The
Financial Industry Regulatory Authority Inc. today charged a broker-dealer that specializes in private deals and investment advisory services with securities fraud in connection with the sale of $89 million in private notes.
The firm, McGinn Smith & Co. Inc. of Albany, N.Y., sold four series of unregistered notes to 515 investors, and relied upon a federal securities law known as Regulation D as the basis for the notes exemption for registration, Finra alleged. That exemption was not available, however, because the notes were sold to more than 35 non-accredited investors.
The firm's president and co-owner, David Smith, was also charged with securities fraud by the regulator.
Finra and other regulators have been cracking down on Regulation D deals, commonly known as private placements.
Last week, the Colorado Securities Division revoked the license of a broker in that state for violating Regulation D when he sold Medical Capital Holdings Inc. notes to a number of investors with whom he did not have a substantial prior relationship.
The Securities and Exchange Commission sued Medical Capital, which offered $2.2 billion in private placements, for fraud last year.
Finra today alleged that McGinn Smith promised investors that their funds would be earmarked for a broad array of public and private investments. Instead, Mr. Smith “misused the majority of the offering proceeds for his own needs and to benefit entities that” he and chairman and co-owner Timothy McGinn controlled, Finra alleged.
Mr. Smith “misused approximately $51 million of investors' funds, directing approximately $17 million to the related entities and approximately $34 million more to make loans to those companies,” the lawsuit alleged.
Mr. Smith received personal loans of about $590,000. Finra said the firm also misrepresented the commission it would take on the sale of the notes, which were sold between 2003 and 2006. It told investors it would receive a 2% commission, but in fact took an 8% commission on the sales, defrauding the investors of about $7.5 million, Finra said.
About $22 million of the loans are still unpaid, and the offerings went into default in 2008, according to the suit.
Finra also alleged the firm, Mr. Smith and Mr. McGinn gave false information to the regulators when Finra staff requested information.
Neither Mr. Smith nor Mr. McGinn returned calls seeking comment Monday afternoon.
