Good-riddance to Malone-Bailey.... facing SEC charges this year
Good thing, $ERHE came to its senses and cut them loose. Not only are they over-priced but they've had issues this year with the SEC. Careless & sloppy... the last thing $ERHE needs.
That's something that $ERHE can do without.
Reorganization and restructuring of costs by management should serve operations more favorably
SEC Settles Suit Over Missed Red Flags In Gaming Co. Audit By Natalie Olivo
Law360, New York (May 3, 2016, 8:19 PM EDT) -- The U.S. Securities and Exchange Commission said on Monday it has settled charges accusing Texas-based audit firm MaloneBailey LLP of ignoring red flags when auditing a Christian-themed video game maker whose CEO the SEC said falsely inflated its revenues through a circular kickback scheme. The SEC’s charges, which were also filed Monday, claimed MaloneBailey LLP and its former partner, accountant Jay Phillip Norris, rubberstamped Left Behind Games Inc.’s audit documents and other SEC filings despite identifying what appeared to be “circular sham transactions.” The firm has agreed to pay more than $160,000 to settle the SEC’s charges, and Norrris has agreed to a $10,000 penalty and three-year suspension from accounting before the SEC, the agency said.
The charges against MaloneBailey stem from the SEC’s 2013 fraud suit alleging Left Behind’s founder and CEO Troy Lyndon issued almost 2 billion shares of stock to purported consultant and co-defendant Ronald Zaucha pursuant to a deal where Zaucha sold off millions of unregistered shares and then kicked back most of the proceeds to the company under the guise of new revenue.
“Reported revenue figures were false and misleading because they were generated mostly from sham transactions using the proceeds of the sale of Zaucha’s stock,” the SEC said in a Monday order. “Also, the Form 10-K did not disclose that the sales to [Zaucha’s company] were sham transactions for which revenues were not in fact properly recognized.”
A Hawaii federal judge ordered Lyndon to pay more than $3.6 million in August 2014 and for Zaucha to pay more than $2.6 million the following January, the SEC said in a statement.
According to the SEC’s Monday filings, MaloneBailey and Norris should have taken more steps to follow up after they flagged Left Behind’s revenue recognition as an area requiring “heightened scrutiny because of the risk of fraud” and identified Zaucha as a potential related party.
“MaloneBailey likely would not have certified financial statements and would have resigned if it had learned that Zaucha was transferring proceeds from his sale of LBG shares directly to Lyndon or LBG,” the SEC said.
The audit firm viewed Left Behind’s arrangement with Zaucha as a “potentially illegal attempt to evade federal securities laws” shortly after signing the game company as a client in January 2011, the SEC said.
However, MaloneBailey took no steps to obtain financial information from Lighthouse Distributors, of which Zaucha is a principal, regarding its sources of funds to purchase Left Behind products, according to SEC filings.
Rather, the audit firm allowed Lyndon and Zaucha to alter language in major documents regarding Lighthouse’s source of funds, including a management representation letter signed by Lyndon and Left Behind’s 10-K form, the SEC said.
MaloneBailey also failed to follow up on numerous other red flags it discovered, including the agency’s investigation of Left Behind, that there was “little documentation” supporting sales by Left Behind to Lighthouse, and attorney letters addressed to Left Behind’s transfer agent saying the company’s shares issued to Zaucha were permitted to be sold by him without registration, the SEC said.
Along with payment orders, Monday’s settlement requires MaloneBailey to review its policies and procedures, retain an independent consultant and undertake audit training.
Caroline Rosen, a spokeswoman for MaloneBailey, told Law360 on Tuesday that the matter is “now 100 percent behind us and fully resolved, and we are steadfast in our commitment to delivering high-quality and efficient audits to publicly traded companies.”
Rosen noted the resolution does not impair MaloneBailey’s ability to practice before the SEC or to issue audit reports.
Monday’s case was not the first time MaloneBailey has been targeted over its auditing.
A California federal judge in October 2013 approved a settlement between shareholders, the firm and some of its co-defendants in a class action claiming U.S advertising company China Century Dragon Media Inc. inflated revenues from its Chinese television commercials to boost its stock price for a 2011 initial public offering.
Of the $778,333 settlement, MaloneBailey agreed to pay $583,333 as the company’s auditor. A $4.7 million default judgement was entered against China Dragon in November, according to court filings.
A representative for the SEC declined to comment Tuesday.
Counsel information for MaloneBailey and Norris could not be immediately determined.
The administrative proceeding is In the Matter of MaloneBailey LLP and Jay Phillip Norris CPA, file number 3-17240, before the U.S. Securities and Exchange Commission.
--Additional reporting by Stewart Bishop and Zachary Zaggar. Editing by Aaron Pelc.
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