Timothy McGinn and David Smith poured millions of dollars from their Albany brokerage firm into lavish homes, expensive country clubs and even thoroughbred race horses.
Federal prosecutors claim they fueled their lifestyle by skimming money from $37 million invested into 17 private trust funds that later meant drastic losses for many of their clients. More than a quarter of the total amount invested into the trust funds went to benefit the firm through fees, or money transferred into their own accounts, according to a 30-count indictment handed up in U.S. District Court Thursday.
Both partners of the defunct McGinn, Smith & Co. are facing counts of conspiracy, mail and wire fraud, securities fraud, and filing a false tax return. Authorities believe the partners grossed more than $8 million, while allowing some of their investors to lose their life savings.
“[The victims] thought they were investing in the safety of this securities firm,” U.S. District Attorney Richard Hartunian said during a news conference Thursday. “In reality, they were sold nothing more than a bill of goods.”
Both McGinn and Smith are scheduled to be arraigned on the charges this afternoon. They could face up to 30 years in prison and $1 million in fines on the conspiracy charge alone.
E. Stewart Jones, the attorney representing McGinn, said his client and Smith aren’t to blame for the losses. He said the brokerage suffered like many others when the economy tanked, but it was an overzealous U.S. Securities and Exchange Commission that spurred a criminal investigation two years ago that ultimately prevented the partners from recouping the losses of their investors.
“If they hadn’t taken these gentlemen out of these businesses two years ago we wouldn’t be having this conversation,” he said. “This was a rush to judgment that penalized the investors and sacrificed Tim and David on the altar of political expedience.”
Prosecutors disagree. They claim McGinn and Smith deliberately misled regulatory agencies by orchestrating complex financial transactions, filing back-dated promissory notes and crafting loans among the partnership that never needed to be repaid.
Hartunian said the partners deceived investors by the hundreds. Though declining to identify any specific victims, the prosecutor said they ran the gamut — from a church school fund to a retired soldier to a state employee.
“The victims of this fraudulent scheme run the spectrum of investors — from young first-time investors looking to build an investment portfolio to elderly people looking to safeguard a nest egg,” he said.
In one instance outlined in the indictment, Smith and McGinn drew $3.7 million in investment for a lending agreement with Firstline Security Inc., a Utah-based company selling residential alarm contracts. At some point between May 2007 and June 2008, the partners paid themselves $620,000 from the fund, according to the indictment.
Shortly after the lending agreement was reached, Frontline landed in costly litigation with its dealer, ADT Security. The company ultimately went into bankruptcy and failed to repay the loan from McGinn, Smith & Co.
Only the partners never alerted their clients of the bankruptcy, nor did they alert them of the defaulted loan, according to the indictment. Instead, they transferred money from other trust funds to make it appear as though the Frontline trust fund was still viable for investors.
Prosecutors allege Smith deposited about $1.56 million from various trust funds into his private accounts, using the funds to pay for country club memberships in Florida, Saratoga Springs and Ireland. He also funded improvements at homes he owns in Orchid Island, Fla., and in Saratoga Springs, it is alleged.
McGinn unlawfully transferred $1.38 million into his private accounts, using some of it to pay for improvements at homes in Boca Raton, Fla., and in Niskayuna, according to the indictment; he also allegedly used the money to pay $147,000 in alimony, $89,000 in income tax and $39,000 on thoroughbred horses.
Of the $37 million invested in the trust funds, Hartunian said 17 percent went to the brokerage firm in fees; another 11 percent went to McGinn, Smith and Matt Rogers, a managing partner of the company.
“In all, 28 percent of investor money benefited the defendants and their brokerage firm,” he said.
Rogers admitted to one count of filing a false tax return in November. He now faces up to three years in prison.
Also charged in the case was Ronald Simons, an accountant who audited financial statements for the company. He admitted to one count of disclosing a false return and now faces up to a year in prison.
McGinn testified at the federal corruption trial of former Republican state Sen. Joseph Bruno in November 2009. The partner was drawn into the case after federal prosecutors learned his firm paid the long-time Senate majority leader $632,000 between 1993 and 2006.The Federal Bureau of Investigation began probing McGinn, Smith & Co, in December 2009.