United States District Court, D. Hawaii
Order Filed: August 20, 2014
For Securities And Exchange Commission, Plaintiff: Amy J. Longo, Lucee Kirka, LEAD ATTORNEYS, Securities and Exchange Commission, Los Angeles , CA; Karen Matteson, LEAD ATTORNEY, U.S. Securites and Exchange Commission Los Angeles, Los Angeles Regional Office, Los Angeles , CA.
Troy Lyndon, Defendant, Pro se, Honolulu , HI.
For Ronald Zaucha, Defendant: Donny E. Brand, LEAD ATTORNEY, PRO HAC VICE, Brand Law Firm, Santa Ana , CA; Lars Peterson, LEAD ATTORNEY, Law Office of Lars Peterson LLLC, Honolulu , HI.
ORDER GRANTING IN PART AND DENYING IN PART
PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT (ECF NO. 68); ORDER DENYING DEFENDANT
TROY LYNDON'S MOTION FOR SANCTIONS (ECF NO. 81), MOTION TO QUASH (ECF NO. 90),
MOTION FOR PERMANENT STAY OF CONSENT AND JUDGMENT (ECF NO. 101), AND REQUEST TO
EXTEND MOTIONS DEADLINE (ECF NO. 127); ORDER AFFIRMING MAGISTRATE JUDGE ORDER
CONCERNING DISCOVERY AND REJECTING APPEALS BY DEFENDANT TROY LYNDON (ECF NOs.
112 AND 118)
Susan Oki Mollway, Chief United States District Judge.
This case involves allegations of securities fraud.
On October 30, 2013, a consent to entry of judgment and permanent injunction in favor of Plaintiff Securities and Exchange Commission (" SEC" ) was filed. See ECF No. 20. On November 1, 2013, the court entered its Judgment of permanent injunction and other relief against Defendant Troy Lyndon. See ECF No. 22.
Before the court is the SEC's motion for summary judgment, seeking to establish the amount of monetary relief. The SEC calculates that Lyndon owes $3.3 million in disgorgement, plus prejudgment interest and a civil penalty. See ECF No. 68. Lyndon, proceeding pro se, opposes the motion, arguing that he was mistaken as to the scope of the consent he signed and of the Judgment, and that the effect of those documents should therefore be stayed. See ECF No. 101.
Lyndon has also filed his own motion, which seeks to quash the SEC's motion for
summary judgment and also seeks sanctions against the SEC for having allegedly threatened and intimidated him. See ECF Nos. 81 and 90. Lyndon appeals the Magistrate Judge's rejection of his requests for discovery and seeks an extension of the deadline to file motions. See ECF Nos. 112, 118, and 127.
At a hearing on June 30, 2014, the court said that it was inclined to grant the SEC's motion, but not inclined to award the full amount requested. The court also announced that it was inclined to deny all of Lyndon's motions and appeals. At the conclusion of the hearing, the court took the motions and appeals under advisement. Later that afternoon, Lyndon filed a request that this judge recuse herself. This court refrained from ruling on the motions and the appeals while the motion to recuse was pending before a different judge. On July 31, 2014, District Judge Leslie E. Kobayashi denied the motion to recuse. See ECF Nos. 131 and 142.
The court now rules on the motions before it, granting the SEC's motion in part and denying it in part. The court grants the SEC the relief it requests, but reduces the amount of disgorgement. The court awards $3,251,169 in disgorgement, prejudgment interest of $289,897.18, and a civil penalty of $150,000. The court denies all of Lyndon's motions and affirms the Magistrate Judge's order that is the subject of Lyndon's appeal.
II. FACTUAL BACKGROUND.
The SEC filed the Complaint in this matter on September 24, 2013. See ECF No. 1.
On October 23, 2013, Lyndon executed a Consent of Defendant Troy Lyndon to Entry of Judgment of Permanent Injunction and Other Relief (" Consent" ). This Consent was filed with the court on October 30, 2013. See ECF No. 20. In the Consent, Lyndon agreed to the entry of a judgment against him that 1) permanently enjoined him from violating certain securities laws; 2) prohibited him from acting as an officer or director of certain types of companies registered with the SEC or filing reports pursuant to the Exchange Act; and 3) prohibited him from participating in the offering of penny stocks. See Id., PageID # 91. Lyndon also acknowledged that the entry of a permanent injunction against him might have collateral consequences, including disqualification from participation in or association with certain organizations. See Id., PageID # 93. Lyndon agreed not to deny the allegations in the Complaint or make any public statement to that effect. Id., PageID #s 93-94.
The Consent included Lyndon's agreement to having this court " order disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange At, 15 U.S.C. § 77u(d)(3)." Id. Lyndon agreed that these amounts would be determined by this court based on a motion by the SEC, that prejudgment interest would run from August 4, 2011, and that, with respect to any such motion, Lyndon was 1) precluded from arguing that he had not violated the federal securities laws that were the subject of the Complaint in this matter; 2) agreeing not to challenge the validity of the Consent or the judgment thereon; and 3) for purposes of the motion, agreeing that the allegations of the Complaint were to be deemed to be true. Id., PageID #s 91-92. Accordingly, for purposes of this motion only, the court deems the allegations of the Complaint to be true instead of evaluating the factual record using the usual summary judgment standard. To the extent this order talks about Zaucha's conduct, the court does not
intend anything it says here to be binding on Zaucha.
