Securities and Exchange Commission v. Constantin et alMEMORANDUM & ORDER: As outlined above, defendant Solomon is individually liableS.D.N.Y.April 25, 2013f" " .... ""~."'.~"'."'...-...~M~,,.-.- '~'" ·.t....-.,.,-. -~"... 'i '".<..... ', ...._" ..1, ._.......~ _,~'" "" ,~,..... ~ '~-'~'''''h """,~~,._ ._' .... _ ...... " ........ , ......_,......,~_,_.___,..," ..-,".' v " \"~ .. ", ,'. "~' ":', ;,'" n ." " ~"". 1 ....- ;" '. ;i., ':UNITED STATES DISTRICT COURT .* .... ;, \ . ." .. ,:. ,,:, -:. .. ~, .. :;..;:, SOUTHERN DISTRICT OF NEW YORK -x SECURITIES AND EXCHANGE COMMISSION, Plaintiff, MEMORANDUM & ORDER -against- 11 Cv. 4642 (MHD) JOSHUA CONSTANTIN et al., Defendants. -x MICHAEL H. DOLINGER, U.S.M.J.: On April 2, 2013, we issued a Memorandum and Order grant summary judgment in favor of plaintiff and ordering supplemental briefing concerning the appropriate amounts of damages to be assessed against each defendant and relief defendant. (Memorandum & Order, 2, 2013 ("April 2, 2013 M&O") (docket no. 59)). Specifi ly, we left open the issue of the amounts of third-tier civil penal ties to be imposed on each defendant and amounts of ill ten gains to be disgorged by each defendant and relief defendant. (Id. at 52 56). Our April 2, 2013 M&O directed pIa iff to file its supplemental submission April 15 I 2013 I providing court wi th "a ear explanation of flow of funds from defrauded clients to each defendant and relief fendant ... [and] an Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 1 of 13 explanation its culations of any prejudgment interest." Id. at 55-56). We further set the deadl for fendants and reli defendants to file their opposition as April 18, 2013. deadline for opposition has sed wi no word from any of the defendants or relief defendants. Relevant Factual Background We incorporate the factual background set forth in our April 2, 2013 M&O. In addition, as outlined in SEC's supplemental submission, we observe that fendants received approximately $1,272,644.00 in total ill gotten gains from seven Windham clients. See PI. Supplemental Mem. in Supp. Disgorgement & Pre Judgment Interest Calculations ("Pl. Suppl. Mem.") 1 10) Of this amount, approximately $1,127,929.00 was placed in Windham's Leeward escrow account id. ) , then misappropriated the benefit of various defendants and ief defendants. 1 Constant transferred $450,000.00 from the escrow account to Leeward Company for the purchase of stock in the name of relief defendant DAC. Id. at 7; Kamar Decl. (docket no. 52) Ex. 1 The Leeward escrow account was funded exclusively by the seven defrauded investors. (Kamar Decl. Ex. 1 at 17 19). 2 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 2 of 13 3 at 54, Ex. 50 at 6, 11). Constantin also transferred a total $645,000.00 from the escrow account to his company, relief defendant Constantin Resource. (Pl. Suppl. Mem. at 7 8 i Kamar Decl. Ex. 50 at 6, 9, 11, 12). The remainder the escrow funds were used to benefit Constantin himself, with $23,000.00 transferred from the escrow account direct to hi s personal checking account, and remaining $9,928.00 used for purposes including cash withdrawals, wire transfer s, and legal fees, all unrelated to the Leeward securities deal and the benefit of Constant and Windham. Suppl. Mem. at 10 i Kamar Decl. Ex . 5 0 at 6, 9, 11, 12, 2 0, 23, 2 9) . In addition to the client funds misappropriated through the Leeward escrow account, clients were charged a total of $135,000.00 in purported fees. (PI. SuppL Mem. 3-5; Kamar Declo Ex . 4 3 at 1, Ex . 7 5 at 3). t his, u It i rnately $ 4 0 , 0 0 0 . 