ALBANY, N.Y. — Alarm industry investors Timothy McGinn and David Smith have been charged with fraud in a wide-ranging federal indictment that alleges they swindled millions of dollars from investors’ accounts and used the money to support their lavish lifestyles.
A 30-count indictment that includes charges of conspiracy, mail and wire fraud, securities fraud and filing false tax returns was handed up by a federal grand jury on Jan. 26. The following day, McGinn and Smith pleaded not guilty to the charges. Both men were released on their own recognizance after each signed $100,000 bonds. At press time, no date had been set for further action.
McGinn, the former CEO of Albany, N.Y.-based Integrated Alarm Services Group Inc. (IASG), and Smith face up to 30 years in prison on allegations they operated a years-long scheme involving the misappropriation of at least $8 million in investors’ funds. Attorneys for McGinn and Smith could not be reached for comment.
McGinn and Smith operated McGinn, Smith & Co., a registered broker-dealer and investment firm that was put into receivership in 2010. In a related civil case, the Securities and Exchange Commission (SEC) filed a civil lawsuit against the long-time business partners, accusing them of mismanaging $136 million in client assets that were placed in unregulated, high-risk investment funds, including a sex-themed cruise line.
The SEC charged McGinn and Smith with running a Ponzi scheme that bilked money from hundreds of victims. The indictment handed up on Jan. 26 by the federal grand jury followed a two-year investigation by the Internal Revenue Service and FBI.
The alleged victims, many of whom were inexperienced investors, were unwittingly lured to invest in high-risk securities and duped into believing the accounts would safely yield high returns, according to federal prosecutors.
“It’s a terrible experience to have the trust you have placed in someone abused, especially when that person is someone who holds a position that would ordinarily be expected to be trustworthy,” says SSI‘s “Legal Briefing” columnist Ken Kirschenbaum, a recognized alarm law expert and U.S. Bankruptcy Trustee in New York. “We have certain expectations of those entrusted with our health and welfare. Licensed alarm professionals, though not managing money, are expected to safeguard privacy and security.”
The top federal counts against McGinn and Smith relate to Firstline Series B Trusts, which raised money from investors in connection with a $2.4 loan to Firstline Security Inc., a firm that generated alarm contracts. The indictment alleges that McGinn and Smith knew that Firstline was facing a lawsuit with its broker dealer, but did not reveal it to investors, nor alert them when Firstline filed for bankruptcy and defaulted on loans.
“Instead, the defendants directed that investors receive $2 million of lulling payments by transferring money from other entities controlled by McGinn and Smith, and their firm sold approximately $600,000 of one of the Firstline investments without any disclosure of the bankruptcy or defaults,” according to a statement released by the Justice Department.
Other counts relate to the Integrated Excellence Trusts. McGinn and Smith allegedly raised about $1.2 million from investors in connection with a loan to benefit Integrated Excellence Inc., which also generated alarm contracts. The indictment alleges that McGinn and Smith were aware the payments received from the loan were not sufficient to pay investors. Again, lulling payments - a small amount of money paid to victims to avoid or delay discovery or disclosure of the fraud - were directed to the investors by transferring money from other entities controlled by McGinn and Smith.
The indictment also accuses McGinn and Smith of personally taking nearly $3 million from investor accounts and using the funds for country club memberships in New York, South Florida and Ireland, and to pay mortgages on expensive homes in New York and Florida.