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On April 20, 2010, William J. Brown, Esq. was appointed temporary Receiver for the entities listed on Exhibit A to the Order to Show Cause, Temporary Restraining Order and Order Freezing Assets and Granting Other Relief (the “Receiver Entities”) posted as Docket No. 5 below by the United States District Court for the Northern District of New York. The Receivership was made permanent pending final disposition of the SEC’s action on July 26, 2010 (Docket No. 96 below).
The website for the United States District Court for the Northern District of New York is www.nynd.uscourts.gov.
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As a further supplement to the November 5 & 20, 2018 and February 1, 2019 Updates below, the Forty-Third and Forty-Fourth Payment Schedules of Investor Distributions have been filed with the Court today for substantially all of those investors who remained as Plaintiffs in the recently dismissed Piaker & Lyons lawsuit. Investors who were previously dismissed by Court Order have generally already received their distributions. A few investors who have just been dismissed have been sent letters requesting additional information in order to complete the processing of their claims. For those investors who are included in the Forty-Third and Forty-Fourth Payment Schedules, first distribution checks of 10% should be mailed to them within the next seven - ten days.
As a further supplement to the November 20 and November 5, 2018 Updates below, there has been no appeal filed for appeal to the United States Supreme Court from the Second Circuit’s dismissal of the plaintiffs’ action against Piaker & Lyons. Accordingly, as described below, the Receiver will begin to process claims for investors who are part of the Piaker & Lyons lawsuit, provided that those investors are not pursuing or plan to pursue other collateral recoveries. The Receiver has been reviewing claims files in anticipation of this development. Investors should expect to see claims being allowed and processed in the next several weeks.
As a supplement to the November 5, 2018 Update below, unless an investor is dismissed from the Piaker & Lyons lawsuit by Order of the Court, the time for appeal to the United States Supreme Court will not expire until January 29, 2019. The Receiver will process claims for investors who are part of the Piaker & Lyons lawsuit and who do not appeal to the Supreme Court after that date unless they obtain an earlier Order of Dismissal as to themselves. Additionally, the investor must not be pursuing or plan to pursue other collateral recoveries in order to eligible for a distribution.
The Receiver has received multiple telephone calls from investors who are plaintiffs in the so-called Piaker & Lyons lawsuit about when they will be eligible for distributions under the Plan of Distribution now that the appeal of the lawsuit’s dismissal has been affirmed by the appeals court. The Receiver has provided an answer to that question to the Kang Haggerty & Fetbroyt LLC law firm. Given that the Receiver continues to receive inquiries directly from investors, this notice is being posted for the benefit of those investors who are plaintiffs in the Piaker & Lyons lawsuit.
The Receiver has become aware that the dismissal of the lawsuit commenced by the Kang law firm on behalf of investors against the Piaker & Lyons, P.C. accounting firm and others has been affirmed on appeal, and a request for rehearing en banc has also been denied. Since the investor plaintiffs are still pursuing this action which constitutes a potential collateral recovery, those investors are not eligible for a distribution under the Plan until such time as all collateral recovery pursuits are finally concluded.
Thus, in order to make a distribution to any investor who is pursuing or who intends to pursue a collateral recovery relating to the McGinn Smith matter, the action or proceeding needs to be finally dismissed or resolved - meaning that the time for appeal, including the filing of a petition for certiorari, to the U.S. Supreme Court has expired, or, alternatively, the investor has been dismissed from the action, with prejudice, by Court Order. Investors in the Piaker & Lyons lawsuit with further questions should first consult the Kang law firm, or if their questions remain unresolved, the Receiver is available to answer those questions.
The Fourth Written Status Report of the Receiver was filed with the Court at Docket No. 1024 (See revised Fourth Written Status Report of the Receiver at Docket No. 1026). The Report supplements the Receiver’s website.
As stated in the Report, a second distribution to investors with allowed claims will occur after all claims objection motions are resolved, which will not occur before year-end 2018. The resolution of the claims objection motions will allow the Receiver to be able to calculate the amount of claims which must be paid from available funds on hand.
On July 6, 2018, the Receiver filed a motion seeking to disallow paper claims and to offset additional preferred payments received by certain investors. The investors whose claims are the subject of the motion were elevated by Timothy McGinn and David Smith to a preferred investor status, by which they were provided with supplemental, “lulling” payments which were not received by other investors. Accordingly, the Receiver’s motion proposes to reduce the distributions made to the preferred investors by the amount of the preferential payments received on a dollar-for-dollar basis. Such a reduction would return the preferred investors to the position they would have otherwise occupied had they been treated like the majority of investors that McGinn and Smith defrauded. The motion can be reviewed by clicking here or at Docket No. 1009 below. The claim numbers of the investors who are the subject of the motion are included on the exhibits to the motion. Those investors will receive a copy of the motion by U.S. Mail. The motion is returnable before the Court on August 16, 2018. Objections, if any, must be filed with the Court and served on the Receiver’s counsel by July 30, 2018 in accordance with the Federal Rules of Civil Procedure and the Local Rules of the United States District Court for the Northern District of New York.
On April 12, 2018, the Court approved the Receiver’s Second Motion for an Order Disallowing Paper Claims. A copy of the Order can be reviewed by clicking here or at Docket No. 990 below. Those investors whose paper claims were the subject of the Motion which have been disallowed by the Order will have the balance of their allowed claims, if any, processed over the next two weeks. Those investors who had claims originally subject to the Motion but who withdrew their paper claims by consent have already had any other allowable claims already processed.
MARCH 23, 2018: RECEIVERíS SECOND MOTION FOR AN ORDER DISALLOWING PAPER CLAIM
The Receiver has filed a Second Motion for an Order Disallowing Paper Claims filed by investors because there is no basis for the payment of such claims in the books and records of McGinn, Smith & Co., Inc. Investors with claim numbers listed on Exhibits A through C to the Motion have claims which are the subject of the Motion. Exhibit A claims are claims in different amounts than the investor’s Receiver-granted claims. Investors with claim numbers on Exhibit B filed paper claims for which there is no basis to make a distribution because those claims are either duplicate claims, no liability claims, non-Receivership claims or Excluded Claims (as defined in the Motion). Investors who have claim numbers on Exhibit C have filed either discrepant claims, duplicate claims, no liability clams, non-Receivership claims or Excluded Claims. A copy of the Motion and explanatory letter was sent to each investor whose claims are involved in the Motion. The Motion can be reviewed by clicking here, or at Docket No. 974 below. The explanatory letter to those investors whose claims are the subject of the Motion is attached to the Motion as Exhibit D. The Motion is returnable before the Court on April 19, 2018. Objections, if any, must be filed with the Court and served on the Receiver’s counsel in accordance with the Federal Rules of Civil Procedure and the Local Rules for the United States District Court for the Northern District of New York by April 2, 2018.
On March 19, 2018, the Receiver filed a Motion seeking to disallow or equitably subordinate the claims of three former McGinn Smith brokers: Frank Chiappoine, William F. Lex and Philip S. Rabinovich, and also the claims of certain family members who are transferees of claims formerly held by William F. Lex. These brokers were found by the SEC’s Chief Administrative Law Judge to have willfully violated the Securities Act, the Exchange Act and Rule 10(b)(5), and were reckless in offering and selling securities based upon material misrepresentations and omissions made to investors purchasing the private placements. The brokers also continued to sell the investments when they were aware that the investments were experiencing problems, and redemptions would only be made if enough replacement sales were made. Copies of the Motion and related Memorandum of Law can be viewed by clicking here (984, 985), or at Docket Nos. 984 and 985 below.
The Receiver has received two reports of investors being contacted by unknown third parties by phone or by e-mail claiming to have money available for the investor. The caller requests the investor to provide detailed personal information. Investors should not give out their personal information to unknown third parties or open e-mail attachments from unknown senders. Also, it is best practice to avoid using shared or public computers when accessing this website.
You will notice that the Receiverís website has a new appearance using dropdown areas where all announcements are collapsed in order to create a more concise appearance. Readers can click on the indicated hyperlink or anywhere in a yellow box to view more or less as to any announcement. Additionally, hyperlinks to the Pleadings, Claims Website and Contact Information sections remain near the top of the website along with calendar year hyperlinks to reach prior announcements. We hope you find these changes helpful.
The distribution process to investors with collateral recoveries is commencing now that investors holding all allowed claims who did not receive collateral recoveries and who have otherwise properly completed their Investor Questionnaire and related documentation is substantially complete. Those investors with allowed claims who received a collateral recovery and who are eligible to receive a first distribution (per the formula below), notwithstanding having received a collateral recovery, will be paid.
