UNITED STATES OF AMERICA
|In the Matter of
TIMOTHY J. BRANNON,
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDDINGS, MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS, AND ISSUING CEASE-AND-DESIST ORDER|
The Commission deems it appropriate that public administrative proceedings be, and they hereby are, instituted against Timothy J. Brannon ("Brannon") pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Sections 15(b)(6) and 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these administrative proceedings, Brannon has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, Brannon, without admitting or denying the findings contained in this Order, consents to the issuance of this Order Instituting Public Administrative Proceedings, Making Findings, Imposing Remedial Sanctions, and Issuing Cease-and-Desist Order ("Order"), the findings contained herein, and the imposition of the relief set forth below.
The Commission makes the following findings: 1
This proceeding concerns the conduct of Timothy J. Brannon, a former registered representative at a brokerage firm and later a consultant of Hollywood Trenz, Inc. ("HTI"). While employed at the brokerage firm from October 1991 through August 1994, Brannon willfully violated the antifraud provisions of the federal securities laws by accepting undisclosed compensation from HTI in exchange for directing many of his brokerage clients to purchase HTI stock. Moreover, after leaving the brokerage firm and going to work for HTI, Brannon participated in a scheme to distribute unregistered HTI stock. At the direction of Edward R. Showalter ("Showalter"), HTI's Chairman of the Board, President, Chief Executive and Chief Financial Officer, Brannon transferred most of the stock issued to him pursuant to Form S-8, purportedly as compensation, to various investors, creditors and consultants of HTI. Because these transfers were designed to raise capital for HTI and were not covered by any applicable registration exemptions, Brannon violated the registration provisions of the federal securities laws.
2.Respondent: Timothy J. Brannon
At all times from October 1991 through August 1994, Timothy J. Brannon, age 45, was employed as a registered representative for Strategic Resource Management, Inc. ("the brokerage firm"), a registered broker-dealer located in Denver, Colorado. Brannon left the brokerage firm in August 1994 to work for HTI on a consulting basis as the manager of HTI's proposed Denver theme restaurant. He left HTI on or about August 1995. Brannon has not worked in the securities industry since leaving the brokerage firm and is currently employed as a mortgage broker in Colorado.
3.Issuer: Hollywood Trenz, Inc.
Hollywood Trenz, Inc. is a Delaware corporation headquartered in Fort Lauderdale, Florida. HTI's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and trades in the over-the-counter market. From approximately April 1993 to the present, HTI has been solely engaged in efforts to develop family entertainment restaurants, but it has been unable to complete construction of any such restaurants to date.
4.Undisclosed Payments from Hollywood Trenz, Inc.
From October 1993 through May 1996, HTI registered offerings totaling more than 25 million shares of HTI common stock pursuant to Forms S-8. While all of these shares were registered purportedly to compensate employees and consultants of HTI, in actuality the vast majority of the shares were used to raise capital for the company. Indeed, HTI raised in excess of $2.57 million through sales to investors of S-8 stock during 1994 and 1995. Many of these investors had been referred to HTI by Brannon.
From April 1993 through August 1994, Brannon directed over twenty of his clients to purchase "discounted" stock directly from HTI. 2 This "discounted" stock price was actually the option exercise price for S-8 stock issued to several HTI consultants. When these consultants were unable or unwilling to pay the exercise price, Showalter reclaimed the S-8 stock from the consultants and then utilized Brannon's services to identify and direct potential investors to HTI. In addition, while still associated with the brokerage firm, Brannon contacted other brokers in the Denver area and encouraged them to sell HTI stock to their customers.
Through August 1994, individuals identified as clients of Brannon's made payments totaling at least $934,000 directly to HTI for S-8 shares. From January through August 1994, Brannon received approximately $155,000 in payments from HTI. However, most of Brannons clients were unaware that he was receiving any such payments from HTI.
