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What you need to know for 08/20/2017

Investment company financial officer admits covering for diverted funds

Investment company financial officer admits covering for diverted funds

Former Chief Financial Officer Brian Shea acknowledged he created false accounting entries to concea

Former Chief Financial Officer Brian Shea acknowledged he created false accounting entries to conceal money that was being improperly diverted by business partners Timothy McGinn and David Smith.

The 53-year-old Niskayuna man and former executive at the Albany-based McGinn, Smith & Co. admitted to one count of corruptly interfering with the administration of the internal revenue laws in U.S. District Court Tuesday. He now faces up to three years in prison and a $250,000 fine at his sentencing on Nov. 30.

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 Timothy McGinn. McGinn did not report the income on his 2008 and 2009 income tax returns, according to prosecutors.

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. He was also aware investor money had been diverted from one entity to pay investors in other entities without any disclosure to any of the investors.

Shea is the latest individual associated with the failed investment company to admit wrongdoing. In November, former senior managing partner Matthew Rogers pleaded guilty to a misdemeanor charge of filing a falsified tax return on behalf of Smith and his wife, Lynn.

Also in November, Binghamton accountant Ronald Simons pleaded guilty to a misdemeanor tax fraud count. He acknowledged filing a false income tax return on behalf of the Smiths.

Federal prosecutors charge that the partners misled 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.

The federal indictment also accuses the partners of misleading investors about a loan they funded for a private security company that was facing costly litigation. When the company went bankrupt and defaulted on the loan, McGinn and Smith unlawfully diverted $2 million from unrelated trust funds to continue paying off interest to investors, the indictment alleges.

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.

Both denied each of the 30 counts in a federal indictment, including charges of conspiracy, mail and wire fraud, securities fraud and filing a false tax return. Both were released on $100,000 bond shortly after their arraignment in January.

McGinn and Smith say they committed no wrongdoing. They say they suffered the same losses their clients sustained as a result of the recession.

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