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Sunday, July 21, 2024 | Back issues
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SEC Says It’s Nailed $90M Ponzi Scheme

ALBANY, N.Y. (CN) - McGinn, Smith & Co. and the two men who ran it squandered $90 million of investors' money by making unsecured loans to prop up cash-poor affiliates, paying salaries, and for their own delight, including hiring strippers for a "sexually themed" cruise, the SEC says.

When jilted investors were left holding worthless notes, David Smith cited the "financial crisis" and "the lack of liquidity in the market" for the losses, the SEC says in its federal complaint.

The commission filed an emergency order on behalf of more than 900 investors on Tuesday. Smith, 65, of Saratoga Springs, and Timothy McGinn, 62, of Schenectady, ran their game out of Albany, the SEC says.

"The offering fraud already has caused significant investor losses, and this emergency action is intended to stop the fraud and preserve the status quo for the benefit of the victims," according to the complaint.

Smith and Timothy McGinn raised more than $136 million in more than 20 unregistered debt offerings through dozens of affiliated entities, the SEC says.

McGinn and Smith funneled investors' money to entities they owned or controlled, then covered up the fraud with lies and omission, the complaint states.

McGinn Smith owed investors in their four main funds at least $84 million as of September 2009, though the funds held a total of less than $500,000, and the defendants' trusts were $18 million in the red, the SEC says.

"Nonetheless, McGinn and Smith have continued to raise money from investors, using similar misrepresentations," the agency says. "Contrary to representations to investors, McGinn and Smith have continued to drain what little cash remains through payment of 'fees' to themselves."

This caused many investors to wonder "if they've bought into a Ponzi scheme," the complaint states, and an MS & Co. broker reported to McGinn and Smith that there are 'many people who refer to our deals as a Ponzi scheme.'"

Smith and McGinn steered investors away from blue chip stocks and pushed risky asset-backed securities instead, which they falsely touted as "safer investments," according to the complaint.

"Internal MS & Co. emails in 2009, including many by McGinn and Smith, reveal a constant need to raise millions of dollars, a growing desperation to make payroll, meet interest payments and assuage investors complaining of a Ponzi scheme, in order to keep their house of cards from collapsing," the lawsuit states.

"The liquidity problems were so severe that one outside broker was forced to invest $10,000 of his own money so one of his elderly customers could be redeemed."

The SEC seeks penalties, disgorgement, freezing of assets and an injunction.

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