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Broker-Dealer Accused of Private-Placement Fraud

As the Financial Industry Regulatory Authority Inc. (FINRA), has been cracking down on private placement deals, another firm has been charged with securities fraud.

McGinn Smith & Co. Inc., which specializes in private deals and investment advisory services, is facing securities fraud charges linked to the sale of $89 million in private notes. According to the charges made by FINRA, the firm sold four series of unregistered notes to 515 investors. FINRA alleges that McGinn Smith used a federal securities law, known as Regulation D, to exempt the notes from registration. However, since the notes were sold to more than 35 non-accredited investors, this exemption did not apply.

David Smith, the president and co-owner of McGinn Smith, has also been charged with securities fraud by FINRA.

Based on FINRA’s allegations, McGinn Smith promised investors that their funds would be earmarked for a wide array of public and private investments. The lawsuit states that Mr. Smith instead used most of the offering proceeds for his own needs and to benefit entities that he controlled with Timothy McGinn, the co-owner and president. FINRA claims that Mr. Smith “misused approximately $51 million of investors’ funds, directing approximately $17 million to the related entities and approximately $34 million more to make loans to those companies.” He allegedly was the recipient of approximately $590,000 in personal loans, as well.

FINRA’s allegations also include misrepresentation of the commission for selling the notes and providing false information to regulators.