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Recent SEC Releases
Friday
Oct242014

ZeekRewards Founder Indicted For $850 Million Ponzi Scheme

Over two years after the Securities and Exchange Commission accused ZeekRewards of being a massive Ponzi and pyramid scheme, a grand jury indicted the company's founder on a multiple fraud charges.  Paul Burks, 67, was charged with mail fraud, wire fraud, mail and wire fraud conspiracy, and tax fraud conspiracy.  Burks is expected to appear in federal court in the coming days to make his initial appearance.  If convicted and sentenced to the maximum term, Burks could face decades in federal prison.

Background

Burks has operated Rex Venture Group, LLC ("RVG") since 1997.  In 2010, he formed zeekler.com, which operated as a penny auction website offering participants the ability to place incremental bids on merchandise in one-cent increments.  Individuals were required to purchase "bids" in lots, usually at a cost of $.65 per bid, in order to participate in the auctions.  Burks launched ZeekRewards in January 2011 as an "affiliate advertising division" of Zeekler.  Participants were then solicited to become investors, or affiliates, in ZeekRewards in the form of investment contracts called the "Retail Profit Pool" and the "Matrix."  None of these investments were registered with the SEC or any state regulatory authorities.

The Retail Profit Pool promised investors the chance to earn lucrative daily returns of "up to 50% of the daily net profits" after completing a process that involved enrolling in a monthly subscription plan, soliciting new customers, selling or purchasing ten Zeeker.com "bids", and placing one free ad daily for Zeeker.com.  According to the ZeekRewards website, a daily commitment of "no more than five minutes per day" was required to share in daily profits.  The daily "award" was usually 1.5% of the individual's 'investment'.  Due to the compounding nature of these "Profit Points", as they were called, the cumulative amount of outstanding Profit Points now numbers nearly $3 billion.  Assuming a 1.5% daily "award", this would require daily cash outflows of $45 million should all investors seek to receive their "award" in cash.  

In addition to the Retail Profit Pool, investors could also participate in the "Matrix", which was a form of multi-level marketing that rewarded investors for each "downline" investor within that investor's "Matrix".  The Matrix consisted of a 2x5 pyramid, and each person added to an investor's Matrix qualified that investor to receive a bonus.  

While ZeekRewards represented to investors that the operation was extremely profitable, in reality, the company's revenues and payments to investors were derived solely from funds contributed by new investors - a classic hallmark of Ponzi schemes.  Indeed, authorities alleged that 98% of all incoming funds were derived from the funds of new investors. Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows.  However, because investors were actively encouraged to "roll-over" their "profit points" back into the scheme, the number of outstanding liabilities to investors steadilty increased, reaching approximately $2.8 billion in August 2012 despite availabie cash reserves of less than 4300 million.  Due to the likelihood that those funds would soon be exhausted, the Commission initiated an emergency enforcement proceeding and sought an asset freeze in August 2012.

Burks, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn over $10 million in investor funds for the benefit of himself and his family members.  

Timing of Charges

Burks becomes the third person to be charged in connection with the scheme after Dawn Wright Olivares and Daniel Olivares were charged in December 2013 and currently await sentencing.  The indictment of Burks has not only been rumored for some time, but also comes as the court-appointed Receiver, Kenneth D. Bell, begins his quest to recover "false profits" from thousands of victims that were fortunate enough to profit from their investment.  The receiver's efforts to recover these "false profits" will become markedly easier in the event that Burks pleads guilty to the fraud, since the guilty plea or conviction of a Ponzi schemer allow the use of the "Ponzi presumption" that significantly simplifies the burden of proof required in the so-called "clawback" actions.  

