Securities Fraudsters Lose 2nd Circuit Appeal

     MANHATTAN (CN) – The 2nd Circuit upheld the convictions Friday of two Albany men who bilked hundreds of investors out of millions of dollars in a Ponzi scheme.
     A jury convicted the two, Timothy McGinn and David Smith, in 2013 of mail and wire fraud, securities fraud, conspiracy, and filing false tax returns.
     McGinn received a sentence of 15 years; Smith got 10 years. Each also must pay restitution of $5.9 million, and together they must forfeit $6.3 million.
     The men founded the Albany brokerage firm McGinn, Smith & Co. in 1981 and worked there as principals.
     Prosecutors accused them of luring a mix of wealthy individuals and unsophisticated investors to various funds that promised solid returns, and then misusing that money when their business faltered.
     Along the way, McGinn and Smith also siphoned off $4 million for their own benefit, buying vacation properties, thoroughbred horses and expensive golf memberships, according to the government’s case.
     The U.S. Securities and Exchange Commission, which filed an emergency enforcement action against the firm in 2010, estimated 841 investors lost $124 million.
     Appealing their convictions, McGinn and Smith said the government failed to prove criminal intent. McGinn also claimed his sentence was unreasonable, and Smith challenged his restitution and forfeiture orders.
     The 2nd Circuit’s rejection of that appeal Friday goes through the counts individually to show how the government offered ample proof of its charges.
     McGinn, for instance, challenged his mail and wire fraud convictions in the sale of certificates in trusts that made loans to home security and Internet/cable service providers. The certificates promised investors a specific interest rate over the life of the trust; the loans to the companies were securitized by their stream of receivables.
     Four of the trusts, though, made two loans to a firm selling security-alarm contracts, Firstline Security Inc., that teetered on insolvency.
     Though the company subsequently filed for bankruptcy and defaulted on the loans, McGinn kept that information from investors, the government showed.
     McGinn claimed he did not know about the company’s dire state, but “the government proof’s showed otherwise,” the appeals court found, pointing to the regular emails to investors about post-bankruptcy sales in the trusts.
     “Considering the email evidence and the fact that MS&C [the firm] had a potent motivation to conceal the bankruptcy because disclosure … would have made it exceedingly difficult, if not impossible for MS&C to procure investors, the jury was entitled to reject McGinn’s self-serving testimony and accept the government’s proof that he knowingly concealed material information from prospective investors,” Judge Barrington Parker wrote for a three-judge panel.
     Likewise, although McGinn and Smith claimed the government failed to prove that they conspired to commit mail and wire fraud, Parker said “the government adduced sufficient evidence” to show that they worked jointly to “divert funds [and] conceal losses through the creation of false accounting records.”
     Parker did agree, though, with the men’s contention that a letter Smith wrote to McGinn years before should not have been admitted at trial as more proof of their conspiracy and intent.
     In the 1999 letter, Smith raised concerns about how stable their business would be if any of the trusts went into default. Smith described how vulnerable to criminal charges they might be, and he characterized what was happening at the brokerage as “a Ponzi scheme.”
     Though the trial court had initially determined the letter inadmissible, it later had a change of heart.
     Parker found that to be “manifestly erroneous” because the government was allowed on cross-examination to “simply read to the jury the most prejudicial and inflammatory portions of the letter under the guise of asking questions.”
     “Considering the overall strength of the government’s case and the fact that the letter was cumulative of other properly admitted evidence,” however, the appellate panel said that the lower “court’s treatment of the 1999 letter was harmless error.”
     The letter also did not constructively amend the indictment, as McGinn and Smith claimed, Parker said.
     The panel found McGinn’s 15-year sentence to be reasonable, and affirmed $600,000 in restitution to which Smith had objected.
     Judges Peter Hall and Debra Ann Livingston concurred with Parker.

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