By Ben Conarck, originally published in Law360 on 3/4/15.
SEC Seeks $99M From Convicted McGinn Smith Brokers
Law360, New York (March 04, 2015, 4:32 PM ET) — The U.S. Securities and Exchange Commission on Tuesday asked a New York federal judge to order two McGinn Smith & Co. brokers accused of a $126 million investment scheme to pay $87,433,200 in disgorgement fees and $11,668,000 in prejudgment interest, less than half of the amount in penalties that the commission had lobbied for last month.
The disgorgement figure, which was presented two weeks after the SEC failed to convince a judge to order the convicted brokers Timothy McGinn and David Smith to pay a combined $248 million in disgorgement and civil penalties, represents the total amount raised through the alleged fraud, minus the money already returned to investors, the commission said.
Judge Gary L. Sharpe said in last month’s decision not to accept the initially proposed disgorgement and civil penalties that a more detailed explanation of how much money was already returned to victims of the scheme was needed, adding that he wouldn’t dole out the penalties “willy-nilly” without one.
William J. Brown, a receiver appointed to handle McGinn Smith & Co.’s remaining assets and safeguard investors’ interests, told Law360 that he hopes the court will find the revised figure satisfactory.
“I worked with the SEC the past two weeks to refine the number and the evidence supporting it, and I believe that we have presented the court with an adequate picture,” Brown said on Wednesday.
The SEC began advocating for a judgment and disgorgement order, as well as “meaningful sanctions” and maximum penalties, for McGinn and Smith in July of 2014. At that point, the two had already been sentenced to 15 and 10 years in prison, respectively.
A jury found that the two brokers stole $4.1 million from clients, running a “brazen” investment scheme that raised $126 million under false pretenses.
Last month, Smith unsuccessfully argued that he should only be held accountable for the $5.7 million restitution order from his criminal trial, but Judge Sharpe was unconvinced by the argument. He said that the SEC had “one final opportunity” to justify its $248 million figure and gave the commission two weeks to do so.
Nonetheless, Judge Sharpe granted an SEC motion barring both brokers from committing future securities violations and also ruled that McGinn be banned from ever serving as officer of a publicly traded company.
McGinn is represented by E. Stewart Jones Jr., who did not immediately respond to a request for comment on Wednesday.
Smith is represented by William J. Dreyer and Benjamin W. Hill of Dreyer Boyajian LLP. Smith’s counsel did not immediately respond to requests for comment on Wednesday.
The SEC is represented by David P. Stoelting, Joshua M. Newville, Lara S. Mehraban, Kevin P. McGrath, Haimavathi V. Marlier and Jack Kaufman.
The case is SEC v. McGinn Smith & Co. Inc. et al., case number 1:10-cv-00457, in the U.S. District Court for the Northern District of New York.