Securities and Exchange Commission
Litigation Release No. 17204 / October 25, 2001
Accounting and Auditing Enforcement Release No. 1472 / October 25, 2001
Securities and Exchange Commission v. Hollywood Trenz, Inc., Edward R. Showalter, Tracy A. Braime, and Robert E. Burton, Jr., Civil Action No. 98-1106 (RMU) (D.D.C. May 4, 1998).
SEC Obtains Final Judgments Against Remaining Defendants in S-8 Scheme
The Securities and Exchange Commission today announced that on May 15, 2001 and October 11, 2001, the Honorable Ricardo M. Urbina, United States District Judge for the District of Columbia, entered final judgments of permanent injunction and other relief against defendants Edward R. Showalter and Tracy A. Braime. These judgments conclude a civil action filed by the Commission on May 4, 1998 against Hollywood Trenz, Inc. ("HTI") and various individuals.
In its Complaint, the Commission alleged, among other things, that Showalter, HTI's Chairman of the Board, President, Chief Executive Officer, and Chief Financial Officer, orchestrated two fraudulent schemes to raise capital illegally. In the first scheme, HTI materially overstated the value of the primary asset of a wholly-owned subsidiary, a portfolio of defaulted bank loans, in reports filed with the Commission and disseminated to the public. In the second scheme, HTI fraudulently raised millions of dollars by issuing HTI stock to nominee consultants pursuant to Form S-8 registration statements. While the registered offerings were all purportedly to compensate HTI's employees or consultants for bona fide services, in at least nine of these cases the free-trading S-8 stock was used to raise capital for or pay expenses on behalf of HTI, often pursuant to undisclosed agreements between Showalter and the consultants. According to the Complaint, Showalter directed the nominees to transfer the great majority of their shares to various investors, HTI creditors and consultants, and, in exchange for their cooperation, these nominees were permitted to retain the remaining shares.
The Commission further alleged that Tracy A. Braime, then Showalter's wife, was one of HTI's principal nominee consultants. At Showalter's direction, she transferred millions of shares of S-8 stock and loaned the proceeds from sales of other S-8 shares to HTI, where it was used to pay HTI's payroll and various creditors and consultants, as well as many of Showalter's personal expenses. Proceeds from the sale of S-8 stock received by Braime were also used to make the downpayment and monthly mortgage payments on an expensive home where Showalter and Braime lived. In total, the Commission alleged that Showalter and Braime were unjustly enriched by proceeds from the sale of at least 2.1 million shares of S-8 stock.
During the litigation, on September 30, 2000, the Court (the Honorable Alan Kay, United States Magistrate Judge) ordered that Showalter and his then attorney, Joseph E. Altschul, jointly and severally, pay to the Commission its expenses in the amount of $5,600 incurred in making a motion to compel production of documents from Showalter and a third party corporation Showalter controlled, which was also represented by Altschul. This obligation was subsequently paid.
On December 4, 2000, the Court ruled that Showalter was in default based upon his repeated violations of Court orders including his failures to appear for scheduled hearings and conferences. On May 15, 2001, the Court entered a Final Judgment of Permanent Injunction and Other Equitable Relief against Showalter, permanently enjoining him from violating, among other things, the antifraud, registration, reporting, and internal control provisions of the federal securities laws. Specifically, the Final Judgment against Showalter enjoins him from violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2), and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder. The Final Judgment further orders him to pay disgorgement in the amount of $538,400, together with prejudgment interest in the amount of $213,560; orders him to pay a civil penalty of $150,000; and bars him from serving as an officer or director of a public company.
On October 11, 2001, the Court entered a Final Judgment against Braime. In agreeing to settle this matter, Braime consented to a permanent injunction enjoining her from violating Sections 5(a) and 5(c) of the Securities Act, without admitting or denying the facts alleged in the Commission's Complaint. Moreover, the proposed final judgment against Braime holds her jointly and severally liable with Showalter for disgorgement of $368,000 plus prejudgment interest thereon, but waives payment of disgorgement and does not impose a civil penalty based upon sworn representations concerning her financial condition.
See also Litigation Release No. 15730 (May 4, 1998).