Sec. & Exch. Comm'n v. Constantin

• Decision Date: 02 April 2013
• Docket Number: No. 11 Cv. 4642(MHD).,11 Cv. 4642(MHD).
• Citation: 939 F.Supp.2d 288
• Parties: SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. Joshua CONSTANTIN et al., Defendants.
• Court: U.S. District Court — Southern District of New York

939 F.Supp.2d 288

SECURITIES and EXCHANGE COMMISSION, Plaintiff,
v.
Joshua CONSTANTIN et al., Defendants.

No. 11 Cv. 4642(MHD).

United States District Court,
S.D. New York.

April 2, 2013.

[939 F.Supp.2d 292]

George S. Canellos, Preethi Krishnamurthy, Barry Antoine Kamar, Wendy Beth Tepperman, Securities & Exchange Commission, New York, NY, for Plaintiff.

James Kousouros, Law Office of James Kousouros, New York, NY, Jenny D. Johnson–Sardella, Leser Hunter Taubman & Taubman, PLLC, Coral Gables, FL, for Defendants.

MEMORANDUM & ORDER
MICHAEL H. DOLINGER, United States Magistrate Judge.

The Securities and Exchange Commission (“SEC”) brought this civil enforcement action against defendants Joshua Constantin, Brian Solomon, and Windham Securities, Inc.,¹ alleging that the defendant broker-dealers misled clients about their professional experience and qualifications, misappropriated client funds, and knowingly prepared false account statements to cover up their fraud, all in violation of § 17(a) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a), and § 10(b) the Securities Exchange Act of

[939 F.Supp.2d 293]

1934 (“Exchange Act”), 15 U.S.C. § 78j(b). For relief, plaintiff seeks a permanent injunction proscribing defendants' future violation of the federal securities laws, imposition of maximum civil penalties, and an order directing defendants and relief defendants to disgorge all ill-gotten gains from defendants' misconduct. ( See Pl.'s Mem. 65).

Following expiration of the discovery period, the SEC has moved for summary judgment. Defendants have not opposed.

THE FACTUAL RECORD

In summarizing the record on plaintiff's motion, we rely on those facts stated in the SEC's Rule 56.1 statement insofar as they are supported by some proffered evidence. To the extent that the SEC has providing competent evidence, those facts are deemed not to be in dispute, since defendants have offered no contradiction.

In late 2005, Constantin Resource Group, Inc., a company wholly-owned and controlled by Joshua Constantin (“Constantin”) ( see Kamar Decl. Ex. 1 at 21), acquired Windham Securities, Inc. (“Windham”), a small, SEC-registered broker-dealer based in Long Island, New York. (Pl.'s Rule 56.1 Statement ¶¶ 5, 22, 46; Kamar Decl. Ex. 1 at 26, Ex. 3 at 14–15, Ex. 14 at 6).

Windham is an introducing broker whose trades and client accounts were managed by two clearing brokers, Penson Clearing Services and, for a period during 2008, LEK Securities Inc. (Pl.'s Rule 56.1 Statement ¶¶ 65–66, 69; Kamar Decl. Ex. 14 at 6). As a “nickel broker-dealer,” ² Windham is not permitted to carry accounts, or to receive or hold funds or securities for its customers. See17 C.F.R. § 240.15c3–1(a)(1), (a)(2)(iv); Fin. Indus. Regulatory Auth., SEA Rule 15c3–1(a)(2)(iv) (2008); ( see also Pl.'s Rule 56.1 Statement ¶¶ 62–64).

From 2005 through 2009, Constantin served as Windham's chief executive officer (“CEO”), managing director, and registered representative. (Pl.'s Rule 56.1 Statement ¶ 6). Brian Solomon joined Windham in November 2006, as the “fixed income director,” and in July 2007 became a registered representative of the company. (Kamar Decl. Ex. 4 at 57–58; Pl.'s Rule 56.1 Statement ¶ 33). Between July 2007 and approximately January 2009, Windham's staff was essentially comprised of Constantin and Solomon, plus an outside compliance officer.³ (Kamar Decl. Ex. 1 at 27, Ex. 2 at 27).

Constantin oversaw general office operations, wrote all of Windham's agreements, and managed all of the company's business through its associated clearing firms. ( Id. at Ex. 4 pp. 137–38). He also was responsible for supervising Solomon, and overseeing and approving all of the transactions and accounts for Solomon's clients. (Pl.'s Rule 56.1 Statement ¶ 40; Kamar Decl. Ex. 4 at 133, 137). Solomon's job responsibilities included “bring[ing] clients to Windham, open[ing] accounts, do[ing] trades and transactions ... mostly trying to raise money and find the specific type of investments for clients.” (Kamar Decl. Ex. 4 at 90). Solomon targeted clients who were “individual investors ... of a high net worth.” ( Id.). His job title at the small company apparently was not fixed and varied as needed, depending on his interactions with clients. ( See id. at

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Ex. 2 pp. 27, 177 (Solomon testified “I was whatever I needed to be in order to complete the task at hand.”)).

