William Lex was hammering David Smith with emails about the investments he was making for clients, complaining that the selling terms had changed and that some were starting to fear they had bought into a Ponzi scheme.
In the missives sent in 2009, the Philadelphia-area broker openly worried about his clients not receiving payments. And he wondered how long investors would remain confident about the money they had entrusted to McGinn, Smith & Co.
“My clients continue to ask me if they’ve bought into a Ponzi Scheme and I’ve tried to reassure them that is not the case,” he wrote in a March 2009 email to Smith, one of the Albany-based firm’s principals. “This current situation is not helping me to build confidence with clients who have hundreds of thousands of dollars in McGinn, Smith investments.”
Read the full SEC press release and the list of charges against the brokers on the Capital Region Scene blog.
The emails Lex sent were later included in a lengthy complaint the U.S. Security and Exchange Commission filed against Smith and longtime associate Timothy McGinn in April 2010. Lex is now among 10 brokers the SEC is accusing of playing along with the securities fraud perpetrated by the business partners, who have since been convicted of federal charges, according to a complaint filed by the agency this week.
The complaint alleges that the 10 brokers made material omissions and misrepresentations to clients as they recommended the unregistered investments offered by the firm. These brokers also ignored red flags about the investments and failed to conduct due diligence in the investments they were recommending, according to the complaint.
“As securities professionals, these brokers had an important duty to determine whether the securities they recommended to customers were suitable, especially when red flags were apparent,” said Andrew Calamari, the SEC’s New York Regional Office director. “These registered representatives performed inadequate due diligence and failed to fulfill their duties.”
The other brokers included Donald J. Anthony Jr. of Loudonville; Frank H. Chiappone of Clifton Park; Richard D. Feldmann of Delmar; William P. Gamello of Rexford; Thomas E. Livingston of Slingerlands; Brian T. Mayer of Princeton, N.J.; Philip S. Rabinovich of Roslyn; and Ryan C. Rogers of East Northport. These brokers made anywhere between $74,500 and $1.5 million in commission from millions of dollars worth of sales from the Four Funds, New York limited liability companies created and managed by McGinn and Smith.
Offerings from the Four Funds raised more than $125 million from roughly 750 investors. These clients had estimated losses exceeding $80 million.
Overseeing the operation was Andrew Guzzetti of Saratoga Springs, the firm’s managing director of private client groups from 2004 to 2009. The SEC alleges that Guzzetti failed to take any action to investigate the offerings and even encouraged brokers to sell notes despite having knowledge of serious discrepancies.
By 2006, the Four Funds began having significant difficulty meeting redemption requests from investors, according to the SEC complaint. Smith then instituted a policy requiring brokers to replace customers redeeming their notes with new ones.
In December 2006, Smith sent an email to Guzzetti, telling him that Rabinovich would need to bring an additional $100,000 into the Four Funds before he could allow him to swap out another investor.
“I am running on fumes with all of these redemptions and cannot afford anymore,” Smith wrote in the email.
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 with the Four Funds.
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. Last month, McGinn was ordered to serve up to 15 years in prison, while Smith was handed a 10-year sentence.