0 0 was transferred to Constantin Resource (Pl. Suppl. Mem. 3; see Kamar Decl. Ex. 45 at 6, 26), $72,500.00 was trans rred to defendant Solomon (Pl. Suppl. Mem. 3-4; Kamar Decl. Ex. 45 at 5, 6, 26), and $22,500.00 was transferred to Windham. (Pl. Suppl. Mem. 4-5; Kamar Decl. Ex. 52 at 18, 19). Constantin transferred yet another $9,715.78 from account of one client, Charles Balaban, rect to the Windham 3 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 3 of 13 checking account. . Suppl. Mem. 4; Kamar Decl. Ex. 52 at 26). He transferred approximately $42,000.00 of investor funds (originally passed through the Leeward escrow account) from Constant Resource to Solomon. (Pl. Suppl. Mem. at 10; Kamar Declo Ex. 45 at 13 20, 26, 33). Of total $1,272,644.00 in fendants' ill-gotten gains, 50,000.00 went to fit relief defendant DAC (in form of a stock purchase) i $643,000.00 went to rel f fendant Constantin Resource, in various forms; $65,145.00 went to fendants Constantin and Windham, collect ly (from purported service fees and outright sappropriations) i and $114,500.00 went to defendant Solomon (including commissions from Windham's clients Balaban and Mier, and $42,000.00 in additional investor funds received from Constantin Resource) . Disgorgement "Where a party olates the federal securities laws, this Court has broad discretion not only to order the sgorgement of any ill-gotten gains, but also to determine the amount to sgorged. This remedy is designed to deprive wrongdoers of any unjust enrichment and, in doing so, to deter others from engaging similar conduct." SEC v. Universal Inc., 646 4 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 4 of 13 F. SUpp. 2d 552, 562-63 (S.D.N.Y. 2009), f'd, 438 F. App'x 23 (2d r. 2011) (internal cites omitted); accord SEC v. rst Sec. Inc., 101 F.3d 1450, 1474 75 (2d Cir. 1996) ----~~----~----- "The amount of disgorgement ordered 'need only be a reasonable approximat profits causally connected to the violation, ' [and] 'any risk of uncertainty [in culating sgorgement] should fallon wrongdoer whose illegal conduct created that uncertainty.'" Id. at 1475 (quoting SEC v. Patel, 61 F.3d 137, 139-40 (2d Cir. 1995)). Thus, while the SEC "bears the ultimate burden persuasion that its sgorgement figure approximates the amount of unjust enrichment, once the SEC made a reasonable demonstration of that amount, the burden fts to the fendant to show that the proposal is not a reasonable approximation, by 'demonstrating received less than the full amount allegedly misappropriated and sought 1968341, at *2 (S.D.N.Y. Aug. 23, 2002) (quoting SEC v. Benson, 657 F. Supp. 1122, 1133 (S.D.N.Y. 1987)). We have ewed the SEC's supplemental submission, as well as the supporting evidence, concerning defendants' and relief defendants' respective ill-gotten gains derived from defendants' unlawful conduct, and we find the SEC's calculations and to be disgorged. I If 2002 WL 5 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 5 of 13 analysis concerning damages to persuas 2 Given that fendants and reI f fendants have f led to file any opposition to the SEC's supplemental submission, we have no cause to doubt the presumpt reasonableness of plaintiff's recommended disgorgement figures. SEC argues that "[t]he Court should hold Constantin and Windham jointly and severally I e... because Constantin owned Constantin Resource, owned Windham through Constantin Resource, and owned all of DAC's equity after DAC fraudulently obtained Leeward shares," that were purchased with misappropriated ient funds. (PI. SuppI. Mem. 12). As Second rcuit has observed, "where a firm has received gains through its awful conduct, [and] where its owner and chief execut officer laborated that conduct and has profited from the violations... it is wi thin the discretion of the court to determine that the owner-officer [] should be subject, on a joint and several 2 Indeed, we note that, though the SEC is "'not requi to trace every dollar of proceedings ... nor ... required to identi misappropriated monies which have been commingl SEC v. Anti c, 2010 WL 3239421, at *5 (S.D.N.Y. Aug. 16, 2010) (quoting SEC v. t Co., 775 F. Supp. 211, 214 n.22 (E.D.Mich.1991), 214 (6th r. 1993}), at the court's request, , in this case, ably demonstrated the trail the majority of misappropriat client funds to each of the defendants and relief defendants. 6 /I Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 6 of 13 .~-. ---------------------------------------- disgorgement order. 