New investment venture for two charged with fraud

Timothy McGinn and David Smith back in the news
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Thursday, October 28, 2010

ALBANY, N.Y.—Security alarm investors Timothy McGinn and David Smith—whom the SEC charged earlier this year with bilking investors of at least $80 million in a Ponzi scheme—are reportedly involved in a new investment venture. Their new business, Security Alarm Credit, has come under the SEC’s radar.

“We are aware of it and have alerted the court to it,” Andrew Calamari, associate director of the SEC’s New York Regional Office, said Oct. 27. “But at the moment, I can’t speak to what action we may or may not take.” Calamari declined further comment.

The Times Union, a newspaper in Albany, N.Y. reported this week that McGinn—who served as CEO of IASG from 2003-2006—and Smith had launched a new investment company. The new company, Security Alarm Credit, has been trying to raise $543,000 to loan Anchor Alarm Center, a third-party monitoring center in Suwanee, Ga., $425,000 at 19.62 percent annual interest, the newspaper said.

McGinn and Smith’s former administrative assistant, Carolyn Gracey, is listed as the company’s owner, according to the newspaper. McGinn and Smith are executive vice presidents in the company, which is headquartered in Gracey’s home in East Greenbush, N.Y., the newspaper said.

Longtime partners Smith and McGinn are the founders of McGinn, Smith & Co., an Albany-based investment firm that conducted investment dealings in the alarm industry. The company is now in receivership after the SEC in April seized Smith’s and McGinn’s business and personal assets and accused the pair and their company of defrauding investors. The SEC has charged that during a time period 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 said.  The court case is pending.

McGinn and Smith could not be reached by Security Systems News for comment, and the lawyer representing them in the SEC case, Martin Russo of the New York firm Gusrae, Kaplan, Bruno & Nusbaum, declined to comment. In the newspaper story, McGinn said he and Smith had a right to earn a living.

Mike Latty, president of Anchor Alarm, confirmed to Security Systems News that he had been offered the loan. Latty, who has said he didn’t know about the SEC fraud charges against McGinn and Smith, said the offer by Security Alarm Credit simply seemed like a good opportunity because banks are reluctant to loan to businesses in the industry.

“I’m just a small business down here in Georgia. I wanted to get a loan, they reached out to me and it sounded like something we could both work and do,” Latty said.

In email and phone interviews, Latty explained that he wants to buy a new building and expand his workforce of 15 to about 20 employees.

Latty said he’d been asking around in the industry about anyone willing to lend money, and so was receptive when McGinn called him.

“For about a year, I have been in search of the right financing structure for expanding my business,” Latty said. “Being in the alarm industry, it only makes sense to use someone that understands our industry and has a history of doing these types of transactions. Mr. McGinn through Security Alarm Credit offered me a very reasonable deal and we proceeded with the paperwork to get this done.”

The loan is not yet final, Latty said, saying he would be open to other offers if they made good business sense. “I will complete a financing deal whether it be with SAC or with someone else that can make a legitimate loan with terms that I can accept,” he said.

Jennifer Holloway, president of the Dallas-based Holloway Security Consulting, which provides transaction and consulting services to the security alarm industry and those seeking to enter it, said she doesn’t have any firsthand information about the story.

However, Holloway believes some general conclusions can be drawn from it.

In an email interview, Holloway said that it “shines a great big spot light on the miserable state of financing options available to small and mid-sized companies in the security industry. It’s very difficult, if not impossible, to find a line of credit financing in the $250k to $5m range in our sector. The demand for this level of financing is high and the supply of lenders is limited.”

Holloway, whose company specializes in acquisitions, financing and underwriting, said the situation “speaks volumes about the need for a trustworthy lender with a reasonable cost of capital to enter this space; providing up-front term loan and line of credit financing to credit-worthy alarm companies and central stations that need capital to grow their business or complete other strategic plans.”