5.Fraudulent Scheme to Distribute Form S-8 Shares
Brannon left the brokerage firm in August 1994 to go to work for HTI on a consulting basis. In addition to acting as the manager of HTI's proposed Denver restaurant, Brannon also continued to encourage other brokers to recommend HTI stock to their clients. Purportedly in exchange for these services, 2.72 million shares were registered on four Forms S-8 and issued to Brannon or TJB Consultants -- Brannon's one-man company formed at Showalter's suggestion solely as a depository for S-8 stock -- between September 1994 and July 1995. Brannon kept only 307,984 of the 2.72 million shares (approximately 11 percent); the remainder were transferred to outside investors, creditors, and consultants of HTI to meet HTI's capital requirements.
Throughout this period, Brannon was aware that Showalter was registering stock on Forms S-8 and issuing it to Brannon primarily for the purpose of distributing that stock to others. Brannon never had control of the S-8 shares issued to him and did not know, prior to the registration of any particular Form S-8, how much of the stock he would be able to keep, that amount being determined entirely by Showalter. Brannon acted as a "nominee" in HTI's distribution scheme because he knew that HTI needed to raise money to complete the Denver facility and was issuing S-8 stock to raise capital.
1.Brannon Violated the Antifraud Provisions of the Federal Securities Laws
Section 17(a) of the Securities Act prohibits a person from making misstatements or omissions of material fact in the offer or sale of a security. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the making of such statements in connection with the purchase or sale of a security. Establishing violations of Sections 17(a)(1) and 10(b) and Rule 10b-5 (collectively "antifraud provisions") requires a showing of scienter. The Supreme Court has defined scienter as a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976). Reckless or willful disregard of the truth satisfies the scienter requirement. IIT v. Cornfeld, 916 F.2d 909, 923 (2d Cir. 1980).
In the context of Sections 10(b) and 17(a), the term "material" refers to "those matters to which a reasonable investor would attach importance in determining whether to buy or sell the securities registered." 17 C.F.R. § 240.12b-20; see also Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (defining materiality as a substantial likelihood that a reasonable investor would consider the information important). Undisclosed payments to brokers are material facts that should be disclosed to investors due to an actual or potential conflict of interest. See SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992) ("Misrepresenting or omitting to disclose a brokers financial or economic incentive in connection with a stock recommendation constitutes a violation of the anti-fraud provisions."); cf. SEC v. Softpoint, Inc., 958 F. Supp. 846 (S.D.N.Y. 1997) (citing SEC v. Scott, 565 F. Supp. 1513, 1527 (S.D.N.Y. 1983) (stating that an apparent kickback agreement between an issuer and an underwriter is material because it "raises an inherent conflict of interest"), aff'd sub nom. SEC v. Cayman Islands Reinsurance Corp., 734 F.2d 118 (2d Cir. 1984)).
Brannon willfully violated the antifraud provisions by failing to disclose to his brokerage clients that he was receiving compensation from HTI in exchange for recommending HTI stock. HTI received payments totaling at least $934,000 from Brannon's clients through August 1994. From January 1994 until he left the brokerage firm in August 1994, Brannon received undisclosed payments from HTI totaling $155,000. Omitting to disclose such a significant financial incentive in connection with a stock recommendation constitutes a violation of the antifraud provisions.
2.Brannon Violated the Registration Provisions of the Securities Act
Brannon violated Sections 5(a) and 5(c) of the Securities Act by selling unregistered S-8 securities into the United States markets without an applicable exemption.
Pursuant to Section 5 of the Securities Act, it is unlawful for any person to sell or offer to sell a security unless it has been registered. Scienter is not required to establish a violation of Section 5. See, e.g., Stokes v. Lokken, 644 F.2d 779, 784 (8th Cir. 1981). A prima facie case for a violation of Section 5 is established by a showing that: (1) no registration statement was in effect or had been filed as to the securities; (2) the defendants, directly or indirectly, sold or offered to sell the securities; and (3) the sale was made through the use of interstate facilities or the mails. SEC v. Continental Tobacco, Inc., 463 F.2d 137, 155 (5th Cir. 1972). Once a prima facie case for a violation of Section 5 has been established, the respondent assumes the burden of proving that the securities offered qualified for a registration exemption. SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953); SEC v. Murphy, 626 F.2d 633, 641, 645 (9th Cir. 1980).