Tax Fraud Conspiracy

While mail fraud and wire fraud charges are commonly brought against individuals associated with Ponzi schemes, the Burks indictment also includes a tax fraud conspiracy charge that centers around the issuance of IRS Form 1099's to victims that reported fictional income derived from the scheme.  While 1099's and/or K-1's are often issued by Ponzi schemers to investors as part of the quest to lend legitimacy to the scheme, the filing of tax fraud conspiracy charges is certainly unusual and it remains to be seen whether this may lead to similar charges in future actions.

More Ponzitracker coverage of ZeekRewards is here.

The indictment is below (h/t to ASDUpdates):

 

File.stamped.burks.indictment

 

Thursday
Oct232014

“Bamboo Cyclist” Gets 4-Year Sentence For $2.5 Million Ponzi Scheme

A Utah man once known as the “Bamboo Cyclist” was sentenced to serve a four-year prison term for masterminding a Ponzi scheme that duped victims out of nearly $3 million.  James Ronald Donahoo, II, of Pleasant Grove, Utah, received the sentence after pleading guilty this past summer to wire fraud, money laundering, and failure to file a tax return.  The sentence reflects the term agreed to in the plea agreement between Donahoo and prosecutors, and Donahoo will also serve a three-year period of supervise release following his release from prison.  Additionally, Donahoo was ordered to pay approximately $2.7 million to his defrauded victims.

Donahoo operated Paradigm, Inc. ("Paradigm"), a Utah corporation that Donahoo represented was in the business of making bridge loans or "hard money loans" to small businesses. Donahoo told potential investors that they could earn monthly returns ranging from 1% to 3% through investments in “hard money” loans or bridge loans. Investors were assured that their investment was safe, with Donahoo representing that each dollar invested was secured by a corresponding amount in the bank.  Investors were also shown monthly bank statements for Paradigm that purportedly reflected their investment growth.  In total, Donahoo raised at least $2.5 million.

However, Donahoo did not invest in “hard money” or bridge loans; rather, $1.5 million of investor funds were used to invest in various businesses overseen by Donahoo’s friends and family.  while Paradigm did invest approximately $1.5 million in various businesses, none of investors' funds were used as represented.  Approximately $267,000 was used to make Ponzi-style payments to existing investors, while Donahoo also misappropriated funds to sustain a lavish lifestyle that included the purchase of more than $11,000 in fur coats, trips to Hawaii, jewelry, and a Mercedez Benz.

After several investors obtained judgments against Donahoo following the scheme's collapse, he reportedly began traveling the country by bicycle billing himself as the "Bamboo Cyclist" as he promoted various philanthropic causes.  Donahoo promoted his cause through various social media sites, including YouTube.  One website apparently formed by one of Donahoo's victims suggested that these efforts, including Donahoo's claim that he was soliciting "micro loans" for 3rd world countries, were simply a continuation of Donahoo's deceit.  One of the YouTube videos is embedded below:

 

Tuesday
Oct142014

Zeek Receiver Blasts Victim Lawyers' Attempt To File Lien On Distributions

With thousands of allowed claims in this matter, it is impractical to allow third parties to interfere with the distribution process. The Receiver is simply not equipped to assess the validity of every interest asserted by a third party in the distribution proceeds of every victim. To allow otherwise would inundate this matter with third-party claims. Further, the Receiver is ill- equipped to address the validity of such claims given that each claim, in effect, becomes another case in and of itself. 

- Kenneth Bell, court-appointed receiver

The court-appointed receiver overseeing recovery efforts for victims of the $600 million Zeek Rewards Ponzi scheme had strong words for a Louisiana law firm that recently filed papers asserting attorney charging liens of over $130,000 against an interim distribution made to victims.  Kenneth D. Bell, the receiver, filed his objection to the Notice of Attorney's Charging Liens (the "Notice") filed by Patrick Miller LLC (the "Law Firm"), arguing that the Notice should be stricken or, in the alternative, the Court should decline to rule on the Notice and instead confirm that the Receiver is free to make distributions to affected victims.  

