United States District Court, S.D. New York
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[Copyrighted Material Omitted]
For Securities and Exchange Commission, Plaintiff: George S. Canellos, LEAD ATTORNEY, Securities & Exchange Commission (3 WFC), New York, NY; Preethi Krishnamurthy, LEAD ATTORNEY, Wendy Beth Tepperman, U.S. Securities and Exchange Commission (3 World Financial), New York, NY; Barry Antoine Kamar, Securities & Exchange Commission (3 WFC), New York, NY.
For Joshua Constantin, Defendant: James Kousouros, Law Off. James Kousouros (NY), New York, NY.
For Brian Solomon, Defendant: Jenny D Johnson-Sardella, Leser Hunter Taubman & Taubman, PLLC, Coral Gables, FL.
For Constantin Resource Group, Inc., Domestic Applications Corp., Relief Defendants: James Kousouros, Law Off. James Kousouros (NY), New York, NY.
MICHAEL H. DOLINGER, UNITED STATES MAGISTRATE JUDGE.
MEMORANDUM & ORDER
The Securities and Exchange Commission (" SEC" ) brought this civil enforcement action against defendants Joshua Constantin, Brian Solomon, and Windham Securities, Inc., 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
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,"  Windham is not permitted to carry accounts, or to receive or hold funds or securities for its customers. See 17 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. (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
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, 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-Elysé es 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
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 Wyndham 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 " $3-$4.5 million" )).
The SEC's complaint and motion papers highlight the stories of two Windham clients, Dr. Charles Balaban and Mr. Edward Mier-Jedrzejowicz (" Mier" ), as exemplars of Windham's fraudulent investment scheme. Defendants apparently defrauded at least five additional Windham clients between 2008 and 2009. (See Pl.'s Rule 56.1 Statement ¶ ¶ 306-19).
Dr. Charles Balaban was referred to Solomon as a potential client in May 2008. (Id. at ¶ 72). At the time, Balaban, a Canadian citizen and resident, was looking to invest $1 million of the proceeds he had received from the sale of his dental practice (id. at ¶ ¶ 74, 101) and informed Solomon that he was looking for an investment that would yield liquid profits in approximately one year. (Id. at ¶ 80). Solomon advised Balaban that he could earn a 200 percent annual return at Windham. (Id. at ¶ 83). Solomon also told Balaban that he had prior experience working with discounted securities (id. at ¶ 86), though Solomon later testified at his deposition that he had only ever managed to purchase discounted debt securities and had never actually succeeded in reselling them for a return on his investment. (Kamar Decl. Ex. 4 at 188-89).
On May 21, 2008, Solomon attempted to open an account for Balaban with Penson Clearing Services, but was told that Penson did " not allow accounts to have Canadian
mailing addresses." (Id. at Ex. 39 p. 2; Pl.'s Rule 56.1 Statement ¶ 98). Solomon emailed Penson a new application package, indicating that Balaban held additional property in the United States and that his account statements should, accordingly, be sent to an address in Santa Monica, California. (Pl.'s Rule 56.1 Statement ¶ 99; Kamar Decl. Ex. 39). That address, which Solomon had suggested to Penson belonged to Balaban, in fact belonged to Solomon. (Pl.'s Rule 56.1 Statement ¶ 100).
Balaban deposited $1 million into his new Penson account on June 5, 2008. (Id. at ¶ 101). Soon thereafter, Constantin transferred $100,000.00 out of the account -- $50,000.00 of which he transferred to Solomon and another $50,000.00 of which he transferred to Constantin Resource -- as Windham's purported ten-percent advisory fee. (Id. at ¶ ¶ 102-103). Balaban later testified that he had not considered the ten-percent fee to be reasonable and, in any event, " it hadn't been discussed originally." (Kamar Decl. Ex. 6 at 31).