Form S-8 permits an issuer to issue stock to "employees," which is defined to include consultants and advisors, for compensatory purposes, "provided that bona fide services shall be rendered by consultants or advisors and such services must not be in connection with the offer or sale of securities in a capital-raising transaction." See General Instructions to Form S-8, Federal Securities Laws (CCH) ¶ 8141, at 7231 (emphasis in original). In this case, however, most of the 2.72 million shares of stock registered on Forms S-8 and issued to Brannon were never intended to compensate him for his consulting services, but rather were designed from the outset to provide working capital for HTI. HTI used this S-8 stock to raise cash from investors and to pay off its various creditors and other consultants. As a result, the stock issued to Brannon was not properly registered under the respective Forms S-8 because these registration statements only covered sales of stock by HTI to "employees." As described above, HTI made no transactions with "employees"; Showalter only used Brannon's name to disguise sales of HTI's stock into the market.
Brannon violated Sections 5(a) and 5(c) of the Securities Act by virtue of his direct participation in the distribution of HTI's unregistered stock. As defined in Section 2(a)(11) of the Securities Act, Brannon was a statutory underwriter, because, as Showalter's nominee, he acquired the HTI stock with a view toward its distribution. Section 4(1) of the Securities Act exempts from registration transactions by any person other than an issuer, underwriter, or dealer. Since Brannon is an underwriter, this exemption is not available to him. In addition, none of Brannon's sales were effected in accordance with the Rule 144 safe-harbor: the stock was not held the requisite length of time, and the transactions did not meet Rule 144's manner-of-sale requirements. Finally, no other exemptions are available for these transactions. Brannon therefore violated Sections 5(a) and 5(c) of the Securities Act by participating in the scheme to distribute unregistered securities orchestrated by Showalter.
Based on the foregoing, the Commission finds that Brannon violated Sections 5(a) and 5(c) of the Securities Act and willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Brannon has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay either a civil penalty or disgorgement plus prejudgment interest. The Commission has reviewed the sworn financial statement and other evidence provided by Brannon and has determined that Brannon does not have the financial ability to pay a civil penalty or disgorgement of $155,000, representing undisclosed payments from HTI, plus prejudgment interest.
In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer of Settlement. In determining to accept the Offer, the Commission considered the cooperation afforded the Commission staff.
Accordingly, IT IS HEREBY ORDERED that:
A. Brannon, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and
B. Brannon, pursuant to Section 15(b)(6) of the Exchange Act, be, and hereby is, barred from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, with the right to reapply for association after five years to the appropriate self-regulatory organization, or if there is none, to the Commission;
C. Brannon shall pay disgorgement of $155,000 plus prejudgment interest, but that payment of such amount be waived based upon Brannon's demonstrated financial inability to pay; and
D. the Division of Enforcement may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Brannon provided accurate and complete financial information at the time such representations were made; (2) determine the amount of the civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Brannon's offer of settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Brannon was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed and whether any additional remedies should be imposed.
Brannon may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding.By the Commission.
Rule 141 of the Commission's Rules of Practice provides that the Secretary, or another duly authorized officer of the Commission, shall serve a copy of the Order Instituting Public Administrative Proceedings, Making Findings, Imposing Remedial Sanctions, and Issuing Cease and Desist Order on each person named as a party in the Order or their legal agent.
The attached Order Instituting Public Administrative Proceedings, Making Findings, Imposing Remedial Sanctions, and Issuing Cease and Desist Order has been sent to the following parties and other persons entitled to notice:
The Honorable Brenda P. Murray
Chief Administrative Law Judge
Securities and Exchange Commission
Mail Stop 11-6
450 Fifth Street, N.W.
Washington, D.C. 20549
Securities and Exchange Commission
Division of Enforcement
450 Fifth Street, N.W.
Mail Stop 7-9
Washington, D.C. 20549
Attention: Andrew L. Snowdon, Esq.
Timothy J. Brannon
8131 Storm King Peak
Littleton, CO 80127
|1||The Commission's findings herein are made pursuant to Brannon's Offer and are not binding upon any other person or entity in this or in any other proceeding.|
|2||Brannon was unaware that the HTI stock he was recommending to his clients during this time had been issued by HTI to consultants pursuant to Forms S-8.|
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