The opinion of the court was delivered by: Ricardo M. Urbina, District Judge
HOLDING THE DEFENDANT IN CIVIL CONTEMPT AND IMPOSING SANCTIONS
This matter is before the court on the application of the Securities
Commission (the "plaintiff" or the "Commission") for an
order to show cause and for an order (1) holding the defendant in civil
contempt for his violation of the court's May 15, 2001 Final Judgment of
Permanent Injunction and Other Relief Against Edward R. Showalter ("Final
Judgment") requiring him to pay disgorgement in the amount of $538,400,
pre-judgment interest in the amount of $213,560, and a civil penalty in
the amount of $150,000 on or before May 31, 2001; (2) directing the
defendant to provide an accounting of his assets; and (3) requiring other
relief. In response to this application, the court held an extended show
cause hearing beginning on June 3, 2002. On this date, after considering
the application and opposition thereto, the court found the defendant,
Mr. Showalter, in civil contempt of the Final Judgment and ordered Mr.
Showalter to file a sworn accounting. Having considered further
submissions from the parties, the court now holds that Mr. Showalter has
failed to purge the court's finding that he is in civil contempt of court
and sanctions Mr. Showalter accordingly. The court also finds that Mr.
Showalter intentionally misrepresented the truth during his testimony at
the show cause hearing and when he swore to the accuracy of the
The Commission initiated this securities fraud case against Mr.
Showalter and other defendants involved with Mr. Showalter's failed
business, Hollywood Trenz, Inc., on May 4, 1998. In its complaint, the
Commission alleges that Mr. Showalter orchestrated two fraudulent schemes
to raise capital illegally. Compl. ¶ 1. In the first scheme,
Hollywood Trenz materially overstated the value of the primary asset of a
wholly owned subsidiary in reports filed with the Commission and
disseminated to the public. Id. ¶ 2. In the second scheme,
Hollywood Trenz fraudulently raised millions of dollars by issuing
Hollywood Trenz stock, pursuant to Form S-8*fn1 registration
statements, to "consultants," purportedly to compensate them for bona
fide services to Hollywood Trenz. Id. ¶ 3. The Commission alleged
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. Id. The
Commission further alleged that Mr. 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 Mr. Showalter's executive
compensation and certain related party transactions. Id. ¶ 4.
The court will first detail Mr. Showalter's violations of the court's
orders that occurred during the pendancy of the litigation. Next, the
court will introduce the current contempt proceedings relating to the
Commission's May 21, 2002 application for an order to show cause and for
1. Notice. On June 8, 2000, the court issued a scheduling order
setting trial in this matter for December 4, 2000. At that status
conference, the court warned 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. In addition,
on August 22, 2000, at a pretrial conference, Mr. Showalter's counsel,
Mr. Altschul, advised the court that Mr. Showalter was aware of the
December trial date, Mr. Showalter had received copies of all documents
in this case by facsimile, and it was Mr. Altschul's practice to keep
Mr. Showalter apprised of all developments in the case.
2. August 22, 2000 Order. At the August 22, 2000 pretrial
conference, the court denied without prejudice defense counsel's motion
to withdraw. The court attempted to reach Mr. Showalter by telephone, at
a number provided by Mr. Altschul, but was unsuccessful. Consequently,
the court ordered Mr. Showalter to appear by telephone for a hearing with
the court and counsel on September 8, 2000 at 9:00 a.m. so that the court
could ascertain, among other things, Mr. Showalter's current address and
whether Mr. Showalter was going to defend this case. The court expressed
its concern that Mr. Showalter was playing games with the court and
emphasized to Mr. Showalter's counsel the need for Mr. Showalter to
participate in the telephone conference. At some point thereafter, Mr.
Showalter's attorney advised him of the court's August 22, 2000 order
directing Mr. Showalter to appear by telephone on September 8, 2000.
Altschul, Landy & Collier, P.A.'s Renewed Motion to Withdraw as
Counsel, dated October 6, 2000 ("Altschul Renewed Motion") ¶ 3.
