SEC Charges 10 Brokers in Connection with the McGinn Smith Ponzi Scheme

In the Matter of Donald J. Anthony, Jr. et al., Admin Proc. No. 3-15514.  On September 23, 2013, the SEC announced charges against 10 former brokers for their roles in a $125 million investment scheme.  In 2010, the SEC filed fraud charges against Timothy McGinn and David Smith to stop their Ponzi scheme and freeze their assets.  McGinn and Smith were also charged criminally and found guilty.  The SEC’s OIP alleges that 10 brokers who recommended the unregistered investment products involved in the scheme misled their customers.  They also overlooked red flags that should have prompted them to do more due diligence into the securities they were recommending to their customers.  The OIP charges Donald J. Anthony, Jr., Frank H. Chiappone, Richard D. Feldmann, William P. Gamello, Andrew G. Guzzetti, William F. Lex, Thomas E. Livingston, Brian T. Mayer, Philip S. Rabinovich, and Ryan C. Rogers.  According to the OIP, hundreds of investors lost more than $80 million in the scheme.  The SEC alleges that Guzzetti was the managing director of McGinn Smith’s private client group and supervised the brokers who recommended the firm’s offerings.  Despite his knowledge of serious red flags, Guzzetti did not do anything to investigate the offerings and instead encouraged the brokers to sell the notes to McGinn Smith customers.  The OIP alleges that the other nine brokers should have investigated the investments more before recommending them to clients.  Moreover, the brokers continued to sell McGinn Smith notes even learning that some investments could only be redeemed if a replacement investor was found, which was contrary to the offering documents.  In addition, the brokers knew that some prior offerings that raised $90 million had defaulted, but they did not examine the later offerings before recommending them to customers.

The OIP alleges that Anthony, Chiappone, Feldmann, Gamello, Lex, Livingston, Mayer, Rabinovich, and Rogers violated Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5.  The order also alleges that Guzzetti failed to reasonably supervise the nine brokers, thereby violating Section 15(b)(6) of the Exchange Act, incorporating by reference Section 15(b)(4).  The SEC’s civil case continues against the firm as well as McGinn and Smith, who were sentenced to 15 and 10 years imprisonment respectively in the criminal case.

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