Securities and Exchange Commission v. McGinn, Smith & Co, Inc. et al

Filing 1130

SUMMARY ORDER - ORDERED that the Ninth Motion, (Dkt. No. 1075), is GRANTED; and it is further ORDERED that the Remar-Lex Claims, listed on Exhibit A to theNinth Motion, (Dkt. No. 1075, Attach. 12 at 4), are DISALLOWED; and it i s further ORDERED that the Rabinovich Claims, listed on the revised versionof Exhibit A to the Ninth Motion, (Dkt. No. 1097, Attach. 1 at 4), excluding claims marked as Individual Claim, are DISALLOWED; and it is further ORDERED that t he ADT Claims listed on Exhibit B to the NinthMotion, (Dkt. No. 1075, Attach. 12 at 5), are RECLASSIFIED to unsecuredclaims and are DISALLOWED; and it is further ORDERED that the HSK Claim, listed on Exhibit B to the NinthMotion , (Dkt. No. 1075, Attach. 12 at 5), is RECLASSIFIED to a secured claim to the extent of the value of the collateral and as an unsecured claim for any deficiency in accordance with the plan of distribution; and it is further ORDERED that the application of the preferential payment offset to reduce the distributions to preferred investors is APPROVED as set forth on Exhibit C-1 to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 6); and it is further ORDERED t hat the preferred investor paper claims listed on ExhibitC-2 to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 7), areDISALLOWED; and it is further ORDERED that each of the paper claims listed on Exhibits D-1, D-2,and D-3 to the Ninth Mot ion, (Dkt. No. 1075, Attach. 12 at 8-11), are DISALLOWED; and it is further ORDERED that the rights of the Receiver to object on any other basis to the claims of all investors or claimants is PRESERVED. Signed by Senior Judge Gary L. Sharpe on 7/7/2020. (jel, )

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 1 of 14

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
________________________________
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,

1:10-cv-457
(GLS/CFH)

v.
MCGINN, SMITH & CO., INC. et al.,
Defendants.
________________________________
SUMMARY ORDER
Pending is the ninth claims motion of William J. Brown, as Receiver,
(hereinafter “the Receiver”), for an order: (1) disallowing certain claims,
(2) reclassifying certain claims, (3) applying preferential payment offset to
certain claims, and (4) expunging certain paper claims, (hereinafter “the
Ninth Motion”). (Dkt. No. 1075.) For the reasons that follow, the Ninth
Motion is granted.
A.

Remar-Lex Claims1
In March 2019, the court entered a Summary Order granting the

Receiver’s Third Claims Motion, (Dkt. No. 984), and disallowing claims
1

Detailed summaries of the facts surrounding this action were included in the court’s
February 17, 2015 and March 30, 2015 orders. (Dkt. Nos. 807, 816.) Accordingly, the court
assumes the parties’ familiarity with the facts of this case and recites only those relevant for
purposes of the pending motion.

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 2 of 14

asserted by, among others, William Lex, (Dkt. No. 1043). Lex was a
broker with McGinn, Smith & Co., Inc. (hereinafter “MS & Co.”) “who sold
$45,536,000 of MS & Co. private placements between September 2003
and July 2009.” (Dkt. No. 1075, Attach. 11 at 8.)
Since the court’s March 2019 Summary Order, “the Receiver
discovered that Lex holds two additional disputed claims[, held jointly by
Lex and Kimellen Remar,] that were not included in the Third Claims
Motion” (hereinafter “the Remar-Lex Claims”). (Id.) Neither Lex nor
Remar responded to the pending motion. For substantially the same
reasons stated in the court’s March 2019 Summary Order, (Dkt. No.
1043), the Remar-Lex claims listed on Exhibit A to the Ninth Motion, (Dkt.
No. 1075, Attach. 12 at 4), are hereby disallowed.
B.