On September 8, 2000 at 9:00 a.m., the court convened a telephonic
conference call with counsel for Mr. Showalter and the Commission, during
which the court attempted to contact Mr. Showalter at various telephone
numbers provided by Mr. Altschul. At the first telephone number (for a
location in Beirut, Lebanon), the court reached a recording in French,
English, and Arabic indicating that the number was not in service. At
the second telephone number, Mr. Showalter's cellular telephone in
Lebanon, the court received a message that the telephone was "out of the
area." By failing to appear at the telephonic conference call, Mr.
Showalter violated the court's August 22, 2000 order.
3. September 7, 2000 Memorandum Order. On September 7, 2000,
Magistrate Judge Kay issued a memorandum order granting the Commission's
motion to compel production of documents and requiring Mr. Showalter,
within ten days, to:
(1) produce to the Commission all documents in his
possession, custody or control that are responsive to
the subpoena issued to him, dated June 20, 2000,
wherever those documents are located . . ., and (2)
attend a deposition at the Securities and Exchange
Commission . . . to answer questions about his
Mem. Order dated Sept. 7, 2000. In addition, Judge Kay ordered Star
Entertainment Group, Inc. ("Star"), a company controlled by Mr. Showalter
and for which he was an agent, to produce to the Commission all documents
responsive to the subpoena issued to Star. Id. Judge Kay further
ordered Star's custodian of records to attend a deposition regarding the
production of the records. See id. By January 5, 2001, the date of the
default order, neither Mr. Showalter nor Star had provided any documents
to the Commission, and indeed, neither responded to the subpoenas, in
violation of the September 7, 2000 memorandum order.
4. September 30, 2000 Order. On September 30, 2000, Judge Kay ordered
Mr. Showalter and Joseph Altschul, jointly and severally, to "pay to the
Securities and Exchange Commission its reasonable expenses incurred in
making its motion for an order to compel, including its attorney's fees,
in the amount of $5,600, within thirty days of the date of this Order."
Order dated Sept. 30, 2000. Mr. Showalter failed to comply with the
September 30, 2000 order.
5. November 21, 2000 Order. On November 7, 2000, the court granted
defense counsel's renewed motions to withdraw. Thereafter, on November
21, 2000, the court issued an order vacating the December 4, 2000 trial
date and scheduled a status hearing for December 4, 2000 at 10:00 a.m.
The court further instructed that "the court may enter default judgment
against any party who fails to appear at the status hearing now set for
December 4, 2000." Order dated Nov. 21, 2000.
The Commission made numerous efforts to serve Mr. Showalter with a copy
of the court's November 21, 2000 order at his business addresses and the
address that his lawyer provided to the court. On December 4, 2000, the
court held a status hearing, however, and Mr. Showalter failed to
appear. This failure to appear was in violation of the court's November
21, 2000 order, even though the defendant had been aware for months that
trial was scheduled to begin on that day. Mr. Showalter also failed to
make any effort to contact the court before the December 4, 2000
hearing. Thus, at the December 4, 2000 hearing, the Commission asked the
court to find Mr. Showalter in default and the court did so.
6. May 15, 2001 Final Judgment of Permanent Injunction and Other
Relief Against Edward R. Showalter. As noted initially, on May 15,
2001, this court issued the Final Judgment, setting forth the injunction
and other relief against the defendant as a result of the default
judgment entered against him on April 30, 2001. The court prohibited
Mr. Showalter from violating various securities laws and required him to
pay disgorgement in the amount of $538,400, pre-judgment interest in the
amount of $213,560, and a civil penalty in the amount of $150,000 on or
before May 31, 2001. Final J. dated May 15, 2001. The Commission mailed
the final judgment to Mr. Showalter's known addresses on May 18, 2001,
and posted the judgment on the Commission's website on October 25, 2001.
Pl.'s Application for Order to Show Cause ("Pl.'s Application"), Ungar
Decl. ¶ 4. The addresses the Commission used were Mr. Showalter's
residence and business addresses in Las Vegas, Nevada. Id. Though the
mail sent to these addresses was returned to the Commission, Mr.
