by T. GormanPosted on Posted in SECActions

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).

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by T. GormanPosted on Posted in SECActions

The SEC brought another insider trading action tied to convicted insider trader Raji Rajaratnam. Portions of the complaint stem from the wire taps used to build that case. SEC v. Taylor, Civil Action No. 13 CV 6670 (S.D.N.Y. Filed September 20, 2013).

Kieran Taylor was the Senior Director of Marketing at Akamai Technologies, Inc. Mr. Taylor learned through his employment that Akamai was planning to lower guidance for the year at the time it announced the second quarter 2008 financial results on July 30, 2008.

After learning that the company would lower guidance for the year, Mr. Taylor sold 2,500 shares of Akamai stock he held in his personal brokerage account. At about the same time he telephoned Danielle Chiesi, a portfolio manager at hedge fund advisory firm New Castle funds LLC. Ms. Chiesi and Mr. Taylor had been life long friends. When the two concluded their conversation, Ms. Chiesi telephone another long time friend, Raji Rajaratnam. In a telephone call captured on tape pursuant to a wire tap, Ms. Chiesi told her friend that according to her Akamai source, yearly guidance would be lowered at the time of the quarterly earnings announcement. While the stock was trading at about $32 per share, company employees thought the price would drop to about $25 Mr. Rajaratnam learned.

The next day New Castle Funds began shorting Akamai shares and purchased put options. Between July 25 and 30, 2008 New Castle Funds sold short over 300,000 shares of Akamai stock and acquired 1,500 put options. Mr. Rajaratnam increased the short position of the Galleon Management hedge funds from 300,000 to 875,000.

Ms. Chiesi also tipped Steven Fortuna of hedge fund advisory firm S2 Capital. Subsequently, that fund established a sizable short position in Akamai stock. It also purchased put options.

On July 30, 2008, after the close of the markets, Akamai announced its second quarter financial results. It also lowered its guidance for 2008. On the next trading day the price of Akamai shares, which had closed at $31.25 before the announcement, opened down at $25.06 and fell to $23.34 by the close. Mr. Taylor avoided losses of about $20,000. New Castle had gains of about $2.4 million. Galleon and S2 had profits, respectively, of $5.1 million and $2.4 million.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

Mr. Taylor settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement of $20,635, prejudgment interest and a penalty of $120,635. In addition, he agreed to the entry of an officer director bar for five years.

To date the SEC has charged 34 firms and individuals in its Galleon related investigation. Those cases involved trading in 15 different securities and illicit profits of $96 million.

Program: Celesq and West Legal Ed present: Financial Fraud: Avoiding the Path of the New SEC Investigative Priority, online on September 25, 2013 at 12:00 p.m. EST (here).

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