The Receiver will determine if an investor with a collateral recovery will be eligible to receive a 10% first distribution by taking the sum of all of the investor’s allowed claims times 10% (the amount of the first distribution) and subtracting that number from the aggregate collateral recovery amount received by that particular investor. If the number is a positive number, the investor will receive a distribution for that amount as a first distribution. If the number is a negative number, the investor will not receive a first distribution. That amount will be a charge against the investor’s subsequent distributions until the number is reduced to zero.
By way of example, if an investor had aggregate claims of $1,000 X 10% = $100. If the aggregate collateral recovery amount were $80, that would result in a positive $20 which the investor would receive as a first distribution. If, however, the aggregate collateral recovery amount was $120, that would result in a negative $20 calculation, and that $20 will act as a further charge when second or later distributions are made. If the amount of a second distribution exceeded $20, then the investor would receive a second distribution.
For first distributions to collateral recovery investors, only one aggregate distribution check will be sent rather than individual checks for each investment. That will mean that those investors who have some or all of their McGinn Smith investments in IRA’s will need to determine what portion of the payment constitutes a “restorative payment” to the IRA(s) and then pay that “restorative payment” into the IRA(s). It is the responsibility of the IRA owner to maintain appropriate documents demonstrating that the amount he or she paid to the IRA(s) as a “restorative payment” is, in fact, a “restorative payment”. Investors will need to consult with their own financial advisor for further advice on how to calculate a “restorative payment”.
Distribution Schedules of approved distributions to investors with collateral recoveries will be titled as such to distinguish them from investors who did not receive collateral recoveries. Investors can expect to see distributions to collateral recovery investors shortly.
This report is to keep investors updated as to the status of distributions from the Receiver to investors with allowed claims. As of October 8, 2017, approximately 1,090 first distribution checks for $4,295,981 have been issued to investors or IRA custodians on behalf of investors. The process of issuing first distribution checks representing 10% of allowed claim amounts to investors is continuing as investors provide additional missing information or signed documents as requested by the Receiver.
Most investors who filed duplicate paper claims have been notified of the same and given an opportunity to withdraw those duplicate claims as described in the September 21, 2017 announcement below. Once the duplicate paper claims are withdrawn by Court Order or consent, investors with allowed claims will also receive first distribution checks.
For those investors who received collateral recoveries, since they have already received payments from third party sources, first distribution payments to those investors was deferred until now. Those claims will begin to be calculated next week to determine if they are eligible for payment of a first distribution, and, if so, an announcement will be posted on the Receiver’s website in the next few weeks.
With respect to claims of investors (i) which have been marked as “Disputed” on the Receiver’s 2012 claims database (which is available to investors using their confidential password), or (ii) who have been separately notified that their claims are in dispute, those claims will be the subject of a claims objection motion which is under preparation. Once those claims are resolved by Court Order or agreement, those claims will be processed accordingly.
A Motion was filed today with the Court to disallow paper claims filed by certain investors in 2012 as part of the claims allowance process which are duplicative of the claims already granted to those investors by the Receiver on the confidential Claims Website. The Receiver is not attempting to disallow claims granted to those investors on the Claims Website. Rather, the Receiver is moving to only disallow the paper claims since they constitute a second claim for the same investment. Only one claim can be paid for each investment. The duplicate paper claims which are the subject of the Motion are listed on Exhibit A to the Motion.
The investors who are the subject of this Motion will receive a copy of the Motion and an explanatory letter from the Receiver by U.S. Mail. A copy of the Motion and explanatory letter can be viewed by clicking here.
Investors who have already agreed by written letter to the Receiver to disallow their paper claims are not subject to this Motion.
Investors whose claims are listed as part of the Motion can expedite their claims review and allowance process by sending a letter to the Receiver agreeing to the withdrawal of their paper claims prior to the Motion being considered by the Court. If such a letter is received, the Receiver will expedite the review and payment of allowed claims. If an investor needs another confidential password to access the Receiver’s Claims Website, it may be requested in writing addressed to the Receiver by U.S. Mail at One Canalside, 125 Main Street, Buffalo, NY 14203.
First Investor Distribution checks for ten percent of each allowed claim are beginning to be mailed to investors holding allowed claims which have been posted or are subsequently posted on the Payment Schedules listed below. The checks are being mailed out in groups and all investors whose claims have been posted on one of the Payment Schedules should receive their check(s) within the next few weeks. The checks are being sent pursuant to the Courtís August 9, 2017 text only Order. Checks must be cashed within 90 days or they will be voided. Please cash your checks promptly.
For investors holding more than one investment, you will receive a check for each investment. As stated previously on the Receiverís website, it is estimated that total distributions to investors with allowed claims will range between approximately 13.5 to 21.7 percent. There is expected to be at least one more distribution to investors with allowed claims following resolution of disputed claims, the collection of additional assets, and the calculation of collateral recoveries.
The Third Written Status Report of the Receiver was filed with the Court today at Docket No. 925. The Report supplements the Receiverís website and is made pursuant to the Courtís January 20, 2017 Text Order.
All Investor Questionnaires and W-9 Forms which have been returned to date have been appropriately filed and indexed in the Receiver’s claims database. Claim review is underway. The first schedule of approved payments to be made under the Plan is expected to be filed before the end of April 2017. Additional schedules will be filed thereafter on a rolling basis.
A. Distribution Process
Several thousand Investor Letters, Questionnaires and W-9ís were mailed to investors and many have been returned by the February 28, 2017 target date. The Receiverís staff is now cataloging each returned envelope and sorting the returned documents into the appropriate claim files. Following those steps, each claim will be reviewed for accuracy and completeness. In accordance with the Plan of Distribution, the Receiver will file, on a rolling basis, schedules of payments to be made under the Plan at least ten days prior to the subject payments being made. It is contemplated that the initial distribution will begin in approximately 60 days and continue thereafter. Investors with allowed claims can expect to receive more than one distribution check over time.
B. Investor Addresses and Incomplete Information
The Receiverís staff is handling return mail and address updates. All address change requests must be made in writing and contain the prior and new address. For those investors whose returned Investor Questionnaires or W-9ís are determined to be incomplete in some manner following review, a follow up letter will be sent by the Receiver.
C. Distribution Amount
The distribution range estimate contained in the Receiverís April 19, 2016 posting below remains the same, between approximately 13.5% to 21.7%. The Receiver holds $21,261,299 as of February 24, 2017.
The printing and mailing house has informed the Receiver that the coding, printing and mailing is complete, and all investors should receive their envelopes sometime this week.
The Receiver continues to receive address change notifications from investors. Those requests which have been received after January 20, 2017 will be updated subsequently since the investor database needed to be frozen as to further changes in order to allow the printing and mailing house to prepare and mail out the several thousand individual investor mailings.
The investor letters, Investor Questionnaires and Form W 9’s for each investment reflected in the Receiver’s records have been sent to the mailing house. The mailing to investors will be prepared and sent directly from the mailing house.
Investors will receive a separate mailing for each claimed investment. A self-addressed return envelope is enclosed for investors to return the completed forms. The Investor Questionnaire is two-sided and individualized for each investment held by an investor. A sample copy of the letter and the Investor Questionnaire can be viewed by clicking here. By looking at the Investor Questionnaire now, investors can begin to assemble the necessary information for completion once they receive their individualized mailings. Please take the time to make sure that the information you provide is accurate, complete and legible.
The envelopes containing the investor letter, Investor Questionnaire and W-9 Form are marked in bold on the outside “McGinn Smith Plan Information”.
Distributions will be made in groups on a rolling basis to holders of allowed claims as properly completed Investor Questionnaires and W-9 Forms are returned. If forms are returned incomplete, illegible or not returned, distributions will be delayed or not made. The completed materials should be returned to the Receiver no later than February 28, 2017.
The vast majority of investor claims are allowed and not disputed. If, however, your claim is marked as Disputed on the Receiver’s website, a “D” or “P” is listed next to your claim number on the investor letter or is otherwise challenged as disputed, the Receiver intends to file a Motion with the Court with notice given to you of a court hearing to resolve issues regarding the claim.
Investors should retain their investor letter(s) since it contains the claim number for each specific claim. Investors will need the claim number to identify payments to be made to each investor.
The Court’s decision approving the Receiver’s Plan of Distribution (Docket No. 904) is now final and no longer subject to appeal. Consequently, each investor will receive by mid-January 2017 (i) an explanatory letter from the Receiver, (ii) an Investor Questionnaire, and (iii) an appropriate tax information form which, in the case of most investors, will be IRS Form W-9.
