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

Filing 807

MEMORANDUM-DECISION and ORDER - ORDERED that the SEC's motion for summary judgment is GRANTED IN PART and DENIED IN PART as follows: GRANTED with respect to the SEC's first cause of action alleging violations of § 17(a) of the S ecurities Act, as against MS & Co., MS Advisors, MS Capital, McGinn, and Smith; GRANTED with respect to the SEC's second cause of action alleging violations of § 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as against MS & C o., MS Advisors, MS Capital, McGinn, and Smith; GRANTED with respect to the SEC's third cause of action alleging violations of § 15(c)(1) of the Exchange Act as against MS & Co., and aiding and abetting violations of § 15(c) (1) as against McGinn and Smith; GRANTED with respect to the SEC's fourth cause of action alleging violations of the Advisors Act as against MS & Co., MS Advisors, McGinn, and Smith; GRANTED with respect to the SEC's si xth cause of action alleging violations of §§ 5(a) and 5(c) of the Securities Act as against MS & Co., MS Capital, McGinn, and Smith; GRANTED with respect to the SEC's request for a permanent injunction barring McGinn and Sm ith from committing future violations of §§ 5(a), 5(c), and 17(a) of the Securities Act, § 10(b) of the Exchange Act, and Rule 10b-5 thereunder, § 15(c)(1) of the Exchange Act, and Rule 10b-3 thereunder, and § 7; 206(1), 206(2), and 206(4) of the Investment Advisers Act, and Rule 206(4)-8 thereunder; and GRANTED with respect to the SEC's request for an order barring McGinn from serving as an officer or director of a public company; and DENIED w ith respect to the SEC's request for civil penalties; and it is further; ORDERED that the court reserves judgment on the SEC's request for disgorgement of profits, only as to the appropriate amount. If the SEC wishes to pursue this theor y, consistent with this Memorandum-Decision and Order, the SEC must provide a reasonable approximation of the profits causally connected to the violations within SEVEN (7) DAYS from the issuance of this Memorandum-Decision and Order. Smith may respo nd within SEVEN (7) DAYS after the SEC files its submission; and it is further; ORDERED that the court reserves judgment on the remainder of the SEC's motion; and it is further ORDERED that, within SEVEN (7) DAYS of this Memorandum-Dec ision and Order, the SEC inform the court whether it has abandoned and/or withdrawn its fifth cause of action and sixth cause of action insofar as it is alleged against the Four Funds, or whether it seeks a trial on those claims; and it is further ORDERED that McGinn and Smith are enjoined from committing future violations of §§ 5(a), 5(c), and 17(a) of the Securities Act, § 10(b) of the Exchange Act, and Rule 10b-5 thereunder, § 15(c)(1) of the Exchange Act, a nd Rule 10b-3 thereunder, and §§ 206(1), 206(2), and 206(4) of the Investment Advisers Act, and Rule 206(4)-8 thereunder; and it is further ORDERED that McGinn is permanently and unconditionally barred from acting as an officer or director of any issuer that has a class of securities registered pursuant to 15 U.S.C. § 78l or that is required to file reports pursuant to 15 U.S.C. § 78o(d). Signed by Chief Judge Gary L. Sharpe on 2/17/2015. (jel, )

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,
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, and
U.S. ATTORNEY’S OFFICE FOR
ND/NY,
Intervenors.
________________________________
APPEARANCES:

OF COUNSEL:

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

DAVID P. STOELTING
HAIMAVATHI V. MARLIER
JACK KAUFMAN
JOSHUA M. NEWVILLE

KEVIN P. MCGRATH
LARA S. MEHRABAN
FOR THE DEFENDANTS/RELIEF
DEFENDANTS AND INTERVENORS:
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; and Third Albany
Income Notes, LLC
Phillips, Lytle LLP
WILLIAM J. BROWN, ESQ.
One Canalside
125 Main Street
Buffalo, NY 14203
Timothy M. McGinn
Office of E. Stewart Jones, Jr.
28 Second Street
Jones Building
Troy, NY 12180

E. STEWART JONES, JR., ESQ.

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

WILLIAM J. DREYER, ESQ.
BENJAMIN W. HILL, ESQ.

Lynn A. Smith
Featherstonhaugh, Wiley Law Firm
99 Pine Street
Suite 207
Albany, NY 12207

JAMES D.
FEATHERSTONHAUGH, ESQ.

Geoffrey R. Smith, Individually and as
Trustee of the David L. and Lynn A.
Smith Irrevocable Trust U/A 8/04/04,
2

and Lauren T. Smith
Linnan, Fallon Law Firm
61 Columbia Street
Suite 300
Albany, NY 12210-2736

JAMES D. LINNAN, ESQ.

Nancy McGinn
Pro Se
426-8th Ave.
Troy, NY 12182
Gary L. Sharpe
Chief Judge
MEMORANDUM-DECISION AND ORDER
I. Introduction
Plaintiff the United States Securities and Exchange Commission
(SEC) commenced this civil enforcement action against defendants David
Smith and Timothy McGinn, along with various entities owned and
controlled by McGinn and Smith: McGinn, Smith & Co, Inc. (MS & Co.),
McGinn, Smith Advisors, LLC (“MS Advisors”), McGinn, Smith Capital
Holdings Corp. (“MS Capital”), First Advisory Income Notes, LLC (FAIN),
First Excelsior Income Notes, LLC (FEIN), First Independent Income
Notes, LLC (FIIN), and Third Albany Income Notes, LLC (TAIN), 1

1

FAIN, FEIN, FIIN, and TAIN are collectively referred to as the “Four Funds.”

3

(collectively, the “MS Entities”), alleging violations of §§ 5(a), 2 5(c),3 and
17(a)4 of the Securities Act of 1933 (“Securities Act”), § 10b of the
Securities Exchange Act of 1934 (“Exchange Act”), 5 and Rule 10b-5
thereunder,6 § 15(c)(1) of the Exchange Act, 7 and Rule 10b-3 thereunder, 8
and §§ 206(1), (2), and (4) of the Investment Advisors Act of 1940, 9 and
Rule 206(4)-8 thereunder. 10 (See generally 2d Am. Compl., Dkt. No. 334.)
The SEC additionally asserts claims of fraudulent conveyance in violation
of § 276 of the New York Debtor and Creditor Law against McGinn, Smith,
defendants Lynn A. Smith11 (“L. Smith”), Geoffrey R. Smith (“G. Smith”),
individually and as Trustee of the David L. and Lynn A. Smith Irrevocable

2

See 15 U.S.C. § 77e(a).

3

See 15 U.S.C. § 77e(c).

4

See 15 U.S.C. § 77q(a).

5

See 15 U.S.C. § 78a.

6

See 17 C.F.R. § 240.10b-5.

7

See 15 U.S.C. § 78o(c)(1).

8

See 17 C.F.R. § 240.10b-3.

9

See 15 U.S.C. § 80b-6(1), (2), and (4).

10

See 17 C.F.R. § 275.206(4)-8.

11

L. Smith is Smith’s wife. (2d. Am. Compl. ¶ 36.)

4

Trust U/A 8/04/04 (the “Smith Trust”), Lauren T. Smith (“L.T. Smith”), 12 and
pro se defendant Nancy McGinn 13 (“N. McGinn”). (Id. ¶¶ 206-11.) L. Smith
and N. McGinn are also named as relief defendants for allegedly receiving
and retaining ill-gotten gains. 14 (Id. ¶¶ 203-05.)
Pending is the SEC’s motion for summary judgment. 15 (Dkt. No.
708.) In its motion, the SEC seeks sanctions in the form of disgorgement
of profits, an injunction prohibiting McGinn and Smith from committing
future securities laws violations, an order barring McGinn from serving as
an officer or director, and civil monetary penalties. (Dkt. No. 708, Attach. 1
at 14-31.) Further, the SEC seeks to include in a disgorgement order
assets held solely in L. Smith and N. McGinn’s names, along with assets
held by the Smith Trust. (Id. at 18-29.)

12

L.T. Smith and G. Smith are the children of L. Smith and Smith. (2d Am. Compl.
¶¶ 34, 35.)
13

N. McGinn is McGinn’s wife. (2d Am. Compl. ¶ 37.)

14

The SEC also alleges violations of § 7(a) of the Investment Company Act of 1940, 15
U.S.C. § 80a-7, but only as against the Four Funds. (2d Am. Compl. ¶¶ 194-97.) Because the
SEC has not moved for summary judgment against the Four Funds, (Dkt. No. 708 at 2), the
court does not consider that claim here.
15

The court notes that L. Smith’s motion for summary judgment, (Dkt. No. 696), and G.
Smith, L.T. Smith, and the Smith Trust’s motion for summary judgment, (Dkt. No. 704), are also
pending. The court will address those motions, along with the SEC’s request to include L.
Smith, N. McGinn, and the Smith Trust’s assets in the disgorgement order, in a forthcoming
decision.

