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McGinn Smith and National Financial Services, LLC

In April 2010, both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) filed lawsuits against McGinn Smith and its principals, alleging that from 2003 through April 2010, McGinn Smith committed an ongoing fraud against over 900 investors. The suits allege that McGinn Smith lured its customers into these investments with the understanding that McGinn Smith made its money on each transaction from the difference between the cost of the investment and its rate of return. However, instead putting customer money into investments generally referred to as Income Notes, McGinn Smith fraudulently transferred investor money into entities it owned or controlled. The transfers were not disclosed to investors, in offering materials and private placement memoranda, as an activity in which the Income Note issuers could engage.

McGinn Smith used National Financial Services, LLC, a Fidelity company, as its clearing firm since 2005. Most McGinn Smith clients were required to maintain an account with NFS to invest in the McGinn Smith investments. NFS provided significant clearing and back office operations for McGinn Smith.

Blum Law Group is representing many customers with losses in these investments in claims against NFS for negligence and other claims and are attempting to recover their investment losses in FINRA arbitration.


1.    Why is the case being filed in arbitration instead of court?

When you opened an account with McGinn Smith, you signed an agreement that included an “arbitration clause.”  These clauses typically provide that any dispute a client has with his or her financial advisor, the brokerage firm and/or the clearing firm servicing the accounts must be submitted to arbitration.  The majority of the arbitrations subject to arbitration clauses in these types of cases are conducted through the Financial Industry Regulatory Authority (“FINRA”), the largest securities dispute resolution forum in the world.  The attorneys at the Blum Law Group have extensive experience litigating arbitration claims through FINRA. 

2.    McGinn Smith is out of business, why are you pursuing claims against National Financial Services?

  Many, but not all, customers of McGinn Smith were also customers of National Financial Services (starting in late 2005). Those McGinn Smith customers who received account statements from McGinn Smith on a regular basis were also customers of National Financial Services, as the clearing firm for McGinn Smith.  As such, National Financial Services owed its customers certain duties relating to McGinn Smith and the investments made.  As we have alleged in an arbitration claim, National Financial Services breached those duties which resulted in monetary losses to you and other investors.

3.    Do I have to pay anything upfront or advance any money to start my case against National Financial Services?

No.  Blum Law Group (the “Firm”) will handle your case on a contingency fee and will advance the costs and expenses of bringing and litigating your case.  The fee is “contingent” because the Firm is paid only if it is successful in recovering money for you.  If the Firm does not recover any money, you do not have to pay anything for the time and efforts of the attorneys working on your case.  Likewise, if there is no recovery, then you do not have to reimburse the Firm for the costs and expenses it incurred in bringing and litigating your case.  However, if the Firm does recover money, then it will retain and deduct the attorneys’ fees and costs/expenses prior to the disbursement of the funds.

4.    If I pursue claims against National Financial Services, am I precluded from recovering in the Securities and Exchange Commission’s (“SEC”) receivership of McGinn Smith?

No.  The SEC has placed McGinn Smith in receivership.  A receiver has been appointed to gather and sell off all of the assets of the company with the hopes of returning any money left over to investors after paying certain liabilities, costs and expenses of McGinn Smith and incurred by the receiver.  The only way an individual pursuing claims against National Financial Services will be prevented from recovering any money from the receivership, or any other action, is if he or she receives back all of the money invested through the action filed against National Financial Services. 

5.    What is SIPC and how could it affect my case?

SIPC stands for the “Securities Investor Protection Corporation” (“SIPC”) which was created in 1970 to protect customers of member brokerage firms that may fail or be liquidated.  If any securities or cash are missing from eligible customer accounts, SIPC steps in to replace those securities and cash.  This protection is currently limited to $500,000 per customer, including a maximum of $250,000 for cash claims. SIPC is not the equivalent of the FDIC (the Federal Deposit Insurance Corporation) as it does not provide blanket coverage for investment losses like the FDIC does for member banks that fail or are taken over due to financial hardships.

The SEC has the power to file an application in federal district court to require SIPC to initiate a liquidation proceeding to protect customers of an insolvent brokerage firm.  If the Board of Directors of SIPC fails to take such action, the SEC can compel SIPC to bring liquidation proceedings.  According to the documents filed in the receivership, the SEC is investigating whether it will file such an application, but to date has not yet filed.  Even if the SEC files the application, investors should not delay the filing of an arbitration claim since there are time limitations in the ability to bring such claims.  Also, the arbitration proceeding would be a parallel proceeding meaning it can proceed independently from other possible actions being taken by the SEC or SIPC.    

6.    If I pursue claims against National Financial Services, am I precluded from recovering from SIPC, in the event it applies?

No.  The only way an individual pursuing claims against National Financial Services would be prevented from recovering any money from SIPC should it apply is if he or she receives back all of the money invested through McGinn Smith though the action against National Financial Services. 

7.     How long will my arbitration claim against National Financial Services take from start to finish?

FINRA arbitrations typically take between twelve (12) to fourteen (14) months to complete through what is known as final hearings.  For customers over the age of 65 with medical conditions that require the matter to be heard faster, FINRA has expressed an intention to have arbitrators handled these cases on an expedited basis--therefore these cases may be resolved in less than twelve months.

Arbitration cases are typically resolved faster than court cases.  A large number of arbitration cases settle prior to the final hearings directly by the parties involved or through mediation.

If you lost money in investments through McGinn Smith and maintained an NFS account, contact us for a free consultation. Darren Blum, managing partner of Blum Law Group can be reached at 1-877-STOCK LAW (1-877-786-2552) or

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