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

Filing 321

MEMORANDUM-DECISION and ORDER, that Lynn Smith's 224 Motion to Dismiss is DENIED. That the Trust, Geoffrey Smith, and Lauren Smith's 283 Motion to Dismiss is GRANTED in part as to the fraudulent conveyance claims against Lauren Smith a nd Geoffrey Smith in his individual capacity. That the Trust, Geoffrey Smith, and Lauren Smith's 283 Motion to Dismiss is DENIED in part as to the fraudulent conveyance claim against the Trust. That the SEC is GRANTED limited leave to re-ame nd its complaint, in full compliance with the terms of this Order, within thirty (30) days from the date of the filing of this Order, after which Geoffrey Smith and Lauren Smith shall respond to the complaint as permitted under the Federal Rules of C ivil Procedure. That if the SEC fails to file an amended complaint within thirty (30) days from the date of the filing of this Order, the Clerk of the Court shall enter judgment dismissing Geoffrey Smith and Lauren Smith from this action without further order of the court. Signed by Judge Gary L. Sharpe on 5/6/2011. (jel, )

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

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

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; DAVID L. SMITH;
LYNN A. SMITH; NANCY MCGINN; GEOFFREY
R. SMITH; LAUREN T. SMITH; FINRA AND THE
FINRA EMPLOYEES; and GEOFFREY R. SMITH,
Trustee of the David L. and Lynn A. Smith
Irrevocable Trust U/A 8/04/04,
Defendants,
LYNN A. SMITH and NANCY MCGINN,
Relief Defendants, and
GEOFFREY R. SMITH, Trustee of the David L. and
Lynn A. Smith Irrevocable Trust U/A 8/04/04,
Intervenor.
_________________________________________
APPEARANCES:

OF COUNSEL:

FOR THE PLAINTIFF:
U.S. Securities & Exchange
Commission
3 World Financial Center
New York, NY 10281

DAVID P. STOELTING
JACK KAUFMAN
KEVIN P. MCGRATH
LARA S. MEHRABAN

FOR THE DEFENDANTS:
Corporate Defendants
Phillips, Lytle Law Firm
3400 HSBC Center
Buffalo, NY 14203

WILLIAM J. BROWN, ESQ.

Timothy McGinn
Office of E. Stewart Jones, Jr.
28 Second Street, Jones Building
Troy, NY 12180

E. STEWART JONES, JR., ESQ.

David Smith
Dreyer, Boyajian Law Firm
75 Columbia Street
Albany, NY 12210

WILLIAM J. DREYER, ESQ.

Lynn Smith, Geoffrey Smith, and
Lauren Smith
Featherstonhaugh, Wiley Law Firm
99 Pine Street, Suite 207
Albany, NY 12207

JAMES D.
FEATHERSTONHAUGH, ESQ.

Nancy McGinn
Pro Se
FINRA
National Association of Securities
Dealers, Inc.
1735 K Street N.W.
Washington, DC 20006

TERRI L. REICHER, ESQ.

2

Gary L. Sharpe
District Court Judge

MEMORANDUM-DECISION AND ORDER
I. Introduction
Plaintiff the United States Securities and Exchange Commission
(SEC) commenced this action against defendants 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 McGinn, and David Smith, alleging various violations of the
Securities Act of 1933,1 the Securities Exchange Act of 1934,2 the
Investment Advisors Act of 1940,3 and the Investment Company Act of
1940.4 (See Am. Compl. ¶¶ 139-165, Dkt. No. 100.) The SEC additionally
asserted claims of fraudulent conveyance under the New York Debtor and
Creditor Law against defendants Timothy McGinn, David Smith, Lynn

1

15 U.S.C. § 77a, et seq.

2

15 U.S.C. § 78a, et seq.; see also Rule 10b-5, 17 C.F.R. § 240.10b-5.

3

15 U.S.C. § 80b-1, et seq.; see also Rule 206(4)-8,17 C.F.R. § 275.206(4)-8.

4

15 U.S.C. § 80a-1, et seq.

3

Smith, Nancy McGinn, Lauren Smith, and Geoffrey Smith, individually and
as Trustee of the David L. and Lynn A. Smith Irrevocable Trust U/A
8/04/04. (See id. at ¶¶ 169-73; see also Feb. 14, 2011 Substitution Order,
Dkt. No. 281.) Lynn Smith and Nancy McGinn were also named as relief
defendants, for allegedly receiving and retaining fraudulently and illegally
obtained proceeds, of which the SEC seeks disgorgement. (See Am.
Compl. ¶¶ 166-68, Dkt. No. 100.) Pending are Lynn Smith’s motion to be
dismissed as defendant and relief defendant, (Dkt. No. 224), and the Trust,
Geoffrey Smith, and Lauren Smith’s motion to dismiss, (Dkt. No. 283). For
the reasons that follow, Lynn Smith’s motion is denied, the Trust
defendants’ motion is granted in part and denied in part, and the SEC is
granted limited leave to re-amend its complaint.
II. Standard of Review
The standard of review under FED. R. CIV. P. 12(b)(6) is well
established and will not be repeated here. For a full discussion of the
standard the court refers the parties to its decision in Ellis v. Cohen &
Slamowitz, LLP, 701 F. Supp. 2d 215, 217-18 (N.D.N.Y. 2010).