5

In this Memorandum-Decision and Order, the court addresses only
the following: (1) whether McGinn and Smith violated the securities laws;
and (2) whether the SEC is entitled to the sanctions its seeks against
McGinn and Smith. The court reserves judgment with respect to the assets
held solely by L. Smith, N. McGinn, and the Smith Trust, and will consider
the issues related to those assets in a later decision. For the reasons that
follow, the SEC’s motion is granted in part and denied in part.
II. Background16
16

At the outset, a few points mut be noted. First, in his response to the SEC’s
statement of material facts, (Dkt. No. 785), Smith failed to comply with this District’s Local
Rules. Local Rule 7.1(a)(3) provides that, in a response to a statement of material facts, “[t]he
non-movant’s response shall mirror the movant’s [s]tatement of [m]aterial [f]acts by admitting
and/or denying each of the movant’s assertions . . . . Each denial shall set forth a specific
citation to the record where the factual issue arises.” Where the opposing party does not
specifically controvert facts, “[t]he [c]ourt shall deem admitted any properly supported facts.”
N.D.N.Y. L.R. 7.1(a)(3). Here, rather than deny certain facts and provide a specific citation to
the record in support of that denial, Smith simply “object[s]” to numerous facts set forth by the
SEC. (See, e.g., Dkt. No. 785 ¶¶ 20-23, 35, 47, 57, 59, 61, 63, 68, 75-84, 91-92.) This is
plainly improper, and the court, therefore, admits those facts asserted by the SEC that are
supported by the record and not specifically or properly controverted by Smith. Second,
despite the passage of the due date, (Dkt. No. 776), McGinn and N. McGinn neither filed a
response to the SEC’s motion, nor notified the court of their intent to forego opposition to the
motion, as is required by this District’s Local Rules. See N.D.N.Y. L.R. 7.1(b)(3). In an
abundance of caution, and particularly in light of N. McGinn’s pro se status, the court ordered
McGinn and N. McGinn to either respond to the SEC’s motion or notify the court of his or her
intent not to oppose the motion. (Dkt. No. 806.) McGinn and N. McGinn blatantly ignored that
order. As a result, in accordance with L.R. 7.1(a)(3), the court deems admitted any properly
supported facts asserted against McGinn and N. McGinn. Further, in this District, where, as
here, “a non-movant has willfully failed to respond to a movant’s properly filed and facially
meritorious memorandum of law (submitted in support of its motion for summary judgment), the
non-movant is deemed to have ‘consented’ to the legal arguments contained in that
memorandum of law under Local Rule 7.1(b)(3).” Pedroso v. Syracuse Cmty. Health Ctr., No.
5:11-CV-1268, 2014 WL 3956570, at *6 (N.D.N.Y. Aug. 13, 2014). Therefore, as against
McGinn and N. McGinn, the SEC “need only show that [its] argument[s] possess facial merit,
which has appropriately been characterized as a ‘modest’ burden.” Id. Accordingly, unless

6

Before delving into the salient facts and winding procedural history, it
is worth establishing a big-picture framework for this case. Generally, the
SEC alleges that McGinn and Smith, individually and through the various
entities that they owned and controlled, orchestrated an elaborate Ponzi
scheme,17 which spanned over several years, involved dozens of debt
offerings, and bamboozled hundreds of investors out of millions of dollars.
(See generally 2d Am. Compl.) More specifically, the SEC alleges that,
between 2003 and 2010, McGinn and Smith raised over $136 million in
over twenty unregistered debt offerings, including the Four Funds—FAIN,
FEIN, FIIN, and TAIN—and various trust offerings, by representing that
investor money would be “invested,” when instead it was “funneled” into
various entities owned or controlled by McGinn and Smith. (Id. ¶¶ 1-3.)
The money was then used to fund unauthorized investments and
unsecured loans, make interest payments to investors in other entities and
offerings, support McGinn and Smith’s “lifestyles,” and cover the payroll at
MS & Co. (Id.)

otherwise noted, the facts are not in dispute.
17

“‘Ponzi scheme’ typically describes a pyramid scheme where earlier investors are
paid from the investments of more recent investors, rather than from any underlying business
concern, until the scheme ceases to attract new investors and the pyramid collapses.”
Eberhard v. Marcu, 530 F.3d 122, 132 n.7 (2d Cir. 2008).

7

On April 20, 2010, in order to halt what it viewed as an ongoing
fraud, the SEC filed a complaint and order to show cause, seeking
emergency relief. (Dkt. Nos. 1, 4.) On the same day, the court granted
the SEC’s application, and temporarily froze assets of McGinn, Smith, and
the MS Entities, along with certain assets of L. Smith and N. McGinn.
(Dkt. No. 5.) As relevant to the pending motions, the following assets
remain frozen: (1) all assets held by McGinn, Smith, and the MS Entities,
(Dkt. No. 61; Dkt. No. 86 at 42), (2) assets held in L. Smith’s name,
including a checking account, (Dkt. No. 86 at 42), a brokerage account,
(id.), and proceeds from the sale of a vacation home in Vero Beach,
Florida, (id.; Dkt. No. 263,); (3) assets held by the Smith Trust, (Dkt. No.
194 at 23); and (4) assets held by N. McGinn, including proceeds from the
sale of the McGinns’ property in Niskayuna, New York, (Dkt. No. 233; Dkt.
No. 276; Dkt. No. 426).
It should also be noted at the outset that, in addition to the case at
bar, a parallel criminal case was brought against McGinn and Smith (“MS
Criminal Case”). See United States v. Timothy M. McGinn and David L.
Smith, 1:12-cr-28. This civil action was stayed pending the outcome of the
MS Criminal Case. (Dkt. No. 474.) After a four-week jury trial before
8

District Judge David N. Hurd, McGinn and Smith were found guilty of
conspiracy to commit mail and wire fraud, mail fraud, wire fraud, securities
fraud, and filing false tax returns. (Pl.’s Statement of Material Facts (SMF)
¶ 50, Dkt. No. 711; Dkt. No. 712, Attachs. 5, 6.) Once the stay was lifted
in this case, (Dkt. No. 589), the court set a briefing schedule for the now
pending dispositive motions. (Dkt. Nos. 672, 695.)
A.

Facts18
The scheme to defraud alleged by the SEC revolves primarily

around three different types of offerings: (1) the Four Funds, (2)
approximately twenty separate trust offerings (the “Trust Offerings”), 19 and
offerings through McGinn Smith Transaction Funding Corporation (MSTF).
(2d Am. Compl. ¶¶ 39-67, 68-103; Pl.’s SMF ¶¶ 9-14.) Below, the Four
Funds and Trust Offerings are discussed separately, while facts relevant

18

Because, as discussed further below, the SEC primarily argues that it is entitled to
summary judgment based on collateral estoppel—an argument with which the court
agrees—this section highlights the major relevant facts, but does not plunge too far into the
minutiae.
19

The Trust Offerings included the following: TDM Cable Trust 06, TDM Verifier Trust
07, Firstline Senior Trust 07, Firstline Trust 07, TDM Luxury Cruise Trust 07, Firstline Senior
Trust 07 Series B, TDM Verifier Trust 08, Cruise Charter Ventures Trust 08, Integrated
Excellence Sr. Trust 08, Integrated Excellence Jr. Trust 08, Fortress Trust 08, TDM Cable
Trust 06, TDM Verifier Trust 09, TDMM Cable Jr Trust 09, TDMM Cable Sr. Trust 09, TDM
Verifier Trust 07R, TDM Verifier Trust 08R, TDMM Benchmark Trust 09, TDM Verifier Trust 11.
(Pl.’s SMF ¶ 12.)

9

to the MSTF offering are interspersed throughout.
1. The Four Funds
The Four Funds were single purpose, New York limited liability
companies formed between September 2003 and October 2005. (Pl.’s
SMF ¶ 9.) The private placement memoranda (PPM) for each of the Four
Funds were substantively identical, and each offered $20 million worth of
notes, with the exception of TAIN, which offered $30 million. (Id. ¶ 11.)
The offerings had three tranches of notes, which paid quarterly interest of
5% to 10.25%, and promised a return of principal at maturity, in one,
three, or five years. (Id.) Smith was primarily responsible for the Four
Funds and their investment decisions. (Id. ¶ 159.)
The PPMs stated that the net proceeds would be used “to acquire
various public and/or private investments.” (Dkt. No. 722 at 15; Dkt. No.
723 at 15; Dkt. No. 724 at 15; Dkt. No. 760, Attach. 1 at 2.) The PPMs
further stated that the Four Funds “may acquire such [i]nvestments
directly, or from . . . an affiliate . . . or . . . managing member that has
purchased the [i]nvestment,” and that, if any of the Four Funds purchases
an investment from a managing member or affiliate, the fund will “pay the
same price for the [i]nvestment that [it] would have paid if [it] had directly
10

purchased the [i]nvestment.” (Dkt. No. 722 at 15; Dkt. No. 723 at 15; Dkt.
No. 724 at 15; Dkt. No. 760, Attach. 1 at 2.)
McGinn and Smith, however, engaged in a course of conduct and
dealings that were contrary to the PPMs. First, investor proceeds from the
Four Funds were used to purchase contracts from pre-2003 trust
offerings, which had begun to fail, for more than their initial cost, or to
make loans to pre-2003 trusts for the purpose of redeeming or making
interest payments to investors. (Pl.’s SMF ¶¶ 75-97, 172; Dkt. No. 712
¶¶ 8-29, 32-34, 36.) Second, the Four Funds used investor money to
directly invest in, rather than purchase investments from, affiliates. (Pl.’s
SMF ¶¶ 98-119.) Indeed, in a November 2007 letter, Smith wrote that:
One of the more troubling aspects of the [Four
Funds] investments has been my willingness to
make substantial investments in affiliated entities,
both because they were available and in some cases
. . . new investments were needed to support past
investments. Thus, . . . the pattern was often the
same; invest more money to support the original
investment.
(Dkt. No. 714, Attach. 1 at 3-4.) Many of the affiliated investments,
however, provided no cash flow to the Four Funds, and were ultimately
considered worthless. (Dkt. No. 712 ¶¶ 30-35.) Finally, proceeds from the

11

Four Funds were funneled through MSTF and then used to pay MS &
Co.’s payroll.20 (Pl.’s SMF ¶¶ 138, 169, 170, 171; Dkt. No. 724, Attach. 16
at 43-44.)
In late 2007, Smith received an email from David Rees—the
comptroller at MS & Co., whose responsibilities included preparing and
maintaining the firm’s financial statements—which showed a $48.8 million
deficit in the Four Funds. (Pl.’s SMF ¶¶ 160, 163.) Nevertheless, Smith
continued to solicit new investments in the Four Funds. (Id. ¶ 164.) In
early 2008, interest payments to junior note holders were first reduced,
and then later eliminated, which constituted a default. (Pl.’s SMF ¶¶ 137,
141; Dkt. No. 727 at 4; Dkt. No. 727, Attach. 1 at 2) The reduction, and
subsequent elimination, of interest payments were attributed to the
collapse of various debt and credit markets and the “sub prime mess.”
(Dkt. No. 727 at 2; Dkt. No. 727, Attach. 1.) Certain preferred investors,
however, continued to receive interest payments, but those payments

20

Although Smith purports to dispute this fact, he has not complied with this District’s
Local Rules. Indeed, in support of his statement that “any Four Funds proceeds that were
allocated to payroll was an error on . . . behalf of Mr. Cooper, not at the direction of . . . McGinn
or . . . Smith[,]” Smith generally cites to 321 pages of G. Smith’s trial testimony. (Dkt. No. 785
¶¶ 169, 170.) This does not, in the court’s view, comport with the mandate in L.R. 7.1(a)(3)
that an opposing party support each denial with “a specific citation to the record where the
factual issue arises.” Smith is represented by sophisticated counsel, and the court declines
Smith’s invitation to scour voluminous documents for disputed facts.