Rabinovich Claims
The Receiver moves to disallow claims filed by Stanley Rabinovich

(hereinafter “the Rabinovich Claims”), who is the father of a former MS &
Co. senior vice president and investment advisor, and who allegedly
assisted Timothy McGinn and David Smith “with the implementation of

2

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 3 of 14

the[ir] Ponzi scheme and was repaid directly from the scheme.” 2 (Dkt.
No. 1075, Attach. 11 at 15-16.) As an initial matter, Rabinovich’s request
for an evidentiary hearing prior to a decision by the court, (Dkt. No. 1094
at 16), is denied.
Despite the court’s broad discretion to approve a distribution plan
proposed by a receiver, see S.E.C. v. Amerindo Inv. Advisors Inc., No. 05cv-5231, 2016 WL 10821985, at *2 (S.D.N.Y. May 20, 2016), “the [d]ue
[p]rocess clause requires that non-party claimants must be afforded notice
and an opportunity to be heard before a [r]eceiver or a [c]ourt resolves its
claims,” SEC v. Callahan, 193 F. Supp. 3d 177, 204 (E.D.N.Y. 2016)
(citations omitted).
However, because the money at issue here is under the control of
the receivership, and because the dispute “directly implicates the
disposition of receivership assets, the [c]ourt has discretion to address
[the Ninth Motion] in a summary proceeding.” See Bank of America, Nat.
Ass’n v. Commack Props., LLC, No. 09 CV 5296, 2011 WL 5401763, at *2
(E.D.N.Y. Nov. 4, 2011) (citations omitted); see also S.E.C. v. Byers, 637
2

The Receiver initially moved to disallow claims filed by Rabinovich’s wife, Eva, as
well. (Dkt. No. 1075, Attach. 11 at 10-11, 15-16.) However, the Receiver conceded on reply
that claims individually held by Eva, which are identified in a revised version of Exhibit A to the
Ninth Motion, (Dkt. No. 1097, Attach. 1 at 4), should not be disallowed, (Dkt. No. 1097 at 9.)

3

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 4 of 14

F. Supp. 2d 166, 184 (S.D.N.Y. 2009) (“[I]t is well-settled that a [d]istrict
[c]ourt has the authority, in implementing a distribution plan in a
receivership case, to use summary proceedings to evaluate claims and
claim priority, provided the parties have an opportunity to be heard to
argue their claims.” (citations omitted)); F.D.I.C. v. Bernstein, 786 F. Supp.
170, 177 (E.D.N.Y. 1992) (“[T]he use of summary proceedings in equity
receiverships, as opposed to plenary proceedings under the Federal
Rules [of Civil Procedure], is within the jurisdictional authority of a district
court.” (citations omitted)). Indeed, “a summary proceeding is the
preferred course of action in a federal receivership because it reduces the
time necessary to settle disputes, decreases litigation costs, and prevents
further dissipation of receivership assets.” Byers, 637 F. Supp. 2d at 184
(internal quotation marks and citation omitted).
Both the Receiver and Rabinovich have had an opportunity to be
heard and have presented thorough arguments on the relevant issues
raised in the Ninth Motion. (Dkt. Nos. 1075, 1094, 1097.) Accordingly,
Rabinovich’s request for a hearing and time to conduct additional
discovery is denied, as the court finds the briefing constitutes sufficient
due process. See Byers, 637 F. Supp. 2d at 184.
4

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 5 of 14

Turning to the merits, the Receiver asserts that, in 2007 and 2009,
Rabinovich provided two bridge loans worth a total of $850,000 to MS &
Co., and that, by providing these loans, he allowed certain offerings to
close, at which time escrow could be broken and McGinnn and Smith
could access investor funds in order to enrich themselves and MS & Co.
entities. (Dkt. No. 1075, Attach. 11 at 8-11.) Further, the Receiver asserts
that the loans were treated as investments; that funds raised by MS & Co.
from new investments were “improperly funneled directly to . . .
Rabinovich”; and that Rabinovich’s loans “were improperly repaid in full
from the[se] secondary sales.” (Id.)
In response, Rabinovich contends that he did not know about the
Ponzi scheme or that his loans were assisting McGinn and Smith in
implementing that scheme; rather, he merely made what he thought were
legitimate loans to MS & Co. (Dkt. No. 1094 at 8-11.) Further, he asserts
that he was not a participant or beneficiary of the scheme, but, instead, a
victim of it, and that the Receiver has not sufficiently shown otherwise.
(Id.) In reply, the Receiver argues that, even if Rabinovich did not have
fraudulent intent, he should have known about the Ponzi scheme based
on the following “red flags”: (1) the loans were documented as
5

