Sec. v. Mcginn, 10–CV–457 (GLS/DRH).
| Decision Date | 07 July 2010 |
| Docket Number | No. 10–CV–457 (GLS/DRH).,10–CV–457 (GLS/DRH). |
| Citation | 752 F.Supp.2d 194 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff,v.McGINN, SMITH & CO., INC.; McGinn, Smith Advisors, LLC; McGinn, Smith Capital Holdings Corp.; First Advisory Income Notes, LLC; First Excelsior Income Notes, LLC; First Independent Income Notes, LLC; Third Albany Income Notes, LLC; Timothy M. McGinn; and David L. Smith, Defendants.Lynn A. Smith, Relief Defendant.David M. Wojeski, Trustee of David L. and Lynn A. Smith Irrevocable Trust U/A 9/04/04., Intervenor. |
| Court | U.S. District Court — Northern District of New York |
OPINION TEXT STARTS HERE
David Stoelting, Esq., Andrew Calamari, Esq., Michael Paley, Esq., Kevin McGrath, Esq., Lara Mehreban, Esq., Linda Arnold, Esq., of Counsel, New York, NY, for Plaintiff, Securities and Exchange Commission.William J. Brown, Esq., Buffalo, NY, Receiver for Corporate Defendants, Phillips Lytle LLP.Greenberg Traurig, Michael L. Koenig, Esq., of Counsel, Albany, NY, for Defendants Timothy M. McGinn and David L. Smith.Featherstonhaugh, Wiley & Clyne, LLP, James D. Featherstonhaugh, Esq., of Counsel, Albany, NY, for Relief Defendant.Jill A. Dunn, Esq., Albany, NY, for Intervenor.
Presently pending are the motions 1 of (1) plaintiff Securities and Exchange Commission (“SEC”) for a preliminary injunction freezing the assets of the defendants and of relief defendant 2 Lynn A. Smith (“Lynn Smith”) and granting related relief pending a final disposition of the complaint herein (Dkt. No. 4, 5), and (2) intervenor David M. Wojeski, Trustee of David L. and Lynn A. Smith Irrevocable Trust U/A 9/04/04 (“Trust”) lifting the temporary restraining order (“TRO”) freezing the Trust and awarding costs and attorney's fees (Dkt. No. 31).3 For the reasons which follow, both motions are granted in part and denied in part.
Defendants Timothy M. McGinn (“McGinn”) and David L. Smith (“David Smith”) joined to form McGinn, Smith & Co., Inc. (“MS & Co.”) in 1981 with a principal place of business at 99 Pine Street, Albany, New York. Through its own employees and through related entities, MS & Co. offered financial services to clients, including investment advice and stock brokerage services as well as investments in securities which it sold. McGinn presently serves as Chairman and Smith as President of MS & Co. Compl. (Dkt. No. 1) at ¶ 16, 17. Lynn Smith is married to David Smith. The Trust was created in 2004 for the benefit of the Smiths' two adult children. The SEC was created, inter alia, to regulate the purchases and sales of securities and acts to enforce compliance with laws and regulations governing such transactions. See 15 U.S.C. § 78a et seq.
The SEC's complaint alleges that from September 2003 to October 2005, MS & Co. and its related entities raised over $120 million from over 900 investors solicited primarily by McGinn and David Smith. Compl. ¶ 1; Mehraban Decl. I (Dkt. No. 4–3) at ¶¶ 2, 3. The investments were made in four funds 5 which made over twenty unregistered debt offerings.6 David Smith managed the funds and their investments while McGinn acted on behalf of MS & Co. and its related entities. Compl. ¶¶ 16, 17. Smith prepared and approved the Private Placement Memorandum (PPM) for each fund, which were essentially identical for all and which were given to investors. Mehraban Decl. I at ¶¶ 3–5. The SEC alleges that in a variety of ways, the defendants misrepresented to investors the true nature of the Four Funds, how the funds would be invested, the diligence with which the defendants had investigated the recipients of the funds' investments, the accreditation of investors, and had failed to register the Four Funds as securities as the law required. Id. at ¶¶ 6–13.
The SEC also alleges that the defendants raised additional capital through trust offerings. Beginning in November 2006, the defendants obtained from investors over $23 million for investment in over eighteen trusts. Mehraban Decl. I at ¶ 14. Potential investors were advised by defendants that the funds were created for specific purposes, such as the purchase of contracts for security alarm services, broadband cable services, telephone services, and luxury cruises. Id. at ¶ 15. Investors were to receive annual returns of 7.75–13% on their investments with the investment principle to be returned at the maturity date 18–60 months from the date of the offering. Id. at ¶ 17. From these trust funds, defendants charged fees under various rubrics totaling over 30% of the total invested in the funds, much of which was not disclosed to investors. Id. at ¶¶ 20–47. Given the high fees, both disclosed and undisclosed, charged to the funds by the defendants, the high rates of return promised investors were not reasonably possible.
In 2008, the defendants began advising investors that interest payments could not be made as promised, promised interest rates would be reduced and maturity dates extended, and defendant would no longer charge fees to the funds. Mehraban Decl. I at ¶¶ 54–56. In 2008, MS & Co. lost over $1.8 million. Id. at ¶ 57. Clients complained to authorities about how their investments were being handled and an investigation of the defendants was undertaken by the Financial Industry Regulatory Authority (FINRA).7 Maya Decl. (Dkt. No. 4–3) at ¶ 3. As events unfolded in 2009, defendants evidenced increasing desperation to satisfy investors' complaints,8 meet payroll, and continue their operations. Id. at ¶¶ 58–80. McGinn and David Smith also took certain steps to protect their own assets from the claims of investors, including transferring title to real estate held jointly with their wives into the names of the wives alone. T. 280–81, 301–02, 372.9 Nevertheless, defendants continued to solicit and raise capital for the Four Funds through 2009 without advising potential investors of, for example, the reduced interest rates, extended maturity dates, and failures to pay earlier investors as represented. Id. at ¶¶ 81–85.
