McGinn, Smith indicted on fraud charges
ALBANY, N.Y.—Security industry investors Timothy McGinn and David L. Smith—already being sued by the Securities and Exchange Commission on a claim they bilked investors of at least $80 million in a Ponzi scheme—now are facing criminal charges that could send them to prison for years, if convicted.
A New York grand jury last week indicted McGinn, 63, and Smith, 66—the founders of an investment firm based here that conducted dealings in the alarm industry—on 30 counts that include mail, wire and securities fraud and filing false tax returns. One count, which alleges conspiracy to commit mail and wire fraud, carries a penalty of up to 30 years in prison. The indictment also seeks $8 million in forfeiture for the alleged offenses.
The indictment contends that from about 2006 to 2009, the pair devised a scheme to mislead investors in order to obtain money to “enrich themselves.” McGinn spent misappropriated funds on thoroughbred racehorses, alimony, his homes in New York and Florida, and for country club memberships in Ireland and the United States, among other expenditures, the indictment says. Smith spent ill-gotten money on his homes in Orchid Island, Fla., and Saratoga Springs, N.Y., and country club expenses, among other things, the indictment charges.
The pair used such means as the U.S. mail and interstate wire transfers to conduct their fraudulent activities, violating federal law, the indictment charges.
The indictment was returned on Jan. 26 and announced by Richard Hartunian, U.S. attorney for the Northern District of New York.
McGinn, who served as CEO of IASG from 2003 to 2006, and Smith appeared in court on Jan. 27 and entered pleas of not guilty. Each was released on $100,000 bail after being required to surrender their passports, according to court records. Attorneys for the pair could not be reached for comment by Security Systems News’ deadline.
Hartunian issued an email statement to SSN that said, “The victims of this fraudulent scheme run the spectrum of investors—from young first-time investors looking to build an investment portfolio to elderly people looking to safeguard their nest egg. They include a church school fund, a retired soldier, a retired nurse, a state employee, and a college student; some investors lost their entire life savings. All of them believed in the viability and safety of the securities being sold by the defendants. In reality, they were sold nothing more than a bill of goods.”
McGinn and Smith are scheduled to go to trial March 15 on civil charges lodged against them by the SEC in the spring of 2010. The SEC seeks recovery of the pair’s “ill-gotten gains” and civil penalties.
McGinn and Smith are the founders of the McGinn, Smith & Co. investment firm. That company is now in receivership after the SEC seized Smith’s and McGinn’s business and personal assets and accused the pair and their company of defrauding investors.
The SEC contends that from 2003 to 2009, the pair diverted funds into financially troubled entities (some in the security alarm industry) and also into their own pockets and to pay for such expenses as “strippers and go-go dancers” on McGinn’s You Only Live Once cruise ship business.
The SEC lawsuit initially stated that McGinn and Smith had defrauded investors of at least $80 million. But that figure has now climbed to $136 million, with as many as 900 investors victimized, according to the Albany Times Union newspaper.
Many of the counts in the criminal indictment focus on McGinn’s and Smith’s involvement with two security companies that generated alarm contracts: Firstline Security Inc. of Utah, and Integrated Excellence Inc. of Georgia.
According to a news release from Hartunian’s office, the pair “raised money from investors in connection with a loan of $2.4 million to Firstline Security.” That summer-model company ended up getting sued by ADT Security Services in 2007 for allegedly breaching its dealer agreement, and it filed for bankruptcy in 2008, according to the indictment.
“The indictment alleges that the defendants knew that Firstline was facing litigation with its dealer, but did not disclose that to investors, or tell them when Firstline filed for bankruptcy and defaulted on loans. Instead, the defendants directed that investors receive $2 million of lulling payments by transferring money from other entities controlled by McGinn and Smith, and their firm sold approximately $600,000 of one of the Firstline investments without any disclosure of the bankruptcy or defaults,” the news release said.
The indictment also alleges that McGinn and Smith “raised about $1.2 million from investors in connection with a loan to benefit Integrated Excellence,” the news release states. “The indictment alleges that the defendants knew that the payments received from the loan were not sufficient to pay investors, but they directed that investors receive lulling payments by transferring money from other entities controlled by McGinn and Smith.”