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 6 of 14

investments and treated as such, and (2) as an investor in a different MS
& Co. fund, Rabinovich was aware that interest payments were being
reduced and ultimately eliminated, while he was being repaid in full for his
“loans.” (Dkt. No. 1097 at 3-5.) For the reasons that follow, the court
agrees with the Receiver.
District courts are afforded discretion “to approve a distribution plan
proposed by a receiver—and to defer to the receiver’s choices for the
plan’s details—so long as the plan is fair and reasonable.” Amerindo,
2016 WL 10821985 at *3 (internal quotation marks and citations omitted).
To be sure, “a district court has extremely broad discretion in supervising
an equity receivership and in determining the appropriate procedures to
be used in its administration.” Bernstein, 786 F. Supp. at 177 (emphasis
added) (citations omitted); see Byers, 637 F. Supp. 2d at 174 (“Court[s]
[have] broad authority to craft remedies for violations of the federal
securities laws.” (citations omitted)).
Rabinovich notes that “[a]ctual, not constructive, knowledge is
required to show that someone was an active participant in, or an aider
and abettor of, fraud” and that there is no evidence of Rabinovich’s
knowledge of the Ponzi scheme. (Dkt. No. 1094 at 8-9.) But Rabinovich
6

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 7 of 14

fails to demonstrate why that should be dispositive, especially in light of
case law to the contrary. See S.E.C. v. Pension Fund of Am. L.C., 377 F.
App’x 957, 962 (11th Cir. 2010) (reasoning that the argument made by an
excluded individual that “he did not personally commit fraud . . . misses
the mark”); S.E.C. v. Bivona, No. 16-cv-01386, 2017 WL 4022485, at *13
(N.D. Cal. Sept. 13, 2017) (“[C]ourts have approved the exclusion of
individuals . . . even when the claimant did not knowingly engage in
unlawful, wrongful, or criminal conduct.”).
Indeed, the issue here is not whether Rabinovich committed or aided
and abetted fraud. Rather, the issue is whether, based on Rabinovich’s
conduct, equity dictates his claims be disallowed in order to favor
legitimate, innocent investors who had no involvement in the Ponzi
scheme. The court is satisfied that equity does dictate as much for the
reasons stated in the Receiver’s motion, (Dkt. No. 1075, Attach. 11),
which is summarized above and need not be discussed any further.
In a nutshell, though, Rabinovich, a sophisticated investor who
invested millions of dollars in MS & Co. entities, should have known that
his loans were being used for fraudulent purposes, especially based on
the red flags identified by the Receiver and noted above. (Dkt. No. 1097
7

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 8 of 14

at 3-5.) Rabinovich was improperly funneled funds raised from new
investors at a time when other investors were receiving minimal, if any,
distributions, and Rabinovich knew this to be true. (Id.)
Accordingly, the court, in an exercise of its broad discretion,
disallows the Rabinovich Claims. 3 See Bivona, 2017 WL 4022485, at *13
(“[I]t would be inequitable to permit a person whose active misconduct or
unlawful activity resulted in harm to investors to recover through a
distribution.” (citation omitted)); S.E.C. v. Merrill Scott & Assocs., Ltd., No.
2:02 CV 39, 2006 WL 3813320, at *12 (D. Utah Dec. 26, 2006) (excluding
an individual who “was more intimately involved with [the scheme] than
the vast majority of clients”).
C.

