Getting back as little as 8 percent of their original investment will be a bitter pill to swallow, but better than nothing for the defrauded clients of McGinn, Smith & Co.
The 841 victims identified in the criminal case against convicted swindlers Timothy McGinn and David Smith could finally get back some of the money they invested with the firm long before it tanked in December 2009. William Brown, the court-appointed receiver, believes the legal challenges in the case should be resolved later this month, meaning he can at last file a distribution plan with the court in the hope of finally parceling out some of what remains of the partners’ assets.
“If the court approves the plan, the distribution would be made later this year,” he said Thursday.
So far, Brown has recovered about $14.5 million in assets and estimates he’ll likely accrue about $19 million when everything is liquidated. Depending on that final total, he estimated investors could see between 8 percent and 15 percent of their investments back.
“It could be more, it could be less,” he said.
Part of the lag in returning investor money has been the host of legal challenges posed by the Smith family. Brown said the challenges, coupled with his work to liquidate some of the complex investments made by the firm, have slowed the process significantly.
“The SEC has had to vigorously pursue the Smiths, who have litigated virtually every step of the way in this case,” he said.
McGinn and Smith were found guilty on counts of conspiracy, wire fraud, securities fraud and filing a false tax return following a nearly month-long trial in Utica last winter. 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. McGinn was ordered to serve up to 15 years in prison, while Smith was handed a 10-year sentence.
Now the partners are facing civil prosecution. Earlier this month, U.S. Magistrate Judge Christian Hummel lifted a stay on the case brought against the partners by the U.S. Securities and Exchange Commission.
On Thursday, the Smith family was dealt another series of losses. Hummel ruled the receiver can proceed with a plan to sell the Smiths’ home on the Great Sacandaga Lake in Edinburg and barred the family from using any of the frozen assets toward paying off the tax liabilities owed by Smith and his wife, Lynn.
Smith was ordered to pay the Internal Revenue Service $241,000 in taxes he evaded by falsely reporting his income. His attorneys tried to argue this penalty should be paid from the frozen assets because the IRS has priority over “future judgments” against Smith.
But Hummel found the priority of the IRS among the victims of the fraud was “at best, unclear.” The judge also found legal precedent showing victims’ priority over the government because the taxes resulted from Smith’s criminal activity.
In the matter of the Sacandaga property, Hummel rejected the Smiths’ claim the home couldn’t be sold by the receiver while it remained part of a trust to benefit their adult children. Lynn Smith sold the property to the trust for $600,000 when the trust was briefly unfrozen in July 2010.
But when SEC investigators learned that David and Lynn Smith were to receive annual $489,932 payments from the trust starting in 2014, they successfully petitioned the court to freeze it again. A U.S. District Court judge ordered Lynn Smith to repay nearly $1 million — including the money she received from the sale — back to the trust in July 2011.
Hummel ruled Lynn Smith’s actions in concealing her and her husband’s interest in the trust resulted in the sale of a property that would have never been sold otherwise. He also found the act “in direct contravention of the purpose of the asset freeze.”
“The trust was deprived of $600,000.00 which never should have been debited from the account,” he wrote in the ruling.