FINRA/SEC Move Against New York Firm; Second Major Case In 24 Hours; Clients Suspect Colossal Ponzi Fraud At McGinn, Smith & Co.

Another investigation into allegations of spectacular financial fraud is under way in New York. The case against McGinn, Smith & Co. of Albany is the second to rock the state in the past 24 hours.

The Financial Industry Regulatory Authority (FINRA) filed a complaint against the company and its president David L. Smith yesterday. The SEC filed a complaint immediately on the heels of FINRA’s complaint, alleging a stunning fraud that may involve at least $120 million.

“McGinn and Smith deceived investors about the true purpose behind these offerings,” said Andrew M. Calamari, associate director of the SEC’s New York Regional Office. “They falsely promised investors a profitable payday but secretly siphoned off money for their own payroll.”

Multiple companies are involved, the regulators said. None of the offerings was registered, and the firm has been charged with selling unregistered securities. The SEC is seeking an emergency asset freeze.

“[T]he debt offerings have been sold to hundreds of investors through four funds and at least 18 trusts created by MS & Co. affiliates,” the SEC said. “They made a host of representations about the extent of due diligence they had performed, among other things. Contrary to their representations to investors, McGinn and Smith used much of the money raised in these offerings to make prohibited investments in their other businesses or make unsecured loans to financially support them.

“They also misused investor funds to pay exorbitant commission and transaction fees to their affiliated entities and make interest payments to investors in the other entities,” the SEC said.

For its part, FINRA said “Smith and McGinn provided falsified documents, submitting backdated promissory notes for personal loans they and others previously received from two of the Related Entities.”

The SEC added that “the full extent of the fraud is not yet known, [but] it appears that investors are currently owed at least $80 million.” Losses could total $84 million or more, according to court filings.

Named defendants by the SEC were McGinn, Smith & Co. Inc.; McGinn, Smith Advisors LLC; McGinn, Smith Capital Holdings Corp.; First Advisory Income Notes LLC (FAIN); First Excelsior Income Notes LLC (FEIN); First Independent Income Notes LLC (FIIN); Third Albany Income Notes LLC (TAIN); Timothy M. McGinn and and David L. Smith.

Clients became worried last year, the SEC said.

“In 2009, Smith and McGinn received e-mails telling them the investors were wondering ‘if they’ve bought into a Ponzi Scheme,’ and a MS&Co. broker reported to McGinn and Smith that there are ‘many people who refer to our deals as a Ponzi Scheme,'” the SEC said.

“As of September 2009, it appears that investors in the four Funds were owed at least $84 million, that the Four Funds had less than $500,000 in cash on hand, and that their remaining assets were worth only a small fraction of the amount owed to investors,” the SEC said.

“Similarly, the Trusts have a negative equity of approximately $18 million, and have never had the ability to pay the interest rates promoted to investors and also pay back principal,” the SEC continued. “Nonetheless, McGinn and Smith have continued to raise money from investors, using similar misrepresentations, as recently as December 2009. During the first few months of 2010, contrary to representations to investors, McGinn and Smith have continued to drain what little cash remains through payment of ‘fees’ to themselves.”

In the past 24 hours alone, investigators in New York have alleged that separate financial frauds involving multiple companies and individuals may have fleeced investors out of $101.5 million or more.

Earlier today, federal prosecutors and the SEC moved against Gryphon Holdings Inc. and related entities of Staten Island. Five people were arrested in the case, which the SEC said involved the illicit collection of at least $17.5 million over the past three years.