ADT and HSK Claims
The Receiver moves to reclassify certain claims asserted by ADT

Security Services, Inc. (hereinafter “the ADT Claims”) and HSK Funding,

3

The disallowed Rabinovich Claims include claims for investments that were held
jointly between Rabinovich and Eva. “The opening of a joint bank account creates a rebuttable
presumption that each named tenant is possessed of the whole of the account so as to make
the account vulnerable to levy of a money judgment by the judgment creditor of one of the joint
tenants.” See S.E.C. v. Smith, 646 F. App’x 42, 43 (2d Cir. 2016) (quoting JRP Old Riverhead,
Ltd. v. Hudson Sav. Bank, 106 A.D.3d 914 (2d Dep’t 2013)); see Hudson Sav. Bank, 106
A.D.3d at 914 (holding that a petitioner is “not required to establish that the judgment debtor
was the sole contributor of funds to the [joint] account” in order for a judgment creditor to be
entitled to a turnover of the entire contents of that account). Rabinovich points to no evidence
in the record that might rebut this presumption.

8

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 9 of 14

Inc. (hereinafter “the HSK Claim”). (Dkt. No. 1075, Attach. 11 at 11-12,
17.) This request is unopposed.
First, ADT filed two paper claims against TDM Cable Funding LLC
and Prime Vision Communications LLC, arising out of an October 2006
agreement whereby “TDM purchased from ADT a certain Balloon
Promissory Note for $3,165,762 made by Prime Vision to ADT”
(hereinafter “the ADT Note”). (Id. at 11.) According to the agreement, “if
the ADT Note were paid or subsequently sold, the proceeds would be
divided and a portion would be paid to ADT.” (Id.) Because the ADT Note
has not been paid or sold, “there is no basis upon which ADT may assert
a claim for payment against either TDM or Prime Vision.” (Id. at 17.)
Accordingly, the ADT Claims, listed on Exhibit B to the Ninth Motion, (Dkt.
No. 1075, Attach. 12 at 5), are hereby reclassified as an unsecured claim,
and are disallowed.
Next, a receivership entity, 107th Street Associates, LLC, borrowed
$1,000,000 from HSK pursuant to an October 2007 promissory note. (Dkt.
No. 1075, Attach. 11 at 12.) This loan was secured “by a pledge of stock”
in a separate entity. (Id.) Thus, because the HSK Claim, which is listed
on Exhibit B to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 5),
9

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 10 of 14

represents a secured debt obligation and not an investor claim, it is hereby
reclassified as a secured claim to the extent of the value of the collateral
and an unsecured claim for any deficiency for purposes of the plan of
distribution.
D.

Preferential Payment Offset
The Receiver seeks an order applying a preferential payment offset

as to claims of certain “preferred” investors. (Dkt. No. 1075, Attach. 11
at 17-20.) The purpose of the preferential payment offset that the
Receiver seeks in the Ninth Motion can be summarized as follows:
Certain investors (“Preferred Investors”) received
preferential payments in the form of interest
payments and redemptions (“Preferential Payments”)
made by two MS [& Co.] [e]ntities, McGinn Smith
Funding LLC (“MSF”) and TDM. MSF and TDM . . .
were used by McGinn and Smith to facilitate
improper and fraudulent transfers between and
among McGinn and Smith, personally, and other MS
& Co. [e]ntities. . . . The Preferential Payments were
made in late 2009 and early 2010, at the height of
the Ponzi scheme and when many other MS & Co.
investors ceased receiving any payments on account
of their investments. . . . The funds used to make
these Preferential Payments were not generated
through the legitimate investment operations of TDM
or MSF but instead were amounts raised from certain
[t]rust [o]fferings or deposited directly by other
investors or MS & Co. [e]ntities. Consequently, the
Preferred Investors received Preferential Payments
10