Lyndon acknowledged in the Consent that he was entering into the agreement voluntarily, and that no " threats, offers, promises, or inducements of any kind have been made by the [SEC] or any member, officer, employee, agent, or representative of the [SEC} to induce [Lyndon] to enter into [the] Consent." Id., PageID # 92.
The Complaint alleges that Lyndon was the founder, chief executive officer, chief financial officer, and chairman of the board of Left Behind Games, Inc. See Complaint ¶ ¶ 3, 13, ECF No. 1, PageID #s 2, 4. It further alleges that Defendant Ronald Zaucha, a pastor, is Lyndon's close friend and has been a Left Behind Games consultant since 2008. Zaucha also owns a company called Lighthouse Distributors, Inc. See Complaint ¶ ¶ 3, 14, ECF No. 1, PageID # 2, 4. Lighthouse purportedly distributed video games, including Left Behind's games. Lyndon and Zaucha had a Lighthouse employee sign the distributor agreement on behalf of Lighthouse; Zaucha's name therefore did not appear on the agreement. The agreement called for Left Behind to sell its video games to Lighthouse and to ship them to Lighthouse, which was in the same building as Left Behind. Id. ¶ 58 and 60, PageID # 14-15. Lighthouse ceased operations in 2012, shortly after Left Behind ceased operations. Id. ¶ 19, PageID # 5.
As part of a fraudulent scheme, Left Behind, beginning in 2009, issued approximately 1.7 billion shares of its common stock to Zaucha, supposedly in exchange for Zaucha's consulting services. Id. ¶ ¶ 3-4, 23-27, 37, PageID #s 2, 6-8, 9-10. During the time Zaucha was a Left Behind consultant, Left Behind was unprofitable and severely undercapitalized. Id. ¶ 4, PageID # 2. The Complaint alleges that the consulting agreements between Zaucha and Left Behind were a " sham" designed to enable Zaucha to sell unregistered shares of Left Behind common stock and to " kick back" stock proceeds to Left Behind, which needed funds. Id. ¶ 36, PageID # 9.
At Lyndon's direction, Zaucha " sold virtually all of this [Left Behind] stock, reaping approximately $4.6 million in sales proceeds. Zaucha then kicked back approximately $3.3 million of these proceeds to the company in three ways." Id. ¶ 4, PageID # 2. First, Zaucha paid Left Behind $871,169 in " early-sell fees." Id. ¶ ¶ 5, 97, PageID #s 2, 24. Second, Zaucha's company, Lighthouse, purchased about $1.38 million of Left Behind's old inventory, then sold a fraction of this inventory for a few thousand dollars and gave most of it away. This indicates that the money allegedly paid for the inventory was actually for a different purpose. Id. ¶ ¶ 6, 67-68, PageID #s 2-3, 15-16. Finally, Zaucha also " kicked back" about $1 million to Left Behind in the form of " loans" and " investments." Id. ¶ ¶ 8, 97, PageID #s 3, 24.
Zaucha allegedly used $1.28 million from the Left Behind stock sales to pay his living expenses, to fund Lighthouse's operations, and to purchase property in Hawaii and California. Id. ¶ 9, 97(d), PageID #s 3, 24.
The Complaint alleges that, relying on the scheme, Left Behind overstated its income on various filings with the SEC. See id. ¶ 7, PageID # 3; see also id. ¶ 63, PageID # 15 (alleging that Left Behind's Form 10-K indicated that its 2011 revenues increased $1,485,044 over the previous year as a result of Lighthouse's alleged purchases), ¶ 68 (alleging that Lighthouse gave away most of the Left Behind product and that Left Behind failed to disclose this in its financial statements
and Forms 10-Q, 10-Q/A, and 10-K), ¶ ¶ 82, 85, 93-94 (alleging that Left Behind filed Forms 10-Q, 10-Q/A, and 10-K with false and misleading revenue statements relating to " sham transactions using the proceeds of the sale of Zaucha's stock" ).
The Complaint further alleges that Zaucha knew that, under SEC Rule 144, 17 C.F.R. § 230.144, the common stock he received could not be sold within a six-month period. Id. ¶ 40, PageID # 10. To get around this restriction, Lyndon sent faxes to Left Behind's stock transfer agent, asking that " New Restricted Stock Certificates" be issued to Zaucha with the following instruction, " Note, hold for 144 paperwork to remove legend." The faxes also back-dated the beneficial ownership date of the stock six months. Id. ¶ 42, PageID # 10. Ultimately, the transfer agent removed the restrictive legends from the common stock and sent the stock to Zaucha's brokerage accounts, from which Zaucha offered and sold the shares into the market. See id. ¶ 47, PageID # 11.
As detailed in Paragraph 48 of the Complaint, between August 4, 2009, and October 10, 2011, Zaucha had accounts at six different brokerage firms from which he sold a total of more than 1.7 billion unregistered Left Behind shares for more than $4.6 million. Id. ¶ 46, PageID # 12. Lyndon instructed Zaucha what price to sell the stock at and how to split the proceeds. That split included a " kick back" of $871,169 to Left Behind as an " early sell fee." Id. ¶ 49-50, PageID # 12-13.
The Complaint alleges that Lyndon was a signatory on all Left Behind bank accounts and that he " treated corporate accounts as his own, withdrawing funds for his ...