The individualized Investor Questionnaire must be completed and signed under penalty of perjury by each investor, one form for each investment, and returned to the Receiver along with the completed tax form. The Investor Questionnaire will ask investors for a number of items of information, including confirmation of a current address in order to receive distribution checks, and information as to any collateral (third party) recoveries received by the investor relating to McGinn Smith.
The Receiver has already provided samples of the items to be mailed to the printing house to obtain an estimate of cost and timeline for mailing to investors.
An investor who holds more than one investment will receive multiple mailings, since the Investor Questionnaires will be customized displaying the name of the investment and the amount that the Receiver considers due to each investor based upon the Proof of Claim process. An investor who holds multiple investments will be required to complete an Investor Questionnaire for each investment. The mailing will contain return envelopes so that an investor can easily return the completed forms to the Receiver by simply adding postage to the return envelope.
When the mailings are actually sent from the printing house in January, a further notice will be posted by the Receiver with sample forms.
The District Court has approved the Receiverís Plan of Distribution as filed with the Court. A copy of the Courtís Memorandum-Decision and Order can be viewed by clicking here or at Docket No. 904 below.
The Receiver will soon post to this website an outline of the process towards making monetary distributions to investors and the timeline for doing so. The process will involve an initial instruction letter, questionnaire and tax form which will be mailed to all known investors. A notice will be posted when that mailing is sent to investors.
Since a number of investors have asked about the status of the approval of the Plan of Distribution, this announcement is to inform parties that the Plan continues to be under review by the Court. No decision has been issued. Further information will be posted by the Receiver when a decision is issued.
Lauren Smith has paid $8,021.60 to the SEC in satisfaction of the judgment the SEC obtained against her, which monies have been placed into a Receiver account for eventual distribution to investors. The total judgment against Lauren Smith was $83,000, and that amount was reduced by $75,000 due to an offset for the Receiver’s sale of the Sacandaga Lake property, the proceeds of which are already deposited into a Receiver’s account for eventual distribution pursuant to the proposed Plan of Distribution.
A number of investors have inquired as to the status of the Plan of Distribution. The Plan is still under review by the Court, and no decision has been issued. Further information concerning the Plan is available at the December 30, 2015 update below.
The Receiver is aware of recent e-mails to McGinn Smith investors who have McGinn Smith investments held by IRA Services. The Receiver was not consulted before the IRA Services e-mail about the estimated value of expected distributions was sent by IRA Services.
The Receiverís Plan of Distribution which is available under the December 30, 2015 announcement estimates the value of distributions if the Plan is approved by the Court at between approximately 13.5% and 21.7%. The Receiver encourages you to discuss any actions regarding your IRA with your legal or tax professional before taking any action.
On April 18, 2016, the Second Circuit in a concise five-page decision affirmed the SECís judgments against David Smith, Lynn Smith, the Smith Trust, Geoffrey Smith and Lauren Smith. A copy of the Summary Order can be viewed by clicking here.
April 5, 2016: SECOND CIRCUIT HEARING ON SMITH PARTIES APPEALS
Oral argument was held yesterday of the appeals by David and Lynn Smith, Geoffrey Smith, and Lauren Smith of the judgment obtained by the SEC in June 2015. The Second Circuit Court of Appeals will issue its decision in due course.
A Motion was filed with the Court today (December 30, 2015) to approve a Plan of Distribution for the benefit of investors with allowed claims. A copy of the Memorandum of Law (which contains the Plan) and Declaration of the Receiver can be obtained by clicking here.
The Plan, which is subject to Court approval, provides for the pro-rata distribution to investors with allowed claims of monies recovered and to be recovered by the Receiver. The hearing date will be posted once it is available.
Investors should monitor this site regularly for updates and further descriptions of the Plan process.
January 6, 2016: UPDATE
In response to the Receiverís December 30, 2015 letter to the Court in connection with the filing of the Plan, the Court has scheduled a status conference on January 14, 2016 for the SOLE purpose of setting up a briefing schedule for the Motion to approve the Plan. It is not a hearing on the Motion or on any substantive issues related to the Plan. Once the Court issues the briefing schedule, it will be posted to this website.
January 19, 2016: UPDATE
The Court has set February 16, 2016 as the date by which Responses, if any, are due to the Receiverís Motion for an Order (i) approving Plan of Distribution of Estate Assets and (ii) Authorizing Distributions, and February 29, 2016 as the date for any Reply to any Responses. The Motion hearing date is set for March 17, 2016 but will be taken on submission (no appearances) unless the Court notifies otherwise.
March 9, 2016: UPDATE
The Receiver has filed an Omnibus Reply to four legal objections which were filed to the Plan of Distribution. Two of the objections opposed the Receiverís Collateral Recovery Rule; another objection sought to have a disputed claim resolved immediately; and the final objection sought more information which was already in the Plan. The Collateral Recovery Rule is a rule typically used by receivers and the S.E.C. to offset against receiver distributions any amounts received by an investor from a third party. Doing so equalizes the distributions to all investors so that all investors receive the same proportionate recovery.
The Receiverís Omnibus Reply can be seen at Docket No. 883 below. The S.E.C. filed a Reply supporting the Plan of Distribution and opposing the objections.
The Receiver will post an announcement when there are further developments or a decision by the Court.
A. Amounts on Hand for Distribution
As of December 11, 2015, the following amounts are in the Receiverís accounts:
|Lynn Smith & Smith Trust||$ 5,031,369|
B. Plan of Distribution for Investors
The Receiver regrets the delay in the filing of the Plan documents, and he expects that the Motion will be filed next week based on current facts.
A. Amounts on Hand for Distribution
As of October 9, 2015, the following amounts are in the Receiverís accounts:
|Lynn Smith & Smith Trust||$ 5,028,875|
B. Plan of Distribution for Investors
The Plan documents have been drafted and are being reviewed for filing with the Court very soon.
This announcement updates several important topics for McGinn Smith investors, as follows:
A. Amounts on Hand for Distribution
As of August 7, 2015, the following amounts are in the Receiverís accounts:
|Lynn Smith & Smith Trust||$ 5,026,385|
B. SEC Brokers Trial
This is an update to the February 25, 2015 report below. The February 25, 2015 Initial Decision has become final (no longer appealable) as to brokers Anthony, Feldman and Rogers. The remaining brokers (Chiappone, Guzetti, Lex, Livingston, Mayer and Rabinovitch) have filed a joint brief and individual briefs (click here) for their appeal. The SECís opposition brief is due on September 24, 2015. Reply briefs from the six appealing brokers are due on October 22, 2015. At that point, it is up to the Commission to issue a decision as to Judge Murrayís Initial Decision.
C. Smith Appeal of SEC Judgment
David Smith, Lynn Smith, the Smith Trust and the Smith children have filed Notices of Appeal from the District Court decision granting the SEC judgment in the action which began this case. Those Notices of Appeal are at Docket Nos. 822, 824 and 827 below. The appeal will not likely be fully briefed until late 2015 or early 2016 and will thereafter be heard by the United States Court of Appeals for the Second Circuit.
D. Plan of Distribution for Investors
The Receiverís tax professionals have worked through the details of the IRS letter dealing with the hundreds of tax returns filed by the Receiver relating to this case. The purpose of doing so was to make sure that distributions would be done in a way most favorable to investors while complying with various tax laws. As a result of the final judgment in the SEC action, the IRS letter, and the research by the Receiverís tax professionals, it now appears that the Receiver will be in a position to file a Plan of Distribution by late Summer so that initial distributions can be made sometime this Fall, subject to Court approval.
The Receiver understands that the Smiths intend to oppose any distribution under that Plan of Smith property while the Smith appeals are pending to the Second Circuit as described in Section C above.
On June 25, 2015, the District Court granted the SEC’s Motion to enter final judgment in its civil lawsuit against Defendants David Smith, Timothy McGinn, Lynn Smith, Geoffrey Smith, Lauren Smith and Nancy McGinn. See Docket No. 834 below. The Court also denied Lynn Smith’s request for a hearing to challenge certain aspects of the SEC judgments. The Court’s reasoning was based on the proposed judgments being consistent with the Court’s prior decisions at Docket Nos. 807 and 816. Accordingly, the Clerk will enter the judgments in the record of the Court. The Smith Defendants have already indicated their intention to appeal these judgments to the Second Circuit Court of Appeals.
