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2010-04-22 06:07:14
By Joseph A. Giannone Joseph A. Giannone Wed Apr 21, 1:19 pm ET
NEW YORK (Reuters) The Securities and Exchange Commission filed an emergency
enforcement action on Tuesday to halt an alleged fraudulent scheme by two
owners of an Albany, New York, brokerage who sold debt in unregistered
offerings and used the proceeds for its operations and to hire strippers.
Chairman Timothy McGinn and President David Smith, owners of McGinn, Smith & Co
Inc, sold about $120 million in more than 25 unregistered debt offerings,
according to a complaint filed in a New York federal court.
The proceeds, not enough to repay investors their principal or interest
payments, went to supporting the firm's struggling operations and to meet
payroll, the SEC said.
They also used funds to hire strippers for a "sexually themed cruise" and other
personal activities.
"McGinn and Smith deceived investors about the true purpose behind these
offerings," said Andrew 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."
No one answered the telephone at the McGinn Smith office.
According to the complaint, debt offerings were sold to hundreds of investors
through four funds and at least 18 trusts created by McGinn Smith.
Smith funneled most the proceeds into business entities that he, McGinn or
another partner either controlled or in which they had financial interests.
Regulators said most of these related companies were in poor financial
condition.
Smith allegedly directed $17 million to these related companies and made $34
million in loans, of which $22 million remains unpaid.
Investor funds were used to pay exorbitant commission and transaction fees to
their affiliated entities and make interest payments to investors in the other
entities.
The SEC's filing comes a day after the Financial Industry Regulatory Authority
(FINRA) filed a securities complaint accusing the firm and Smith with fraud in
the sale of $89 million in unregistered securities.
The firm and Smith misused investor funds and violated securities registration
rules, FINRA said. Smith was charged with misleading investors.
Smith and McGinn moreover were charged with providing FINRA staff with
falsified documents. FINRA said that the securities were not registered and
were not eligible for an exemption.
Securities regulators have been cracking down on private placement fraud.
(Reporting by Joseph A. Giannone; editing by Carol Bishopric and Robert
MacMillan)