The founder of a religious-themed video game manufacturer, who resides in Honolulu, and his "close friend," who owns a condominium in Kihei, have been charged by the Securities and Exchange Commission in an alleged scheme to significantly inflate the company revenue "through sham circular transactions."
The SEC alleges that company founder Troy Lyndon, who serves as the chief executive officer and chief financial officer of Left Behind Games Inc., had the company issue almost 2 billion shares of stock to Ronald Zaucha as compensation for consulting services to the California-based company, said the SEC complaint filed in U.S. District Court in Hawaii on Tuesday.
The true purpose of the arrangement was to enable Zaucha to sell millions of unregistered shares of Left Behind Games stock and then kick back a portion of stock proceeds to the company to prop up its revenue when the company was recording millions in losses, the SEC said.
"Lyndon and Zaucha's scheme duped investors into believing Left Behind Games was becoming a successful enterprise when it was struggling to stay afloat," said Michele Wein Layne, director of the SEC's Los Angeles office. "Lyndon essentially gave Zaucha stock in exchange for phony revenue streams that created an inaccurate portrait of the company's financial health."
The SEC claims that Lyndon and Zaucha violated securities registration and anti-fraud statutes and that Lyndon violated laws by making misrepresentations to auditors and falsely certifying SEC filings. The complaint seeks permanent injunctions, financial penalties and penny stock bars against Lyndon and Zaucha, and an officer-and-director bar against Lyndon.
The company's stock was temporarily suspended by the SEC on Wednesday through Oct. 8 "due to a lack of current and accurate information about the company because it has not filed certain periodic reports with the commission."
The stock with symbol "LFBG" had been trading at less than a penny.
In a posting on his website (troylyndon.com) Wednesday, Lyndon issued a statement denying "intentional" violations and saying that he had asked the SEC for two years how he could self-report if there were any violations. He said that his attorney told him that "any person that earned shares could use them for any purpose."
"After our company asked the SEC directly for clarification regarding the proper way to book a series of transactions conducted with Mr. Zaucha, they've turned our request into a lawsuit against this CEO that has already given everything for the benefit of his investors, resulting in my own personal bankruptcy in 2012," Lyndon said.
Attempts to reach Zaucha were unsuccessful.
According to the SEC 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." The company developed games such as "Left Behind: Eternal Forces" and "Left Behind 3: Rise of the Antichrist."
Financial troubles caused the company to terminate all of its employees and to close its office at the end of 2011, the complaint said.
The SEC alleges that Lyndon and Zaucha concocted their scheme beginning in 2009 in an apparent last-ditch effort to save the company, which was unprofitable and severely undercapitalized at the time. For the fiscal year ending March 31, 2010, the company logged a net loss of $21.3 million, the complaint said.
Left Behind Games issued stock to Zaucha for consulting services, and at Lyndon's direction, he promptly sold virtually all shares for about $4.6 million, the complaint said. Zaucha then kicked back $3.3 million of the proceeds to the company in three ways.
* Zaucha paid the company $871,000 from September 2009 to June 2010 for what his consulting agreement termed "early-sell fees" for his excessive sale of stock, the complaint says.
* In December 2010, Zaucha formed a company called Lighthouse Distributors and used the proceeds of his stock sales to finance the purchase of about $1.4 million in old and obsolete inventory from Left Behind Games. Lighthouse gave most of these products away to churches and religious organizations, earning only a few thousand dollars, yet Left Behind Games improperly recognized the $1.4 million in revenue from these transactions and falsely claimed that its revenue had increased nearly 1,300 percent from the prior fiscal year, the complaint said. Lighthouse Distributors ceased operations in January 2012.
*Zaucha later kicked back another $1 million to Left Behind Games from the stock sale that was listed in the company books as "loans" and "investments."
Lyndon allowed Zaucha to retain $1.3 million of his stock sale proceeds for personal uses, which included the purchase of condominiums on Maui and in Orange County, Calif., the complaint said.
A search of county property tax records indicates that Zaucha is connected to a unit in Menehune Shores in Kihei. He is listed as the contact for the unit, owned by Menehune Shores #203 Land Trust. The website homeaway.com lists the unit as a vacation rental and Zaucha as its owner.
The county assessed the unit at $355,000.
On the Lighthouse Educational Ministries webpage, Zaucha lists himself as founder and executive director of the organization, a nonprofit formed in 2001 to prepare inmates for their release from incarceration.
The SEC claims that Zaucha performed few, if any, consulting services. 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 nonprofit corporations when, in fact, Lyndon understood Zaucha's experience to be as a pastor running prison ministries rather than in marketing.
The SEC's investigation, which is continuing, is being conducted by its Los Angeles office.
* Lee Imada can be reached at email@example.com.