4

III. Discussion5
A.

Relief Defendant Status
A “nominal” or “relief” defendant is “a person who can be joined to aid

the recovery of relief without an assertion of subject matter jurisdiction only
because [s]he has no ownership interest in the property which is the
subject of the litigation.” SEC v. Cherif, 933 F.2d 403, 414 (7th Cir. 1991);
see also SEC v. Colello, 139 F.3d 674, 677 (9th Cir. 1998) (“[T]he SEC
may name a non-party depository as a nominal defendant to effect full
relief in the marshalling of assets that are the fruit of [an] underlying
fraud.”). Federal courts have jurisdiction over and “may order equitable
relief against” a relief defendant in a securities enforcement action if she:
“(1) has received ill-gotten funds; and (2) does not have a legitimate claim
to those funds.” SEC v. Cavanaugh, 155 F.3d 129, 136 (2d Cir. 1998)
(citation omitted); see also Cherif, 933 F.2d at 414 n.11 (“A court can
obtain equitable relief from a non-party against whom no wrongdoing is
alleged if it is established that the non-party possesses illegally obtained

5

For a full discussion of the factual and procedural background, the court refers the
parties to Magistrate Judge David R. Homer’s July 7 and November 22, 2010 MemorandumDecisions and Orders. (See July 7, 2010 Order at 3-12, Dkt. No. 86; Nov. 22, 2010 Order at 24, Dkt. No. 194.) Importantly though, for purposes of the pending motions, the court will limit
its analysis to the factual allegations contained in the SEC’s amended complaint.

5

profits but has no legitimate claim to them.”). And “once jurisdiction over
the [relief] defendant is established[,] ... it is unnecessary to obtain subject
matter jurisdiction over [her].” Cherif, 933 F.2d at 414 (citation omitted).
Here, the SEC alleges that during the period of the defendants’
fraudulent conduct—which is laid out with considerable detail and
specificity—Lynn Smith, without providing any consideration, “received
more than $1.8 million from [David] Smith and the McGinn Smith Entities,”
including “$375,000 in December 2007; $325,000 in June and July 2009;
$100,000 in March 2010; ... $185,000 in October 2006 and May 2007[;] ...
[and] many other payments from McGinn Smith Entities.” (Am. Compl. ¶¶
81, 107-08, Dkt. No. 100.) The SEC further alleges that Lynn Smith
maintained a brokerage account at McGinn, Smith & Co, which she
“allowed [David] Smith, [Timothy] McGinn and the McGinn Smith Entities to
draw upon ... for business and personal needs without restrictions, and
[which] served as a de facto financing arm for [David] Smith and [Timothy]
McGinn and the McGinn Smith Entities during the period of the fraud.” (Id.
at ¶ 109.) “L[ynn] Smith allowed [David] Smith to use the Stock Account as
a personal line of credit to further his personal and professional interests.
Internal e-mails during the period of the fraud show McGinn Smith
6

employees freely transferring money into and out of the Stock Account,
which contained ill-gotten gains.” (Id.) In October 2002, $3 million in
Charter One stock was shifted from this Stock Account to a McGinn Smith
Entity account, with the Smiths as the signatories. (See id. at ¶¶ 110-112.)
The following year, the stock was shifted back into Lynn Smith’s
possession, whereafter her husband “deposited significant personal assets
into the Stock Account, including cash of $38,430, the proceeds of a trust
amounting to $326,304, and a note receivable totaling $410,000.” (Id. at ¶
113.)
By 2009—after the Financial Industry Regulatory Authority (FINRA)
began investigating McGinn, Smith & Co.’s activities—“[David] Smith and
L[ynn] Smith began moving assets that had been jointly held into solely
L[ynn] Smith’s name.” (Id. at ¶ 115; see also id. at ¶ 114 (citing to an email
sent by David Smith on January 14, 2009, to Timothy McGinn, which stated
that “Lynn and I have to shift money around between us”).) This asset
shifting, all of which was done “without consideration,” included: “L[ynn]
Smith open[ing] up a checking account in her name for the first time and ...
depositing assets into this account which had previously been deposited
into a joint account, including [David] Smith’s paychecks”; and the transfer
7