On May 22, 2015, the Second Circuit Court of Appeals upheld the criminal convictions of Messrs. McGinn and Smith. The Court corrected a ruling regarding the restitution order to make clear that funds should be credited against the restitution orders only when they are distributed to victims and not merely when collected by the Receiver. A copy of the Decision can be read by clicking here. The defendants will remain incarcerated per their August 7, 2013 sentencings as originally reported below. The appeal of the SECís civil case by the defendants is expected to continue.
The IRS has issued a letter to the Receiver setting forth its position. The Receiverís tax professionals are reviewing the letter and confirming that it will allow distributions without risk of potential disgorgement attempts by the IRS against victims or the Receiver.
The Receiver has been notified by the Department of Justice, Tax Division, that they expect to be able to inform the Receiver by the end of March 2015 that their review of the McGinn Smith and related tax returns is complete. Assuming such a satisfactory communication is received, the distribution plan to investors could then go forward. For further background information, see the January 23, 2015 and the October 22, July 9 and January 6, 2014 Updates below.
Judge Sharpe today signed and entered a 55-page Decision granting the balance of the SECís Motion for Summary Judgment, including granting a disgorgement of profits for $87,433,218 plus pre-judgment interest of $11,668,132 to be returned to defrauded investors, and that the assets of the Smith stock account, the Smith Vero Beach home, the Smith checking account, and the Smith Trust are to be used to satisfy, in part, the disgorgement order. The opposition of Lynn Smith, Geoffrey Smith, and the Smith Trust and their respective motions for judgment in their favor were denied. A copy of the Decision is available at docket entry 816 below, or by clicking here.
This Decision results in a complete victory for the SECís position supported by a detailed analysis of McGinn, Smith & Co. records by the Receiver.
The SEC has now filed its Memorandum of Law supported by the Receiver’s Declaration so as to provide to the Court the calculations necessary to support the Court entering a judgment of disgorgement against Messrs. McGinn and Smith for investor losses. The SEC and the Receiver believe the appropriate amount is $87,433,218. These pleadings can be found at Docket No. 809 on the case docket below. David Smith has seven days to respond, and a decision will eventually be made by the Court. The Court has also promised to issue a further ruling on whether the Smith and Smith Trust monies (currently totaling more than $5 million) are available for distribution to the investors by the Receiver or will be returned to the Smiths or the Smith Trust.
A decision was issued this afternoon prohibiting for varying periods seven former McGinn Smith brokers from acting in the securities industry and ordering disgorgement and civil money penalties. The decision can be read by clicking here.
This Administrative and Cease-and-Desist proceeding commenced by the SEC pursuant to various securities laws was brought against 10 brokers formerly employed by McGinn Smith: Donald J. Anthony, Jr., Frank H. Chiappone, Richard D. Feldmann, William P. Gamello, Andrew G. Guzzetti, William F. Lex, Thomas E. Livingston, Brian T. Mayer, Philip S. Rabinovich, and Ryan C. Rogers.
An initial announcement by the Receiver of the commencement of this proceeding is described in the September 24, 2013 update listed below, which also includes a copy of the SEC press release and the SECís public order detailing the charges at the outset of the proceeding.
The February 25, 2015 Initial Decision permanently bars Messrs. Anthony, Lex and Livingston from the securities industry and suspends Messrs. Chiappone, Guzzetti, Mayer, Rabinovich and Rogers for 12 months from the securities industry. The claims against Mr. Gamello were dismissed for lack of evidence. Additionally, a disgorgement of commissions was ordered in the following amounts plus interest: Donald J. Anthony - $18,904; Frank H. Chiappone - $103,800; William F. Lex - $335,066; Thomas E. Livingston - $1,120; Brian T. Mayer - $34,962; Philip S. Rabinovich - $158,542; and Ryan C. Rogers - $137,942.
Additionally, each of Donald J. Anthony, Frank H. Chiappone, Andrew G. Guzzetti, William F. Lex, Thomas E. Livingston, Brian T. Mayer, Philip S. Rabinovich, and Ryan C. Rogers were ordered to pay a civil money penalty in the amount of $130,000. These monies are to be paid to the SECís Fair Fund for the benefit of investors harmed by the violations. The decision was reached after 18 days of public hearing including testimony by the Receiver on two occasions. The hearings concluded on February 24, 2014.
Judge Sharpe issued a 57-page Decision today granting in large measure summary judgment in favor of the Securities and Exchange Commission against McGinn,. Smith & Co. Inc. and related entities, David Smith and Timothy McGinn. The decision largely substantiates the SEC’s lawsuit which commenced the Receivership proceeding. The Court has directed the SEC to file further evidence with the Court as to the amount the SEC claims for disgorgement. A copy of the decision can be obtained by clicking here.
The Court expressly reserved decision as to assets presently frozen involving the Smith Trust, Lynn Smith and Nancy McGinn. The Receiver holds over $5 million in such assets, which the Receiver believes should be distributed to defrauded investors. There is no specific timeline when the Court will issue that portion of its decision.
Distributions in the estate are still being held up awaiting clearance from the IRS so that the $21.8 million held by the Receiver can be distributed to defrauded investors.
|Lynn Smith & Smith Trust||$||5,016,315|
The Receiver has recently reached agreement for the full repayment of $973,169.99 from an overdue loan due to Third Albany Income Notes, LLC and has also resolved two Guaranty claims for up to $35,000 plus interest.
The Receiver has recently received a number of notices in class actions regarding settlements which could involve McGinn Smith investors. These claim notices should have also been mailed directly to any investor who owns any of these investments. The Receiver’s records currently do not reveal if any McGinn Smith investors/customers are potentially affected. The Receiver will take no further action respecting these settlements. For that reason, those class actions are summarized below along with the information necessary to obtain information and any known relevant dates. Each investor should deal with this information as they deem appropriate with the respective Noticing Agent. Further, information can be obtained from the relevant party by clicking here.
The SEC on September 5, 2014 announced that it has decided not to further appeal the Appellate Court decision described below in the Stanford case. While not surprising, this concludes any judicial effort to broaden SIPC coverage to situations like Stanford and McGinn Smith.
July 21, 2014: SIPC UPDATE
A federal appeals court in the Stanford Ponzi scheme case has affirmed the lower court ruling rejecting the SEC’s efforts to have the Securities Investor Protection Corp. (SIPC) compensate victims. If the Court had adopted the SEC’s position, it might have resulted in SIPC compensation for McGinn Smith victims. A copy of the decision can be viewed by clicking here.
The appeals court read the statute as not requiring SIPC coverage when the victims are not “customers” of the brokerage but rather are customers of a related entity. The McGinn Smith facts are similar. Consequently, there is likely no SIPC compensation for McGinn Smith victims based on the existing law.
For further background on this issue, see the following updates below: November 19, 2013, October 17, 2013, September 19, 2011, May 23, 2012, and September 25, 2012.
July 9, 2014: UPDATES
A. SEC Lawsuit vs. McGinn, Smith & Co., Inc., et al. - On July 8, 2014, the SEC filed its motion with the Court seeking summary judgment against David L. Smith, Timothy M. McGinn, Lynn A. Smith, Geoffrey R. Smith, Lauren Smith and Nancy McGinn based on the allegations in the SEC lawsuit commenced on April 20, 2010. The SEC’s Memorandum of Law which explains the SEC’s lengthy submissions to the Court is at Docket No. 708 below.
This development is important to investors because a decision in the SEC’s favor would result in approximately $2,328,323 as to Lynn Smith and $2,706,829 as to the Smith Trust which the Receiver has collected from various sources including Lynn Smith and Smith Trust investments and sales of the Vero Beach and Sacandaga Lake properties becoming available for distribution to investors and creditors.
The defendants (Lynn Smith (Docket No. 696), Geoffrey Smith, Lauren Smith, and the Smith Trust (Docket No. 704) have filed their own summary judgment motions seeking dismissal of the SEC’s claims against them.
The parties have the right to file reply pleadings. A decision is not likely before Fall 2014 at the earliest.
B. IRS and Investor Distributions - This updates the January 6, 2014, February 3, 2014 and March 20, 2014 Updates in the next information box concerning the IRS and the Department of Justice and a Plan of Distribution.
A conference was held with the Court on July 2, 2014. The IRS asked for more time to review the tax returns and gave the Receiver a list of questions to answer. The Court set August7, 2014 for a further status conference. Until the IRS completes its review and provides satisfactory distribution clearance to the Receiver, no investor distributions can be made.
C. Amounts on Hand for Distribution - As of June 27, 2014, the following amounts are in the Receiver’s accounts:
D. Sacandaga Lake Property Sale - A closing of the sale occurred on May 16, 2014. See Docket No. 693 below. Net proceeds of $546,204.16 have been deposited into a Receivership account pending further Court Order.
