United States v. McGinn

Decision Date22 May 2015
Docket Number13–3202CON,13–3477XAP,Nos. 13–3164–cr L,13–3544XAP.,s. 13–3164–cr L
Citation787 F.3d 116
PartiesUNITED STATES of America, Plaintiff–Appellee–Cross–Appellant v. Timothy M. McGINN, David L. Smith, Defendants–Appellants–Cross–Appellees.
CourtU.S. Court of Appeals — Second Circuit

James C. Knox, Esq., E. Stewart Jones, PLLC, Troy, N.Y., for DefendantAppellant, Cross–Appellee Timothy M. McGinn.

Justin S. Weddle (Lauren E. Curry, on the brief), Brown Rudnick LLP, New York, N.Y., for DefendantAppellant, Cross–Appellee David L. Smith.

Rajit S. Dosanjh (Elizabeth C. Coombe, on the brief), Assistant United States Attorneys for Richard S. Hartunian, United States Attorney, Northern District of New York, Syracuse, N.Y., for PlaintiffAppellee, Cross–Appellant.

Before: PARKER, HALL, and LIVINGSTON, Circuit Judges.

Opinion

BARRINGTON D. PARKER, Circuit Judge:

After trial in the Northern District of New York (Hurd, J. ), a jury convicted Timothy M. McGinn and David L. Smith of various securities, mail, and wire fraud and tax charges. On appeal, McGinn and Smith challenge their convictions, principally contending that the government's proof of criminal intent was insufficient. A key issue relates to the government's allegedly improper use of a letter written by Smith a number of years before the events leading to the indictment. The defendants also challenge the legality of the court's charge on the tax counts and McGinn contends that his sentence was procedurally and substantively unreasonable. Finally, Smith contends that the court's restitution and forfeiture orders included losses related to conduct for which he was acquitted. The government cross-appeals the district court's restitution orders.

For the reasons that follow, we affirm the defendants' convictions and the sentences. As for the government's cross-appeal, we remand the case for the limited purpose of correcting the written judgments to conform them to the requirements of the MVRA, 18 U.S.C. § 3663A.

BACKGROUND

The charges in this case arise from the operation by McGinn and Smith of McGinn, Smith & Company, Inc. (“MS & C”), an Albany-based investment firm and registered broker-dealer. In October 2012, the government filed a thirty-two count superseding indictment, charging the defendants with conspiracy to commit mail and wire fraud as well as substantive counts of mail, wire, and securities fraud, and filing false tax returns. See 18 U.S.C. §§ 1341, 1343 and 1349 ; 15 U.S.C. §§ 78j(b) and 78ff ; and 26 U.S.C. § 7206(1).

Viewing the evidence, as we must, in the light most favorable to the government, we find that the evidence adduced at trial established the following. MS & C was a firm founded and run by the defendants. From September 2006 to December 2009, Smith was the Chief Executive Officer and McGinn was Chairman of the Board. MS & C structured and sold to its clients a range of investment vehicles, but the charges arose from three types of offerings sold to MS & C investors. The first consisted of seventeen trusts structured to securitize streams of receivables, the majority of which concerned revenue streams from monthly contracts written by home security and telephone, internet, and cable service providers. The second was a fund managed by an affiliate, McGinn Smith Transaction Funding Corporation (“MSTF”), whose objective was primarily to provide bridge financing for transactions originated and negotiated by MS & C. The third was a series of four funds that invested more broadly in various public and private securities (the “Four Funds”).

With respect to the first type of offering, MS & C sold trust certificates to investors who were promised a specified interest rate payable in monthly installments over the life of the trust. The terms of each trust offering were set forth in Private Placement Memoranda (“PPMs”), which described the operation of the trusts, including the use of proceeds, the expected rates of return, and the fees payable to MS & C. Each trust had a “minimum offering,” an amount which was required to trigger the operation of the trust. Investor funds were to be held in escrow until the target was reached, at which point escrow was “broken,” and the funds would be released and the trust would invest them. In the first type of investment, MS & C would advance funds to the various service providers. The advances would be secured by the receivables and the trust expected to generate profits from the spread between the amount advanced and the stream of receivables. Alternatively, some trusts advanced funds to entities that had previously purchased monthly service accounts and took as security the underlying contracts.