of “a house in Vero Beach, Florida ... to L[ynn] Smith after being previously
held in joint ownership.” (Id. at ¶¶ 116-18, 136-37.) Based on these
alleged activities, the SEC claims that:
Relief Defendant[] L[ynn] Smith ... [was a] recipient[], without
consideration, of proceeds of the fraudulent and illegal sales of
securities alleged[;] ... profited from such receipt or from the
fraudulent and illegal sales of securities alleged ... by obtaining
illegal proceeds under circumstances in which it is not just,
equitable, or conscionable for them to retain the illegal
proceeds[;] ... [and has] been named as a Relief Defendant for
the amount of proceeds by which [she] has been unjustly
enriched as a result of the fraudulent scheme or illegal sales
transactions.
(Id. at ¶ 167.) Consequently, the SEC demands that “L. Smith ... disgorge
any ill-gotten gains.” (Id. at ¶ 18.)
In light of these allegations, the court is satisfied that the SEC has
met the two elements that qualify Lynn Smith as a relief defendant. First,
with heightened particularity, the complaint identifies an array of unlawfully
obtained funds and assets that Lynn Smith received, oversaw, used, and
maintained in her possession. Second, the alleged source of these funds
and assets and the manner in which they were obtained by and transferred
to Lynn Smith sufficiently establish that she does not have a legitimate
claim to them. Therefore, the court concludes that, at a minimum,

8

jurisdiction exists over Lynn Smith as a relief defendant. Lynn Smith’s
motion to be dismissed as a relief defendant is denied.
B.

New York Debtor and Creditor Law
Under § 276 of the New York Debtor and Creditor Law, “[e]very

conveyance made and every obligation incurred with actual intent, as
distinguished from intent presumed in law, to hinder, delay, or defraud
either present or future creditors, is fraudulent as to both present and future
creditors.” N.Y. DEBT. & CRED. LAW § 276. “Where a conveyance ... is
fraudulent as to a creditor, such creditor, when his claim has matured, may,
as against any person except a purchaser for fair consideration without
knowledge of the fraud at the time of the purchase, ... [h]ave the
conveyance set aside ... to the extent necessary to satisfy his claim ....” Id.
§ 278(1)(a). In order to make out a claim under § 276 for fraudulent
conveyance, a party must meet FED. R. CIV. P. 9(b)’s heightened standard
by pleading with particularity an actual intent to defraud, see Atlanta
Shipping Corp., Inc. v. Chem. Bank, 818 F.2d 240, 251 (2d Cir. 1987),
which “may be inferred from circumstantial evidence, or ‘badges of fraud,’”
including:
(1) the inadequacy of consideration received in the allegedly
9

fraudulent conveyance; (2) the close relationship between
parties to the transfer; (3) information that the transferor was
rendered insolvent by the conveyance; (4) suspicious timing of
transactions or existence of a pattern after the debt had been
incurred or a legal action against the debtor had been
threatened; or (5) the use of fictitious parties.
Eclaire Advisor Ltd. as Tr. to Daewoo Int’l (Am.) Corp. Creditor Trust v.
Daewoo Eng’g & Constr. Co., 375 F. Supp. 2d 257, 268-69 (S.D.N.Y. 2005)
(internal quotation marks and citations omitted); see also Hassett v.
Goetzmann, 10 F. Supp. 2d 181, 188 (N.D.N.Y. 1998). For example, “[t]he
transfer of property by the debtor to his spouse ... while retaining the use
and enjoyment of the property, is a classic badge of fraud.” In re Kaiser,
722 F.2d 1574, 1583 (2d Cir. 1983) (citation omitted).
David and Lynn Smith created an irrevocable trust pursuant to a
Declaration of Trust dated August 4, 2004. (See Am. Compl. ¶ 119, Dkt.
No. 100.) The named beneficiaries of the Trust are the Smiths’ children,
thirty year-old Geoffrey, and twenty-eight year-old Lauren. (See id.) When
the Trust was created, it had no assets.
Shortly after the Trust’s creation, David and Lynn Smith entered into
a Private Annuity Agreement with the Trust on August 31, 2004. (See id. at
¶ 120.) David and Lynn Smith each signed the Agreement. (See id.)

10

According to the Agreement, David and Lynn Smith agreed to sell 100,000
shares of Charter One stock to the Trust in exchange for annuity payments
of $489,932 per year, beginning on September 26, 2015, and ending upon
the death of the surviving spouse. (See id.) The payment amount,
$489,932, is based on an annuity annual interest rate of 4.6%. (See id.)
The Agreement was accompanied by a separate one-page addendum
titled “Private Annuity” and dated September 7, 2004. (See id. at ¶ 121.)
The addendum sets forth a joint life expectancy for David and Lynn Smith
of thirty-one years, which, when calculated from the date that the payment
obligations would begin in 2015, predicts twenty years of annuity
payments. (See id.) Thus, by operation of the $489,932 annual payments,
the Agreement envisions David and Lynn Smith ultimately receiving almost
$10 million from the Trust. (See id.)
On September 1, 2004, the 100,000 shares of Charter One stock
were transferred to the Trust from the Stock Account. (See id. at ¶ 123.)
This transfer was made on the heels of a publicly announced all-cash
acquisition of Charter One by Citizens Financial Group, a deal which would
result in the conversion of the 100,000 shares of Charter One stock to
$4.45 million at $44.50 per share. (See id. at ¶ 122.) The deal was
11

