October 29, 2013 — Phony Ponzi schemes, used to cheat unsuspecting investors out of millions of dollars, are illegal. The Dodd-Frank Act of 2010 includes a whistleblower program to protect potential investors by allowing tipsters to notify the Securities and Exchange Commission (SEC) about illicit Ponzi schemes and other SEC fraud when they are discovered. Informants may be eligible for compensation for collaborating with the government — up to thirty percent of the government’s recovery.
Brokers Allegedly Ignored Warning Signs to Place Customers in $125 Million Investment Scam
Ten former brokers with a firm in Albany, New York have been charged by the SEC in a $125 million Ponzi scheme. Timothy M. McGinn and David L. Smith, co-owners of McGinn Smith & Co., have already been sentenced to prison for their involvement in the investment scam.
According to the SEC, the gigantic Ponzi scheme swindled 750 investors out of $80 million. The ten brokers recently charged allegedly recommended that their customers invest in unregistered investment products. In addition to misrepresenting some facts and omitting others, the brokers allegedly ignored warning signals that should have caused them to pursue further due diligence before recommending the securities to their customers.
Between 2004 and 2009, Andrew G. Guzzetti supervised McGinn Smith’s brokers who recommended that customers invest in the firm’s offerings. Though Guzzetti should have had suspicions about the phony offerings, the SEC alleges that he took no action to investigate and actively encouraged firm brokers to sell the notes.
Nine other brokers should also have done further investigation, according to the SEC. The brokers kept selling McGinn Smith notes even after they learned that customers who had invested in some of the firm’s offerings could not be redeemed unless another investor was found to take the previous customer’s place. This requirement was directly at odds with what was represented in the offering documents.
In addition, the brokers continued to recommend McGinn Smith notes to their customers, even after they learned in January 2008 that four of the firm’s offerings, in which customers had invested nearly $90 million, had defaulted. The brokers also neglected to conduct any investigation into subsequent McGinn Smith offerings before urging their customers to invest.
Tipsters Collaborate With SEC About Illegal Ponzi Schemes
When a Ponzi scheme is as big as the McGinn Smith operation described here, it’s likely that some insider employees were aware of the scam. Insiders who uncover similar schemes to cheat investors should learn how the Dodd-Frank whistleblower program works. This is especially true for tipsters who want to remain anonymous. The SEC fraud lawyers with Waters & Kraus have a well-established track record for protecting whistleblowers’ interests in many kinds of fraud cases. Contact us by email or phone our securities fraud attorneys at 800.226.9880 to learn how we can work together to stop fraud in the financial investment industry.