Background

The filing is the latest in the back-and-forth between the Law Firm and Bell, and comes after the filing of the Notice on September 29, 2014. In December 2013, Bell sought court approval for distribution procedures, which included, among other things, a provision that payments would be made directly to victims.  The Law Firm filed a sharply-worded objection, claiming that the payments should be sent directly to their firm and characterizing the Receiver's decision as a refusal to consider their clients' claims and a violation of the victims' constitutional due process rights.  In his response, the Receiver dismissed the Law Firm's claims, noting that the fee agreement had been procured as part of a class action that had been filed in violation of the stay order, and taking issue with the attorneys' right to such a "large" fee simply for filling out an online claims form.  The Receiver also noted that

whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.

On April 1, 2014, the Court approved the Receiver's Motion in all aspects.  Several days later, the Law Firm filed a Motion for Clarification and/or Reconsideration, which, in the Receiver's words, "again challeng[es] the Court’s decision by seeking to change the approved distribution process to require the Receiver to aid the Movants’ attorneys in collecting their attorneys’ fees from the Movants."  Characterizing the reason for the motion as the Law Firm's inability "to let go of their pecuniary interests," the Receiver explained that he sought to make payments directly to victims to prevent duplicative payments, to ensure aggregate net winners do not receive distributions by using multiple addresses, and even ensuring that the Receiver does not unwittingly violate the Department of Treasury’s Office of Foreign Assets Control’s (OFAC) regulations.  While observing that his plan "may not assist Movants’ attorneys’ efforts to collect their fees," he argued that no clarification of the Order was necessary.  

An attorney's charging lien is used to create a security interest in favor of an attorney with a contract entitling him to a portion of the proceeds.  When the Notice was filed, it was unclear how the Law Firm intended to collect their claimed entitlement to each affected victim's distribution, or if there has been resistance from victims for complying with the demands for payment.  The exhibit attached to the Notice listed over 400 claimants holding over $1.34 million in total claims who supposedly signed a contingency fee contract with the Law Firm.

The Objection

In the Objection, the Receiver stated that the Notice "appears to be an attempt by Mr. Michaud to circumvent the Court’s prior orders regarding this issue and insert himself as the recipient of money that belongs to victims."  Of note, it appears that all but eight of the hundreds of affected victims were not recipients of the first interim distribution made earlier this month, as the Receiver claimed that the Law Firm had failed to follow an earlier court order requiring the amendment of certain claimants' mailing information to reflect their actual address rather than that of the Law Firm.  The Receiver also insinuated that, in failing to comply with the order, the Law Firm may also have violated rules governing attorney conduct in both Louisiana and North Carolina by placing the financial interest of the Law Firm over that of their clients.  

The Objection also observes that, while the Receiver did not address the merits of whether the Law Firm was entitled to compensation for whatever assistance it provided to victims during the claims process, neither he nor the Court should be forced to act as the Law Firm's enforcer where "the agreements’ enforceability and unconscionability plainly may be at issue."  Rather, the contingency fee contract explicitly provides for mandatory arbitration to resolve disputes.  Further, the Objection cites a North Carolina case for the proposition that a charging lien can only attach to a judgment, rather than a non-legal administrative proceeding such as the claims process.  The Receiver also notes that charging liens are not particularly favored in North Carolina:

Here, a charging lien is inappropriate given that Mr. Michaud continues to represent these victims in a matter which has not yet been resolved; there is no evidence of either an avoidance of payment or a dispute as to the amount of fees; and there is no indication that these victims have received notice that Mr. Michaud seeks to claim 25% of this first distribution. 

In closing, the Receiver requested an Order directing the Law Firm to timely update the contact information for its clients to reflect their actual address so as to allow the Receiver to make their interim distributions.  