1/ First Jers Sec., 101 F.3d at 1475i see SEC v. AbsoluteFuture. com, 393 F. 3d 94, 96 (2d r. 2004). In light of our prior findings concerning the ose relationship between Windham, Constantin Resource, and Constantin (April 2, 2013 M&O 2, 3, 53), as well as evidence suggest that Constantin was the sole ty owner of DAC after DAC received stock paid for by defendants' fraud (Kamar Decl. Ex. 95 at 11), we conclude that joint and several li lity among I four of them is appropriate. Defendants Constant and Windham are jointly and severally liable for the amount of $1,158,145.00 (constitut the full value of defendants' ill-gotten gains, less $114,500.00 that went to Solomon) Relief defendant DAC is joint and severally liable for $450,000.00 of $1,158,145.00 amount that Constantin and Windham are li e to sgorge. Relief defendant Constantin Resource ~s jointly and severally liable for $643,000.00 of the $1,158,145.00 amount that Constantin and Windham are liable to disgorge. As for fendant Solomon, he is individually liable to disgorge $114,500.00. Civil Penalties In our April 2, 2013 M&O, we set forth the standard for civil ties under securities fraud statutes as llows: 7 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 7 of 13 "Section 20(d) of the Securit Act and Section 21 (d) (3) (B) of the Exchange Act outl ine lcategories referred to as 'tiers of penalties. though each tier establishes a maximum penalty per ation l the amount of any civil penalty rests squarely in the discretion of the court.1I Universal Inc' l 646 F. Supp. 2d at 567. The court may impose third- t civil penal ties for any ation the Act involving "fraud l deceit I manipulation l or deliberate or reckless disregard of a regulatory requirement ll that "resulted in substantial losses or created a significant risk substantial losses. 1I 15 U.S.C. § 77t(d); 15 U.S.C. § 78u(d). With t to natural persons I the court may impose a third-tier penalty of ei $100 1 000.00 each violation or the gross amount of his or her pecuniaryl gain resulting from the violation l whichever is greater. With respect to non natural rsons thel court may impose a third-tier penalty of eit $500 1 000.00 for each violat or gross amountI his or pecuniary gain re ting the violation l whichever is greater. 15 U.S.C. § 77t (d) (2) (C); 15 U.S.C. § 78u(d) (3) (B) (iii). "In determining whether civil penalties should be imposed and the amount of the fine l courts look to al number of factors including (1) the egregiousness ofl the f endant ' s conduct i (2) the degree the fendant's scienter; (3) whether the defendant's conduct created substanti losses or risk of substanti losses to other persons; (4) whether defendant's conduct was isolated or recurrent; and (5) whether the penalty should be reduc due to the defendant's demonstrated current and future financial condition. 11 SEC v. Mill 436 F. App'x 11 3 (2d r. 2011) (quoti SEC Hal iannis 470 F. Supp.l 2d 373 1 386 (S.D.N.Y. "While these ors are helpful in charact zing a parti ar defendant's actions, the civil penalty framework is a 'discretionary nature and each case 'has its ownI particular facts and circumstances which ermine the appropriate penalty to be imposed.' II entica LLC, 479 F. Supp. 2d [319,] 331 [(S.D.N.Y. 2007)] (quoting Moran, 944 F. Supp. at 296-97) . 8 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 8 of 13 (April 2, 2013 M&O, 50-51). We then went on to conclude that, in 1 ight of defendants' tern of fraudulent misconduct and the significant financi losses that they had caused their clients, each of the defendants should be subj ected to thi tier civil penalt s. Id. at 51-52). Given the sweep nature of defendants' fraud, "[t] exact number of violations committed by t Defendants is nearly impossible to determine." SEC v. Invest Better 2001, 2005 WL 2385452, at *5 (S.D.N.Y. May 4, 2005). Accordingly, we conclude that defendants should charged "a flat penal ty equal to the gross amount of pecuniary gain as a result of the total number of violations." Id.; see Hal s, 470 F. Supp. 2d at 386. ----""'--- Defendants Constantin and Windham are jointly and several liable for civil penal ties total $1,158,145.00. See SEC v. PLC, ---~--~----=------ 2 0 12 WL 103 6 0 8 7, at *10 ( S . D . N . Y . Mar. 28, 2012) (finding jo and several liability for civil penalties permissible); SEC v. Elliott, 2011 WL 3586454, at *19 (S.D.N.Y. Aug. 11, 2011) (imposing j nt and several liability for civil penal ties amount equal to di sgorgement amount). Defendant Solomon is individually liable civil penalt s of $114,500.00. 