Timothy McGinn and David Smith had investors from all walks of life.
Some were seasoned investors, such as a commodity trader. Others were novices — middle-class people who bought into trust funds they thought were going to a specific purpose.
They included Ron DeLeonardis, a high school friend of Smith’s who operated a fish fry restaurant, and Robert Wargo, a Catholic priest from Pennsylvania. There was Bill Ferraro, a retired school administrator and Robert Pugliese, a command sergeant major in the Army National Guard.
Some trusted the business partners with their retirement money while others hoped their investment would put their children through college. Paul Sokal, for instance, invested the insurance money he got after his son died in an accident, so his other son could go to college.
Through their differences, all these investors shared a common bond, Assistant U.S. Attorney Elizabeth Coombe told jurors Thursday: They trusted their money with the Albany-based investment firm, McGinn, Smith & Co.
“They had an obligation to put the interest of their investors above their own,” she said during closing statements at their trial in U.S. District Court Thursday in Utica.
But these investments turned out to be anything but safe. Coombe said investor money pouring into various trust funds for clearly outlined purposes was being siphoned off by the partners and used to pay preferred clients.
The partners also used investor money to cover payroll expenses and fund ventures that were never outlined in legal memorandums, Coombe said. Investors — some of whom testified during the four-week trial — were sometimes paid dividends with money they were putting into other trust funds.
And when federal regulators began to probe the business dealings of McGinn and Smith, the partners ordered a cover-up, Coombe said. Documents were back-dated and submitted as genuine, giving the appearance of proper accounting when examiners from the Financial Industry Regulatory Authority asked to track the investments.
“Entries were changed after getting a request from a regulator,” she said. “That’s completely different than changing a journal entry. That’s a cover-up.”
McGinn and Smith’s defense team described a markedly different scenario, accusing federal prosecutors of reaching a conclusion of criminality in the partners’ complex business dealings and then strong-arming company executives and accountants into taking plea deals to testify in the case. They accused prosecutors of coaching witnesses and crafting a 32-count federal indictment that failed to take into consideration the reality of the business environment in which McGinn, 64, and Smith, 67, operated.
“What was unusual about this was that it happened in 2007, 2008, and 2009, when this country’s economy was tanking,” said E. Stewart Jones, McGinn’s defense attorney.
William Dreyer, Smith’s defense attorney, described how prosecutors coaxed Brian Shea, the company’s former chief executive officer, into acknowledging he submitted back-dated promissory notes to regulators regarding money that McGinn and Smith had diverted in connection with offerings of unregistered securities. As part of his plea, Shea testified that Smith directed him to create the false entries to conceal money being improperly diverted from an escrow account to McGinn.
“He came here to help himself,” Dreyer said of Shea. “To save himself.”
Dreyer spoke of testimony delivered by senior managing partner Matthew Rogers and Binghamton accountant Ronald Simons, both of whom struck plea deals with the prosecution. He said Simons cooperated to avoid paying a massive tax liability to the Internal Revenue Service, while Rogers struck a deal that would allow him to keep his brokerage license.
Dreyer also noted that Smith’s family — his two children and his wife — invested roughly $1.7 million in the deals the prosecution alleges the partners orchestrated to bilk investors. He said they ultimately lost $895,000 through those investments.
“You don’t commit fraud … when the investment body consists of your own family,” he said.
Even when it was clear their investments were faltering, Jones said the partners tried to set them on a path that would ultimately protect their clients. He described McGinn as working tirelessly to rescue Firstline Security Inc., a Utah-based company selling residential alarm contracts that went bankrupt, and had crafted a “rescue mission” that would have made investors whole within five years were it not thwarted by government intervention.
“The intent to defraud in this case is at that table,” he shouted gesturing to the prosecution. “This has been a shell game by this government.”
Coombe described the so-called rescue mission as a “red herring” meant to illicit sympathy among jurors. She likened McGinn’s plan to taking investor money to Las Vegas and trying to win back their losses on a blackjack table.
“A belief you could hold onto the money and it would eventually turn out — that’s not a defense,” she said.
Federal prosecutors claim the money McGinn and Smith skimmed from $37 million invested into 17 private trust funds later meant drastic losses for 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 the indictment.
The federal indictment came after the U.S. Securities and Exchange Commission lodged a civil complaint against the firm in April 2010. Now stayed by the federal court, the civil case claimed McGinn and Smith orchestrated a scheme to raise more than $136 million from more than 900 investors by conducting more than 20 fraudulent debt offerings in four funds and various trusts.
The complex case is possibly the largest financial scandal to touch down in the Capital Region. The trial involved roughly 200 exhibits and more than 40 witnesses. McGinn and Smith both took the stand in their own defense this week.
Jurors are expected to begin deliberating today. If convicted on the top counts, the partners face up to 30 years in prison and $1 million in fines.
McGinn remained confident the partners will be exonerated. He said the government’s allegation of fraud doesn’t match the reality of the firm’s records, which shows a precise accounting of where all of the investor money was dispersed.
“If you steal money, everything is not going to be accounted for down to the last penny,” he said outside the courthouse. “They tried to fit all the data into their theory and that didn’t work.”