Gary Ardizzone trusted his broker.
The 73-year-old retiree from Broadalbin took Frank Chiappone’s advice before and bought into McGinn, Smith & Co.’s alarm contracts prior to 2003 — investments that paid off. Living in Florida off his retirement income, he described himself to the Clifton Park broker as a guy with “conservative investment goals and low risk tolerance.”
Between May 2004 and October 2008, about $232,000 flowed from Ardizzone into securities investments suggested by Chiappone, a registered representative of McGinn, Smith & Co. who advised his client he had made similar investments for his own family. With no reason to mistrust Chiappone’s advice, Ardizzone signed off on the investments, never realizing that the Albany-based brokerage firm was going to implode. When the company failed, many investors lost vast sums of money.
“Ardizzone did not do any independent due diligence, because he counted on Chiappone, the person selling the product to him, to do the due diligence,” wrote Brenda Murray, a chief administrative law judge for the U.S. Securities and Exchange Commission.
“Chiappone knew of many red flags … but he did not investigate to provide some basis for his recommendations to his clients that they purchase the securities,” Murray concluded.
And neither did his fellow brokers at the firm, Murray concluded in a decision released by the SEC last week. Chiappone was among seven brokers and one manager ordered sanctioned after they were found to have made material omissions and misrepresentations to clients as they recommended unregistered investments offered by McGinn, Smith & Co.
The decision found the brokers ignored red flags about the investments and failed to conduct due diligence in the investments they were recommending. As a result, Murray found each should face penalties ranging from a year-long suspension to a lifetime ban from the industry, in addition to financial penalties.
“Despite the blatant failures by [these individuals, none of them] evidenced an understanding that their activities involved wrongdoing,” Murray wrote in the 119-page decision. “The reaction was to blame McGinn and [business partner David] Smith for committing fraud and [the Financial Industry Regulatory Authority] and the commission for not discovering McGinn and Smith’s illegal activities sooner. [They] view everyone at fault but them.”
The most severe penalties were handed out to Donald J. Anthony Jr. of Loudonville, Thomas E. Livingston of Slingerlands and William Lex of Philadelphia — each of whom was ordered permanently barred. Chiappone, Andrew Guzzetti of Saratoga Springs, Brian T. Mayer of Princeton, N.J., Philip S. Rabinovich of Roslyn and Ryan C. Rogers of East Northport were ordered suspended for 12 months.
Murray declined to take action on William P. Gamello of Rexford — among the brokers named in the initial SEC complaint —because his only alleged violation was selling unregistered securities. With the exception of Lex, all of the brokers listed in the decision were still working in the securities industry.
The sanctioned brokers were also told to return commissions they made on securities sales made after Feb. 1, 2008, the date after which they became aware the securities they were selling were in distress. The commission amounts range from $1,120 collected by Livingston to $335,066 taken in by Lex.
Murray assessed penalties of $130,000 to all seven brokers and Guzzetti, who managed the operation. Gamello, who was largely absolved of wrongdoing, wasn’t assessed a penalty.
Richard Feldmann of Delmar —another broker implicated in the case— settled his case last year by accepting a ban from the securities industry and agreeing to return $299,000 in commissions, in addition to $55,384 in interest. Feldmann also agreed to pay a civil penalty of $130,000.
The money collected from the group was ordered into a “fair fund” to benefit clients harmed by their violations.
At least two of the individuals ordered sanctioned — Rabinovich and Mayer — indicated they will appeal, claiming they were also victims of McGinn and Smith. Now business partners at RMR Wealth Management in New York City, they claim they had every reason to rely on the information provided to them by their former firm and that they dealt fairly with all clients — some of whom testified on their behalf.
“The overwhelming evidence clearly showed that we did all we should have done and could have done on behalf of our clients,” the partners said in a joint statement released this week. “The testimony, even from the government’s own witnesses, showed that we fulfilled our duties to our clients, acted in their best interests, and suffered losses just as our clients did primarily because of the financial crisis and also because of the defrauding.”
McGinn and Smith were found guilty of conspiracy, wire fraud, securities fraud and filing a false tax return following a nearly month-long trial in Utica in January 2013. Federal prosecutors outlined how the business partners of more than three decades ordered company accountants to create backdated documents and bogus promissory notes as FINRA examiners began to probe their dealings with the Four Funds — a collection of unregistered securities they controlled.
The documents, prosecutors said, were a desperate attempt for McGinn and Smith to legitimize a business that paid them handsomely with untaxed fees they took from the dozens of entities they used to attract investors. McGinn was ordered to serve up to 15 years in prison, while Smith was handed a 10-year sentence.
Testimony included in Murray’s decision shows brokers of the embattled company continuing to fight for their commissions as they scrambled to bring new investors into the collapsing scheme. One caustic email from Chiappone — intended for Smith but never sent — discusses his dissatisfaction over bringing more clients into the company without getting his commission.
“As I sit frozen in place at my desk I am having trouble even finding the words to write,” he wrote in the August 2008 email. “This is about the commissions due to us for the notes. The market meltdown has been a nice screen for the fact that you have mismanaged the assets that my clients and I entrusted in your care.”