SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 15730 / May 4, 1998
Accounting and Auditing Enforcement Release No. 1032
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).
In the MATTER OF TIMOTHY J. BRANNON, Administrative Proceeding File No. 3-9597, Securities Act of 1933 Release No. 7533, Securities Exchange Act of 1934 Release No. 39949.
In the MATTER OF WILLIAM D. TETSWORTH, JR., CPA, Administrative Proceeding File No. 3-9598, Securities Exchange Act of 1934 Release No. 39950, Accounting and Auditing Enforcement Release No. 1031.
The Securities and Exchange Commission today filed a complaint in the United States District Court for the District of Columbia seeking permanent injunctions against Hollywood Trenz, Inc. ("HTI"), a Florida-based company that has been attempting to open a chain of family entertainment restaurants; Edward R. Showalter, HTI's Chairman of the Board, President, Chief Executive Officer, and Chief Financial Officer; Robert E. Burton, Jr., HTI's former Chief Operating Officer and Vice-Chairman; and Tracy A. Braime, Showalter's wife and a former consultant of the company. The Commission also seeks civil penalties from Showalter, Braime, and Burton; disgorgement of illegal gains and prejudgment interest from Showalter and Braime; and an order barring Showalter from serving as an officer or director of a public reporting company.
The complaint alleges that from 1993 through at least 1996, HTI engaged in two fraudulent schemes to raise capital illegally, both of which were orchestrated by Showalter. Specifically, the complaint alleges:
In the first scheme, HTI materially overstated the value of its primary asset, a portfolio of defaulted bank loans, by inflating its cost of $22,000 to over $7 million in two public filings. In the second scheme, HTI fraudulently raised over $2.57 million by using Forms S-8 to register stock purportedly to compensate consultants, when, in fact, the majority of the stock was transferred to HTI's creditors, other third parties, and outside investors who paid HTI directly for their shares. Showalter entered into undisclosed agreements with the consultants whereby the consultants retained only some of the Form S-8 shares and acted as conduits through which HTI distributed the remaining S-8 shares to its creditors, outside investors, and other third parties. Burton participated in this scheme by drafting many of the consulting agreements and instructing consultants on how and where to transfer their shares. One of these nominee consultants was Braime. Showalter and Burton signed or reviewed the Forms S-8 and HTI's periodic reports when each knew, or was reckless in not knowing, that they contained materially false information concerning the use of the S-8 stock. In addition, HTI's periodic reports, as well as its books and records misstated or failed to disclose material information concerning Showalter's executive compensation and related party transactions involving Showalter's wife and an HTI director.
The Commission alleges that by engaging in such conduct, HTI, Showalter and Burton violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 ("Exchange Act"), the antifraud provisions of the federal securities laws; and each of the defendants violated Sections 5(a) and 5(c) of the Securities Act, the registration provisions of the federal securities laws. In addition, the complaint further alleges that HTI and Showalter violated the reporting and other provisions of the Exchange Act, Sections 13(a) and 13(b)(2), and Rules 12b-20, 13a-1, 13a-11, and 13a-13. Finally, the Commission alleges that Showalter violated Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1, provisions concerning the falsification of books and records, and Exchange Act Rule 13b2-2, which prohibits making material misstatements to an accountant in connection with an audit.
The Commission today also instituted and simultaneously settled two related administrative proceedings. In the first, the Commission issued an Order against Timothy J. Brannon, a former registered representative and HTI consultant. The Commission's Order found that Brannon willfully violated the antifraud provisions of the federal securities laws by accepting undisclosed payments from HTI while employed at a brokerage firm in exchange for recommending HTI stock to many of his clients. The Order further found that Brannon violated the registration provisions of the federal securities laws by acting as a conduit in HTI's and Showalter's fraudulent S-8 distribution scheme. Without admitting or denying the findings contained therein, Brannon consented to the issuance of the Commission Order, which (i) orders him to cease and desist from committing or causing any violations of the provisions of the federal securities laws described above; and (ii) bars him from association with any broker, dealer, municipal securities dealer, investment adviser or investment company, with the right to reapply for association after five years.
In the second related proceeding, the Commission simultaneously instituted and settled administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice against William D. Tetsworth, Jr., a certified public accountant. The Order finds that Tetsworth issued an audit report containing an unqualified audit opinion on the financial statements of HTI's subsidiary that materially overstated the valuation of a portfolio of defaulted bank loans. Without admitting or denying the findings contained in the Order, Tetsworth consented to the issuance of the Order, which finds that he engaged in improper professional conduct by failing to obtain sufficient competent evidential matter to afford a reasonable basis for his audit opinion; and denies him the privilege of appearing or practicing before the Commission as an independent accountant, with the right to apply for reinstatement, subject to certain conditions, after two years.