939 F. Supp. 2d 288
S.D.N.Y.2013Background
- SEC filed civil enforcement against Constantin, Solomon, and Windham Securities alleging fraud, misrepresentation of qualifications, misappropriation of client funds, and false account statements in violation of §17(a) and §10(b).
- Windham was an introducing broker managed by Constantin and Solomon; funds and accounts were controlled by clearing firms Penson and LEK.
- Constantin and Solomon misled clients about windham’s operations, falsified statements, and promoted nonexistent or inflated investment opportunities (e.g., Leeward) to solicit funds.
- Funds from clients were diverted to Constantin Resource and other entities; Windham’s purported Leeward investments had little or no basis in client holdings or profits.
- SEC sought a permanent injunction, disgorgement of ill-gotten gains, and civil penalties; relief defendants Constantin Resource Group and DAC potentially disgorged funds.
- COURT granted summary judgment against all defendants and relief defendants, with injunction and disgorgement ordered and penalties to be determined after supplemental submissions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is there liability under the antifraud provisions for conduct in connection with securities sales? | SEC asserts a broad, deceptive scheme violated §17(a) and §10(b)/Rule 10b-5. | Solomon and Constantin did not contest; no meaningful defense presented. | Yes; defendants are liable under the antifraud provisions. |
| Should Windham be held liable and/or its control persons liable? | SEC argues Windham is liable due to control and participation in the scheme. | Not explicitly argued; court treats Windham as corporate defendant. | Constantin and Solomon’s conduct attributable to Windham; primary liability established. |
| Is permanent injunctive relief appropriate and warranted given the misconduct? | SEC seeks permanent injunction to prevent future violations. | No opposition. | Permanent injunction granted. |
| Are disgorgement and civil penalties appropriate, with remediation to follow? | SEC seeks disgorgement and third-tier penalties; supplemental submissions required for precise amounts. | No opposition. | Disgorgement ordered; penalties to be set after supplemental submissions; relief defendants to disgorge similarly. |
| Are relief defendants liable for disgorgement? | Relief defendants received assets derived from misconduct. | Not actively contested. | Relief defendants to disgorge assets traceable to misconduct; calculations to be clarified in supplemental briefing. |
Key Cases Cited
- Landreth Timber Co. v. Landreth, 471 U.S. 681 (U.S. 1985) (determine whether instruments labeled as stock are securities under the Reves framework)
- First Jersey Sec., Inc. v. William J. Zwerner & Co., 101 F.3d 1450 (2d Cir. 1996) (materiality and fraud standards in securities cases; fiduciary duties may arise in broker relationships)
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (U.S. 2006) (fraud in securities must coincide with a securities transaction; domestic transaction requirement)
- Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (elements of securities fraud under §10(b) reflect scienter and conveyance via interstate commerce)
- Szur v. United States, 289 F.3d 200 (2d Cir. 2002) (fiduciary duty and disclosure obligations in broker-customer relationships)