completed on August 31, 2004. (See id.) Thus, on the same day that the
100,000 shares were transferred to the Trust, the buyout occurred,
whereby the Trust was instantaneously credited with $4,450,000. (See id.
at ¶ 124.)
During the subsequent five and one-half years, from September 1,
2004, to April 15, 2010, the named beneficiaries, Geoffrey and Lauren
Smith, never received a distribution from the Trust. (See id. at ¶ 125.) On
April 15, 2010, Geoffrey Smith requested a distribution of $95,000. (See
id.) However, the $95,000 was transferred directly from the Trust to Lynn
Smith’s checking account, and was allegedly used by David and Lynn
Smith to pay their personal taxes. (See id.)
Based on these allegations, the SEC claims that David and Lynn
Smith’s transfer of the Charter One stock to the Trust constitutes a
fraudulent conveyance that was made with the actual intent to hinder,
delay, or defraud present or future creditors. (See id. at ¶¶ 126, 170.) To
illustrate the Smiths’ actual intent, the SEC alleges the following facts: (1)
the transfer occurred after the defendants became engaged in the
fraudulent conduct charged, which was underway by 2003; (2) at the time
of the transfer, David Smith’s liability regarding his investors and law
12

enforcement was objectively foreseeable; (3) at the time of the transfer,
David Smith actually knew about his exposure to liability, as evidenced by
a handwritten note in which he states that he is “vulnerable to criminal
prosecution,” that the “investments have no chance of ever being repaid in
full,” that his conduct is “bordering on fraud,” that he has been “misleading
both our own employees and customers,” and that he “strongly believe[s]
that in civil or criminal litigation we would lose badly”; (4) in December
2003, David and Lynn Smith, among others, had been named as
defendants in a securities fraud suit filed in the United States District Court
for the Southern District of New York, Meyers v. Integrated Alarm Servs.
Grp., Inc., No. 03-cv-09748; (5) David and Lynn Smith knowingly made the
transfer on the day of the Charter One buyout in order to shelter the large
sum of $4.5 million in cash; (6) on February 26, 2004, the SEC’s BrokerDealer Inspection Program notified Smith by letter that, after conducting an
examination of McGinn, Smith & Co., it had found various “deficiencies
and/or violations of law”; and (7) in the early stages of this matter, David
and Lynn Smith inexplicably concealed the existence of the Private Annuity
Agreement. (See id. at ¶¶ 127-33.)
Consequently, the SEC contends that the Trust received fraudulently
13

conveyed assets, and that the disbursements received by Geoffrey and
Lauren Smith after July 7, 2010, also constitute fraudulently conveyed
assets. (See id. at ¶¶ 171-72.)
1.

The SEC as a Creditor
Preliminarily, Lynn Smith and the Trust, Geoffrey Smith, and Lauren

Smith (Trust defendants) challenge the SEC’s standing as a creditor under
§ 276. (See Lynn Smith Mem. of Law at 22-25, Dkt. No. 224:1; Trust Defs.
Mem. of Law at 11-12, Dkt. No. 283:1.) In response, the SEC offers a
meager series of what can at best be categorized as either “analogous”
cases6 or cases that “implicitly” recognize the SEC as a creditor.7 (See Pl.
Reply Mem. of Law at 12-13, Dkt. No. 249.) Notwithstanding the parties’
cursory treatment of this issue, the court finds that the SEC qualifies as a
creditor under § 276 to the extent that, if successful on the claims asserted,

6

See, e.g., United States v. Kaplan, 267 F.2d 114, 117 (2d Cir. 1959) (finding that the
government is a creditor where it is seeking to recover unpaid distilled spirits taxes); United
States v. Hansel, 42 F. Supp. 2d 201, 203 (N.D.N.Y. 1999) (finding that the Internal Revenue
Service is a creditor where it is seeking to recover unpaid tax deficiencies); Crabb v. Mager’s
Estate, 66 A.D.2d 20, 24 (4th Dep’t 1979) (finding that county social services commissioner is
a creditor where it is seeking to recover erroneously distributed medical assistance benefits).
7

See, e.g., Commodity Futures Trading Comm’n v. Walsh, 618 F.3d 218, 230 (2d Cir.
2010) (certifying to the New York Court of Appeals questions of law regarding the SEC’s
fraudulent conveyance claim without questioning whether the SEC constitutes a creditor); SEC
v. Shainberg, No. 07 Civ. 8814, 2010 WL 972204, at *3-4 (S.D.N.Y. Mar. 17, 2010)
(entertaining the merits of the SEC’s fraudulent conveyance claim without addressing whether
the SEC constitutes a creditor).