12

came from MTSF funds, not proceeds from the Four Funds. 21 (Pl.’s SMF
¶¶ 168, 170; Dkt. No. 724, Attach. 16 at 41-42.) Finally, in October 2008,
Smith sent a letter to all note holders in all tranches of the Four Funds,
which outlined a restructuring plan, extended the maturity dates of the
notes, reduced interest payments for all tranches, and forfeited all future
fees due to MS & Co. (Pl.’s SMF ¶¶ 142-44; Dkt. No. 741, Attach. 3.)
2. The Trust Offerings22
Beginning in October 2006, MS & Co. was the sales agent for the
Trust Offerings, which sold trust certificates. (Pl.’s SMF ¶ 12.) Investors in
the Trust Offerings were promised interest payments ranging from 7.75%
to 13% per year, and a return of principal at maturity, which ranged from
fifteen months to five years. (Id. ¶ 13.) Investors were advised that the
proceeds raised by the Trust Offerings, minus certain disclosed fees and
deal costs, would be invested in specific streams of receivables, such as

21

Smith disputes that the interest payments to the Four Funds investors came from
MSTF funds, but, again, in support of that proposition cites G. Smith’s entire trial testimony.
(Dkt. No. 785 ¶¶ 168, 170.) For the same reasons discussed above, see supra note 20, this
fact is deemed admitted.
22

Again, Smith purports to dispute many of the facts below, but, in support of his
denials, he generally cites the full contents of lengthy documents, including the PPMs for
eighteen of the Trust Offerings, and the entire trial testimony transcripts of G. Smith, Smith,
and Richard Engel. (See, e.g., Dkt. No. 785 ¶¶ 149-51, 203, 229, 233, 237, 238, 241, 250.)
For the same reasons discussed above, see supra note 20, these facts are deemed admitted.

13

the purchase of contracts for security alarm services, broadband cable
services, telephone services, and luxury cruises. (Id. ¶¶ 146, 147.)
For each Trust Offering, however, less than the amount represented
in the PPM was actually invested in the identified streams of receivables.
Specifically, the PPMs promised that, in aggregate, 85% of money raised
from investors would be invested in the disclosed assets, but, in fact, only
58% of the money was invested as promised. (Dkt. No. 712 ¶ 44, at 40,
62.) Moreover, the funds raised from the Trust Offerings paid fees to MS
& Co. in excess of the fees disclosed in the PPMs. Indeed, although the
PPMs disclosed combined maximum underwriting and other fees payable
to MS & Co. of up to $3.2 million, from October 2006 through December
2009, MS & Co. received over $6.4 million in connection with the Trust
Offerings, and, further, Smith, McGinn, and Matthew Rogers, a former
senior managing director at MS & Co., personally took approximately $4.7
million from funds raised from the Trust Offerings. (Id. ¶¶ 46, 47, at 40,
42-43, 62; Pl.’s SMF ¶¶ 59, 150-51.)
Furthermore, like the Four Funds offerings, the investments that
were made by the Trust Offerings did not generate sufficient returns to
cover interest and principal payments owed to investors. Thus, contrary to
14

the terms of the PPMs, in many instances, McGinn and Smith used
investor funds from one offering—including the various Trust Offerings, the
Four Funds, and MSTF—to cover interest and principal payments in other
Trust Offerings. (Pl.’s SMF ¶¶ 197, 198, 201, 203; Dkt. No. 712 ¶ 52.)
The Firstline Trust 07, Firstline Sr. Trust 07, Firstline Trust 07 Series B,
and Firstline Sr. Trust 07 Series B offerings (collectively, the “Firstline
Trusts”) are good examples.
The Firstline Trusts raised money from investors, which was then
loaned to Firstline, Inc., an alarm company in Utah. (Pl.’s SMF ¶ 225.)
The investors were to receive monthly payments from Firstline’s revenue
stream. (Dkt. No. 712 ¶¶ 55, 56.) Firstline, however, filed for bankruptcy
on January 25, 2008, and, after filing, failed to make its payments on the
loans. (Pl.’s SMF ¶ 228.) The Firstline Trusts then used approximately $2
million from MSTF and other Trust Offerings, including TDM Cable Trust
06, TDM Verifier Trust 07R, and Integrated Excellence Jr. Trust 08, to pay
interest to investors. (Id. ¶¶ 229, 233, 237, 238, 241; Dkt. No. 725, Attach.
4.) Further, although McGinn and Smith knew about Firstline’s bankruptcy
almost immediately, they did not disclose this information to investors, or
to their brokers, who continued to sell Firstline certificates after the
15

bankruptcy, without informing potential investors of Firstline’s financial
condition. (Pl.’s SMF ¶¶ 231, 232, 235, 236, 244.) Investors were not
informed about Firstline’s bankruptcy until September 2009, and, although
they were told that they would continue to receive monthly payments from
Firstline receivables, money paid to investors in Firstline, in fact, again
came from other Trust Offerings. (Id. ¶¶ 248, 250.)
3. FINRA Proceedings
Eventually, McGinn and Smith’s clients complained to authorities
about how their investments were being handled, and, in January 2009,
the Financial Industry Regulatory Authority (FINRA) 23 undertook an
investigation of McGinn, Smith, and MS & Co. (Pl.’s SMF ¶¶ 4, 63, 64,
551; Dkt. No. 192, Attach. 3 ¶ 9.) On April 5, 2010, FINRA charged
McGinn, Smith, and MS. & Co. with violating § 10(b) of the Exchange Act

23

FINRA, created in 2007, is a private not-for-profit corporation and a self-regulatory
organization that is registered with the SEC as a national securities association pursuant to
§ 15A of the Exchange Act. See 15 U.S.C. § 78o-3; Nat’l Ass’n of Sec. Dealers, Inc. v. SEC,
431 F.3d 803, 804 (D.C. Cir. 2005). “By virtue of its statutory authority, [FINRA] wears two
institutional hats: it serves as a professional association, promoting the interests of its
members . . . and it serves as a quasi-governmental agency, with express statutory authority to
adjudicate actions against members who are accused of illegal securities practices and to
sanction members found to have violated the Exchange Act or [SEC] regulations issued
pursuant thereto.” Nat’l Ass’n of Sec. Dealers, 431 F.3d at 804 (citations omitted). In its
self-regulatory role, FINRA requires members to arbitrate disputes with clients, and an
arbitration may result in an award of damages to a client against a member, and FINRA may
investigate the conduct of a member and impose sanctions. See Karsner v. Lothian, 532 F.3d
876, 880 (D.C. Cir. 2008). FINRA is not a party to this action.

16

and Rule 10b-5 thereunder, along with various FINRA rules. (Dkt. No.
712, Attach. 14.) On September 14, 2011, FINRA issued a default
decision, which barred McGinn and Smith from association with any
FINRA member firm. (Dkt. No. 712, Attach. 15.) In addition to the action
initiated by FINRA itself, some of McGinn and Smith’s clients commenced
arbitrations in FINRA, alleging, among other causes of action, unsuitable
investments, negligence, breach of contract, breach of fiduciary duty,
fraud, misrepresentations, and omissions, and seeking compensatory
damages. (See, e.g., Dkt. No. 740, Attach. 6 at 16-25.)
B.

Procedural History
As noted above, on April 20, 2010, the SEC filed its complaint and

an order to show cause, and, on the same day, the court entered an order
temporarily freezing certain assets, pending a preliminary injunction
hearing, and appointing a temporary receiver over the MS Entities’ assets.
(Dkt. Nos. 1, 4-5.) McGinn, Smith, and the MS Entities, through the
receiver, consented to a preliminary injunction continuing the freeze of
their assets. (Dkt. No. 61; Dkt. No. 87 at 40.) On July 22, 2010, the court
entered a preliminary injunction order, which, among other things,
confirmed the appointment of William Brown, Esq. as the Receiver over
17

the assets of the MS Entities, pending the final disposition of the action.
(Dkt. No. 96.)
Also as noted above, this case was stayed pending the completion
of the MS Criminal Case. (Dkt. No. 474.) On October 11, 2012, a grand
jury returned a superseding indictment against McGinn and Smith, which
charged them each with one count of conspiracy to commit mail and wire
fraud, nine counts of mail fraud, ten counts of wire fraud, six counts of
securities fraud, and three counts of filing a false tax return. (Dkt. No. 712,
Attach. 4.) Among other things, the superseding indictment alleged that
McGinn and Smith made material misrepresentations and omissions in
connection with the Trust Offerings, the Four Funds, and MSTF. (See
generally id.)
On February 6, 2013, the jury returned verdicts. (Dkt. No. 712,
Attachs. 18, 19.) Both McGinn and Smith were convicted of conspiracy to
commit mail and wire fraud, McGinn was convicted of seven counts of mail
fraud, all ten counts of wire fraud, all six counts of securities fraud, and all
three counts of filing false tax returns, and Smith was convicted of three
counts of mail fraud, two counts of wire fraud, all six counts of securities
fraud, and all three counts of filing false tax returns. (Dkt. No. 712,
18

Attachs. 5, 6, 18, 19.) On August 7, 2013, Smith was sentenced to ten
years imprisonment and was ordered to pay a $50,000 fine, and McGinn
was sentenced to fifteen years imprisonment and ordered to pay a
$100,000 fine. (Dkt. No. 712, Attach. 20 at 38-39, 40-41; Dtk. No. 713 at
32-33, 34-35.) The court also ordered that Smith and McGinn be held
jointly and severally liable for a restitution payment of $5,748,722. (Dkt.
No. 712, Attach. 20 at 35; Dkt. No. 713 at 29.) McGinn and Smith
appealed their convictions, and the United States appealed as to the
sentences only. (MS Criminal Case, Dkt. Nos. 237, 238, 249, 250.)
On September 3, 2013, the stay in this civil proceeding was lifted.
(Dkt. No. 589.) Soon thereafter, briefing schedules were set, (Dkt. Nos.
672, 695), and the now-pending motions were filed.
III. Standard of Review
The standard of review pursuant to Fed. R. Civ. P. 56 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 Wagner v. Swarts,
827 F. Supp. 2d 85, 92 (N.D.N.Y. 2011), aff’d sub nom. Wagner v.
Sprague, 489 F. App’x 500 (2d Cir. 2012).