The filing of a Plan of Distribution has been delayed because the Receiver cannot determine if any tax liability remains. The Internal Revenue Service no longer issues “Closing Memoranda” to Receivers which was one way that Receivers would know they could distribute recovered monies to defrauded investors without risk of personal liability to the Receiver for non-payment of taxes.
The Receiver independently and with the cooperation of the SEC attempted to address this issue with the IRS and the Department of Justice without success. Accordingly, the Receiver filed a Motion at Docket No. 658 below in an attempt to establish a process to compel Governmental Units to file claims or alternatively establish the priority of victim payments over any IRS claims in accordance with IRS policy. The Court has set a conference with the Receiver and Governmental Units for January 22, 2014 to address the Motion.
The Receiver currently has on hand $18,607,827 as of January 3, 2013, which consists of $15,021,126 recovered by the Receiver plus $3,586,650 claimed by the Smith interests as still belonging to them but which has been frozen by the Court and is under the Receiver’s control. As to the $3,586,650, the SEC’s trial to determine ownership should begin sometime this year. The Receiver expects additional recoveries in the range of $4 million to $7 million in 2014. Thus, the recovery pool could reach $22 million to $26 million. Total investor claims are expected to be in the $100 million to $120 million range.
The Receiver will file a Plan of Distribution for Court approval prior to the resolution of the IRS and Governmental Unit claims making any distribution to investors subject to resolution of the tax issues.
UPDATE: February 3, 2014: The Court held the scheduled conference with the attorneys involved. The Department of Justice, Tax Division, lawyers requested time to ascertain if a solution could be achieved. The Court set a further conference for early March 2014. As of January 31, 2014, the Department of Justice reported to the Receiver that they were still pursuing a potential solution.
UPDATE: March 20, 2014: On February 16, 2014, the Department of Justice requested multiple copies in a designated format of all two hundred plus federal tax returns filed previously with the IRS by the Receiver. The returns were organized in the requested manner and copied onto CD’s by the Receiver’s tax accountants and delivered to the Department of Justice on February 28, 2014.
The Department of Justice informed the Receiver and the Court at a court conference on March 6, 2014 that the IRS would review the returns and estimated it would take 90 days to do so. The Court scheduled another conference for July 2, 2014.
Further updates will be posted as warranted.
Following decisions by the United States Court of Appeals and the District Court (Docket No. 592), the Receiver filed a Report in response to the Court’s five requested topics (Docket No. 604). Based on that Report, the Court authorized the Receiver to proceed with the sale of the Smith’s Sacandaga Lake Property (Docket No. 647). The Receiver has initiated the sale process.
February 18, 2014: UPDATE The Smith Sacandaga Lake Property has been listed for sale. An offer has been received and will be the basis on which higher and better offers will be solicited. All competing offers are to be received along with a deposit by March 7, 2014 at 4:00 p.m. Eastern Time. If a higher and better offer is received, the Receiver will conduct an auction on March 12, 2014 at 10:00 a.m. Eastern Time. The procedures are set forth in the attached Notice which can be viewed by clicking here.
March 20, 2014: UPDATE The Receiver has accepted an offer for the sale of the Smith Sacandaga Lake Property. The offer is subject to a mortgage contingency on one of the three parcels. Further details are contained in the Receiver’s Report filed with the Court at Docket No. 687> below. A closing should take place by June 2014.
Senator Charles Schumer has introduced a bill which could aid McGinn Smith fraud victims by easing the requirements for SIPC coverage if the bill were enacted into law. A copy of a news article reporting on this development can be viewed by clicking here.
A motion (Docket No. 628) has been filed to sell the estate’s interest in Benchmark Communications, LLC, a triple play (Internet, phone and cable) business in the Gulf southeast portion of the United States, free and clear of all liens, claims and encumbrances. Notice of an auction for competing bids has been served and filed. The sale is for approximately $470,000 subject to cash on hand at closing. The approval hearing in on November 22, 2013 at 10:30 a.m.
January 6, 2014: UPDATE The sale has closed, and the net proceeds were deposited to a Receiver account.
On October 15, 2013, the appeal by the SEC of the Court decision in the Stanford fraud case denying the SEC’s request to compel SIPC coverage was argued in the United States Court of Appeals for the D.C. Circuit. As described in Item 27 below, the primary issues continue to be whether the defrauded Stanford investors were “customers” of a SIPC member in order to be eligible for SIPC coverage and whether SIPC had a duty to protect the defrauded investors in the Stanford case. The Court will make a decision at a later date.
The SEC yesterday announced charges against 10 former McGinn Smith brokers for ignoring red flags that should have led them to conduct more due diligence into the securities they were recommending to their customers. A copy of the SEC’s press release summarizing the charges can be read by clicking here. A copy of the SEC’s public order detailing the charges can be read by clicking here.
A motion has been filed which will result in a $4 million payment to the estate for the benefit of investors. McGinn Smith entities made investments described in the Motion (Docket No. 590) in Verifier. Verifier has agreed to repurchase the securities subject to higher and better offers and court approval. An auction is scheduled for September 30, 2013 at 9:00 a.m., as described in the Notice (Docket No. 597). The approval hearing is on October 2, 2013 at 9:00 a.m. Any party interested in making a competing offer and bidding should contact the Receiver.
November 19, 2013: Update The Motion was approved. The redemption closed, and $4 million has been paid to the estates and deposited into the Receiverís account for the benefit of investors.
As of September 13, 2013, the Receiver’s accounts contain $15,031,086 in cash including $3,581,805 in which the Smiths and the Smith Trust claim an interest.
The Sentencing Memorandum filed by David L. Smith can be viewed by clicking here.
The Sentencing Memorandum filed by Timothy M. McGinn can be viewed by clicking here.
The United States District Court for the Northern District of New York will hold sentencing hearings for David L. Smith and Timothy M. McGinn on Wednesday, August 7, 2013 in Utica, New York. The Court’s sentencing decisions will be posted here promptly after the hearings.
The United States Government has filed with the Court its Sentencing Memorandum, and a Response to the Defendants’ Sentencing Memoranda filed by Messrs. McGinn and Smith. These documents can be viewed by clicking here.
The Receiver has also filed two letters with the Court in connection with the sentencings which can be viewed by clicking here.
The Sentencing Memorandum filed by David L. Smith can be viewed by clicking here.
The Sentencing Memorandum filed by Timothy M. McGinn can be viewed by clicking here.
The jury in the McGinn Smith criminal trial has returned a guilty verdict against the defendants, David L. Smith and Timothy M. McGinn. Further details regarding the verdict and sentencing will be posted here in the near future.
JURY VERDICT UPDATE: FEBRUARY 7, 2013: Both Timothy McGinn and David Smith were convicted yesterday of conspiracy to commit mail and wire fraud, wire fraud, mail fraud, securities fraud, and filing false tax returns. The jury convicted Timothy McGinn of 27 of 29 counts of the Superseding Indictment. You can view the jury’s Verdict Form for Timothy McGinn by clicking here. The jury convicted David Smith of 15 of 29 counts of the Superseding Indictment. You can view the jury’s Verdict Form for David Smith by clicking here. You can also view the statement from the U.S. Attorney’s Office respecting the convictions by clicking here.
The Government’s criminal trial against David L. Smith and Timothy M. McGinn began on Monday, January 7, 2013. A jury has been selected, and opening legal arguments took place on Tuesday, January 8, 2013. The Government’s first witnesses were called to testify on Tuesday afternoon. Testimony is continuing, and the trial is expected to last three to four weeks. The results of the trial will be posted here as soon as they are available.
UPDATE: JANUARY 24, 2013: The Government concluded its part of the trial yesterday afternoon at 2:25 p.m. The defendants requested the Court to grant them a verdict in their favor prior to their putting on any evidence. That motion was denied. Consequently, the defendants have begun to call witnesses in their defense. Further updates will be posted as soon as they are available.
UPDATE: FEBRUARY 1, 2013: The lawyers’ closing arguments in the criminal trial took place all day yesterday, and the Court gave the jury its instructions this morning. The jury is now deliberating. Further updates will be posted as soon as they are available.
