U.St. Sec. & Exch. Comm'n v. Collector's Coffee, Inc.

697 F.Supp.3d 138

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. COLLECTOR'S COFFEE, INC., et al., Defendants.

19 Civ. 4355 (VM) (GWG)

United States District Court, S.D. New York

Signed October 4, 2023

Gregory Alan Kasper, Mark Lander Williams, Sharan Lieberman, Terry Ryan Miller, U.S. Securities and Exchange Commission, Denver, CO, for Plaintiff.

Carlos Alberto Ryerson, Ryerson & Associates, P.C., Houston, TX, Harlan J. Protass, Protass Law PLLC, New York, NY, Peter Alan Joseph, Law Offices of Peter Joseph, New York, NY, James Madison Ardoin, III, Jimmy Ardoin & Associates, PLLC, Bellaire, TX, for Defendant Collector's Coffee Inc.

Cary J. Hansel, III, Hansel Law, PC, Baltimore, MD, Peter Alan Joseph, Law

Offices of Peter Joseph, New York, NY, Robert Gerard Heim, Tarter Krinsky & Drogin LLP, New York, NY, George A. Lambert, Law Offices of Leonard Suchanek, Washington, DC, for Defendant Mykalai Kontilai.

OPINION AND ORDER

GABRIEL W. GORENSTEIN, UNITED STATES MAGISTRATE JUDGE.

The United States Securities and Exchange Commission ("SEC") brought this case against defendants Collector's Coffee, Inc. ("CCI") and Mykalai Kontilai ("Kontilai"), alleging violations of federal securities laws. See Amended Complaint, filed Nov. 4, 2019 (Docket # 134) ("Am. Compl."). Kontilai's wife, Veronica Kontilai, was named as a "relief defendant" due to her alleged receipt of illicit funds. See id. ¶ 8. Before the Court is the SEC's motion for a preliminary injunction and asset freeze.¹ Also before the Court is Kontilai's motion for a modification of the asset freeze currently in place.² For the reasons that follow, the SEC's motion is granted and Kontilai's motion is denied.

I. BACKGROUND

As previously summarized by this Court, the SEC has alleged a broad range of wrongdoing by Kontilai and CCI related to the use of investor funds. See United States S.E.C. v. Collector's Coffee, Inc., 2021 WL 1956369, at *1-3 (S.D.N.Y. May 17, 2021). In short, the SEC alleges that Kontilai and CCI misappropriated investor funds, misrepresented CCI and its assets to prospective investors, attempted to impede the SEC's investigation of those violations, and fabricated evidence in support of their position. See Am. Compl. The SEC alleges six statutory violations: (1) that CCI and Kontilai violated section 10(b) of the Exchange Act, and Rule 10b-5(b), by making fraudulent misstatements and omissions in connection with the sale or purchase of securities, id. ¶¶ 171-73; (2) that CCI and Kontilai violated section 17(a)(2) of the Securities Act through the same fraudulent misstatements and omissions, id. ¶¶ 174-76; (3) that CCI and Kontilai's actions amount to a prohibited fraudulent scheme under section 10(b) and Rule 10b-5(a) and (c), id. ¶¶ 177-79; (4) that these same actions violated section 17(a)(1) and (3), id. ¶¶ 180-82; (5) that CCI and Kontilai's actions violated Rule 21F-17 of the Exchange Act, id. ¶¶ 183-85; and (6) that Veronica Kontilai received funds traceable to CCI and Kontilai's violations, and those funds must be equitably disgorged, id. ¶¶ 186-89.³

The complete history of the SEC's request for a temporary restraining order and preliminary injunction was previously recounted by this Court in United States S.E.C. v. Collector's Coffee Inc., 2021 WL 266284, at *1-2, 7 (S.D.N.Y. Jan. 27, 2021). In brief, on May 16, 2019, the court issued a temporary restraining order freezing assets held by Kontilai and CCI up to the amount of $46,121,649.68. Temporary Restraining Order, filed May 16, 2019 (Docket # 12) ("TRO"). On November 13, 2019, the parties consented to the undersigned presiding over the preliminary injunction hearing. See Notice, Consent, and Reference, dated Nov. 13, 2019 (Docket # 143). On December 9, 2019, shortly before the preliminary injunction hearing was to take place, the parties stipulated to an injunction and asset freeze under the terms of the TRO pending a hearing on the SEC's request for a preliminary injunction. See Order, filed Dec. 9, 2019 (Docket # 175). That order added a freeze as to the assets of Veronica Kontilai as a relief defendant. Id. at 4.

Neither side sought to have an adjudication of the SEC's motion for a preliminary injunction until May 2022 when Kontilai filed opposition papers to the SEC's preliminary injunction motion, which had been filed two and a half years earlier, see Memorandum of Law in Opposition, filed May 9, 2022 (Docket # 1014), and then requested an evidentiary hearing on that motion, see Letter from C. Hansel, filed May 21, 2022 (Docket # 1028).

Ultimately, the Court held the hearing on November 7, 2022, January 24, 2023, and February 21, 2023. See Transcript, dated Nov. 7, 2022 (Docket # 1129) ("Nov. 7 Tr."); Transcript, dated Jan. 24, 2023 (Docket # 1161) ("Jan. 24 Tr."); Transcript, dated Feb. 21, 2023 (Docket # 1168) ("Feb. 21 Tr.").