14

it will be seeking to recover on a consequent civil penalty judgment.
The Debtor and Creditor Law defines a “creditor” as “a person having
a claim, whether matured or unmatured, liquidated or unliquidated,
absolute, fixed or contingent.” N.Y. DEBT. & CRED. LAW § 270. Mirroring
“creditor,” the term “debt” is defined to include “any legal liability, whether
matured or unmatured, liquidated or unliquidated, absolute, fixed or
contingent.” Id. These terms, “creditor” and “debt,” enjoy broad
application. See Amalgamated Bank of N.Y. v. Marsh, 823 F. Supp. 209,
222 (S.D.N.Y. 1993); see also Sunrise Indus. Joint Venture v. Ditric Optics,
Inc., 873 F. Supp. 765, 771-72 (E.D.N.Y. 1995); Shelly v. Doe, 249 A.D.2d
756, 757 (3d Dep’t 1998). As a result, “one who has a legal right to
damages capable of enforcement by judicial process, is a creditor.”
Marcus v. Kane, 18 F.2d 722, 723 (2d Cir. 1927) (citations omitted); see
also Drenis v. Haligiannis, 452 F. Supp. 2d 418, 428 (S.D.N.Y. 2006)
(“Under New York’s broad definition of ‘creditor,’ one who has a right to
maintain a [civil] action but has not recovered judgment at the time of the
transfer is a creditor ....” (citing Marcus, 18 F.2d at 723)). Thus, the Debtor
and Creditor Law abrogates “the ancient rule whereby a judgment and a
lien were essential preliminaries to equitable relief against a fraudulent
15

conveyance,” and allows a plaintiff “without attachment or execution, [to]
establish [its] debt, whether matured or unmatured, and challenge the
conveyance in the compass of a single suit.” Am. Sur. Co. of N.Y. v.
Conner, 251 N.Y. 1, 7-8 (N.Y. 1929). Importantly though, in seeking to set
aside a fraudulent conveyance, a creditor is limited to the value of its claim,
and may not act in a representative capacity. See N.Y. DEBT. & CRED. LAW
§ 270; see also Sullivan v. Kodsi, 373 F. Supp. 2d 302, 309 (S.D.N.Y.
2005) (“[T]he liability ... is limited to a judgment in the amount of monies
‘wrongfully received,’ regardless of the total amount of the conveyance(s).”
(citation omitted)); De West Realty Corp. v. IRS, 418 F. Supp. 1274, 1279
(S.D.N.Y. 1976) (“If a conveyance is fraudulent ... a creditor may obtain
judgment ... up to the value of the property, but not exceeding the amount
of the creditor’s claim.” (citation omitted)); Soc’y Milion Athena v. Nat’l Bank
of Greece, 281 N.Y. 282, 293 (N.Y. 1939) (“[The plaintiff] is not entitled to a
judgment setting [the conveyance] aside completely and subjecting the
property to the claims of other creditors through a receiver and judicial
administration of the affairs of the debtor ....”); Gruenebaum v. Lissauer,
185 Misc. 718, 728 (N.Y. Sup. Ct. 1945) (“Plaintiff may act in his own right
alone.”); cf. Eberhard v. Marcu, 530 F.3d 122, 131-34 (2d Cir. 2008)
16

(holding that a receiver’s standing to maintain a set aside action is
prescribed by the receivership entity’s own rights and status as a creditor).
At this juncture, the court is satisfied that the SEC falls within the
definition of “creditor” under the Debtor and Creditor Act. First, the SEC
clearly has a legal right, and obligation, to initiate a civil enforcement action
under the circumstances alleged. Second, the SEC’s action exposes the
defendants, including David and Lynn Smith, to significant legal liability
which, upon judgment, would constitute a “debt” under § 270. (See Pl.
Reply Mem. of Law at 13, Dkt. No. 249 (“[T]hese profits remain a debt
owed by culpable defendants to the government.”)). Therefore, the court
finds that, in the present context, the SEC stands as a creditor under the
New York Debtor and Creditor Law. See In re Hodge, 216 B.R. 932, 936
(Bankr. S.D. Ohio 1998) (finding that the “SEC, as the public agent
responsible for enforcing the securities laws, comes within the ambit of a
creditor to whom the disgorgement judgment is owed” even though
“[p]ayment of the disgorgement and civil penalty judgments were to be
made to the U.S. District Court and the U.S. Treasury”). To hold otherwise
would likely narrow the intended scope of § 276 and “unduly hinder
enforcement of the Securities Act.” In re Maio, 176 B.R. 170, 171-72
17

(Bankr. S.D. Ind. 1994).
2.

Fraudulent Conveyance
Largely in reliance on Magistrate Judge Homer’s July 7 and

November 22, 2010 Orders and the “law of the case” doctrine, Lynn Smith
and the Trust defendants insist that the Trust assets are untainted and that
the stock transfer was made with adequate consideration. (See Lynn
Smith Mem. of Law at 2, 18-21, Dkt. No. 224:1; Trust Defs. Mem. of Law at
1-2, 7-11, Dkt. No. 283:1.) In addition, the Trust Defendants argue that the
SEC has not adequately alleged a cause of action against Geoffrey Smith
and Lauren Smith as Trust beneficiaries. (See Trust Defs. Mem. of Law at
12-16, Dkt. No. 283:1.) The court rejects defendants’ assertions that the
Trust’s assets are definitively untainted and were obtained with adequate
consideration, for such assertions are both contradicted by the complaint
and unsupported by, if not inconsistent with, Judge Homer’s findings. As to
Lynn Smith, the SEC has sufficiently alleged a claim against her for her
involvement in a catalogue of fraudulent conveyances. However, as to the
SEC’s fraudulent conveyance claims against Lauren Smith and Geoffrey
Smith in his individual capacity, the court finds that the SEC has failed to
adequately plead a factual basis for such a claim.
18

a.