19

IV. Discussion24
A.

First, Second, Third, and Fourth Causes of Action
With respect to its first four causes of action, the SEC first contends

that summary judgment is appropriate because McGinn and Smith’s
convictions in the MS Criminal Case have preclusive effect by virtue of
collateral estoppel. (Dkt. No. 708, Attach. 1 at 2-11.) Second, the SEC
contends that it is entitled to summary judgment because additional
evidence demonstrates that there are no genuine issues of material fact.
(Dkt. No. 708, Attach. 1 at 2-11.) In response, Smith only disputes that
collateral estoppel applies; he does not address the SEC’s argument that
it is also entitled to summary judgment based on undisputed evidence.

24

The court would be remiss if it did not note, at the outset of its discussion of the
parties’ respective arguments, its disappointment with the SEC’s submissions. In its
November 24, 2014 text order, (Dkt. No. 804), the court first expressed its frustration with the
SEC after the court’s unsuccessful attempt to make heads or tails of the manner in which the
SEC uploaded its nearly 400 exhibits to the docket. The court further ordered the SEC to
submit an appendix that clearly identified the docket number, and, where relevant, attachment
number, of each of its exhibits, so that locating a particular document was not a seemingly
endless game of Where’s Waldo. Worse than its haphazard filing, however, is the SEC’s
memorandum of law, which can only be described as carelessly drafted. Putting aside the
SEC’s utter failure to provide any specificity with respect to its requests for an order granting
$124 million in disgorgement and $124 million in civil penalties, which are discussed below,
throughout its submission, the SEC left blank underscores where it clearly intended to cite a
paragraph in its statement of material facts, (Dkt. No. 708, Attach. 1 at 12-13), and sporadically
misspelled McGinn’s surname—and not even consistently, (id. at 14 (referring to McGinn as
“McMinn” and “McGinnis”). Of course, the court understands that mistakes happen, and is
generally more forgiving of typographical errors and other inconsequential slipups. But in this
instance, it is clear that the SEC did not treat this submission with the type of care, attention,
and professionalism that the court expects of a federal agency.

20

(Dkt. No. 785, Attach. 22 at 3-6.) For the following reasons, the court
agrees that summary judgment is appropriate based on both collateral
estoppel and the undisputed evidence.
1. Collateral Estoppel
“The doctrine of offensive collateral estoppel permits a plaintiff to bar
a defendant from relitigating an issue that was decided in a prior case
against the defendant.” Roe v. City of Waterbury, 542 F.3d 31, 41 (2d Cir.
2008). Collateral estoppel applies when:
(1) the issues in both proceedings are identical, (2)
the issue in the prior proceeding was actually
litigated and actually decided, (3) there was full and
fair opportunity to litigate in the prior proceeding, and
(4) the issue previously litigated was necessary to
support a valid and final judgement on the merits.
S.E.C. v. Haligiannis, 470 F. Supp. 2d 373, 382 (S.D.N.Y. 2007) (quoting
N.L.R.B. v. Thalbo Corp., 171 F.3d 102, 109 (2d Cir. 1999)). “[T]he
moving party has the burden of demonstrating the identity of the issues
and the opposing party has the burden of showing lack of a full and fair
opportunity to litigate the issue in the prior action.” S.E.C. v. Tzolov, No.
08 Civ. 7699, 2011 WL 308274, at *1 (S.D.N.Y. Jan. 26, 2011) (internal
quotation marks and citation omitted).

21

“It is well-settled that a criminal conviction, whether by jury verdict or
guilty plea, constitutes estoppel in favor of the United States in a
subsequent civil proceeding as to those matters determined by the
judgment in the criminal case.” Maietta v. Artuz, 84 F.3d 100, 102 n.1 (2d
Cir. 1996) (internal quotation marks and citation omitted). The rationale
behind this rule is as follows:
The Government bears a higher burden of proof in
the criminal than in the civil context and consequently
may rely on the collateral estoppel effect of a criminal
conviction in a subsequent civil case. . . . The
criminal defendant is barred from relitigating any
issue determined adversely to him in the criminal
proceeding, provided that he had a full and fair
opportunity to litigate the issue.
S.E.C. v. Shehyn, No. 04 CV 2003, 2010 WL 3290977, at *3 (S.D.N.Y.
Aug. 9, 2010) (quoting Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 43 (2d
Cir. 1986) (citations omitted)). Further, collateral estoppel may apply even
during the pendency of an appeal. See S.E.C. v. Contorinis, No. 09 Civ.
1043, 2012 WL 512626, at *3 (S.D.N.Y. Feb. 3, 2012) (citing RussellNewman, Inc. v. The Robeworth, Inc., No. 00 Civ. 9797, 2002 WL
1918325, at *1 n.1 (S.D.N.Y. Aug.19, 2002)), aff’d 743 F.3d 296 (2d Cir.
2014).

22

a. The First Four Causes of Action and Their Elements
In its first cause of action, the SEC alleges violations of § 17(a) of
the Securities Act as against MS & Co., MS Advisors, MS Capital, McGinn,
and Smith. (2d. Am. Compl. ¶¶ 176-79.) In its second cause of action, the
SEC alleges violations of § 10(b) of the Exchange Act and Rule 10b-5
thereunder as against MS & Co., MS Advisors, MS Capital, McGinn, and
Smith. (Id. ¶¶ 180-82.) In its third cause of action, the SEC alleges that
McGinn and Smith aided and abetted violations of § 15(c)(1) of the
Exchange Act, and Rule 10b-3 thereunder. (Id. ¶¶ 183-89.) Finally, in its
fourth cause of action, the SEC alleges that MS & Co., MS Advisors,
McGinn, and Smith violated §§ 206(1), (2), and (4) of the Advisers Act,
and Rule 206(4)-8 thereunder. (Id. ¶¶ 190-93.)
Section 17(a) of the Securities Act, § 10(b) of the Exchange Act, and
Rule 10b-5 thereunder are collectively referred to as the antifraud
provisions of the federal securities laws. See VanCook v. S.E.C., 653
F.3d 130, 137 (2d Cir. 2011); S.E.C. v. Parklane Hosiery Co., Inc., 558
F.2d 1083, 1085 n.1 (2d Cir. 1977). Generally, the antifraud provisions
“prohibit the use of fraudulently misleading representations in the
purchase or sale of securities.” Parklane, 558 F.2d at 1085 n.1.
23

Section 10(b) prohibits, among other things, the use “in connection
with the purchase or sale of any security . . . [of] any manipulative or
deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). 25
Section 17(a) prohibits the exact same conduct in the offer, purchase, or
sale of securities, using the mails or the instruments of interstate
commerce. 15 U.S.C. § 77q(a). Similarly, § 15(c) of the Exchange Act
prohibits a broker or dealer from using “any manipulative, deceptive, or
other fraudulent device or contrivance” “to induce or attempt to induce the
purchase or sale of [] any security.” 15 U.S.C. § 78o(c)(1); see SEC v.
George, 426 F.3d 786, 792 (6th Cir. 2005).

25

Rule 10b-5, promulgated under Section 10(b), makes it:
unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or
of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were
made, not misleading, or
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.

17 C.F.R. § 240.10b-5.

24

The elements necessary to establish violations under § 10(b) and
Rule 10b-5 are that the defendant: “(1) made a material misrepresentation
or a material omission as to which he had a duty to speak, or used a
fraudulent device; (2) with scienter; (3) in connection with the purchase or
sale of securities.” SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d
Cir. 1999). The standard for establishing violations of § 17(a) of the
Securities Act and § 15(c)(1) of the Exchange Act are “[e]ssentially the
same.” Id.; see George, 626 F.3d at 792.
Section 206 of the Advisers Act provides that:
It shall be unlawful for any investment adviser, by
use of the mails or any means or instrumentality of
interstate commerce, directly or indirectly (1) to
employ any device, scheme, or artifice to defraud
any client or prospective client; [or] (2) to engage in
any transaction, practice, or course of business
which operates as a fraud or deceit upon any client
or prospective client.
15 U.S.C. § 80b-6. Additionally, § 206(4) also prohibits investment
advisors from “directly or indirectly . . . engag[ing] in any act, practice, or
course of business which is fraudulent, deceptive, or manipulative.” 15
U.S.C. § 80b-6(4).26 Facts showing a violation of §§ 17(a) or 10(b) by an
26

Section 206(4) is applicable to pooled investment vehicles. See 17 C.F.R.
§ 275.206(4)-8. Pooled investment vehicles are “any investment company as defined in section
3(a) of the Investment Company Act.” Id. § 275.206(4)-8(b). An investment company,

25

investment adviser will also support a showing of a § 206 violation. See
Haligiannis, 470 F. Supp. 2d at 383; SEC v. Berger, 244 F. Supp. 2d 180,
188-89 (S.D.N.Y. 2001).
b. The Civil Elements Are Identical to the Criminal Elements
“Courts have applied collateral estoppel in the securities fraud
context because the elements necessary to establish civil liability under
Section[s] 17(a)[,] 10(b)[, and 206] are identical to those necessary to
establish criminal liability under Section 10(b).” Haligiannis, 470 F. Supp.
2d at 382-83 (granting summary judgment on §§ 17(a), 10(b), and 206(1)
and (2) claims after finding defendant was estopped from contesting
liability based on his conviction of one criminal count of a § 10(b)
violation)); see Tzolov, 2011 WL 308274, at *2-3.
Further, for collateral estoppel to apply, the civil claims need not
arise under the same statutory provisions under which a party was
convicted; it is enough if “the factual allegations underlying the . . .
convictions are sufficient to establish that [the defendant] also violated the

pursuant to the Investment Act, is one which “is or holds itself out as being engaged primarily,
or proposes to engage primarily, in the business of investing, reinvesting, or trading in
securities.” 15 U.S.C. § 80a-3. Liability may be found where an investment adviser makes a
false statement of material fact to an investor, realized or prospective, or fails to disclose
material facts necessary to make statements made to investors be truthful. See 17 C.F.R.
§ 275.206(4)-8(a).

