SEC Files A Financial Fraud Action Against CEO and Consultant
The Commission filed a financial fraud action against the CEO of, and a consultant to, a company which claims to have sold Christian video games. The defendants fraudulently inflated the revenue of the company by nearly 1,300% in one year through a sham transaction, according to the complaint. SEC v. Lyndon, Civil Action No. CV13 00486 (D. Haw. Filed September 24, 2013).
Defendant Troy Lyndon is the founder, CEO, CFO and Chairman of the Board of Left Behind Games, Inc. Ronald Zaucha, also a defendant, is Mr. Lyndon’s friend and purportedly a consultant to the company. He claims to have been involved in conducting a ministry in prisons since the late 1990s. Mr. Zaucha is also the founder of Lighthouse Distributors, Inc. That company supposedly is a wholesaler of Christian-themed video games.
The financial fraud centers on apparent efforts to prop-up Left Behind Games, d/b/a Inspired Media Entertainment, based in Murrieta, California. The company, whose shares are registered with the Commission under the Exchange Act, was founded by Mr. Lyndon in 2001. In its annual report the company states it is “the world leader in the publication of Christian video games and a Christian social network provider.”
Since its founding, Left Behind has never had a profitable year. At some point Mr. Lyndon had Left Behind retain Mr. Zaucha as a consultant under three separate agreements. Each was vague. Mr. Zaucha preformed few actual duties under the agreements, according to the complaint.
In mid-2009 the two men orchestrated a scheme to inflate the revenue of Left Behind. Under the consulting agreements the company began issuing shares to Mr. Zauha for his services. Those shares, which were not registered, were promptly sold into the market, netting Mr. Zauha about $4.6 million.
About $3.3 million from the stock sales was then paid back to Left Behind back under three arrangements:
Early sell: Under one almost $900,000 was paid to the company as “early sell fees resulting from excessive sales of stock.
Game purchase: Under a second arrangement Mr. Zaucha had Lighthouse Distributors use his Left Behind stock proceeds to finance the purchase of about $1.38 million in old and possibly obsolete inventory. Lighthouse donated much of the inventory to churches and religious organizations.
Loans/investments: Under another arrangement Mr. Zaucha paid about $1 million to Left Behind which was booked in a variety of ways including as a loan and an investment.
Left Behind recognized revenue on the sales to Lighthouse immediately, although for other sales it claimed to use a different revenue recognition method which would have delayed taking the proceeds into income. This permitted the company to report $1.6 million in revenue in its March 31, 2013 form 10-K.
Nevertheless, by 2011 the company terminated all of its employees and closed its offices. Its corporate status has been revoked by Nevada where it was reincorporated and Delaware where it was initially incorporated.
The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b), 13(a), 13b2-5 and 20(a). The case is in litigation. See Lit. Rel. No. 22813 (September 25, 2013).