The image of Windham that Constantin and Solomon promoted to their clients was very different from the true nature of the company. In practice, Constantin worked out of a small office in Long Island, New York,⁴ while Solomon worked primarily out of his home in Santa Monica, California, and occasionally from a temporary office space in Los Angeles. (Pl.'s Rule 56.1 Statement ¶¶ 46–47, 52; Kamar Decl. Ex. 4 at 100, 104, 107, 119–20). During the period from approximately 2008 to May 2010, Windham managed accounts for a client base of approximately eight individuals. ( See Kamar Decl. Ex. 1 at 182). However, Windham promoted itself as a large, international company. The company's letterhead, website, marketing materials, and business cards listed offices on Park Avenue in Manhattan, Santa Monica Boulevard in Los Angeles, and the Champs–Elysées in Paris, in addition to the office in Long Island, New York. (Pl.'s Rule 56.1 Statement at ¶ 57; Kamar Decl. Exs. 15, 25, 29). The first three of these offices were actually “virtual” office spaces, which Windham had contracted to use for the receipt of mail and as occasional meeting spaces, and which were temporary spaces, shared with other corporate entities. (Pl.'s Rule 56.1 Statement ¶¶ 57–59; Kamar Decl. Ex. 9 at 112–18). While Constantin and Solomon made occasional use of the Manhattan and Los Angeles offices, neither office served as a center for Windham's operations, and no one from Windham had ever conducted any-business out of the purported office in Paris. (Kamar Decl. Ex. 9 at 114, 116). In addition, between late 2007 and mid–2008, Windham began operating a website with the French domain name “www. windham. fr,” and Constantin and Solomon began sending emails from accounts ending in “@windham. fr.” (Pl.'s Rule 56.1 Statement ¶¶ 58, 60).

On numerous occasions, Solomon lied to clients about his involvement in foreign markets, indicating, for example, that he was leaving on a business trip to Hong Kong (Kamar Decl. Ex. 46), and that he “often work[ed] the European open” ( id. at Ex. 70), when in fact neither was true. ( Id. at Ex. 2 p. 74, Ex. 4 p. 153; see also id. at Ex. 6 p. 17 (client testified that Solomon had boasted that his experience “went back to his workings in Europe, where he had done [investment deals] before.”)).

Although Constantin and Solomon had both dropped out of college and neither had received degrees (Pl.'s Rule 56.1 Statement ¶¶ 1, 2, 13; Kamar Decl. Ex. 6 at 13, Ex. 18 at 6, Ex. 19), they each suggested to their clients and potential investors that they had graduated with degrees from well-respected schools. (Kamar Decl. Ex. 4 at 190–91 (discussing Solomon's attendance at Dartmouth College), Ex. 15 (claiming Constantin “has an undergraduate degree in Economics from Fordham University where he also did his graduate work”)).

Solomon frequently misrepresented Windham's investment experience and prior performance to potential investors. For example, he advised one client that he had previously worked with small companies and had “brought them to market.” ( Id. at Ex. 6 p. 17). He wrote to another client,

As an example of our track record, please review the following IPO's that over the past year we have participated

[939 F.Supp.2d 295]

in the syndicates ... Looking at these shows you that what we do is tangible (tangible = transactions with results you can verify).

( Id. at Ex. 70). Solomon then proceeded in the same email to list six company stocks in a chart comparing the companies' stock prices at the time of public offering and as of the date of Solomon's email. ( Id.). In fact, no one at Windham had participated in any of those syndicates or, for that matter, had ever successfully taken a private company public. ( See id. at Ex. 1 pp. 190, 192, 195, Ex. 4 p. 24). Solomon also told clients that Windham had “a floor of traders in New York” ( id. at Ex. 7 p. 234), when, in fact, at the time the company did not. (Pl.'s Rule 56.1 Statement ¶¶ 221–22).

Constantin and Solomon promised, and otherwise encouraged clients to believe, that they could expect unreasonably large and rapid returns on their investments through Windham. ( Compare Kamar Decl. Ex. 34 (Solomon suggests to client that Windham could deliver a 400% to 500% return on investment) and Ex. 35 (Solomon writes to a potential client “Investments do not wait, and we need to meet certain deadline [sic] to maintain our 500% [return] goal ... If we do not hear any response from you by Tuesday, we will withdraw, close your account and be unavailable to you in the future.”) with id. at Ex. 5 pp. 526, 532 (Solomon testifies “You know, I can't say that Windham had 500 percent historical returns.”); see also id. at Ex. 72 (Solomon encourages client to expect a “fast profitable return.”). Constantin reinforced Solomon's rosy projections, advising clients that they would be able to liquidate their investments many months before they actually ended up being able to do so ( see, e.g., id. at Exs. 79, 80, 82), and promising very high returns. ( See id. at Ex. 84 (“I expect the results of this transaction when completed to be nothing short of stellar and even taking into account the extra time the internal rate of return on this investment should be off the charts”)). In one case, Constantin cited to a client, as a company's purported book value, a figure that was more than seven times the actual book value that he knew the company to have. ( Compare id. at Ex. 84 p. 90 (Constantin quotes book value of “$22–$33 million”) with Ex. 85 p. 1 (actual book value listed as...