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 11 of 14

comprised of funds that they were not entitled to
receive, at a time when most other investors in MS &
Co. were no longer receiving payments on account
of their investments.
(Id. at 12-13 (internal quotation marks and citations omitted).) The
Receiver further explains that:
To permit the Preferred Investors to retain the
Preferential Payments, without a corresponding
dollar-for-dollar reduction in the amount of their pro
rata distribution on account of their [claims], would
result in the Preferred Investors retaining excess
amounts improperly paid to the Preferred Investors
by MS & Co. from funds that should have been
invested, and not used to make payments of
principal and interest. The [p]referential [p]ayment
[o]ffset promotes equality among all investors by
accounting for this unfair treatment.
(Id. at 19.) None of the investors subject to the proposed offset, whom are
listed on Exhibit C-1 to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 6),
have objected.
After a careful review of the Receiver’s arguments as to this aspect
of the Ninth Motion, the court approves the preferential payment offset
described therein, and outlined on Exhibit C-1, (id.), as it will promote
equality amongst all investors. Additionally, the paper claims filed by
certain Preferred Investors, listed on Exhibit C-2 to the Ninth Motion, (id.
11

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 12 of 14

at 7), are disallowed.
E.

Paper Claims
Finally, the Receiver moves the court to disallow certain paper

claims filed by various investors because they are either (1) “claims filed
by investors for the same investments as their Receiver-granted claims
but in different amounts”; (2) “claims filed by investors that are exactly
duplicative and are in the exact amount of the claims listed on the [c]laims
[w]ebsite”; (3) “claims for investments which are not reflected in the books
and records of [MS & Co.]”; (4) “claims for investments in entities that are
not part of the Receivership”; (5) “claims filed for investments in entities
that were excluded from the Receivership by the [p]lan [d]istribution
[o]rder”; and (6) “[u]ntimely [c]laims.” (Dkt. No. 1075, Attach. 11 at 21-22.)
This aspect of the motion is unopposed as well.
Because there is no legal or equitable basis to make distributions to
investors on account of these paper claims, which are listed on Exhibits D1, D-2, and D-3 to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 8-11),
they are hereby disallowed.
V. Conclusion
WHEREFORE, for the foregoing reasons, it is hereby
12

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 13 of 14

ORDERED that the Ninth Motion, (Dkt. No. 1075), is GRANTED;
and it is further
ORDERED that the Remar-Lex Claims, listed on Exhibit A to the
Ninth Motion, (Dkt. No. 1075, Attach. 12 at 4), are DISALLOWED; and it is
further
ORDERED that the Rabinovich Claims, listed on the revised version
of Exhibit A to the Ninth Motion, (Dkt. No. 1097, Attach. 1 at 4), excluding
claims marked as “Individual Claim,” are DISALLOWED; and it is further
ORDERED that the ADT Claims listed on Exhibit B to the Ninth
Motion, (Dkt. No. 1075, Attach. 12 at 5), are RECLASSIFIED to unsecured
claims and are DISALLOWED; and it is further
ORDERED that the HSK Claim, listed on Exhibit B to the Ninth
Motion, (Dkt. No. 1075, Attach. 12 at 5), is RECLASSIFIED to a secured
claim to the extent of the value of the collateral and as an unsecured claim
for any deficiency in accordance with the plan of distribution; and it is
further
ORDERED that the application of the preferential payment offset to
reduce the distributions to preferred investors is APPROVED as set forth
on Exhibit C-1 to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 6); and it
13

Case 1:10-cv-00457-GLS-CFH Document 1130 Filed 07/07/20 Page 14 of 14

is further
ORDERED that the preferred investor paper claims listed on Exhibit
C-2 to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 7), are
DISALLOWED; and it is further
ORDERED that each of the paper claims listed on Exhibits D-1, D-2,
and D-3 to the Ninth Motion, (Dkt. No. 1075, Attach. 12 at 8-11), are
DISALLOWED; and it is further
ORDERED that the rights of the Receiver to object on any other
basis to the claims of all investors or claimants is PRESERVED; and it is
further
ORDERED that the Clerk provide a copy of this Summary Order to
the parties.
IT IS SO ORDERED.
July 7, 2020
Albany, New York

14