The Receiver has received inquiries from investors who placed their McGinn Smith investments into IRA’s. In an effort to provide more public dissemination of the information the Receiver has shared with those investors who have made inquiries, the Receiver is posting this message. This message is not intended, however, to constitute tax advice to any investor or any other person. Rather, it is to provide a common sense answer to the current situation and expectations of the Receiver. The following is based on the assumption that SIPC coverage will not be available for reasons discussed elsewhere on the Receiver’s website, the fact that the criminal trial is still underway, and the SEC’s civil case has not yet been brought to trial and will not go to trial until after the conclusion of the criminal case.
A Motion has been filed to transfer the underlying asset as described in November 5, 2012 Announcement. The lease termination and sale closed on November 29, 2012. The proceeds have been deposited into the Receiverís Seton Hall bank account.
On November 2, 2012, the Receiver filed a Motion (see Docket No. 544 below) to approve a settlement with Seton Health System, Inc. (formerly St. Mary’s Hospital of Troy) providing for the surrender of a ground lease dated January 27, 1982 in exchange for a payment of $70,000, relieving the estate of real property taxes and charges exceeding $372,000, and releasing the estates from all obligations under the ground lease and related obligations. Full details are contained in the Motion. The Motion will be heard by the Court on November 16, 2012 at 11 a.m.
The Court approved the Motion, and a closing is scheduled prior to the end of November 2012. The lease termination and sale closed on November 29, 2012. The proceeds have been deposited into the Receiver’s Seton Hall bank account.
The United States Attorney late yesterday announced a superseding criminal indictment of Messrs. Smith and McGinn (See January 26, 2012 Announcement regarding the original criminal indictment). The superseding indictment alleges additional criminal counts including for mail and wire fraud, securities fraud and filing a false income tax returns. A copy of the press release from the Department of Justice can be read by clicking here. A copy of the Superseding Indictment can be read by clicking here.
On October 15, 2012, the defendants filed a motion seeking a continuance of the criminal trial. The United States has until October 22, 2012 to respond, and the Court will hold a status conference on October 25, 2012.
At the pre-trial conference on October 25, 2012, the Court set a final pre-trial conference, jury selection and trial for November 19, 2012 commencing at 9:30 a.m.
On November 14, 2012, the District Court issued an Order directing the criminal trial to begin on January 7, 2013 due to the extensive witness and exhibit lists which had been filed with the Court which would make it unlikely that the trial would be completed prior to the upcoming holidays. The Court stated it will not entertain any further motions for a continuance or adjournment of the trial.
The criminal trial commenced on January 7, 2013. See January 7, 2013 announcement for further details.
Mr. Casolo is a former McGinn, Smith & Co. Inc. broker who has been criminally indicted by the Albany County District Attorney. It appears that the alleged criminal acts for which Mr. Casolo has been indicted took place after Mr. Casolo left McGinn Smith.
NOTICE TO ALL PARTIES HOLDING ANY FORM OF EQUITY INTEREST IN THE McGINN, SMITH & CO. INC., ET AL. RECEIVERSHIP ENTITIES OF PROCEDURE AND BAR DATE FOR FILING OF PRE-RECEIVERSHIP INTEREST CLAIMS:
UPDATED: October 17 and November 7, 2012
On October 2, 2012, the Receiver filed a Motion (see Docket No. 531 below) to establish a procedure for the filing of all asserted equity interest claims in the MS Entities (as defined in the Motion). The Court has approved the Motion and set December 17, 2012 as the Bar Date or last day to file equity interest claims. By November 7, 2012, the Receiver will mail to each Equity Holder (i) a password, (ii) written instructions regarding how the Equity Holder may access the Equity Claims Site, and (iii) a notice describing the Equity Claims Procedure and the Equity Claims Bar Date. Further details will also be posted to this website by November 7, 2012.
On November 7, 2012, a letter from the Receiver (“Equity Claims Site Access Notice”) generally describing the equity interest claims process was mailed to all known Equity Holders of the MS Entities (defined below). The letter also included a (i) Notice of Equity Claims Bar Date and Procedure (“Equity Claims Notice”) and (ii) Equity Claim Form. Copies of the Equity Claims Site Access Notice (without password), the Equity Claims Notice, and the Equity Claim Form are also available for viewing and download by clicking here.
Equity Holders should carefully read and follow the Equity Claims Notice for the Court approved procedure.
CLAIMS WEBSITE: The Equity Claims Website containing the Equity Schedules can be accessed by clicking here using the confidential password in the Equity Claims Site Access Notice. The Equity Claims Website is for the confidential use of Equity Holders only. Equity Holders should access the Equity Claims Website using the confidential password contained in the Equity Claims Site Access Letter so as to review the Equity Schedules and determine if a written Claim needs to be filed prior to the Bar Date.
BAR DATE FOR CLAIMS: The bar date or last day to file pre-Receivership Equity Claims is December 17, 2012 if you have an equity claim against any of the entities listed on the Schedule of Receivership Entities attached to the Equity Claims Notice (collectively, “MS Entities”).
WHO DOES NOT NEED TO FILE A CLAIM: If an Equity Holder agrees with the address, the description for their Equity Claim(s), the amount(s) as listed on the Equity Schedules on the Equity Claims Website, and the claim(s) is/are not listed as disputed, contingent or unliquidated, the Equity Holder does not need to take any further actions. The claims in that event will be treated in the amount set forth on the Equity Schedules, subject to the right of the Receiver to object to the Claim at a later date, amend the amount of the Claim, or seek to avoid any Claim or payment, but only after giving notice by first class mail of such an intention with an opportunity to object to any such Equity Holder.
WHO MUST FILE A CLAIM: Equity Holders are required to timely file a written claim in the manner described in the Equity Claims Notice using the Equity Claim Form if:
The Equity Claims Notice and Equity Claim Form are self-explanatory, but if any Equity Holder has a question as to the equity claims procedure (not the calculation of a claim), they may contact Karen M. Ludlow, Phillips Lytle LLP, at (716) 218-4404 or email@example.com.
To the extent of any inconsistency, the Equity Claims Site Notice shall govern.
The Receiver believes that Equity Claims against the MS Entities will primarily, but not exclusively, consist of claims based upon shareholder (including all classes of stock such as common stock and preferred stock), partnership, or membership interests in the following MS Entities: Health Enterprises Management, McGinn, Smith & Co., Inc., FGF Partners, GPV Associates, IP Investors, Portfolio Partners, Seton Hall Associates Limited Partners, 74 State Capital LLP, TNA Associates, Upstate Imaging Associates, M&S Partners, McGinn, Smith Holdings LLC, McGinn, Smith Firstline Funding LLC, Mr. Cranberry LLC, MSFC Security Holdings LLC, TDM Cable Funding LLC, TDMM Cable Funding LLC and White Glove Cruises LLC.
THIS EQUITY INTERSET CLAIM PROCEDURE DOES NOT INVOLVE CREDITORS OR INVESTORS WHO HOLD NON-EQUITY CLAIMS (SUCH AS MONEY CLAIMS) AGAINST THE MS ENTITIES SINCE THOSE CLAIMS WERE PART OF THE PROCESS WHICH HAD A JUNE 19, 2012 BAR DATE.
As of the close of business on September 21, 2012, the Receiver’s accounts have a balance of $12,088,156.56. Of this amount, approximately $2,020,630.46 represents proceeds held from property in the name of Lynn Smith or the Smith Trust. The latter monies are being held pending a final Order of the Court regarding their disposition as a result of prior Court decisions.
Brian Shea, the former chief financial officer and controller of McGinn, Smith & Co. Inc. has pled guilty to one count of interfering with the administration of the internal revenue laws (26 U.S.C. § 7212(a)). He will be sentenced at a later date. A copy of the press release issued by the U.S. Attorney’s Office may be read by clicking here.
The United States District Court for the District of Columbia denied the SEC’s request for a court order compelling SIPC to commence a liquidating proceeding to provide defrauded investors with SIPA coverage in the Stanford Group Company case. The Court’s decision was based on the fact that the investors were not “customers” of the SIPC member (the broker-dealer) because they paid their money to a non-SIPC member; i.e. a non-broker dealer.
The SEC appealed that decision on August 31, 2012. The appeal is pending.
Similar to the Stanford case, the evidence reviewed to date by the Receiver and the SEC in the McGinn Smith case indicates that investors paid their money to the promoted investment and not to McGinn, Smith & Co. Inc., the broker-dealer. On that basis and consistent with the decision of the District of Columbia Court pending the outcome of the SEC’s appeal of that decision, the SEC faces the same problem in this case as in Stanford in pursuing SIPA coverage for defrauded investors under existing law.
The resolution of any disputed, contingent or unliquidated claims will likely be deferred until after the conclusion of the Government’s criminal indictment of Messrs. McGinn and Smith and the SEC’s civil action since many of the legal and factual issues will be identical.