26

securities laws provisions at issue.” SEC v. Dimensional Entm’t Corp.,
493 F. Supp. 1270, 1277 (S.D.N.Y. 1980). Thus, courts have also applied
collateral estoppel in civil enforcement actions where a defendant
previously pled guilty or was convicted of wire fraud. See, e.g., Shehyn,
2010 WL 3290977, at *2-3 (granting summary judgment on the SEC’s
§§ 17(a), 10(b), and Rule 10b-5 claims based on the defendant’s prior wire
fraud guilty plea); see also SEC v. Tandem Mgmt. Inc., No. 95 CIV. 8411,
2001 WL 1488218, at *10 (S.D.N.Y. 2001) (applying collateral estoppel to
the SEC’s § 206(4) claim where defendant was previously convicted of
wire fraud).
c. Collateral Estoppel Applies Here
The SEC contends that collateral estoppel compels the entry of
summary judgment on its first four causes of action. (Dkt. No. 708, Attach.
1 at 2-11.) Specifically, the SEC argues that the superseding indictment
and the second amended complaint allege the same conduct and
violations, and, further, the elements necessary to prove its first four
causes of action are the same as those elements that were proven to
convict McGinn and Smith of conspiracy to commit mail and wire fraud,
mail fraud, wire fraud, and securities fraud. (Id. at 4-11.) Smith, however,
27

disputes that collateral estoppel applies. (Dkt. No. 785, Attach. 22 at 4-5.)
Specifically, he contends that the issues related to the convictions and the
claims in the second amended complaint are not identical. 27 (Id.) The
court agrees with the SEC.28
In order to determine whether the issues are identical for collateral
estoppel purposes, courts routinely compare the criminal indictment with
the civil complaint. See Tzolov, 2011 WL 308274, at *2-4 (comparing
conduct alleged in the complaint with conduct alleged in the indictment
and concluding that, due to the overlapping factual allegations, there was
identity of issue for collateral estoppel purposes); SEC v. Credit Bancorp,
Ltd., 738 F. Supp. 2d 376, 394-95 (S.D.N.Y. 2010) (same). Here, contrary
to Smith’s assertions, the issues in this civil case and the MS Criminal
Case are identical. A comparison of the second amended complaint and

27

Smith also argues that the issues related to the conspiracy conviction are ambiguous
because, based on the jury instructions, it is unclear whether the jury’s verdict related to
investors and FINRA or to FINRA only. (Dkt. No. 785, Attach. 22 at 5-6.) Because Smith’s
convictions for mail fraud, wire fraud, and securities fraud are sufficient for collateral estoppel
purposes, the court need not consider whether the conspiracy conviction also establishes the
securities fraud claims here.
28

The parties do not dispute that the issues in the MS Criminal Case were actually
litigated and decided, that McGinn and Smith had a full and fair opportunity to litigate in the MS
Criminal Case, or that the issues previously litigated were necessary to support a valid and
final judgment. Indeed, it is clear from the record that those elements of collateral estoppel are
met. Thus, the court only discusses the first and only disputed element—whether the issues in
both proceedings are identical.

28

the superseding indictment demonstrates that both instruments concern
the same defendants—McGinn and Smith—allege the same scheme to
defraud in connection with the same offerings—the Four Funds, Trust
Offerings, and MSTF—and describe substantially the same conduct.
(Compare 2d Am. Compl. with Dkt. No. 712, Attach. 4.)
For example, both the superseding indictment and second amended
complaint allege that McGinn and Smith misrepresented and omitted
material information concerning Firstline’s financial condition to investors.
(2d Am. Compl. ¶¶ 100-101; Dkt. No. 712, Attach. 4 ¶¶ 21-40.) Both
McGinn and Smith were convicted of mail fraud, and McGinn was also
convicted of wire fraud, specifically in connection with the Firstline Trusts.
(Dkt. No. 712, Attach. 4; Dkt. No. 712, Attach. 18 at 5; Dkt. No. 712,
Attach. 19 at 3, 5-6.) Additionally, both the second amended complaint
and the superseding indictment allege that, contrary to what was disclosed
in the PPMs, McGinn and Smith improperly diverted millions of dollars
from the Trust Offerings, including Integrated Excellence Sr. Trust 08 and
TDMM Cable Jr. Trust 09, for their own personal benefit or for the benefit
of other MS Entities. (2d Am. Compl. ¶¶ 68, 72-76, 81-87; Dkt. No. 712,
Attach. 4 ¶¶ 55-58.) Further, both the second amended complaint and the
29

superseding indictment allege that McGinn and Smith misrepresented,
and omitted material information concerning, the true purpose of TDM
Verifier Trust 08 and Fortress Trust 08 to investors and potential investors.
(2d Am. Compl. ¶¶ 68, 72-76, 88-92; Dkt. No. 712, Attach. 4 ¶ 108.) Both
McGinn and Smith were then convicted of six counts of securities fraud
specifically in connection to TDM Verifier Trust 08 and Fortress Trust 08.
(Dkt. No. 712, Attach. 4 ¶ 108; Dkt. No. 712, Attach. 18 at 8-10; Dkt. No.
712, Attach. 19 at 8-10.)
Smith, however, contends that the SEC has failed to meet its burden
in proving identity of issues because his acquittals on twenty of the counts
charged in the indictment “are sufficient to raise a material issue of fact.”
(Dkt. No. 785, Attach. 22 at 4-5.) Smith’s acquittals, however, are of no
moment. See SEC v. Bravata, 3 F. Supp. 3d 638, 657 (E.D. Mich. 2014)
(noting that an acquittal on one substantive fraud count was “irrelevant” for
collateral estoppel purposes). Convictions are what matter for collateral
estoppel purposes, and, as discussed above, Smith was convicted of mail,
wire, and securities fraud based on the same conduct alleged in the
second amended complaint.
Smith also contends that summary judgment is inappropriate
30

because “there are numerous differences” between the second amended
complaint and the superseding indictment, as the second amended
complaint only engages an in-depth discussion of four of the Trust
Offerings, while the superseding indictment primarily related to conduct
involving other Trust Offerings. (Dkt. No. 785, Attach. 22 at 4-5.) Smith’s
comparison of the second amended complaint and the superseding
indictment, however, is too pedantic; it ignores the overarching similarities
between the two instruments, and instead focuses on immaterial
differences.
Indeed, the second amended complaint specifically identifies each of
the Trust Offerings, generally discusses what McGinn and Smith promised
investors in the PPMs, and then explains that the true purpose of the Trust
Offerings, contrary to the PPMs, was “to structure a series of transactions
that would allow various McGinn Smith Entities to siphon off millions of
dollars in transaction fees and commissions and to serve the interest of
McGinn Smith Entities, not the Trust investors.” (2d Am. Compl. ¶¶ 6876.) Further, like the superseding indictment, the second amended
complaint also explains how McGinn and Smith “fraudulently maintained
the illusion of success by funding interest payments with principal raised in
31

other Trust [O]fferings.” (Id. ¶¶ 74-76; Dkt. No. 712, Attach. 4 ¶¶ 41-50.)
The second amended complaint then offered more detailed examples of
how the Trust Offerings were improperly used through a specific
discussion of the TDMM Benchmark 09, TDMM Cable Trust 09, TDM
Verifier Trust 08, Cruise Charter Venture Trust 08, and Firstline Trust
offerings. (2d Am. Compl. ¶¶ 77-101.) Thus, both the superseding
indictment and the second amended complaint allege the same scheme to
defraud in connection with the same offerings, and, therefore, there is
identity of issue for collateral estoppel purposes.
Because all of the elements of collateral estoppel have been met,
the SEC is entitled to summary judgment on its first four causes of action,
which, as discussed above, all require that the SEC establish essentially
the same elements that were already proven in the MS Criminal Case by
virtue of McGinn and Smith’s convictions of wire fraud, mail fraud, and
securities fraud. Accordingly, the SEC is entitled to summary judgment on
its claims alleging (1) violations of § 17(a) of the Securities Act, as against
MS & Co., MS Advisors, MS Capital, McGinn, and Smith; (2) violations of
§ 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as against MS &
Co., MS Advisors, MS Capital, McGinn, and Smith; (3) violations of
32

§ 15(c)(1) of the Exchange Act as against MS & Co., and aiding and
abetting violations of § 15(c)(1) 29 as against McGinn and Smith; and (4)
violations of §§ 206(1), (2), and (4) violations of the Advisors Act 30 as
against MS & Co., MS Advisors, McGinn, and Smith.
2. Additional Evidence of Securities Laws Violations
The SEC also contends that summary judgment is warranted on its
first four causes of action based on additional, undisputed evidence. (Dkt.
No. 708, Attach. 1 at 11.) In his response, Smith does not address this
point at all. The court agrees that there remain no outstanding questions
of material fact with respect to whether McGinn and Smith violated the
securities laws. For example, with respect to the Four Funds, the SEC

29

The court notes that, in order to establish aider and abettor liability, in addition to
proving a primary violation of the Exchange Act, the SEC must establish that the aider-abettor
had knowledge of the primary violation and knowingly and substantially participated in the
wrongdoing. SEC v. Ehrenkrantz King Nussbaum, Inc., No. 05 CV 4643, 2012 WL 893917, at
*14 (E.D.N.Y. Mar. 15, 2012). There is no dispute that McGinn and Smith had knowledge of
the primary violations and knowingly and substantially participated in the wrongdoing.
30

The court notes that, in addition to the requirements discussed above, in order to
establish violations of §§ 206(1), (2), and (4) of the Advisors Act, the SEC must also prove that
the violation was committed by an “investment adviser.” 15 U.S.C. § 80b-2(a)(11) (defining
“investment adviser” as “any person who, for compensation, engages in the business of
advising others . . . as to the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as part of a regular business,
issues or promulgates analyses or reports concerning securities”); see Abrahamson v.
Fleschner, 568 F.2d 862, 870 (2d Cir. 1977) (holding that “persons who manage[ ] the funds of
others for compensation are ‘investment advisers’ within the meaning of the statute.”) There is
no dispute that MS Advisors and MS & Co. are investment advisors under the act.