II. FACTS

A. Hearing Testimony

The Court heard testimony from eight witnesses. The SEC called Edward Little, Richard Coleman, Gary Ferrell, Kirk Jensen, David Chapman, Michael Cutsey, and Jacqueline Moessner. See Nov. 7 Tr. CCI called Stefano Vranca. Jan. 24 Tr. Neither Kontilai nor Veronica Kontilai called any witness.

We first summarize the relevant parts of each witness's testimony and later make credibility determinations.

1. Edward Little

Little was an attorney retained by Kontilai to represent him in this case, although Little eventually withdrew from the representation. Nov. 7 Tr. at 7:20-8:9. Little's firm was not responsible for maintaining the Collectors Café website and email domain, and the firm had no control over "anything related to paying or maintaining [the] platforms." Id. at 19:5-20:5. Little had "many conversations directly with [] Kontilai" regarding the documents contained on CCI email accounts, but the firm never gained access to potential discovery materials. Id. at 21:5-23:21.

2. Gary Ferrell

Ferrell was the CEO of a company called Public Media, which was owned by Ferrell and Kontilai. Nov. 7 Tr. at 102:16-103:2. Ferrell had full control of Public Media's finances, and the only connection between Public Media and CCI was that CCI paid Public Media $450,000 to produce a pilot episode for CCI's "Collector's Café" television program. Id. at 103:15-104:11. The payments for this pilot were made by Kontilai, rather than by an account in CCI's name. Id. at 142:14-143:22. Neither CCI nor Kontilai ever made a loan to Public Media, id. at 104:12-25, and Public Media was not "a predecessor to Collector's Coffee in any way," id. at 107:1-3.

Ferrell also served in corporate roles for CCI, including as secretary and treasurer, and as a company director. Id. at 110:22-111:3. Ferrell was a director "from the very beginning," and served continuously on the board during the year 2007, id. at 111:4-5, 20-25, although the board never actually met, id. at 153:5-6. Kontilai was likely the majority shareholder of CCI at the time and would not have needed board approval for "all decisions." Id. at 154:14-24.

To Ferrell's knowledge, Gail Holt was never named chairman of CCI's board, and was not "associated with CCI in any way" in 2007. Id. at 112:12-21. Ferrell reviewed a series of documents purporting to remove Ferrell from the CCI board and appoint Gail Holt, see Board & Shareholder Resolutions, annexed as Ex. 54 to PHPFF (Docket # 1052-58),⁴ but stated that he had never been removed as secretary to his knowledge, and had no knowledge of Gail Holt's supposed appointment as chairman, id. at 126:7-127:17. The board had not entered into an employment agreement with Kontilai, id. at 129:14-20, and had never authorized payment of a salary to Kontilai, id. at 130:8-131:5. The board had not approved any agreement allowing Kontilai or Veronica Kontilai to pay down any supposed loans or credits to CCI by using company credit cards for personal expenses. Id. at 131:9-24. Ferrell was not aware of a 2007 convertible note agreement for $4 million between CCI and Gail Holt, nor of a $1.411 million note between CCI and Kontilai. Id. at 132:13-134:23.

3. David Chapman

Chapman served on the board of directors for CCI for a period beginning in 2009, and later served as an "investor relations" consultant between 2013 and 2018. Declaration of David Chapman, dated Oct. 21, 2022 (Docket # 1093-5) ("Chapman Decl."), ¶¶ 2-3. Although he was a member of CCI's board of directors, Chapman did not attend any board meetings. Nov. 7 Tr. at 238:21-239:3. Chapman was not aware of "any compensation paid or owed by [CCI] to [] Kontilai" and was not aware of any loans from Kontilai to CCI. Chapman Decl. ¶ 2.

Chapman was aware of emails and oral statements in which Kontilai told prospective investors that Kontilai had not taken salary from CCI. Id. ¶ 4. On one occasion, he heard Kontilai tell investor Richard Coleman that CCI had "10-year contracts with hundre[d]s of dealers and $3.5 billion in inventory" and that "the contracts signed by Jackie Robinson⁵ were worth $36 million." Id. ¶ 14. Kontilai often sent private placement memoranda ("PPMs") and investment information directly to investors, and although Chapman communicated with investors from time to time, "Kontilai paid close attention to what prospective and existing investors were told and ... controlled what [Chapman] was permitted to say." Id. ¶¶ 8-10.

4. Richard Coleman

Coleman invested roughly $1.25 million into CCI on behalf of a trust. Declaration of Richard Coleman, dated Oct. 20, 2022 (Docket # 1093-3) ("Coleman Decl."), ¶ 2.

Coleman received numerous written representations from CCI and Kontilai regarding his investment. Id. ¶ 3. These included two subscription agreements and an April 28, 2008 PPM. Id.; see Email from L. Feliciano to R. Coleman, dated July 28, 2016 (Exhibit 64) (attaching July 2016 subscription agreement); Email from L. Feliciano to R. Coleman, dated Jul 28, 2016 (Exhibit 65) (attaching 2008 PPM); Email from L. Feliciano to R. Coleman, dated Jul 28, 2016 (Exhibit 66) (attaching a...