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What you need to know for 01/19/2018

Brokers handed prison terms

Brokers handed prison terms

David Smith was given a 10-year sentence in federal prison for his conviction on 15 felony counts of

David Smith knew Timothy McGinn was taking too many liberties with investor money and tried to warn of these questionable tactics in a letter he wrote to his longtime business partner in 1999.

The letter paraphrased by Judge David Hurd in U.S. District Court on Wednesday foreshadowed the ignoble descent of McGinn, Smith & Co. from one of the Capital Region’s premier brokerage firms to an insolvent company being probed by federal authorities. Hurd told Smith he had chances to rein in the “arrogant” McGinn, but failed to do so before they lost millions of dollars of investor money.

“You not only didn’t step in and stop Mr. McGinn, you participated with him,” he said. “If you had stepped in and got Mr. McGinn to stop what he was doing, you wouldn’t be here today.”

Hurd ultimately handed Smith a 10-year sentence in federal prison for his conviction on 15 felony counts of conspiracy, wire fraud, securities fraud and filing a false tax return. The judge reserved sharper comments — and a stiffer sentence — for McGinn.

Hurd scolded McGinn, who was convicted on 27 of 29 counts, for claiming jurors in his case lacked “financial sophistication” to understand his investments. He also faulted McGinn for being arrogant before handing the disgraced broker a 15-year prison sentence.

“You didn’t really care about the rules as long as you provided for yourself and your preferred clients,” Hurd said.

The partners were also ordered to jointly pay $5.74 million in restitution to victims. McGinn was also ordered to pay $274,000 to the U.S. Internal Revenue Service and a $100,000 fine; Smith was ordered to pay the IRS $241,000 and assessed a $50,000 fine.

Neither partner offered a full apology for their swindle and many of their comments delivered in court suggested they faulted their convictions. McGinn said he and Smith regretted the losses sustained by investors.

“Yet in our business, your honor, nobody bats 1.000,” he told the judge.

Smith said the trust investments in question were capable of earning back the money they lost were it not for the federal case against him and McGinn. He apologized for the money investors lost, but defended them as sound investments — ones he convinced his own family to pour nearly $1 million into before they went south.

“I believe to this day these were sound investments,” he said.

But Hurd was unconvinced by either partner. Instead, he relied on roughly 60 impact statements sent by some of the 841 victims identified in the case to decide on a punishment.

“I read each and every one of the impact statements, and the hardship that has occurred here has been enormous,” he said.

Still unclear is the fate of the parallel civil action against the partners lodged by the U.S. Securities and Exchange Commission. Those proceedings were stayed in federal court pending resolution of the criminal matter.

Also unclear is when victims in the case will receive payouts from the estimated $14.1 million now under control of William Brown, the court-appointed receiver overseeing the partners’ frozen assets. He sat in the gallery during the sentencing but did not speak.

Though they faced separate sentencing proceedings — first McGinn and then Smith — both partners were shackled in the courtroom and turned over to U.S. marshals to begin serving their prison terms. Afterward, U.S. Attorney Richard Hartunian said the “long-standing personal enrichment plan” committed by McGinn and Smith was the largest fraud case ever prosecuted in the Northern District of New York.

“Through false representation and material omissions committed over several years, McGinn and Smith obtained investors’ hard-earned money and used it as their own,” Hartunian said during a news conference at the courthouse. “They covered their tracks by creating false accounting entries and the movement of money among accounts and by misleading regulators.”

In April 2010, the Financial Industry Regulatory Authority filed a civil complaint accusing McGinn, 65, and Smith, 68, of selling tens of millions of dollars in unregistered debt offerings and trusts. The same day, the U.S. Securities and Exchange Commission obtained a court order freezing the firm’s assets, alleging the partners funneled $136 million raised from roughly 900 investors into their own financially troubled or bankrupt pursuits and for their personal activities.

Over the next year and a half, federal investigators methodically built a criminal case against the partners. McGinn and Smith were each indicted in January 2012 on 30 counts of fraud.

During a nearly five-week trial in February, federal prosecutors outlined how the business partners of more than three decades ordered company accountants to create backdated documents and bogus promissory notes as examiners with the Financial Industry Regulatory Authority began to probe their dealings. 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 — many of whom would later lose vast sums of money.

The federal case focused on about $30.2 million in losses from 17 trust funds. The partners swindled roughly $6.3 million from investors to use for their own purposes.

The federal case against McGinn and Smith was bolstered by several of their own executives and business associates testifying against them. In November 2011, Ronald Simons, a partner at the accounting firm Piaker & Lyons, testified against them after admitting to falsifying a tax return to conceal $407,000 in fees distributed to Smith’s family.

Less than a month later, former senior managing partner Matthew Rogers admitted to falsifying income statements to conceal $950,000 in payments from McGinn, Smith & Co. And in July 2012, Brian Shea, the company’s chief financial officer, admitted to making false accounting entries to conceal $130,000 that McGinn diverted from investors.

The defense team representing McGinn and Smith characterized the collapse of their investments as resulting from the disastrous economic collapse that befell the nation in 2008. At trial, they argued the partners would have prevented the losses that stung so many investors had it not been for the meddling of the SEC, which froze all of their assets.

And they reiterated this notion during the sentencing. They claimed McGinn and Smith would have retained roughly 80 percent of the money owed to investors when federal regulators stepped in.

E. Stewart Jones, McGinn’s defense attorney, said the firm was “swimming upstream” amid a bad economy and government that seemed more concerned with bailing out big banks than small investment companies. He questioned why his client should face a similar life sentence as James “Whitey” Bulger, an infamous gangster now on trial in Massachusetts for 19 murders.

William Dreyer, Smith’s defense attorney, said his client “was out of the loop” when the firm’s questionable accounting practices began. He characterized Smith as a man of integrity who tried to correct problems as they came to his attention.

“He recognized wrongs, he recognized problems, and when he recognized the problems, he tried to fix them,” he said,

Smith’s adult daughter and son also came to his defense,, largely blaming the government and media for vilifying their father. Lauren Mirich, 31, described him as an honest man who had suffered greatly from his accusers.

“He’s almost 70 years old, and he’s had everything taken from him,” she said through sobs.

Geoffrey Smith said he watched the federal case “spiral from ridiculous and untrue” to being “truly terrifying.” The 33-year-old financial analyst who testified at his father’s trial said he pored through the firm’s records and couldn’t find any evidence of fraud, including among the $150,000 in losses he himself incurred through investments with McGinn, Smith & Co.

“What I found was that I was not a victim of fraud,” he said. “I was subject to market forces.”

These accounts were starkly contrasted by statements given by six victims who spoke in court. They included Fulton County Attorney Arthur Spring, who said he could no longer retire because of the losses he incurred.

Spring was left paralyzed after being injured in car accident when he was 18 years old. He said the driver in the accident was the last person who made him feel like a victim until McGinn and Smith lost his money.

“We are victims,” he said. “These defendants have hundreds and hundreds of victims.”

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