McGinn, Smith to be sentenced today in Utica
Updated 11:09 a.m.
CAPITAL REGION When Ron and Kathryn DeLeonardis got a call from investment broker Timothy McGinn in October 2010, they automatically assumed the their investment broker was calling to apologize for losing their savings.
After all, they were friends. Ron and Tim both graduated from Colonie Central and later served together in the Army Reserve.
They started investing with McGinn, Smith & Co. during the early 1980s, and their friendship grew. Tim used to grab a bite at Bob and Ron’s Fish Fry in Albany, the restaurant that had been in the DeLeonardis family since 1948 — the business they sold in 2002 so they could build their portfolio at the brokerage firm.
They socialized and attended some of the same parties. Ron called Tim directly to check on his investments and the two maintained a friendly rapport.
Then came the 2008 economic collapse. Expected interest payments from their investments dwindled and then stopped. A letter from the firm arrived, explaining how the downturn had stalled the final principle payment on their investment and the measures the firm would be taking to correct the problem.
As the months passed, Ron and Kathryn periodically met with Tim, who assured them their investment was safe. He told them to “stay with it,” that everything would work out in the end, Ron recalled Thursday.
“And then boom, the bottom fell out,” he said.
In April 2010, the Financial Industry Regulatory Authority filed a civil complaint accusing Tim McGinn and David L. Smith of selling tens of millions of dollars in unregistered debt offerings and trusts. The same day, the U.S. Securities and Exchange Commission obtained a court order freezing the firm’s assets, alleging the partners funneled $136 million raised from roughly 900 investors into their own financially troubled or bankrupt pursuits and for their personal activities.
It was months later, in the fall of 2010, that McGinn called DeLeonardis and his wife. But instead of the expected apology for losing roughly $370,000 of their money, the couple got a sales pitch for money to fund McGinn’s new alarm business. “He tried to sell me more notes,” recalled DeLeonardis, who testified during the partners’ five-week trial that ended this past February.
Over the next year and a half, investigators methodically built a criminal case against the partners. McGinn and Smith were both indicted in January 2012 on dozens of charges, including conspiracy to commit mail fraud, conspiracy to commit mail and wire fraud, wire fraud, securities fraud and filing a false tax return.
Both partners were convicted, and will be sentenced today in Utica. Federal prosecutors have asked U.S. District Court Judge David Hurd to impose “very substantial” prison terms for both McGinn, 65, and Smith, 68.
While the criminal case against the disgraced business partners will largely conclude this week, the legacy left by their failed investment schemes will continue to resonate through the courts and their victims. The civil complaint lodged by the SEC has been on hold until the criminal case was resolved, leaving the partners’ assets frozen and their investors — some who lost their life savings — wondering whether they’ll ever receive any of the money they lost.
“We have an awful taste in our mouths,” said Vince Gentile, a 65-year-old retired auto mechanic from Greenfield, who lost about $255,000 through the firm. “Everything seems to drag on.”
The trial was postponed three times last year, while the sentencing originally scheduled for June was delayed until Wednesday. Meanwhile, victims continue to watch the partners’ assets slowly paid out to attorneys and accountants involved in various aspects of the case.
William Brown, the court-appointed receiver overseeing the partners’ frozen assets, said those assets are now worth $14.1 million . He estimated the continued sale of their other holdings could yield another $7 million to $10 million sometime in 2014.
“We do have a lot of moving balls right now,” he said this week.
There are costs associated with selling assets that have been frozen for years. For instance, a home owned by the Smiths in Vero Beach, Fla., and valued at $1.65 million was sold for $1.12 million in April 2013. But after taxes and the mortgage was paid, the sale yielded less than a tenth of that price, according to court documents.
The partners also were allowed to dip into their assets to pay their legal expenses during the criminal case, according to court documents. The law firm of William Dreyer, the attorney representing Smith, was paid roughly $306,000 over the past year, while E. Stewart Jones, the lawyer representing McGinn, was authorized to collect about $40,000 in fees from his client’s assets.
The court-appointed receiver — a bankruptcy attorney working with the Buffalo-based law firm of Phillips Lytle — has collected about $781,000 in fees from the assets, court documents state.
Though the accounting of what has been paid out is tough to track and Brown couldn’t provide a breakdown, a tally of records from the civil case suggests payments have been made in excess of $1.2 million. For those who lost their life savings with the firm, these payments seem like insult to injury.
“I have nothing. I have zero,” lamented Leslie Levy, a 62-year-old former Wall Street adviser whose losses were in excess $400,000. “I’m in debt so high I can’t even think about because I’ll have a nervous breakdown.”
Levy, who lives in San Diego, Calif., invested her life savings with the partners beginning in the early 1990s. She thought she’d have enough money to live comfortably later in life. Now she struggles to pay for just life’s necessities.
“It’s a living nightmare everyday,” she said. “And we’re victimized everyday.”
Even the prospect of collecting from what remains of the partners’ assets is small consolation for those who lost their retirement savings. Some estimates suggest they could receive as little as 5 cents back on each dollar they invested, depending on how long the SEC case drags out.
“Our biggest hope now is that they have a deal worked out with the SEC so they no longer have to use investor money for attorneys,” said DeLeonardis,
There’s also hope that the SEC will refer the case to the Securities Investor Protection Corporation for coverage. Created in 1970 to protect customers of member-brokerage firms that fail or are liquidated, the non-profit corporation provides up to $500,000 to cover losses.
SIPC agreed to pay some victims of infamous financier Bernard Madoff’s multibillion-dollar Ponzi scheme. And in May 2012, U.S. Sen. Charles Schumer authored a letter to SEC’s chairwoman Mary Schapiro urging her to refer the case of McGinn, Smith & Co. to the agency for coverage.
This effort was dealt a blow in July 2012, when a U.S. District Court judged ruled SIPC didn’t have to cover victims of Allen Stanford — a broker convicted of operating a $7 billion Ponzi scheme — because his clients failed to meet the precise definition of “customer” as defined by the Securities Investor Protection Act. The SEC has since appealed this ruling and a reversal could open the door for McGinn, Smith & Co. to receive compensation from SIPC.
“There’s still a chance for justice. The decision in the Stanford case, which sets the precedent preventing SIPC from covering McGinn-Smith victims, has been appealed and we hope it will be overturned,” said Meredith Kelly, a spokeswoman for Schumer’s office.
Yet there’s a sense of exhaustion among former investors who simply want the debacle to at last come to an end. Though some feel the partners should be handed a long period of incarceration and others feel they should be forced to work off their debts to investors, all agreed they’re tired of the seemingly never-ending case.
“The whole system is ridiculous,” said Earl Seguine Jr., a 67-year-old retired budget analyst who lost about $185,000 with the brokerage firm “We’re not getting a thing out of it so we might as well stop it.”
Seguine said he can’t even declare the money he lost on his taxes yet, since he’s not sure what, if anything, he’ll recoup. Even after this coming week’s sentencing, he sees a series of appeals, civil trials and other litigation that will prevent any full resolution in the near future.
“This thing,” he paused. “I think it’s going to go on beyond this decade.”