9 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 9 of 13 Prejudgment Interest award of prejudgment st in securit s fraud actions though discretionarYI is well~established in ourl circuit. See l I Wickham Contract Co. Inc. v. Local Union No. 31 Int'l Bhd. of Elec. Workers I AFL-CIO I 955 F.2d 831, 835 (2d Cir. 1992) (citing Rolf v. • Eastman Dillon & CO' 6371 F.2d 77, 8687 (2d Cir. 1980)). SpecificallYI Second rcuit has held that, in light of the "remedial purpose of the [securities laws], the goal of deprivi culpable fendants of their unlawful ins and the 1 of any unf rness tol defendants" a court may order prejudgment interest "for the entire period from the time of defendants' unlawful gains to the entry of judgment." First Sec., 101 F.3d at 1477. ------------~------ In this case that period runs from March 18, 2009 to thel present for fendants Constantin and Windham; from October 171 2008 to the present for defendant Solomon; from September 29, 2008 to the present for reI f defendant Constant Resourcei and from September 8, 2008 to the present for relief defendant DAC. (See . Suppl. Mem. 15).3 3 We note however, that the SEC's calculations of prejudgment interest, on which we relYI assume an end date of March 31 1 2013. (PI. Suppl. Mem. 2 I 15 & Exs. 202, 203, 204 1 205) . l 10 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 10 of 13 We apply the Internal Revenue Code/s statutory interest rate. Id. at 2/ 15); see First Sec./ 101 F.3d at 1476. ----~------~------- Constant and Windham are j 0 ly severally liable for a tot of $176/577.85 in prejudgment interest. Of this total/ Constantin Resource is jointly and severally liable with them for not more than $118/485.87 DAC is jointly and severally liable with them for not more than $82/921.71. 4 (Id. at Exs. 202/ 203/ 204, 205). Solomon is individual liable for $20/420.10 in prejudgment interest. CONCLUSION As outlined above/ defendant Solomon is individually liable (1) to disgorge $114/500.00/ (2) to pay civil penalties of $114/500.00/ and (3) to pay prejudgment interest of $20/420.10. Defendants Constantin and Windham are joint and severally liable (1) to disgorge $1/158/145.00/ (2) to pay civil penalt s and (3 ) to pay prejudgment interest $176/577.85. Relief defendant Constantin Resource is jointly and several liable for $643,000.00 of t defendants Constantin and Windham are also Ii e sgorgement. Relief fendant Constant Resource is also 4 The exact amounts of prejudgment interest owed by each relief defendant will depend on the amounts disgorged by of them. 11 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 11 of 13 jointly and severally liable with Constantin and Windham for $118,485.87 of the $176,577.85 in prejudgment interest for which Constantin and Windham are liable. Relief fendant DAC is (1) jointly and severally liable for $450,000.00 of the $1,158,145.00 in disgorgement for which Constantin and Windham are liable, and (2) is jointly and several liable for $82,921.71 of the $176,577.85 in prejudgment interest for which Constantin and Windham are liable. Plaintiff is to submit a proposed judgment forthwith on notice to defendants. DATED: New York l New York April 241 2013 MICHAEL H. DOLINGER UNITED STATES MAGISTRATE JUDGE 12 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 12 of 13 Copies of the foregoing Memorandum and Order have been sent today to: Preethi Krishnamurthy, Esq. George S. Canellos, Esq. Barry Antoine Kamar, Esq. Wendy Beth Tepperman, Esq. U.S. Securities and Exchange Commission Three World Financial Center New York, NY 10281 James Kousouros, Law Off of James Kousouros, Esq. 260 Madison Avenue, 22 Floor New York, NY 10016 Mr. Brian Solomon bsolomon@solomonkeegan.com 13 Case 1:11-cv-04642-MHD Document 63 Filed 04/25/13 Page 13 of 13