SEC Suit Against Broker Ponzi Scheme, SEC Wins

Two NY men guilty of violating securities law luring 841 investors into ponzi scheme involved sexually-based #cruise.  Read court docs Other  #cruise laws cases

SECURITIES AND EXCHANGE COMMISSION – Plaintiff,
v.

McGINN, SMITH & CO., INC.,
McGINN, SMITH ADVISORS, LLC,
McGINN, SMITH CAPITAL HOLDINGS CORP., :
FIRST ADVISORY INCOME NOTES, LLC, :
FIRST EXCELSIOR INCOME NOTES, LLC, :
FIRST INDEPENDENT INCOME NOTES, LLC, :
THIRD ALBANY INCOME NOTES, LLC, :
TIMOTHY M. MCGINN, AND :
DAVID L. SMITH, :Defendants, and :
LYNN A. SMITH

SUMMARY OF ALLEGATIONS

1. The Commission brings this action to stop an ongoing fraud orchestrated by defendants McGinn, Smith and entities they control. Since 2003, McGinn and Smith have used MS & Co., a registered broker-dealer and investment adviser, MS Advisors, an investment advisor, and MS Capital, as well as dozens of affiliated entities they own or control (collectively, “the McGinn Smith Entities”), to raise over $136 million in more than 20 unregistered debt offerings. The debt offerings, including the Four Funds and numerous trust entities (the “Trusts”), have been sold to more than 900 investors. The offering fraud already has caused significant investor losses, and this emergency action is intended to stop the fraud and preserve the status quo for the benefit of the victims.

2. McGinn, Smith, MS & Co., MS Advisors and MS Capital deceived investors in the Four Funds. They told investors that their hard-earned money would be invested and that the profits would depend on the spread between the cost of the investment and the rate of return. Instead, the Defendants secretly funneled investor money to entities they owned or controlled, even though this was not permitted by offering materials. Defendants concealed from investors the truth about the Four Funds, including the fact that investor money was being routed to inhouse entities controlled by Smith and McGinn and to other non-public and illiquid investments, and that these actions were having a disastrous impact on the investors.

3.In addition to the Four Funds, Smith and McGinn directed a series of smaller-scale offerings, primarily through various Trusts. The Trusts also were used as vehicles to funnel investor funds to various companies controlled by Smith and McGinn, contrary to the terms of 2 the Private Placement Memoranda (PPMs). Investor money raised in offerings for the Trusts was routinely diverted to other McGinn Smith entities as liquidity needs of the enterprise dictated. The Defendants also used offering proceeds to make unauthorized investments in and unsecured loans to speculative, financially troubled McGinn Smith Entities, to make MS & Co.’s payroll, to pay commission and transaction fees to McGinn Smith Entities, to make interest payments to investors in other entities, to support McGinn’s and Smith’s lifestyle, and to procure strippers for a “sexually themed” cruise.