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Securities and Exchange Commission v. Hollywood Trenz

January 5, 2001

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
V.
HOLLYWOOD TRENZ, INC., EDWARD SHOWALTER, TRACY BRAIME, AND ROBERT E. BURTON, DEFENDANTS.



The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

Document No. None

MEMORANDUM OPINION

Setting Forth Reasons for Finding that Defendant Edward Showalter is in Default

I. INTRODUCTION

The Securities and Exchange Commission ("SEC" or "Commission") commenced this securities-fraud action more than two and a half years ago, alleging that the defendants had orchestrated two fraudulent schemes to raise capital in violation of the federal securities laws. The SEC sought permanent injunctions against the defendants, as well as disgorgement, civil penalties, and a permanent officer-and-director bar against defendant Edward Showalter. Without admitting or denying any of the allegations in the complaint, two defendants, Hollywood Trenz and Robert Burton, consented to entries of final judgment against them. The other two defendants, Edward Showalter and Tracy Braime, filed answers in which they denied the SEC's allegations.

This matter is now before the court on the SEC's oral motion that the court find that defendant Showalter is in default. Throughout the course of this litigation, Edward Showalter has consistently ignored the court's instructions and defied its orders. At a status hearing held on December 4, 2000, at which Showalter failed to appear despite being sent notice, the court determined that Showalter was in default. The purpose of this Memorandum Opinion is to set forth the reasons underlying the finding that Mr. Showalter is in default and to support the entry of default made by the court clerk.

II. BACKGROUND

Hollywood Trenz, a publicly held Delaware corporation headquartered in Fort Lauderdale, Florida, is engaged in the development of family-entertainment restaurants with a Hollywood theme, though at the time the SEC initiated this suit, it had not completed construction of any such restaurants. See Compl. ¶ 10. Edward Showalter has been the president, chief executive officer, chief financial officer, and chairman of the board of Hollywood Trenz since 1993. See id. ¶ 11. Tracy Braime, who married Mr. Showalter in September 1994, worked as an interior design consultant for Hollywood Trenz during 1995 and 1996. See id. ¶ 13.

In its complaint, the SEC alleges that Showalter orchestrated two fraudulent schemes to raise capital illegally. See Compl. ¶ 1. According to the SEC, in the first scheme, Hollywood Trenz materially overstated the value of the primary asset of a wholly owned subsidiary, a portfolio of defaulted bank loans, in reports filed with the SEC and disseminated to the public. See id. ¶ 2. In the second scheme, Hollywood Trenz fraudulently raised millions of dollars by issuing Hollywood Trenz stock, pursuant to Form S-8 registration statements, to "consultants," purportedly to compensate them for bona fide services to Hollywood Trenz. *fn1 See id. ¶ 3. The SEC alleges that the majority of the S-8 stock was used to raise capital for Hollywood Trenz by using the consultants as conduits through which Hollywood Trenz distributed the shares to the public. See id. The SEC further alleges that Showalter caused Hollywood Trenz's periodic reports filed with the Commission, as well as Hollywood Trenz's books and records, to misstate or fail to disclose other material information, including the amount of Showalter's executive compensation and certain related party transactions. See id. ¶ 4.

On June 8, 2000, the court issued a scheduling order setting trial in this matter for December 4, 2000. As that date approached, however, the defendants' repeated defiance of court orders raised the possibility that the defendants would not appear for trial. Out of an abundance of caution, the court vacated the trial and set a status hearing for the same date. In its order vacating the trial date and setting a status hearing, the court warned the parties that "the court may enter default judgment against any party who fails to appear at the status hearing now set for December 4, 2000." See Order dated Nov. 21, 2000. Although defendant Braime participated in the status hearing by teleconference, defendant Showalter made no appearance, telephonic or otherwise. Nor did he contact the court since that time to explain his failure to appear. Accordingly, the court found that Mr. Showalter was in default, and instructed the SEC to submit proposed findings of fact and conclusions of law in support of this finding. As the court's own findings of facts will illustrate, Mr. Showalter's behavior evinces repeated and willful disregard of the court's orders in this case, warranting the finding that he is in default.

III. FINDINGS OF FACT

A. DEFENDANT SHOWALTER WAS AWARE OF THE COURT'S SCHEDULING ORDERS

At a status hearing on June 8, 2000, the court issued a Pretrial Scheduling and Procedures Order, setting forth, among other things, a trial in this case for December 4, 2000. At the same status hearing, the court admonished Mr. Showalter's counsel that Mr. Showalter needed to give his full attention to the case, restructure his priorities, and personally attend a mediation session with United States Magistrate Judge Alan Kay on June 29, 2000. Mr. Showalter's appearance at the June 29, 2000 mediation session with Magistrate Judge Kay indicates that he was aware of the schedule in this case.

On August 11, 2000, the filing deadline for the parties' joint pretrial statement, Mr. Showalter's attorneys (lead counsel Joseph Altschul, Esq., and local counsel, David Durbin, Esq.) filed motions to withdraw as counsel. In his motion to withdraw, Joseph Altschul advised the court that he had served Mr. Showalter at his last known address "with a copy of this motion [to withdraw] and a notice advising [the defendants] to obtain other counsel, or if the party intends to conduct the case pro se or to object to the withdrawal, to do so by notifying ...


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