The Commission prevailed on a motion for summary judgment against a brokerage firm, its principle and a former managing director, ultimately securing judgments of over $2.7 million. SEC v. Constantin, Civil Action No. 11-CV-4642 (S.D.N.Y. Filed July 6, 2011). This is one of what may be an increasing number of actions involving brokers and market professionals defrauding their clients.
The Constantin case was brought against Windham Securities, its owner and principal Joshua Constantin, and former firm managing director Brian Solomon. The complaint centers on an alleged fraud in connection with a private placement. Specifically, the defendants raised more than $1.1 million for investors in Leeward Group, Inc, a company that was suppose to be going public. Rather than invest the money as represented to investors, it was funneled in part to other entities and diverted to personal use. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 20(a).
In July 2012 the Commission moved for summary judgment as to each defendant. Subsequently the Court granted the motion, concluding that there was no material dispute of fact and ruling in the SEC’s favor. The Court found that the defendants made a series of misrepresentations in connection with the sale of the shares. Mr. Constantin diverted investor funds to his own purpose, according to the Court. In an effort to conceal the wrongful conduct, Messrs. Constantin and Solomon furnished misleading documents to the investors.
The Court entered judgments of permanent injunction against each defendant, prohibiting future violations of the Sections cited in the complaint. In addition the Court directed Mr. Constantin and Windham Securities pay, on a joint and several basis, $2.49 million in disgorgement, prejudgment interest and penalties. Mr. Solomon was directed to pay $249,000 in disgorgement, prejudgment interest and penalties. A supplemental order requires the defendants, along with two relief defendants, to pay $2.74 million in disgorgement, prejudgment interest and civil penalties on a joint and several basis. See also Lit. Rel. No. 22656 (April 24, 2013).
Earlier this year the Commission brought an action against a brokerage firm, its principal and others for defrauding clients. In the Matter of John Thomas Capital Management Group LLC, Adm. Proc. File No. 3-15255 (March 22, 2013) names as Respondents George Jarkesy, Jr., his management company, John Thomas Capital Management Group LLC, Anastasios “Tommy” Belesis, and the brokerage he founded, John Thomas Financial, Inc. The Order there focused on two key claims. One alleged misrepresentations regarding portfolio values and the other false statements to investors.
The claim regarding portfolio values centers on JT Capital which managed two funds. Although investors received monthly statements showing the value of their holdings, key assets were not valued in accord with the representations made to investors. Rather, Mr. Jarkesy assigned them arbitrary values which increased the amount of the portfolio and the management fees. The offering materials had similar misrepresentations regarding the role of Respondent Belesis, the millions of dollars paid to JT Financial and even the identity of the outside auditors. The Order alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). This case will be set for hearing. Subsequently, FINRA brought a proceeding against the firm and its principle alleging trading ahead, failure to obtain best execution and intimidation. That action will also be set for hearing.