Sex, fraud, and alarm accounts
ALBANY, N.Y.— Security alarm industry investors David L. Smith and Timothy McGinn—who served as CEO of IASG from 2003-2006—had their business and personal assets seized on Tuesday. The SEC has charged Smith and McGinn with running a Ponzi scheme that defrauded investors of at least $80 million and diverting those funds into financially troubled entities (some in the security alarm industry), their own pockets, and to pay for “strippers and go-go dancers” on McGinn’s You Only Live Once cruise ship business.
McGinn and Smith “falsely promised investors a profitable payday, but secretly siphoned off money for their own payroll,” said Andrew Calamari, associate director of SEC’s New York Regional Office, in the SEC complaint.
Smith and McGinn are principals in McGinn, Smith & Co., a registered broker dealer that runs Alarm Traders, a buyer and seller of alarm monitoring accounts to security companies that claims to have moved more than $400 million in accounts.
According to the SEC report, beginning in 2003, and continuing until December 2009, Smith and McGinn raised more than $120 million in more than 25 debt offerings that were not registered with the SEC; they allegedly misrepresented the nature of investments and returns and used “funds to support their financially troubled or bankrupt entities, to make payroll for McGinn, Smith & Company, and even for their own personal activities.” The SEC said offerings were sold to more than 900 investors.
The SEC on Tuesday obtained an emergency court order to freeze Smith and McGinn’s assets. The SEC action followed a complaint filed on Monday by the Financial Industry Regulatory Authority (FINRA) that charged Smith with “securities fraud ... and providing FINRA with falsified documents.”
Smith and McGinn did not return calls from Security Systems News.
Calamari, of the SEC, told Security Systems News that all of Smith and McGinn’s business and personal assets are frozen at the moment.
“The defendants are scheduled to appear at a court hearing on May 3. At that hearing, the judge will decide whether to keep this relief in place until the trial is done,” he said.
Among the McGinn and Smith’s debt offerings were four funds and numerous trust entities, many in the security alarm industry. Firstline Trusts, for example, raised $7 million in 2007 to buy security contracts from Firstline Security, a summer-model company in Utah. Firstline filed for bankruptcy in Jan. 2008, but MS & Co “continued to sell notes in this offering without disclosing the bankruptcy filing to investors,” according to the SEC.
The complaint says many MS & Co trusts were “created to loan the offering proceeds, minus placement agent fees, to another McGinn Smith Entity ... to purchase specific contracts or receivables from a third entity, such as contracts for burglar alarm services or ‘triple play’ [broadband, cable, telephone] services or luxury cruise charters.”
MS & Co. investors unwittingly invested in a “sexually oriented charter cruise venture created by McGinn ... and run by a woman with whom McGinn was romantically involved.” Investors were told that the investment was in an MS & Co. affiliate called CCV which “is engaged in the business of procuring whole ship charters and selling the berths to various affinity groups.” McGinn did not tell investors that “CCV operated under the name YOLO (You Only Live Once) Cruises, that the affinity group was sexually oriented and that strippers and go-go dancers would be procured to entertain passengers.”
In September 2009, the funds were owed at least $84 million, but had less than $500,000 on hand, the complaint said. The trusts had a negative equity of approximately $18 million and, according to the SEC, “have never had the ability to pay the interest rates promoted to investors and also pay back principal.” McGinn and Smith continued to raise money from investors through December 2009 and during the first few months of 2010, “continued to drain what little cash remain through payments of fees to themselves.”
The complaint also says that funds were used for luxuries such as payments for Smith’s Lexus and Mercedes, monthly payments for McGinn to exclusive country clubs such as Schuyler Meadows Club, Fort Orange Club and Pine Tree Golf Club. Payments totaling $335,500 were also made to Smith’s wife, Lynn Smith.
The SEC is seeking “full disgorgement, penalties in an amount be determined by the judge, continued asset freezes and receivership, various bars, and various other injunctive relief,” Calamari said.
FINRA is seeking full restitution for investors and asking for other sanctions that will be determined by a hearing panel. FINRA, which licenses all brokerage firms, can suspend or revoke a company’s license and bar individuals from working in the industry permanently.