn and David Smith of stealing nearly $1 million more from their investors than charged in their original indictment, prompting their defense attorneys to claim they don’t have enough time to prepare for trial next month.

The longtime partners of the Albany-based McGinn, Smith & Co., already accused of bilking more than $8 million from their investors, were arraigned on two additional counts of mail fraud in connection with the additional funds. These charges allege that they faked documents to try to hide their activities from investigators at the Financial Industry Regulatory Authority. An indictment unsealed in U.S. District Court Thursday in Albany accuses them of creating false accounting entries and fraudulent loan documents that were later submitted to investigators.

The additional charges could prolong the criminal case against the partners, if their defense attorneys are granted more time to prepare for trial.

This could hurt former investors, many of whom are anxious for the criminal case to wrap up so that a civil prosecution can begin. Some fear the mounting legal fees associated with the case will eat away the partners’ assets, which are frozen and could eventually be divided up among former investors if the civil case is successful.

“We are waiting and trying to make ends meet just from Social Security,” states a letter from former investors Robert and Ilene Nemith of New Jersey, dated Oct. 2. “This is not justified the way things are being done.”

The new allegations claim McGinn and Smith illegally diverted more than $473,000 of investor money from an escrow account to pay preferred clients who had unrelated investments between May 2008 and July 2009. The new indictment also claims they improperly shifted $525,000 from bank accounts for three unrelated investments to pay the broker-dealer’s employees between November 2008 and April 2009 — almost exactly a year before the U.S. Securities and Exchange Commission filed a civil case against the partners.

McGinn and Smith pleaded not guilty to the new charges before U.S. District Judge Randolph Treece in Albany. Both were ordered released on the same $100,000 bond and the conditions laid out during their original arraignment on a 30-count indictment in January.

McGinn, 63, of Clifton Park, is permitted to travel to Florida, where he maintains a second home and a job. Smith, 66, of Saratoga Springs, is allowed to travel throughout New York and New England.

Outside the courthouse Thursday, both declined to discuss the case.

The new indictment was filed as lawyers for the partners are preparing for a complex trial starting on Nov. 13. E. Stewart Jones, the attorney representing McGinn, called the new indictment “fundamentally wrong and unfair.”

“What’s contained in this indictment they knew about a long time ago,” he said.

William Dreyer, the attorney representing Smith, and Jones intend to petition the court to postpone the trial, scheduled before Judge David Hurd at the U.S. District Court in Utica. Federal prosecutors declined to comment on the new charges outside of what was included in the superseding indictment.

The new indictment alleges McGinn and Smith used Firstline Series B Trusts to raise money from investors in connection with a loan of $2.4 million to Firstline Security, Inc., a company that generated alarm contracts. But they failed to alert investors that Firstline was facing a costly lawsuit with its dealer, was filing for bankruptcy and had defaulted on loans, according to the indictment.

Instead, the partners diverted $2 million from other entities they controlled and ordered it paid out to investors. Meanwhile, their firm sold roughly $600,000 of Firstline investments without any disclosure of the bankruptcy or defaults, prosecutors allege.

The partners are also accused of using Integrated Excellence Trusts to generate $1.2 million from investors for Integrated Excellence Inc., another alarm company. The new indictment claims the payments they received from the loan were not sufficient to pay investors, but they managed to forestall any suspicion by transferring money from other holdings.

The original indictment accuses the partners of misleading clients about the roughly $37 million they put into 17 trust funds. As a result, prosecutors say, investors were unaware that the partners had diverted $4.1 million from the trusts to benefit themselves and another person.

McGinn and Smith allegedly tapped escrow accounts to pay bills and other investors. Together, they are accused of using more than $3 million of investor funds to pay for lavish homes, expensive country club memberships and even thoroughbred racehorses.

The federal investigation into the firm has already landed three convictions. Last year, former senior managing partner Matthew Rogers pleaded guilty to the misdemeanor charge of filing a falsified tax return on behalf of Smith and his wife, Lynn.

Around the same time, Binghamton accountant Ronald Simons pleaded guilty to a misdemeanor tax fraud count, acknowledging that he filed a false income tax return on behalf of the Smiths. Both Simons and Rogers are scheduled to be sentenced in January.

In July, former Chief Financial Officer Brian Shea acknowledged that he submitted backdated promissory notes to a regulatory agency regarding money that McGinn and Smith had improperly diverted in connection with offerings of unregistered securities. As part of his plea, Shea admitted that Smith directed him to create the false entries to conceal money being improperly diverted from an escrow account to McGinn.

Shea is expected to be sentenced on Nov. 30.