The Law of the Case Doctrine
Both parties rely on the “law of the case” doctrine, not surprisingly

where it helps their respective cases. However, the court is generally
reluctant to apply the law of the case doctrine at this point in the action.
The law of the case doctrine applies in two distinct circumstances. The
first, which clearly is not present here, is where an issue has been
“expressly or impliedly decided by the appellate court.” United States v.
Quintieri, 306 F.3d 1217, 1229 (2d Cir. 2002) (internal quotation marks and
citation omitted). The second circumstance in which the law of the case
doctrine applies is where a court is presented with an issue that it has
already ruled on. “[W]hen a court has ruled on an issue, that decision
should generally be adhered to by that court in subsequent stages in the
same case.” United States v. Uccio, 940 F.2d 753, 758 (2d Cir. 1991)
(citation omitted). And the court should “adhere to its own prior rulings in a
given case absent cogent or compelling reasons to deviate, such as an
intervening change in controlling law, the availability of new evidence, or
the need to correct a clear error or prevent manifest injustice.” Id. (internal
quotation marks and citations omitted).
Here, following a period of limited preliminary discovery, Judge
19

Homer conducted an evidentiary hearing and made a series of rulings
regarding the appropriateness of freezing various assets, including those
contained in the Trust. (See generally July 7, 2010 Order, Dkt. No. 86.) As
to the Trust, Judge Homer initially found that the SEC failed to demonstrate
a substantial likelihood that the Trust was created with ill-gotten gains or
that David Smith was a beneficial owner of the Trust. (See id. at 37.) The
SEC thereafter filed a motion with the court to reconsider its rulings
regarding the Trust’s assets, which was granted on two alternative
grounds, namely, fraud, misrepresentation, or misconduct, and the
existence of newly discovered evidence. (See Nov. 22, 2010 Order at 20 &
n.17, Dkt. No. 194 (citing FED. R. CIV. P. 60(b)(2) & (3)).) In reconsidering
its prior ruling, the court granted the SEC’s motion for a preliminary
injunction freezing the assets of the Trust, finding that there was a
substantial likelihood that David Smith possessed a substantial equitable
and beneficial interest in the Trust. (See id. at 21-23.) But, while the
court’s findings extended to David and Lynn Smith’s fraudulent intent in
creating the Trust, (see id. at 22), Judge Homer’s findings were not
boundless; to the contrary, they were based on proof extracted from a
condensed discovery, governed by the “substantial showing of likelihood of
20

success” standard, and confined to evaluating the assets’ susceptibility to
freezing. Thus, in light of these limitations, and because the pending
motions implicate the adequacy of the SEC’s pleadings regarding distinct
issues, reliance on the law of the case doctrine here would seem to offend
the well-settled principle that the doctrine be “only addressed to its good
sense.”8 Higgins v. Cal. Prune & Apricot Grower, Inc., 3 F.2d 896, 898 (2d
Cir. 1924) (citations omitted); see also City of Anaheim v. Duncan, 658
F.2d 1326, 1328 n.2 (9th Cir. 1981) (“[A] decision on a preliminary
injunction does not constitute the law of the case ....” (citation omitted));
Berrigan v. Sigler, 499 F.2d 514, 518 (D.C. Cir. 1974) (“The decision of a ...
court whether to grant or deny a preliminary injunction does not constitute
the law of the case for the purposes of further proceedings ....” (citations
omitted)); Garten v. Hochman, No. 08 Civ. 9425, 2010 WL 2465479, at *3
n.1 (S.D.N.Y. June 16, 2010) (“[T]he law of the case doctrine is not typically
applied in connection with preliminary determinations, such as a ruling on a
motion for a preliminary injunction.” (citation omitted)); see, e.g., Davidson
v. Bartholome, 460 F. Supp. 2d 436, 443 (S.D.N.Y. 2006) (finding the law

8

Regardless of the applicability or non-applicability of the law of the case doctrine, the
court is confident that its findings are entirely consistent with those of Judge Homer.

21

of the case doctrine inapplicable where the court ruled on a summary
judgment motion “before any meaningful discovery,” and was later
presented with a summary judgment motion after discovery had been
completed).
b.