Constantin invested some of Balaban's remaining funds in the purchase of 200,000 shares of common stock in a company called Omega World. (Id. at Ex. 6 p. 40). As of about June 27, 2008, Balaban's Penson account reflected a cash balance of approximately $670,000.00, plus the 200,000 shares in Omega World. (Id.).
Solomon next advised Balaban of a potential investment opportunity in Leeward, a private insurance company that Windham was purportedly helping to take public through a reverse merger process. (Pl.'s Rule 56.1 Statement ¶ ¶ 108-110). On July 7, 2008, Constantin transferred $600,000.00 from Balaban's Penson account into an escrow account that Windham had established for the Leeward deal. (Pl.'s Rule 56.1 Statement ¶ ¶ 119, 121, 125). The next day, Constantin wired $150,000.00 out of the Leeward escrow account to Constantin Resource. (Id. at ¶ 122). He wired another $250,000.00 from the escrow account to Leeward, purportedly for the purchase of Leeward stock in the name of DAC. (Id.). On July 17, 2008, Constantin transferred another $175,000.00 from the Leeward escrow account to Constantin Resource. (Id. at ¶ 124). Then, on July 22, 2008, Constantin transferred another $60,000.00 from Balaban's
Penson account to the Leeward escrow account, from which he then transferred $84,000.00 to Constantin Resource on July 24, 2008. (Id. at ¶ ¶ 126-27). On October 30, 2008, Constantin transferred the balance of Balaban's funds from his Penson account -- $9,715.78 -- straight into Windham's checking account. (Id. at ¶ 129). In return for each of these transfers of funds, Balaban apparently received no stock and no other form of material benefit from any of the recipients of his funds.
Penson mailed Balaban's account statements to the designated address in Santa Monica, California, which, as noted, belonged to Solomon. (Id. at ¶ 130). Solomon reviewed Balaban's Penson account statements but did not forward them to Balaban or notify Balaban of their contents, including the fact that, by July 2008, Balaban's Penson account had a cash balance of less than $10,000.00 and reflected no securities holdings or purchases. (See id. at ¶ ¶ 131-34).
On August 11, 2008, Constantin emailed Solomon an account statement showing 200,000 shares of Omega World stock held by LEK Securities, Inc. in Balaban's name. Solomon forwarded that account statement to Balaban (id. at ¶ 136) and indicated, " You have a second position now Leeward (the NY insurance company.) That stock is not showing in this account yet. As was the case with Omega World, it takes some time for the new stock to settle in the account." (Id. at ¶ 137).
In late August 2008, Balaban notified Solomon that he had not been receiving monthly account statements. (Id. at ¶ 139). Although Balaban completed a form titled " Consent to Electronic Delivery of Documents" that Solomon had provided to him, and although Solomon regularly accessed and reviewed Balaban's accounts online, Balaban was never given online access to his Penson or LEK account statements. In addition, Solomon did not forward any of Balaban's paper Penson account statements to Balaban at his Canadian address. (See id. at ¶ ¶ 141-143).
Instead, at Constantin's direction, Solomon created an account statement for Balaban under Windham's logo. The August 2008 Windham statement reflected a purported total account value of $1,019,740.00, including the following holdings, listed as " equities" : 200,000 shares of Omega World stock and a $660,000.00 " Pre-IPO Promissory Note" in Leeward Corp. (Id. at ¶ ¶ 151, 162). Solomon and Constantin prepared a similar account statement for Balaban for September 2008, reflecting a purported total value of $1,039,740.00, an increase of exactly $20,000.00 from the previous month's statement. (Id. at ¶ 153). Despite their representation to Balaban that his account held Leeward securities, Constantin and Solomon knew that Balaban's Penson and LEK accounts did not reflect any Leeward holdings. (See id. at ¶ 160; Kamar Decl. Ex. 4 at 272, 275). Nonetheless, Solomon advised Balaban in writing that he held " 660,000 shares of Leeward." (Pl.'s Rule 56.1 Statement ...