33

has demonstrated that, beginning with the first issuance in 2003, investor
proceeds were used to redeem or pay interest to investors of pre-2003 MS
& Co. offerings and to make loans to entities controlled by McGinn and
Smith. (Pl.’s SMF ¶¶ 75-97; Dkt. No. 712 ¶¶ 8-29, at 45.) This was not
disclosed in the PPMs, and operated to the great detriment of Four Funds
investors. Accordingly, the SEC is entitled to summary judgment on its
first four causes of action.
B.

Sale of Unregistered Securities
The SEC also seeks summary judgment on its sixth cause of action,

which alleges that MS & Co., MS Capital, the Four Funds, McGinn, and
Smith violated § 5(a) and (c) of the Securities Act when they sold
unregistered securities through means of interstate commerce. 31 (2d. Am.
Compl. ¶¶ 198-202; Dkt. No. 708, Attach. 1 at 12-14.) Smith argues that
genuine issues of material fact exist as to whether the securities sold
required registration. (Dkt. No. 785, Attach. 22 at 9-10.) The court agrees
with the SEC.
Sections 5(a) and (c) of the Securities Act make it unlawful for any

31

The court notes that the SEC has not moved for summary judgment as against the
Four Funds. (Dkt. No. 708 at 2.) Thus, although the court grants the SEC’s motion with
respect to this claim, it nevertheless remains outstanding with respect to the Four Funds.

34

person to offer or sell any security through interstate commerce when no
registration statement has been filed. See 15 U.S.C. § 77e(a) and (c);
SEC v. Kern, 425 F.3d 143, 147 (2d Cir. 2005). To prove a violation of
§ 5, the SEC must establishing three prima facie elements: (1) the
defendant directly or indirectly sold or offered to sell securities; (2) use of
the interstate transportation or communication and the mails in connection
with the offer or sale; and (3) “lack of a registration statement as to the
subject securities.” SEC v. Cavanagh, 445 F.3d 105, 111 n.13 (2d Cir.
2006). “Scienter is not an element of a Section 5 violation.” SEC v.
Softpoint, Inc., 958 F. Supp. 846, 859-60 (S.D.N.Y. 1997) (citing Universal
Major Indus. Corp., 546 F.2d 1044, 1047 (2d Cir. 1976)), aff’d 159 F.3d
1348 (2d Cir. 1998). A defendant may rebut this prima facie case by
showing that the securities involved were not required to be registered.
SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953).
Here, the SEC’s claims relate to the notes sold in the Four Funds.
(Dkt. No. 708, Attach. 1 at 12-14.) There is no dispute as to whether
defendants offered and sold “securities” as that term has been broadly
defined. See Reves v. Ernst & Young, 494 U.S. 56, 65-66 (1990) (“[I]f the
seller’s purpose is to raise money for the general use of a business
35

enterprise or to finance substantial investments and the buyer is interested
primarily in the profit the note is expected to generate, the instrument is
likely to be a ‘security.’”). There is also no dispute as to whether the notes
sold were registered; they were not. (See, e.g., Dkt. No. 722 at 11 (stating
that the notes will not be registered under the Securities Act).) In addition,
Smith does not dispute that interstate communication and the mails were
used to offer and sell the notes. Thus, the SEC has established a prima
facie § 5 violation. Summary judgment, therefore, is appropriate, unless
Smith can prove that the securities were exempt from registration.
Smith has failed to meet his burden. First, rather than point to a
specific exemption or cite any authority, Smith argues that the Four Funds
“were not investment companies but specialty finance companies
designed to provide financing, primarily in the form of debt, to emerging
growth companies and did not require registration.” (Dkt. No. 785, Attach.
22 at 9.) Second, Smith appears to invoke the registration exemptions
found in Rule 506 of Regulation D, see 17 C.F.R. § 230.506, but utterly
fails to explain how this exemption applies and where facts exist in the
record which support its application. (Dkt. No. 785, Attach. 22 at 9-10.)
Thus, Smith has failed to demonstrate that the securities were exempt
36

from registration, and summary judgment on the SEC’s sixth cause of
action as against MS & Co., MS Capital, McGinn, and Smith is also
appropriate.
C.

Sanctions
The SEC seeks sanctions in the form of disgorgement of profits, an

injunction prohibiting McGinn and Smith from committing future securities
laws violations, an order barring McGinn from serving as an officer or
director, and civil penalties. (Dkt. No. 708, Attach. 1 at 14-31.) The court
addresses each requested sanction below.
1. Disgorgement
First, the SEC seeks an order holding McGinn and Smith jointly and
severally liable for disgorgement of $124 million, plus pre-judgment
interest. (Dkt. No. 708, Attach. 1 at 14-17.) In response, Smith contends
that the collateral estoppel doctrine limits the civil damages to Judge
Hurd’s $5.7 million restitution order related to investor losses, and,
alternatively, that the SEC’s motion for disgorgement is moot. (Dkt. No.
785, Attach. 22 at 6-9.) The SEC is correct that disgorgement is
warranted, but, given the evidence now before the court, it is impossible
for the court to make an informed decision as to the appropriate dollar
37

amount to be disgorged.
A district court has broad discretion to order disgorgement of profits
obtained through violation of federal securities laws and, if ordered, in
calculating the disgorgement amount. SEC v. First Jersey Sec., Inc., 101
F.3d 1450, 1474-75 (2d Cir. 1996). “The primary purpose of disgorgement
as a remedy for violation of the securities laws is to deprive violators of
their ill-gotten gains, thereby effectuating the deterrence objectives of
those laws.” Id. at 1474. “[D]isgorgement forces a defendant to account
for all profits reaped through his securities law violations and to transfer all
such money to the court.” Cavanagh, 445 F.3d at 117. “In determining
the amount of disgorgement to be ordered, a court must focus on the
extent to which a defendant has profited from his [violation].” SEC v.
Universal Express, Inc., 646 F. Supp. 2d 552, 563 (S.D.N.Y. 2009), aff’d
438 F. App’x 23 (2d Cir. 2011).
“[B]ecause of the difficulty of determining with certainty the extent to
which a defendant’s gains resulted from his frauds . . . the court need not
determine the amount of such gains with exactitude.” SEC v. Razmilovic,
738 F.3d 14, 31 (2d Cir. 2013). Under Second Circuit law, “‘[t]he amount
of disgorgement ordered need only be a reasonable approximation of
38

profits causally connected to the violation.’” Contorinis, 743 F.3d at 305
(quoting First Jersey, 101 F.3d at 1474-75). Once the SEC has met its
burden, “the burden shifts to the defendant to show that his gains ‘were
unaffected by his offenses.’” Razmilovic, 738 F.3d at 31 (quoting SEC v.
Lorin, 76 F.3d 458, 462 (2d Cir. 1996)). Defendants are “entitled to prove
that the . . . measure is inaccurate,” SEC v. Warde, 151 F.3d 42, 50 (2d
Cir. 1998) (citing SEC v. Bilzerian, 29 F.3d 689, 697 (D.C. Cir. 1994)), but
the “‘risk of uncertainty in calculating disgorgement should fall upon the
wrongdoer whose illegal conduct created that uncertainty.’” Contorinis,
743 F.3d at 305 (quoting First Jersey, 101 F.3d at 1475). Ultimately,
however, the final decision as to the amount of disgorgement rests with
the district court. See First Jersey, 101 F.3d at 1474-75.
The court also has discretion to order payment of prejudgment
interest on any disgorged gains. Requiring the payment of interest
prevents a defendant from obtaining the benefit of “what amounts to an
interest free loan procured as a result of illegal activity.” SEC v. Credit
Bancorp, Ltd., No. 99 Civ. 11395, 2011 WL 666158, at *3 (S.D.N.Y. Feb.
14, 2011) (internal quotation marks and citation omitted), aff’d sub nom.
SEC v. Blech, 501 F. App’x 74 (2d Cir. 2012). “In deciding whether an
39

award of prejudgment interest is warranted, a court should [take into
account] . . . considerations of fairness and the relative equities of the
award[,] . . . the remedial purpose of the statute involved, and/or . . . such
other general principles as are deemed relevant by the court.” First
Jersey, 101 F.3d at 1476 (internal quotation marks and citations omitted).
Finally, the court may hold joint tortfeasors jointly and severally
liable. “Where an individual or entity has collaborated or worked closely
with another individual or entity to violate the securities laws, those
individuals and/or entities may be held jointly and severally liable for any
disgorgement.” Universal Express, 646 F. Supp. 2d at 563 (citing First
Jersey, 101 F.3d at 1475). The SEC is neither “required to trace every
dollar of proceedings” nor “identify misappropriated monies which have
been commingled.” SEC v. Anticevic, No. 05 CV 6991, 2009 WL
4250508, at *4 (S.D.N.Y. Nov. 30, 2009) (internal quotation marks and
citations omitted). It is understood that “[g]enerally . . . ‘apportionment is
difficult or even practically impossible because [the] defendants have
engaged in complex and heavily disguised transactions.’” Universal
Express, 646 F. Supp. 2d at 563 (quoting SEC v. Hughes Capital Corp.,
124 F.3d 449, 455 (3d Cir. 1997)), aff’d 438 F. App’x 23 (2d Cir. 2011).
40