The Trust and the Transfers
The complaint more than adequately sets forth several asset

transfers involving David and Lynn Smith that, as alleged, could constitute
fraudulent conveyances under § 276. As discussed at length above, the
SEC alleges that, in addition to receiving large sums of money, Lynn Smith
took sole ownership of the Vero Beach house in 2009 without any
legitimate explanation or exchange of valid consideration. Based on the
circumstances surrounding these money and property transfers, there is no
question that the SEC has met FED. R. CIV. P. 9(b)’s heightened pleading
burden regarding David and Lynn Smith’s actual intent to hinder, delay, or
defraud present or future creditors. Specifically, the SEC proffers the
following “badges of fraud”: (1) the lack of any apparent consideration for
the transfers; (2) as husband and wife, David and Lynn Smith’s relationship
was one of paramount closeness; (3) the suspicious timing of the transfers,
which took place either during the perpetration of or in response to the
22

unraveling and impending discovery of David Smith and Timothy McGinn’s
pandemic fraud; (4) David Smith’s constructive and actual knowledge that
the fraud would be discovered, that he would be subject to his investors
and creditors’ claims, and that he was being investigated and facing
possible civil and criminal charges; (5) the commencement, and
subsequent settlement, of a securities fraud suit against David and Lynn
Smith in December 2003; and (6) David Smith’s continued use and
enjoyment of the property after its transfer.
The SEC further alleges that David and Lynn Smith fraudulently
transferred the 100,000 shares of Charter One stock to the Trust. To
demonstrate David and Lynn Smith’s actual intent to hinder, delay, or
defraud creditors, the SEC asserts the same badges of fraud, including that
the stock transfer was made without any consideration. In response, the
Trust defendants contend that the stock transfer was made by David and
Lynn Smith in exchange for the annuity payments, which constitutes valid
consideration. (See Trust Defs. Mem. of Law at 12-14, Dkt. No. 283:1.)
The Trust defendants’ contention is without merit.9 The facts as alleged by
9

For the most part, the cases cited by the Trust defendants are either substantively or
procedurally inapposite. See, e.g., In re Sharp Int’l Corp., 281 B.R. 506, 521-24 (Bankr.
E.D.N.Y. 2002) (rejecting § 276 fraudulent conveyance claim where the plaintiff did not allege
any badges of fraud, where the conveyance was made to an actual creditor, and where the

23

the SEC evidence a complete lack of good faith exercised by David and
Lynn Smith in creating, funding, and structuring the Trust.10 See N.Y.
DEBT. & CRED. LAW § 272(a) (“Fair consideration is given for property, or
obligation ... [w]hen in exchange for such property, or obligation, as a fair
equivalent therefor, and in good faith, property is conveyed and an
antecedent debt is satisfied ....”); see also United States v. McCombs, 30
F.3d 310, 328 (2d Cir. 1994) (“[W]here actual intent to defraud creditors is
proven, the conveyance will be set aside regardless of the adequacy of
consideration given.”). In addition to this lack of good faith and the

conveyance did not adversely affect the plaintiff’s ability to repay its other creditors); Weiser v.
Kling, 38 A.D. 266, 268-69 (1st Dep’t 1899) (acknowledging that if a defendant affirmatively
establishes that he was a purchaser for fair consideration, then the plaintiff has the additional
burden to prove that the purchaser had previous notice of the seller’s fraudulent intent).
Insofar as the Trust defendants rely on Gutierrez v. Bernard, 55 A.D.3d 384 (1st Dep’t
2008), for the proposition that “‘the thing disposed of must be of value, out of which the creditor
could have realized all, or a portion of his claim,’” 55 A.D.3d at 385 (quoting Hoyt v. Godfrey,
88 N.Y. 669 670 (N.Y. 1882)), such reliance is misplaced. (See Trust Defs. Mem. of Law at 7,
Dkt. No. 283:1; Trust Defs. Reply Letter Br. at 2, Dkt. No. 318.) As the court has discussed at
length, the SEC has adequately alleged under both federal and state law its potential
entitlement to assets held in or transferred out of David Smith and Lynn Smith’s possession.
Judge Homer’s findings neither support nor command a different conclusion.
10

This conclusion is reinforced, though not compelled, by Judge Homer’s finding that
“David Smith possessed an equitable and beneficial interest in the Trust through the Annuity
Agreement and that his conduct in controlling the investments of Trust assets by the Trustee,
paying the Trust’s taxes, and, with [Lynn Smith], paying the living expenses of his adult child
was to protect the assets of the Trust to insure their existence when the Annuity Agreement
payments were to commence and not simply to protect those assets for the use of his
children.” (Nov. 22, 2010 Order at 21, Dkt. No. 194.)
Moreover, the factual allegations contained in the complaint, when considered in
conjunction with Judge Homer’s findings regarding the conduct of the Trust representatives,
(see id. at 3, 7-8, 18), also raise serious questions about the Trust’s good faith.

24

generally suspicious timing of the creation of the Trust, the SEC highlights
the particularly suspicious timing and nature of the stock transfer, which
David and Lynn Smith knowingly consummated on the day that the stock
would be converted to $4.45 million cash. Furthermore, this transfer
essentially emptied the Stock Account of its dominant asset. (See Am.
Compl. ¶¶ 110, 112, 120, Dkt. No. 100.) And although David and Lynn
Smith’s interest in the Trust’s assets did not ostensibly vest until 2015, the
Private Annuity Agreement clearly contemplates David and Lynn Smith’s
long-term access to and interest in the Trust’s assets. Thus, the stock
transfer is equally clouded in potential fraud.
Therefore, the court finds that the SEC has successfully alleged
claims of fraudulent conveyance against Lynn Smith for the property
transferred to her by David Smith, and against the Trust for the Charter
One stock transferred to it by David and Lynn Smith.
c.