Showalter used the Las Vegas business address on a tax return filed on
November 13, 2001. Id.
7. May 22, 2002 Order to Show Cause and for Other Emergency Relief.
Pursuant to an ex parte application by the Commission, this court
issued an Order to
Show Cause and for Other Emergency Relief on May 22,
2002. Pl.'s Application; Order dated May 22, 2002. The order to show
cause directed the defendant to respond by May 29, 2002 and set a hearing
for June 3, 2002. Order dated May 22, 2002. The order also required
Mr. Showalter to provide the clerk's office with his passport and ordered
various financial entities to freeze Mr. Showalter's assets. Id. Mr.
Showalter responded to the order to show cause on May 31, 2002, appeared
for the show cause hearing on June 3, 2002, and at the hearing
surrendered his passport to the court. 6/3/02 Tr. at 1, 20. By June 3,
2002 the defendant had submitted no payments toward the judgment.
8. June 3, 2002 Finding of Civil Contempt. The show cause hearing
began on June 3, 2002 and ended three days later. On June 3, 2002, the
court determined that the Commission met its initial burden by making a
prima facie showing for contempt and that Mr. Showalter had failed to
justify his noncompliance with the Final Judgment. 6/3/02 Tr. at 18-20.
Thus, the court found Mr. Showalter in contempt of the May 15, 2001 Final
Judgment. Id. Mr. Showalter's consistent disregard for his
responsibilities to the court indicated to the court that no lesser
sanction than a civil contempt order would be effective to ensure that
Mr. Showalter satisfies the requirements of the Final Judgment. Id. The
court sanctioned Mr. Showalter on June 3, 2002 by incarcerating him for
one day, freezing his assets, and refusing to return his passport.
6/3/02 Tr. at 18-20. In response to Mr. Showalter's promises to provide
sworn accountings for his own finances and those of his new company,
International Financial Group ("IFG"), the court released him from jail
and unfroze some of his assets. 6/4/02 Tr. at 50-53; 6/6/02 Tr. at 205.
Following are findings of fact and conclusions of law relating to the
show cause hearing and the subsequent discovery and submissions regarding
the defendant's assets and his ability to purge himself of the civil
A. The May 15, 2001 Final Judgment
1. On May 15, 2001, this court enjoined Mr. Showalter from violating
the anti-fraud provisions and other provisions of the federal securities
laws, and ordered Mr. Showalter to pay disgorgement in the amount of
$538,400 and pre-judgment interest in the amount of $213,560 on or before
May 31, 2001. Final J. dated May 15, 2001.
2. Mr. Showalter made no payments on the judgment until more than a
year later — $300 on June 17, 2002; $150 on July 22, 2002; $1,000
on August 27, 2002; and $500 on August 29, 2002. 6/25/02 Tr. at 173;
Ross, Dixon & Bell letters dated June 17, July 22, Aug. 27, and Aug.
B. The Defendant's Extravagant Lifestyle
Since the Final Judgment
3. In 2002, the defendant has received a salary of at least
$8,000-$10,000 per month. Adler Decl. Ex. 3 at 5; 6/25/02 Tr. at 157-61;
6/4/02 Tr. at 37-38; Ross Dixon & Bell letter dated Aug. 13, 2002.
4. Since the Final Judgment, Mr. Showalter has taken extravagant
vacations at luxury resorts. Following are three examples:
a) In late January 2002, Mr. Showalter stayed at the St. Regis
Monarch Beach Resort & Spa with, "[a] friend of mine. I don't
— I can't recall her name." 6/26/02 Tr. at 271. Mr. Showalter
used his IFG check card to pay for resort charges totaling over $1,900
though he explained that the charges were "personal. They are for me."
b) Mr. Showalter also vacationed at the Disney Grand Californian
Hotel in January 2002, accompanied by "I don't recall her name." Id. at
329. On this vacation Mr. Showalter charged over $500 to his personal
credit card, which he ...