The joint-violators bear the burden of demonstrating that their liability can
be reasonably apportioned. Id.
Here, as discussed above, McGinn and Smith committed pervasive
and egregious securities laws violations that spanned several years and
resulted in significant pecuniary gain for McGinn, Smith, and the MS
Entities. Thus, based on this finding, the court’s equitable powers are
invoked, and it has no trouble concluding that the SEC is entitled to a
disgorgement order. Indeed, Smith himself does not argue that a
disgorgement order is inappropriate. Rather, he merely disputes the
amount to be disgorged. (Dkt. No. 785, Attach. 22 at 6-9.)
Thus, having concluded that a disgorgement order is appropriate,
the next step is to determine the amount to be disgorged. In this regard,
the court further agrees with the SEC that the proper metric for calculating
disgorgement in actions such as this is subtracting the amount returned to
investors from the total amount raised through the fraudulent offerings.
See, e.g., SEC v. Pittsford Capital Income Partners, LLC, No. 06 Civ 6353,
2007 WL 2455124, at *16 (W.D.N.Y. Aug. 23, 2007) (calculating
disgorgement by subtracting the total amount paid back to investors as
redemptions from the total amount rased through the fraudulent offerings),
41

aff’d 305 F. App’x 694 (2d Cir. 2008); Haligiannis, 470 F. Supp. 2d at 38485 (“The Court finds a proper estimation of defendant’s ill-gotten gains to
be the total difference between contributions and distributions after the
fraud began.”); SEC v. Invest Better 2001, No. 01 Civ. 11427, 2005 WL
2385452, at *9 (S.D.N.Y. May 4, 2005) (calculating disgorgement in Ponzi
scheme by subtracting total distributions from total contributions).
Therefore, the SEC need only demonstrate “a reasonable
approximation of profits causally connected to the violation.” Contorinis,
743 F.3d at 305 (internal quotation marks and citation omitted). As Smith
argues, however, this is where the SEC’s submissions fall short. (Dkt. No.
785, Attach. 22 at 8 (“The SEC fails to meet its burden with respect to [the
disgorgement amount] it seeks and advances no evidence that supports
its calculation.”).) The SEC seeks disgorgement “of at least $124 million,
the proceeds of [defendants’] fraud still owed to investors.” (Dkt. No. 708,
Attach. 1 at 14-17.) In support of its assertion that $124 million is a
reasonable approximation of “all proceeds of the offering fraud remaining
unpaid to investors,” (id. at 15), the SEC cites one paragraph of the
Receiver’s declaration, which in turn cites no additional evidence
supporting that calculation, (id. at 14 (citing Dkt. No. 712, Attach. 2 ¶ 3)).
42

The court cannot and will not rely on one sentence from the Receiver’s
declaration and, willy-nilly, order $124 million to be disgorged; more
explanation is necessary. See SEC v. Bass, No. 1:10-CV-00606, 2012
WL 5334743, at *3 (N.D.N.Y. Oct. 26, 2012) (granting the SEC’s request
for disgorgement in full and, in doing so, relying on exhibits submitted by
the SEC, including “a comprehensive listing of [d]efendants’ bank account
activity involving investor funds and the [d]eclaration of . . . an SEC
attorney, in which she explains the origin of this information and how the
[SEC] used it to calculate the disgorgement amount” and further noting
that “[e]ach individual payment—from investors to [d]efendants, as well as
from [d]efendants back to investors—is catalogued in the SEC’s exhibits”);
Pittsford Capital Income Partners, 2007 WL 2455124, at *16 (granting the
SEC’s request for disgorgement in full where “the SEC . . . proffered
evidence, through issuer records, bank records and investor checks” to
establish the principal raised through fraudulent offerings and the total
amount redeemed).
Equally unpersuasive are Smith’s main arguments regarding the
appropriate amount of a disgorgement order, and little discussion of them
is warranted. In essence, and citing not a single authority that supports
43

his contentions, Smith argues that any disgorgement order issued by the
court should be limited to Judge Hurd’s $5.7 million restitution order
related to investor losses, and, alternatively, that the restitution order
renders the SEC’s request for disgorgement moot. (Dkt. No. 785, Attach.
22 at 6-9.) Restitution and disgorgement, however, are distinct. See SEC
v. Drexel Burnham Lambert, Inc., 956 F. Supp. 503, 507 (S.D.N.Y. 1997)
(“While some cases have equated [restitution and disgorgment], they are
distinct in that restitution aims to make the damaged persons whole, while
disgorgement aims to deprive the wrongdoer of ill-gotten gains.” (citations
omitted)). Smith has not cited, nor has the court found, a single case in
which restitution in a criminal case limited or governed the disgorgement
amount in a parallel civil case, and his arguments, therefore, are rejected.
Accordingly, without more explanation and evidence from the SEC,
not only is the court unable to grant the SEC’s request for disgorgement of
$124 million,32 but it is also incapable of using its broad equitable powers
to fashion appropriate relief on its own. Indeed, while the court can

32

To further confound matters, in its reply brief, the SEC states, on the same page,
both that “investor losses exceed[] $80 million” and that “investor losses . . . are approximately
$100 million.” (Dkt. No. 801 at 7.) How investor losses dropped by millions of dollars between
the time the SEC submitted its opening brief and the time that it submitted its reply brief also
remains unexplained.

44

roughly approximate the total amount of money raised in the Trust
Offerings, Four Funds, and MSTF offerings, (see Pl.’s SMF ¶¶ 11, 12, 14),
it has no concept of what amount, if any, has been returned to investors.
It very well may be that all of the evidence necessary to make an informed
decision regarding the appropriate amount to be disgorged is buried
somewhere within the SEC’s nearly 400 exhibits, but it is not the court’s
duty to find and rely on those documents without the SEC’s direction or
invitation.
However, in light of the fact that the SEC has demonstrated that a
disgorgement order of some amount is appropriate, and because “[t]he
deterrent effect of an SEC enforcement action would be greatly
undermined if securities law violators were not required to disgorge illicit
profits,” the court reserves judgment on the amount to be disgorged at this
juncture. SEC v. Wyly, No. 10-cv-5760, 2014 WL 3739415, at *7
(S.D.N.Y. July 29, 2014) (internal quotation marks and citations omitted).
Thus, the SEC is entitled to one final opportunity to propose a reasonable
approximation of profits causally connected to the violations, with greater
explanation and in reliance on documentary evidence. Accordingly, if it
wishes to pursue this theory, the SEC must provide a reasonable
45

approximation of McGinn and Smith’s profits causally connected to the
violations within fourteen days from the issuance of this MemorandumDecision and Order. Smith may respond, if he so chooses, within seven
days after the SEC files its submission, and the SEC may file a reply
within seven days after Smith files his response, if any.
2. Civil Monetary Penalties
The SEC also seeks civil penalties pursuant to § 20(d) of the
Securities Act,33 § 21(d)(3) of the Exchange Act, 34 and § 209(e) of the
Advisers Act.35 Specifically, the SEC seeks penalties in the amount of “the
defendant[s]’ gross pecuniary gain,” or $124 million. (Dkt. No. 708, Attach.
1 at 31.) For similar reasons as discussed above, the SEC’s request is
denied.
The Securities Act, the Exchange Act, and the Advisers Act provide
that, when any person has violated any provision of these statutes, the
SEC may bring an action to seek a civil penalty and a district court “shall
have jurisdiction to impose, upon a proper showing, a civil penalty to be

33

See 15 U.S.C. § 77t(d).

34

See 15 U.S.C. § 78u(d)(3).

35

See 15 U.S.C. § 80b-9(e).

46

paid by the person who committed such violation.” 15 U.S.C. §§ 77t(d)(1),
78u(d)(3)(A), 80b-9(e)(1). Under each statute, a penalty may be imposed
for each violation as follows: (i) a first-tier penalty for any violation; (ii) a
second-tier penalty if the violation “involved fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory requirement”; and (iii) a
third-tier penalty if the violation “involved fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory requirement” and “such
violation directly or indirectly resulted in substantial losses or created a
significant risk of substantial losses to other persons.” Id. §§ 77t(d)(2),
78u(d)(3)(B), 80b-9(e)(2).
Each statute provides that, for each violation, the amount of penalty
“shall not exceed the greater of”: (i) the specified maximum amount for a
natural person or any other person “[f]or each violation”, or (ii) “the gross
amount of pecuniary gain to such defendant as a result of the violation.”
Id. §§ 77t(d)(2), 78u(d)(3)(B), 80b-9(e)(2). The maximum amounts
specified for a natural person and for any other person respectively are: a
first-tier penalty of $5,000 and $50,000, a second-tier penalty of $50,000
and $250,000, and a third-tier penalty of $100,000 and $500,000. See 15

47

U.S.C. §§ 77t(d)(2)(C), 78u(d)(3)(B), 80b-9(e)(2). 36 Further, while a
disgorgement award may be imposed jointly and severally and need not
be “measured as to each individual defendant,” a civil penalty is required
by statute to be so measured. SEC v. Pentagon Capital Mgmt. PLC, 725
F.3d 279, 288 (2d Cir. 2013). “[T]he actual amount of the penalty [is] left
up to the discretion of the district court.” Kern, 425 F.3d at 153.
Here, the SEC requests only that the court follow the “gross
pecuniary gain” method of calculation and impose a penalty equal to “at
least $124 million.” (Dkt. No. 708, Attach. 1 at 31.) The SEC does not at
all address what the civil penalty would be under the “per violation”
method of calculation, because “[w]hile there are multiple ways to
calculate what constitutes a violation, it is unlikely that any ‘per violation’
calculation of the penalty would result in a higher penalty than the $124
million in gross proceeds.” (Id.)
There are two main problems with the SEC’s suggestion. First, as
discussed above, the SEC has not demonstrated that $124 million is even

36

As required by the Debt Collection Improvement Act, the maximum amounts of all
civil penalties are adjusted for inflation for violations occurring after: (a) December 9, 1996 and
before February 2, 2001, see 17 C.F.R. § 201.1001, pt. 201 subpt. E, tbl. 1; (b) February 2,
2001, see 17 C.F.R. § 201.1002, pt. 201 subpt. E, tbl. II; (c) February 14, 2005, see 17 C.F.R.
§ 201.1003, pt. 201, subpt. E, tbl. III; and (d) March 3, 2009, see 17 C.F.R. § 201.1004, pt.
201, subpt. E, tbl. IV.

