U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22813 / September 25, 2013
Accounting and Auditing Enforcement Release No. 3492 / September 25, 2013
Securities and Exchange Commission v. Troy Lyndon and Ronald Zaucha, Civil Action No. CV13 00486 SOM KSC (D. Haw. September 24, 2013)
SEC Charges CEO of Video Game Company and Purported Consultant in Revenue Inflation Scheme
On September 24, 2013, the Securities and Exchange Commission charged the founder of a religious-themed video game manufacturer and his friend with scheming to falsely inflate the company's revenue by nearly 1,300 percent in a one-year period through sham circular transactions.
The SEC alleges that Troy Lyndon, who serves as the company's CEO and CFO, caused Left Behind Games Inc. to issue almost two billion shares of stock to Ronald Zaucha as purported compensation for consulting services to the California-based company. The true purpose of the arrangement was to enable Zaucha to sell millions of unregistered shares of Left Behind Games stock into the market and then kick back a portion of his stock proceeds to the company in order to prop up its revenue at a time when it was in dire need of additional funds.
The SEC's complaint was filed September 24, 2013. Lyndon lives in Honolulu and Zaucha lives in Maui. The company's stock was suspended by the SEC today.
According to the SEC's complaint, Left Behind Games was founded in 2001 and touted itself as "the only publicly-traded exclusive publisher of Christian modern media" and "the world leader in the publication of Christian video games and a Christian social network provider." However, financial troubles caused the company to terminate all of its employees and close its office at the end of 2011.
The SEC alleges that Lyndon and Zaucha concocted their scheme beginning in 2009 in an apparent last-ditch fraudulent effort to save the company, which was unprofitable and severely undercapitalized at the time. Left Behind Games issued stock to Zaucha for his so-called consulting services, and at Lyndon's direction he promptly sold virtually all of his stock for approximately $4.6 million in proceeds. Zaucha then kicked back approximately $3.3 million of these proceeds to the company in three deceiving ways.
The SEC alleges that Zaucha first paid the company $871,000 between September 2009 and June 2010 for what his consulting agreement termed as "early-sell fees" for his excessive sale of stock. Secondly, in December 2010, Zaucha formed a company called Lighthouse Distributors and used the proceeds of his stock sales to finance the purchase of approximately $1.38 million in old and obsolete inventory from Left Behind Games. Lighthouse simply gave most of these products away to churches and religious organizations, yet Left Behind Games improperly recognized the revenue from these sham transactions and falsely claimed that its revenue had increased nearly 1,300 percent from the prior fiscal year. Zaucha later kicked back another $1 million to Left Behind Games as instructed by Lyndon. Meanwhile, Lyndon allowed Zaucha to retain $1.28 million of his stock sale proceeds for personal uses, which included the purchase of condominiums in Maui and Orange County, Calif.
Zaucha performed few, if any, consulting services, according to the SEC's complaint. Each of the consulting agreements was vague about the services that Zaucha would provide. One agreement noted that Zaucha had experience in marketing related to non-profit corporations when, in fact, Lyndon understood Zaucha's experience to be as a pastor running prison ministries rather than in marketing. Two agreements also vaguely stated that Zaucha would perform services to build an "independent rep network" to contact church pastors in an effort to offer Left Behind Games products. In reality, Left Behind Games had no "network" of independent representatives calling potential purchasers of its products.
The SEC's complaint alleges that Lyndon and Zaucha violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint also alleges that Lyndon violated Section 13(b)(5) of the Exchange Act, and Rules 13a-14, 13b2-1, and 13b2-2, and that he aided and abetted Left Behind Games' violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. The complaint seeks permanent injunctions, financial penalties, and penny stock bars against Lyndon and Zaucha, and an officer-and-director bar against Lyndon.
The SEC's investigation, which is continuing, has been conducted by Lucee Kirka, Carol Shau, and Marc Blau of the Los Angeles office. The SEC's litigation will be led by Karen Matteson and Amy Longo.