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Securities and Exchange Commission v. Showalter

September 12, 2002

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
EDWARD R. SHOWALTER, DEFENDANT.



Document No. 74

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

MEMORANDUM OPINION HOLDING THE DEFENDANT IN CIVIL CONTEMPT AND IMPOSING SANCTIONS

I. INTRODUCTION

This matter is before the court on the application of the Securities and Exchange 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 tha t Mr. Showalter intentionally misrepresented the truth during his testimony at the show cause hearing and when he swore to the accuracy of the accounting documents.

II. BACKGROUND

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 other relief.

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 document production. 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.

Pursuant to Judge Kay's memorandum order, the Commission also duly noticed depositions of Mr. Showalter's and Star's custodian of records for September 18, 2000 at the Commission's offices in Washington, D.C. 9/18/00 Tr. at 5-6. Mr. Showalter and Star (as well as their counsel) failed to appear at the court-ordered depositions, in violation of the September 7, 2000 memorandum order. Id. at 4-8. After Commission counsel contacted Mr. Showalter's counsel by telephone from Mr. Showalter's scheduled deposition on September 18, 2000, Mr. Altschul advised Commission counsel that he had informed Mr. Showalter in a telephone conversation on September 13, 2000 about the depositions, and that Mr. Showalter and Star would not be appearing at the depositions. Id. at 2-9.

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 Nove mber 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 contempt finding.

III. FINDINGS OF FACT

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. 29, 2002.

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. ...


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