The Receiver expects to file a Motion with the Court shortly requesting approval to make a limited interim distribution to allowed claims. Further details will be posted to this website.
The SEC has sent an update letter to Judge Homer regarding potential SIPC coverage. The letter is available at Docket No. 491 below. In summary, the SEC is advising the Court and investors that a pending decision by another federal court in an action commenced by the SEC against SIPC involving the Stanford Group Company (“SGC”) will be relevant to the McGinn Smith case. The SEC anticipates that the Commission will consider “whether to request that SIPC initiate a liquidation proceeding for the benefit of McGinn Smith investors, or to seek any relief under SIPA, after the [other federal] court renders a decision in the SGC matter.” UPDATE: See September 25, 2012 Announcement.
NOTICE TO ALL INVESTORS & CREDITORS OF McGINN, SMITH & CO. INC., et al.
CLAIMS PROCEDURE AND BAR DATE FOR FILING OF PRE-RECEIVERSHIP CLAIMS
See September 25, 2012: CLAIMS PROCESS UPDATE
On May 1, 2012, a letter from the Receiver (“Access Notice”) generally describing the claims process was mailed to all known Investors and Creditors of the MS Entities (defined below). The letter also included a (i) Notice of Claims Bar Date and Claims Procedure (“Notice”) and (ii) Claim Form. Copies of the Access Notice (without password), the Notice, and the Claim Form are also available for viewing and download by clicking here.
Investors and Creditors should carefully read and follow the Notice for the Court approved procedure.
CLAIMS WEBSITE: The Claims Website containing the Schedules is organized into four tabs named Investors, FINRA Arbitrations, Unsecured Claims, and Secured Claims, and can be accessed by clicking here using the confidential password in the Access Notice. The Claims Website is for the confidential use of Investors and Creditors only. Creditors and Investors should access the Claims Website using the confidential password contained in the Access Letter so as to review the Schedules and determine if a written Claim needs to be filed prior to the Bar Date.
MAY 7, 2012 UPDATE: If a person receives on Access Notice but is unable to locate their name on any of the four tabs on the Claims Website, it is possible that the person is not an Investor or Creditor because the mailing list included other categories including potential investors and equity investors. There will be a separate claims process for equity investors in the near future.
BAR DATE FOR CLAIMS: The bar date or last day to file pre-Receivership Claims is June 19, 2012 if you have a claim against any of the entities listed on the Schedule of Receivership Entities attached to the Notice (collectively, “MS Entities”).
WHO DOES NOT NEED TO FILE A CLAIM: If an Investor or Creditor agrees with the description for their Claim(s) and the amount(s) as listed on the Schedules on the Claims Website and the claim(s) is/are not listed as disputed, contingent or unliquidated, the investor or creditor does not need to take any further actions. The claims in that event will be treated in the amount set forth on the Schedules, subject to the right of the Receiver to object to the Claim at a later date, amend the amount of the Claim, or seek to avoid any Claim or payment, but only after giving notice by first class mail of such an intention with an opportunity to object to any such Investor or Creditor.
WHO MUST FILE A CLAIM: Creditors and Investors are required to timely file a written claim in the manner described in the Notice using the Claim Form if:
The Notice and Claim Form are self-explanatory, but if any Investor or Creditor has a question as to the claims procedure (not the calculation of a claim), they may contact Jourdan L. Stevenson, paralegal, Phillips Lytle LLP, at (716) 504-5758 or firstname.lastname@example.org.
To the extent of any inconsistency, the Notice shall govern.
The District Court has granted in part and denied in part the Motions of Messrs. McGinn and Smith for the release of certain assets to pay the costs of their criminal defense. In the case of Mr. McGinn, the Court allows him to sell or monetize 9 of 10 items listed on pages 8-9 of the Memorandum-Decision and Order at Docket No. 478 below. As to Mr. Smith, he is allowed to use up to $181,000 in his 401-K account, and $8,135 from his IRA. In each instance, the Court has established a structured procedure supervised by the Court for the liquidation of the approved assets and for the allowance of fees and expenses to criminal defense counsel. As to the Trust, the Court clarified that its intention is for the Receiver to control, manage and pay the expenses of the Trust’s assets and denied the Trust’s Motion for reimbursement of expenses and the release of assets to pay its attorneys fees, in part, because “the interests of defrauded investors in preserving the frozen assets substantially outweighs the interests of the Trust in releasing assets to pay attorney’s fees and costs.” The Memorandum-Decision and Order is at Docket No. 478 below.
The United States Attorney, as a result of the pending criminal proceedings against Messrs. McGinn and Smith, has requested and been granted a stay of dispositive motions and trial in the SEC’s civil lawsuit. See Docket No. 474 below. Such a stay is customary when there are parallel criminal and civil proceedings. The Order does not stay the activities and responsibilities of the Receiver.
ASSETS FOR SALE Alarm Contracts - SOLD; Triple Play Contracts - SOLD; Travel Agency SOLD. (Updated as of March 12, 21, 26 and 28, April 5, May 7, June 8, and September 25, 2012):The sales have closed, and the purchase price deposited into the Receiver’s accounts for each of the alarm contract, triple play, and travel agency sales.
Messrs. McGinn and Smith were criminally indicted today on multiple federal criminal charges. A copy of the Indictment can be read by clicking here. A copy of the Department of Justice press release which describes the Indictment can be read by clicking here. UPDATE: September 25, 2012: The criminal trial is scheduled to commence on November 13, 2012 in Utica, New York. UPDATE: October 12, 2012: See October 12, 2012 Announcement regarding superseding indictment.
The discovery phase of the SEC lawsuit has ended. See Docket No. 428 below. UPDATE: September 25, 2012: The SEC’s lawsuit has been stayed pending the outcome of the Government’s criminal trial against Messrs. McGinn and Smith. See March 26, 2012 Announcement.
The Receiver intends to abandon and shred certain non-material records after December 19, 2011. Docket No. 427 below describes the records and the proposed process.
Matthew Rodgers, a former senior managing director of McGinn, Smith & Co. Inc., pled guilty today to one count of filing a false income tax return. He will be sentenced at a later date. A copy of the press release issued by the U.S. Attorney’s Office may be read by clicking here.
The short sale of the McGinn residence closed on November 18, 2011 per prior Court Orders (Docket Nos. 276 and 337). $15,000 in net sale proceeds were paid to the Receiver. One-half of that amount was deposited into a Receiver’s account, and the other one-half paid to Nancy McGinn per prior Court Order. The house was overencumbered by liens, and the second mortgagee accepted a substantial payment discount from what it was owed but agreed to release proceeds to the Receiver in return for the Receiver arranging the sale.
The Receiver’s Second Written Report was filed with the Court (Docket No. 425 below).
A certified public accountant has pled guilty to one count of Delivering and Disclosing a false Federal Income Tax Return in 2007 for Lynn and David Smith. The transactions at issue arose out of TDM Cable Funding LLC in 2006. The same accountant also prepared audited financial statements and tax returns for McGinn, Smith & Co. Inc. and its related entities. He will be sentenced at a later date. A copy of the U.S. Attorney’s press release may be read by clicking here.
In order to clarify whether SIPC (Securities Investor Protection Corporation) protection exists in the McGinn Smith cases, this explanation is being posted by the Receiver. SIPC protection as a general matter is for cash and securities, such as stocks and bonds, held by a customer at a brokerage firm protected by SIPC. At this point, it appears that the investments in the McGinn Smith case were not purchased from the licensed broker dealer, McGinn, Smith & Co. Inc. UPDATE: The latest SEC letter to the Court on this subject is described in May 23, 2012 Announcement.
The SEC has advised the Receiver that it is still considering whether it will make a coverage referral of the McGinn Smith case to SIPC.
Investors may also wish to review the SIPC website at www.sipc.org/How/Covers.aspx.
The SEC has filed a letter with the Court on this subject. See Docket No. 391 below. For a further update, see September 25, 2012 Announcement.
As of September 9, 2011, the Receiver’s accounts have a balance of $8,094,973.22. This amount represents proceeds from operating businesses and other assets. Additional monies will be collected from the sale of at least four operating businesses prior to year-end based upon current facts. At the initiation of the Receivership, the Receiver’s account balances totaled only $485,491.63. A more specific Report will be filed with the Court and posted on this website shortly. Subject to Court approval and SEC consent, it is possible that at least a preliminary distribution could be made sometime in the first six months of 2012.