48

a “reasonable approximation” of McGinn and Smith’s profits for
disgorgement purposes. The SEC’s claim that $124 million accurately
reflects McGinn and Smith’s gross pecuniary gain for civil penalty
purposes is equally unsubstantiated. Second, the Second Circuit has
made clear that a finding of joint and several liability for civil penalties is
contrary to the securities statutes providing for a civil penalty. See
Pentagon Capital, 725 F.3d at 287 (noting that “[t]he statutory language
allowing a court to impose a civil penalty plainly requires that such awards
be based on the ‘gross amount of pecuniary gain to such defendant’”
(quoting 15 U.S.C. § 77t(d)(2)). Here, the SEC has made no attempt to
identify either the per violation penalty or gross pecuniary gain penalty for
each individual defendant, but rather seeks a lump sum of $124 million.
The court will not endeavor to make these calculations on its own. See
SEC v. GTF Enters., Inc., No. 10 Civ. 4258, 2014 WL 1877080, at *8
(S.D.N.Y. May 6, 2014) (recommending that no amount of civil penalties
be awarded because the SEC provided no evidence of the gross amount
of pecuniary gain to each individual defendant). Accordingly, the SEC’s
request for civil penalties is denied.
3. Permanent Injunctions
49

Next, the SEC seeks an order enjoining McGinn and Smith from
future securities laws violations. (Dkt. No. 708, Attach. 1 at 29-30.) The
court agrees that an injunction is warranted.
The Securities Act, Exchange Act, and Advisers Act provide for
injunctive relief when their provisions have been violated. See 15 U.S.C.
§§ 77t(b), 78u(d), 80b-9(d). Pursuant to those provisions, a defendant
may be permanently enjoined from further violations of the acts. Id.
Injunctive relief should be granted when there is a “realistic likelihood of
recurrence” of the violations, and may be appropriate even on summary
judgment. SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99-100
(2d Cir. 1978). The following factors are considered when determining the
likelihood of recurrence: “(1) the degree of scienter involved, (2) the
isolated or recurring nature of the fraudulent activity, (3) the defendant’s
appreciation of his wrongdoing, and (4) the defendant's opportunities to
commit future violations.” Softpoint, 958 F. Supp. at 867 (citing
Commonwealth Chem. Sec., 574 F.2d at 100).
Here, the SEC has submitted evidence that demonstrates a high

50

degree of scienter. 37 Further, McGinn and Smith’s fraudulent behavior
was not limited to an isolated incident but, rather, was a scheme that
involved multiple debt offerings, spanned several years, and defrauded
hundreds of investors. Thus, McGinn and Smith are permanently enjoined
from committing future violations of §§ 5(a), 5(c), and 17(a) of the
Securities Act, § 10(b) of the Exchange Act, and Rule 10b-5 thereunder,
§ 15(c)(1) of the Exchange Act, and Rule 10b-3 thereunder, and
§§ 206(1), 206(2), and 206(4) of the Investment Advisers Act and Rule
206(4)-8 thereunder.
4. Officer or Director Bar Against McGinn
Finally, the SEC seeks an order barring McGinn, who served as

37

For example, the SEC submitted an undated, handwritten letter from Smith to
McGinn, which stated the following:
While you have previously rejected my characterization of these
acts as similar to a “Ponzi scheme,” . . . we are now in the
possession of indisputable empirical evidence that the new
investments have no chance of ever being repaid in full . . . . For us
not to allow for these deficits by setting up adequate reserves is, in
my judgment, bordering on fraud. Certainly, by not disclosing in the
prospectus our poor history of collections, we are not providing the
prospective investors an accurate picture of this risk. We both
know why we don’t make that disclosure—because such disclosure
would cause our salesm[e]n to cease selling and investors to cease
buying. Thus, we are misleading both our own employees and
customers. . . . This is wrong. I strongly believe that in civil or
criminal litigation we would lose badly on this point.
(Dkt. No. 715 at 8-10.)

51

chief executive officer of Integrated Alarm Services Group, Inc., a
publically traded company, (Pl.’s SMF ¶ 2), from serving as an officer or
director of a publicly traded corporation. (Dkt. No. 708, Attach. 1 at 30.)
The SEC’s request is granted.
The Exchange Act and the Securities Act authorize the court to
“prohibit, conditionally or unconditionally, and permanently . . . any person
who violated [the applicable provisions] from acting as an officer or
director [of a public company] if the person’s conduct demonstrates
unfitness to serve as an officer or director. 15 U.S.C. §§ 77t(e), 78u(d)(2).
The Second Circuit has identified six non-exclusive factors that are “‘useful
in making the unfitness assessment’”:
(1) the egregiousness of the underlying securities law
violation; (2) the defendant’s repeat offender status;
(3) the defendant’s role or position when he engaged
in the fraud; (4) the defendant’s degree of scienter;
(5) the defendant’s economic stake in the violation;
and (6) the likelihood that misconduct will recur.
SEC v. Bankosky, 716 F.3d 45, 48 (2d Cir. 2013) (quoting SEC v. Patel,
61 F.3d 137, 141 (2d Cir. 1995)).
Again, McGinn has failed to respond to the SEC’s motion. Based on
the evidence submitted by the SEC, the court is satisfied that McGinn’s

52

past conduct—namely, unrepentantly orchestrating and prolonging an
intricate Ponzi scheme—demonstrate that he is unfit to serve as an officer
or director. Thus, the SEC’s request is granted.
E.

Outstanding Claims and Issues
Before concluding, it is prudent to outline the claims and issues that

remain outstanding. First, and most obviously, at this juncture the court
has reserved judgment on L. Smith’s motion for summary judgment, (Dkt.
No. 696), L.T. Smith, G. Smith, and the Smith Trust’s motion for summary
judgment, (Dkt. No. 704), and the portion of the SEC’s motion regarding
the assets held solely by L. Smith, N. McGinn, and the Smith Trust, (Dkt.
No. 708, Attach. 1 at 18-29, 32-40). The court will address those motions
in due course.
Second, as noted above, the SEC has not moved for summary
judgment on its fifth cause of action, which alleges that the Four Funds
violated § 7(a) of the Investment Company Act of 1940, 15 U.S.C. § 80a-7,
(2d Am. Compl. ¶¶ 194-97). Thus, this claim remains outstanding. The
SEC also has not moved for summary judgment as against the Four
Funds, (Dkt. No. 708 at 2), and, therefore, the SEC’s sixth cause of action
as it relates to the Four Funds also remains outstanding, (2d Am. Compl.
53

¶¶ 194-97). Accordingly, the SEC is ordered to inform the court whether it
has abandoned and/or withdrawn these claims, or whether it seeks a trial.
V. Conclusion
WHEREFORE, for the foregoing reasons, it is hereby
ORDERED that the SEC’s motion for summary judgment is
GRANTED IN PART and DENIED IN PART as follows:
GRANTED with respect to the SEC’s first cause of action
alleging violations of § 17(a) of the Securities Act, as against
MS & Co., MS Advisors, MS Capital, McGinn, and Smith;
GRANTED with respect to the SEC’s second cause of action
alleging violations of § 10(b) of the Exchange Act, and Rule
10b-5 thereunder, as against MS & Co., MS Advisors, MS
Capital, McGinn, and Smith;
GRANTED with respect to the SEC’s third cause of action
alleging violations of § 15(c)(1) of the Exchange Act as against
MS & Co., and aiding and abetting violations of § 15(c)(1) as
against McGinn and Smith;
GRANTED with respect to the SEC’s fourth cause of action
alleging violations of the Advisors Act as against MS & Co.,
54

MS Advisors, McGinn, and Smith;
GRANTED with respect to the SEC’s sixth cause of action
alleging violations of §§ 5(a) and 5(c) of the Securities Act as
against MS & Co., MS Capital, McGinn, and Smith;
GRANTED with respect to the SEC’s request for a permanent
injunction barring McGinn and Smith from committing future
violations of §§ 5(a), 5(c), and 17(a) of the Securities Act,
§ 10(b) of the Exchange Act, and Rule 10b-5 thereunder,
§ 15(c)(1) of the Exchange Act, and Rule 10b-3 thereunder,
and §§ 206(1), 206(2), and 206(4) of the Investment Advisers
Act, and Rule 206(4)-8 thereunder; and
GRANTED with respect to the SEC’s request for an order
barring McGinn from serving as an officer or director of a
public company; and
DENIED with respect to the SEC’s request for civil penalties;
and it is further;
ORDERED that the court reserves judgment on the SEC’s request
for disgorgement of profits, only as to the appropriate amount. If the SEC
wishes to pursue this theory, consistent with this Memorandum-Decision
55

and Order, the SEC must provide a reasonable approximation of the
profits causally connected to the violations within SEVEN (7) DAYS from
the issuance of this Memorandum-Decision and Order. Smith may
respond within SEVEN (7) DAYS after the SEC files its submission; and it
is further;
ORDERED that the court reserves judgment on the remainder of the
SEC’s motion; and it is further
ORDERED that, within SEVEN (7) DAYS of this MemorandumDecision and Order, the SEC inform the court whether it has abandoned
and/or withdrawn its fifth cause of action and sixth cause of action insofar
as it is alleged against the Four Funds, or whether it seeks a trial on those
claims; and it is further
ORDERED that McGinn and Smith are enjoined from committing
future violations of §§ 5(a), 5(c), and 17(a) of the Securities Act, § 10(b) of
the Exchange Act, and Rule 10b-5 thereunder, § 15(c)(1) of the Exchange
Act, and Rule 10b-3 thereunder, and §§ 206(1), 206(2), and 206(4) of the
Investment Advisers Act, and Rule 206(4)-8 thereunder; and it is further
ORDERED that McGinn is permanently and unconditionally barred
from acting as an officer or director of any issuer that has a class of
56

securities registered pursuant to 15 U.S.C. § 78l or that is required to file
reports pursuant to 15 U.S.C. § 78o(d); and it is further
ORDERED that the Clerk of the Court provide a copy of this
Memorandum-Decision and Order to the parties.
IT IS SO ORDERED.
February 17, 2015
Albany, New York

57