According to the SEC, as of the date of the commencement of this action, the defendants had raised over $120 million in investments in outstanding funds and over $80 million in principle is currently owed to investors. It appears that MS & Co. and its related entities possessed less than $1 million in assets for the benefit of investors as of that date. First Report of the Receiver (Dkt. No. 49) at 5.
On April 20, 2010, the SEC commenced this action by filing a complaint 10 alleging that the conduct described above constitutes past and ongoing violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10b–5 under the 1934 act, 17 C.F.R. § 240.10b–5; and related provisions. Compl. at ¶¶ 7–12. To preserve defendants' assets for the benefit of investors in the event it prevails here, the SEC simultaneously sought and received the TRO appointing a receiver to take possession of defendants' assets and of MS & Co. and its related entities, freezing defendants' assets pending the outcome of this action, freezing the assets of Lynn Smith, ordering verified accountings, and related relief. Dkt. Nos. 4, 5. A receiver was appointed and the assets of the defendants and Lynn Smith were frozen pending a hearing TRO at 7.
Prior to the commencement of the hearing on June 9, 2010, McGinn and David Smith consented to a preliminary injunction continuing the freeze of their assets. Dkt. No. 61. Through the receiver, the remaining defendants also consented to such an order. T. 40. Without objection, the SEC's motion for a preliminary injunction as to all defendants will be granted. Issues remain, however, as to both Lynn Smith and the Trust.
Lynn Smith has been married to David Smith for forty-two years. Smith Aff. (Dkt. No. 23) at ¶ 2; T. 271, 357. Lynn Smith's father died shortly after her marriage leaving her, inter alia, a stock account then valued at approximately $60,000 (“Stock Account”) and a camp on Great Sacandaga Lake. 11 Lynn Smith Aff. ¶¶ 13, 14; T. 326, 355–58. These inheritances have always been maintained solely in Lynn Smith's name. Lynn Smith Aff. ¶ 17; T. 355–59. In addition, in 2009, David Smith and Lynn Smith transferred title to a vacation property in Vero Beach, Florida (“Vero Beach home”) into the name of Lynn Smith alone. T. 280–81, 372.12 In 2009, Lynn Smith also opened a checking account solely in her name after the Smiths had maintained only a single joint checking account for the previous forty years. T. 281–83, 374, 403–04. Thereafter, funds from the joint checking account were transferred into her account along with other funds and it was used to pay the Smiths' joint obligations. T. 282–83; 374–75.
The Stock Account was managed for the first few years by the firm retained by Lynn Smith's father. Lynn Smith Aff. at ¶¶ 14, 15; T. 358–59. However, David Smith became a licensed broker in the mid–1970s and assumed management of the account. T. 360. Over the years, the Smiths used proceeds from the account, inter alia, to purchase their jointly owned primary residences, pay the costs of college educations for their two children, purchase two jointly owned vacation homes in Vermont and later in Florida, and create a Trust in both their names. T. 279–81; 328–29; 350–51; 368–72; see also subsection l(D) infra. Notwithstanding these expenditures, however, the value of the Stock Account grew from a low of $10,000 in the 1970s to a high of over $7 million in 2001. T. 326–27; 349; 363–64. As of January 2010, the account's value was approximately $2.1 million. T. 364; see also T. 349–50 ().
Although title to the Stock Account always has remained in the name of Lynn Smith alone, David Smith enjoyed unfettered control...
To continue reading
Request your trial
-
Sec. & Exch. Comm'n v. McGee
...to the stockbroker and not his mother, requiring application of the Cavanagh test. Id. at 301–02;see also SEC v. McGinn, Smith & Co., 752 F.Supp.2d 194, 208 (N.D.N.Y.2010) (“Where a defendant treated an asset as his own, the asset should be treated as that of the defendant and the Cavanagh ......
-
Zabit v. Brandometry, LLC
...Plaintiffs point to SEC v. McGinn, Smith & Co. , which concerned the equitable distribution of jointly-owned assets. 752 F. Supp. 2d 194, 207 (N.D.N.Y. 2010) ("Where a defendant and relief defendant jointly own an asset, the central inquiry concerns the element of control implicating the co......
-
U.S. Sec. & Exch. Comm'n v. Ahmed
...[6] whether the defendant ever withdrew any funds from the asset.’ " Ahmed I , 123 F.Supp.3d at 308 (quoting SEC v. McGinn Smith & Co. , 752 F.Supp.2d 194, 207-08 (N.D.N.Y. 2010) ).1. Evidence That Relief Defendants are Nominal Owners of Defendant's Assets Relief Defendants maintain that th......
-
Sec. & Exch. Comm'n v. Kelly
...17(a)(2), the SEC must prove that the defendant made materially false statements or omissions. See, e.g., SEC v. McGinn, Smith & Co., 752 F.Supp.2d 194, 212–213 (N.D.N.Y.2010); SEC v. Global Telecom Servs., LLC, 325 F.Supp.2d 94, 111 (D.Conn.2044); SEC v. Espuelas, 699 F.Supp.2d 655, 659–63......