The government's proof at trial established that, contrary to the provisions of the PPMs, the defendants withdrew and diverted significant sums of money from certain trusts, largely for personal use. Some of these withdrawals took place even before the trusts reached their minimum offering and escrow was broken. Furthermore, the proof showed that when certain of the investments made by the trusts did not generate sufficient returns to cover payments owed to investors, McGinn and Smith diverted funds from one offering to cover shortfalls in another.

At trial, the government devoted significant attention to two loans made by four of the trusts to a company called Firstline Security, Inc. that sold security alarm contracts. The government's proof established that between October 2007 and June 2008, MS & C raised approximately $3.2 million that investors were told would be invested in two Firstline trusts. During the course of raising these funds, McGinn learned that Firstline was threatened with and then had filed for bankruptcy, but defendants failed to disclose this information to existing and new investors. After Firstline defaulted, McGinn diverted funds from other trusts to cover the shortfall and knowingly concealed these events through false statements to investors.

With respect to the second type of offering, the government's proof showed that in 2008, MS & C, through MSTF, issued investors approximately $6.875 million in notes, ostensibly to invest in transactions originated by MS & C and to invest in other public and private securities including preferred shares of MS & C.

As to the third type of offering, from 2003 to 2005, MS & C raised approximately $90 million from investors for the Four Funds. According to the PPMs, investor money was to be used to acquire a variety of assets including securities, bonds, loans, leases, mortgages, equipment leases, and securitized cash flow instruments. Investors could purchase secured notes, offering between a 5% and 10.25% interest rate.

Although the Four Funds were initially profitable, by late 2007, they were “under water” by about $40 million and MS & C was unable to make the necessary interest payments. Gov't App'x 206. The government proved that, to cover up this lack of profitability and to continue the interest payments, defendants reduced and suspended payments to investors, and McGinn diverted funds from a MSTF escrow account to preferred Four Funds' investors. The government also proved that McGinn and Smith failed to disclose these diversions to investors and attempted to conceal them through false accounting entries.

Similarly, as the financial condition of MS & C deteriorated in 2008 and 2009, Smith ordered that accounting entries be changed to conceal the fact that MS & C was failing. Various expenses such as rent and legal fees were not properly recorded and restricted monies from the Four Funds accounts were used to meet MS & C's payroll. This and similar fraudulent conduct was concealed from investors and omitted or misstated in required regulatory filings.

The government proved that, while all of this was going on, the defendants improperly diverted some $4.1 million for the personal benefit of themselves and another key insider, that they used this money to fund lavish lifestyles that included luxury homes, vacation properties, thorough-bred race horses, and expensive golf memberships, and that they failed to report these receipts as income on federal tax returns.

As MS & C was unraveling, its financial condition came to the attention of the Financial Industry Regulatory Authority (“FINRA”), which, in June 2009, initiated a “cause based” examination of MS & C. At first, FINRA was concerned about the co-mingling of funds, but FINRA examiners soon realized that significant amounts of the diverted money were ending up in the defendants' personal bank accounts. The government proved that when questioned about these transactions (including under oath), Smith and McGinn provided the examiners with false explanations and when FINRA requested documentation, the defendants altered and backdated the relevant accounting entries in order to conceal the transactions.

Following a four-week trial, the jury convicted both defendants of conspiracy to commit mail and wire fraud (Count 1); mail and wire fraud (Counts 8, 9, 10, 14 and 17); securities fraud (Counts 21–26); and filing false tax returns (Counts 27–29 for McGinn and Counts 30–32 for Smith). McGinn was also convicted of additional mail and wire fraud counts (Counts 4–7, 11–13, 15–16, 18–19 and 20).

McGinn was principally sentenced to 180 months' and Smith to 120 months' imprisonment on the conspiracy count and the substantive mail, wire, and securities fraud counts to run concurrently with 36 month sentences on the tax counts. The district court ordered McGinn and Smith to pay restitution of $5,992,800 and $5,989,736, respectively, and to forfeit $6,336,440. This appeal followed.

DISCUSSION
I. Sufficiency of the Evidence

We begin with defendants' contentions regarding the sufficiency of the evidence underlying their convictions. We review de novo a challenge to the sufficiency of the evidence and affirm if the evidence, when viewed in its totality and in the light most favorable to the government, would permit any rational...

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