Disbursements to the Beneficiaries
Notwithstanding the Trust’s amenability to suit under § 276, the SEC

has failed to lay a foundation for the claims asserted against Lauren Smith
and Geoffrey Smith individually. The lone allegation against Geoffrey
Smith and Lauren Smith is that they “received funds after July 7, 2010 that
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had been fraudulently conveyed to the Smith Trust.”11 (Am. Compl. ¶ 172,
Dkt. No. 100.) Without any allegation regarding the intent of the Trust as
the transferor, the details of the transfers, or the conduct and knowledge of
Geoffrey Smith and Lauren Smith as the transferees, the claims against
Geoffrey Smith and Lauren Smith cannot withstand any level of scrutiny
under Rule 12(b)(6) and are therefore dismissed.12
However, in light of the evidence on record and the SEC’s request to
“be allowed to replead in the event [that] any portion of the motion to
dismiss filed by the Trust [defendants] ... is granted,” (see Pl. Reply Mem.
of Law at 8, Dkt. No. 313), the court grants the SEC limited leave to amend
its complaint to assert a sufficient factual basis for Geoffrey Smith and
Lauren Smith’s liability under § 276.
3.

Original and Supplemental Jurisdiction
To the extent that Lynn Smith or the Trust defendants contend that

11

As already indicated by the court, the SEC alleges that on April 15, 2010, Geoffrey
Smith “requested a distribution of $95,000, which he testified was to give to his parents to pay
their personal taxes.” (Am. Compl. ¶ 125, Dkt. No. 100.) The SEC admits that “[t]he funds
were transferred directly from the Smith Trust to L[ynn] Smith’s checking account.” (Id.)
Accordingly, this distribution could not serve as a basis for a fraudulent conveyance claim
against Geoffrey Smith for several reasons, not least of which is that he never actually
received or retained those funds.
12

The specter of bad faith that hangs over the Trust is not enough to substantiate this
set of otherwise bare claims.

26

this court does not have, or should not exercise, jurisdiction over the
fraudulent conveyance claims, that contention is rejected. First, district
courts “have original jurisdiction of all civil actions, suits or proceedings
commenced by the United States, or by any agency or officer thereof
expressly authorized to sue by Act of Congress.” 28 U.S.C. § 1345; see
also Fed. Sav. & Loan Ins. Corp. v. Ticktin, 490 U.S. 82, 84-85 (1989). As
this action was commenced by the SEC, which is a federal agency
expressly authorized to commence civil suits, see 15 U.S.C. §§ 77t(d),
78u(d)(3), 80a-41(e)(1), 80b-9(e)(1), the court has original jurisdiction over
the claims asserted. Second, even if the fraudulent conveyance claims fell
outside the reach of § 1345, the court would still exercise supplemental
jurisdiction over the fraudulent conveyance claims pursuant to 28 U.S.C. §
1367(a), since the facts underlying the fraudulent conveyances are closely
related to and substantially overlap with the securities violations levied
against the main defendants. See United Mine Workers of Am. v. Gibbs,
383 U.S. 715, 725 (1966) (“The state and federal claims must derive from a
common nucleus of operative fact.”). Therefore, because the fraudulent
conveyances alleged constituted part of, or a further step in, the
overarching fraud alleged, the court finds that supplemental jurisdiction
27

over the state-law fraudulent conveyance claims is proper, and accordingly
rejects any remaining arguments about whether such jurisdiction exists or
should be exercised.
IV. Conclusion
WHEREFORE, for the foregoing reasons, it is hereby
ORDERED that Lynn Smith’s motion to dismiss (Dkt. No. 224) is
DENIED; and it is further
ORDERED that the Trust, Geoffrey Smith, and Lauren Smith’s
motion to dismiss (Dkt. No. 283) is GRANTED in part as to the fraudulent
conveyance claims against Lauren Smith and Geoffrey Smith in his
individual capacity; and it is further
ORDERED that the Trust, Geoffrey Smith, and Lauren Smith’s
motion to dismiss (Dkt. No. 283) is DENIED in part as to the fraudulent
conveyance claim against the Trust; and it is further
ORDERED that the SEC is GRANTED limited leave to re-amend its
complaint, in full compliance with the terms of this Order, within thirty (30)
days from the date of the filing of this Order, after which Geoffrey Smith
and Lauren Smith shall respond to the complaint as permitted under the
Federal Rules of Civil Procedure; and it is further
28

ORDERED that if the SEC fails to file an amended complaint within
thirty (30) days from the date of the filing of this Order, the Clerk of the
Court shall enter judgment dismissing Geoffrey Smith and Lauren Smith
from this action without further order of the court; and it is further
ORDERED that the Clerk provide a copy of this MemorandumDecision and Order to the parties.
IT IS SO ORDERED.
May 6, 2011
Albany, New York

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