The Objection is below:

Zeek Doc 260

Tuesday
Oct142014

Music Producer Convicted Of $2.5 Million Gold and Diamond Ponzi Scheme

A music producer who once worked with superstars Kenny G and Whitney Houston was convicted by a federal jury of operating a Ponzi scheme that promised lucrative returns through trading in precious metals including gold and diamonds.  Charles Huggins, 68, was convicted on one count of wire fraud and one count of conspiracy to commit wire fraud.  Huggins faces up to twenty years in federal prison on each count, as well as criminal fines of $250,000 or twice the gross gain or loss caused from the offense.  U.S. District Judge Sidney Stein ordered Huggins to be jailed until his January sentencing based on his heightened flight risk and connections to African officials. 

Huggins operated several companies including JYork Industries Inc. (“JYork”) and Urogo Inc. (“Urogo”).  Beginning in 2008, Huggins solicited potential investors by promising that their funds would be used for the mining of gold and diamonds from the African countries of Sierra Leone and Liberia, and that the extracted stones would then be sold in the United States at a significant profit.  In total, Huggins and his companies raised more than $4 million from several dozen investors.

However, Huggins used very little of investor funds for mining precious metals in Africa.  Rather, investor funds were used by Huggins for a variety of undisclosed personal purposes, including monthly rent for a $7,200 Manhattan apartment, Mercedes car payments, and doting on an aspiring young actress who called Huggins "daddy."  Additionally, money was also diverted to companies owned by Huggins' co-conspirators, Christopher Butchko and Anne Thomas.  The three were arrested on fraud charges in February 2013, and FBI agents later located $35,000 in cash-stuffed envelopes and approximately $1,000 smaller diamonds in a safe-deposit box.  

A copy of the criminal complaint is below:

Huggins, Butchko, Thomas Complaint

Friday
Oct102014

Former TD Bank Official Arrested For Role In Rothstein's $1.2 Billion Ponzi Scheme

As some have predicted, federal authorities have unveiled criminal charges against a former TD Bank official implicated in the massive $1.2 billion Ponzi scheme masterminded by Scott Rothstein.  Frank Spinosa, 53, was arrested today on five counts of wire fraud and one count of conspiracy to commit wire fraud and was later released on a $250,000 bond.  Spinosa's lawyer, who called the arrest "unnecessary" and "one of those typical Rothstein case flourishes," has maintained his client's innocence and indicated he intends to stand trial on the charges.

Rothstein's relationship with Spinosa began after he opened over 20 attorney trust accounts and law firm operating accounts in late 2007 at TD Bank and another bank TD Bank later acquired.  Spinosa was Rothstein's point of contact beginning in 2008, and communicated often with Rothstein regarding the accounts and various documents that were provided to investors.  As Spinosa's compensation was tied to the size and volume of accounts he managed, the fact that Rothstein's accounts were among TD Bank's largest accounts in South Florida meant increased compensation and bonuses for Spinosa.  

Spinosa was implicated in the massive scheme by Rothstein himself, who claimed during a 2011 deposition that he had recruited Spinosa to assist in the preparation of false "lock letters" used to show investors that their investments were safe and that Rothstein could not remove funds from the account holdings the funds. According to the Securities and Exchange Commission, which filed civil fraud charges against Spinosa last year, Spinosa also made oral assurances to at least two investors that certain trust accounts at TD Bank holding investor funds contained hundreds of millions of dollars when in reality the "locked" accounts typically held less than $100.  In one instance during August 2009, months before the scheme eventually collapsed, Spinosa participated in a conference call with Rothstein and an investor in which he told the investor that an account had a balance of $22 million when, in reality, the account had a balance of less than $100.  The investor subsequently made four more investments with Rothstein in the ensuing months.

Over two dozen other individuals have been charged for their role in Rothstein's scheme and sentenced to prison.  Spinosa could face decades in federal prison if convicted of all charges and sentenced to the statutory maximum.  

Other Ponzitracker coverage of the Rothstein scandal is here.

A copy of the indictment is here (thanks to Chuck Malkus, authorof The Ultimate Ponzi)

Spinosa Indictment by jmaglich1