The Receiver has filed a motion to approve a settlement with Security Systems, Inc. (“SSI”) regarding the McGinn Smith Firstline Funding, LLC (“MS Firstline”) transaction. The Motion will be heard by the Court on August 30, 2011 at 9:30 a.m. The settlement involves the resolution of a $1.1 million pre-Receivership loan to MS Firstline by SSI by payment of a substantially reduced amount to the lender, forgiveness of interest, and cancellation of an attrition guaranty. The repayment of an unrelated loan made by the Receivership estates to an entity known as Integrated Excellence Funding, LLC will also be repaid to the Receivership estates in the approximate amount of $606,636. Complete details of the Motion and the reasons supporting it are contained in Docket No. 365 below. Also see attached letter by clicking here. On August 30, 2011, the Court approved the settlement with Security Systems, Inc. per Docket No.372 below, and Security Systems, Inc. previously acquired the Integrated Excellence alarm contracts collateral for a total of $642,944.91, which proceeds were placed into a Receiver’s account.
The Second Circuit Court of Appeals issued two opinions on August 8, 2011 denying appeals by Lynn Smith, Geoffrey Smith and Lauren Smith and sustaining the District Court’s decision to freeze the Smith Trust and the Smith’s stock account (See Docket Nos. 194 and 86 below). The Appeals Court also upheld the District Court’s Order permitting the sale of the Smith’s Florida home in a sale to be conducted by the Receiver (See Docket No. 263 below). Copies of both decisions are available by clicking here.
The County of Albany seeks to foreclosure for unpaid taxes a certain real property owned by Upstate Imaging Associates. The circumstances of the property are described in Docket No. 343 below. Additionally, the Receiver has mailed an explanatory letter to each of the relevant investors of whom he is aware.
The District Court has awarded sanctions against Defendants Lynn A. Smith, Jill A. Dunn and David Wojeski, relating to issues surrounding the David L. and Lynn A. Smith Irrevocable Trust. Pursuant to the Decision, Lynn Smith is to disgorge $944,848 to the Receiver in addition to paying the SEC $51,232 for attorneys’ fees and costs incurred by the SEC. If Lynn Smith fails to disgorge the full amount by September 1, 2011, the Receiver is granted authority to take certain actions to recover the unpaid amounts from the Great Sacandaga Lake property, including its sale or rental. Ms. Dunn is to disgorge $5,355 to the Receiver, and Mr. Wojeski is to disgorge to the Receiver $13,834. Sanctions which were sought against Thomas Urbelis and a request to pursue discovery against James D. Featherstonhaugh were denied. A copy of the Decision is at Docket No. 342 below.
The District Court has granted the SEC’s Motion to appoint the Receiver to sell the Vero Beach property. See Docket No. 263 below. The Receiver has started the process to interview real estate brokers and will commence a sales process once an appropriate realtor is selected and engaged on appropriate terms. As of February 17, 2011, the Receiver has retained Norris and Company as the Real Estate broker for the sale of the Vero Beach property. The property should be listed in the Multiple Listing system the week of February 21, with photos of the property having been taken on February 18, 2011. The District Court has denied Lynn Smith’s motion for a stay of the sale order. (See Docket No. 285 below.) The property is listed for sale at $1.65 million, furniture available. Lynn Smith has appealed the Order permitting the sale of the Vero Beach property to the United States Court of Appeals for the Second Circuit. In response to Lynn Smith’s motion to stay the sale pending a decision by the Court of Appeals, the Court has allowed the property to continue to be listed and shown and for the Receiver to receive offers on the property, but the acceptance of any offer is stayed until a Motion Panel of the Circuit Court renders a decision on the motion for stay pending appeal. The Second Circuit subsequently agreed with Judge Homer that the Receiver should sell the property.
The closing took place on April 23, 2012 for $1,120,000 with the estate retaining $102,310.94 after payment of past-due taxes, assessments and mortgage. The Receiver obtained a material concession from the mortgagee to produce equity for the estate.
Many investors have inquired as to what value to use for McGinn Smith investments held in their IRA’s. At this time, because of the uncertainty of the ultimate value of the underlying assets comprising the investments, the Receiver cannot value the investments. It presently appears to the Receiver that the value of the investments in general will likely be materially less than fifty percent of the original investment value and, in most cases, likely less than that. Individual investors should consider applying a rule of reason taking into account the facts and circumstances of this case. Valuations will not be possible until sometime in the last half of 2011 when assets have been monetized or collected.
UPDATE: JANUARY 24, 2013: The Receiver has received inquiries from investors who placed their McGinn Smith investments into IRA’s. In an effort to provide more public dissemination of the information the Receiver has shared with those investors who have made inquiries, the Receiver is posting this message. This message is not intended, however, to constitute tax advice to any investor or any other person. Rather, it is to provide a common sense answer to the current situation and expectations of the Receiver. The following is based on the assumption that SIPC coverage will not be available for reasons discussed elsewhere on the Receiver’s website, the fact that the criminal trial is still underway, and the SEC’s civil case has not yet been brought to trial and will not go to trial until after the conclusion of the criminal case.
It presently appears to the Receiver that the value of investments, in general, will likely be materially less than 40% of the original investment value and, in most cases, likely less than that. Final valuations will not be possible until after the claims objection process is complete, the criminal and civil trials are concluded, and available assets and expenses are tallied.
Third Albany Income Notes, LLC holds a subordinate mortgage lien on real property in Albany, New York commonly known as 74-76 State Street. The first mortgagee (CIT) commenced a mortgage foreclosure action which, if successful, would have had the effect of wiping out the subordinate TAIN mortgage. The Receiver has settled with Court approval CIT’s motion to lift the stay as to the TAIN mortgage position for $50,000 without waiving any of his other rights including those as a holder of equity interests in the owner of the property as more fully described in Docket Nos. 202 and 234.
On November 5, 2012, a foreclosure auction was held following multiple prior adjournments. Ittleson Trust (as successor to CIT) as mortgagee with a claim exceeding $11 million bid in its mortgage for $5 million at the public foreclosure auction. Ittleson was the only bidder as expected. Efforts to find a buyer for the hotel property prior to the foreclosure sale were unsuccessful. The foreclosure has the effect of extinguishing the subordinate lien held by TAIN. Consequently, and as expected, the $50,000 paid to the Receiver in 2010 is the only consideration the estate is likely to receive from the real property.
UDATE: February 7, 2014 - 74 STATE STREET HOTEL PROPERTY SOLD - It has been reported in the Albany Times Union that the 74 State Street Hotel and underlying property have finally been sold to a new owner following the foreclosure of the property by the senior lender, CIT, more than a year ago after a very long foreclosure process. The reported sale price was $3.8 million. More than $11 million was originally borrowed or invested from other sources. The McGinn Smith estates held a subordinate interest which was foreclosed by the senior lender, CIT, but the Receiver had been paid $50,000 as part of the foreclosure process, which was placed in a Receiver account for eventual distribution to investors. If the Receiver had not negotiated that payment, the McGinn Smith estates would not have received anything in connection with the property. Two articles about this event can be viewed by clicking here.
The Court has granted the SEC’s motion, reimposed the freeze on the Smith Trust, and granted the SEC the right to move for sanctions against the Trust, Lynn Smith, the former and current Trustees of the Trust, and certain of their professionals. Please see the Court’s decision at Docket No. 194 below. A copy can be viewed by clicking here
The Court held hearings on November 16 and 17, 2010 regarding the SEC’s Motion for reconsideration of the freezing of the Smith Trust. The Smith Trust hearing involved live witness testimony. The Court also heard arguments on the SEC’s Motion to hold Messrs. Smith and McGinn in contempt. The Court will announce its decisions at a later date. When the Court issues its decisions, they will be posted on this website.
The Receiver has sent a letter to all known investors on August 13, 2010. The letter is also available by clicking here.
The Receiver is undertaking a review of the assets and liabilities of the Receiver Entities at this time. The Receiver expects to communicate with interested parties by an initial letter communication sometime in the next several weeks once more is known. In the interim, interested parties can review this website from time to time for possible updates.
The Receiver has filed a Motion with the Court to establish a process for the fixing and allowance of investor and creditor claims. The Motion is at Docket No. 466 below. The Court will first need to approve the process proposed by the Receiver. The Court will consider the proposed claims procedure motion at a hearing on March 27, 2012. If the procedure is approved, detailed instructions for investors and creditors will be posted prominently on this website.
The Court approved the Motion on March 27, 2012. See May 1, 2012 announcement for detailed instructions. The claims bar date for all pre-Receivership period claims is June 19, 2012.