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Friday
Dec142012

Madoff's Former Lawyer Seeks to Intervene in Zeek Receivership, Dissolve Receiver's Appointment

 

In a wild turn of events Friday evening, Bernard Madoff's former lawyer sought to intervene on behalf of two potential clawback targets in the $600 million Zeek Rewards Ponzi scheme, disputing the Securities and Exchange Commission's ("SEC") characterization that the scheme violated federal securities laws and seeking to end the brief tenure of the court-appointed receiver. The motion, filed by famed New York criminal attorney Ira Lee Sorkin on behalf on Trudy Gilmond ("Gilmond") and Kellie King ("King"), takes issue with the SEC's determination that the fraud perpetrated by Zeek and its principals involved the sale of securities - thus bringing the operation under the ambit of federal securities laws. King and Gilmond are currently being pursued by the court-appointed receiver, Kenneth Bell, for over $1.5 million in "false profits" they received from the scheme based on an original investment of $4,597 - thus giving them plenty of incentive to seek the requested relief.

The crux of Sorkin's motion focuses on the contention that the 'investment products' at issue - the various methods by which a Zeek participant could build up 'profit points' that included either selling penny auction bid packages or purchasing "VIP bids" and giving them away - did not fit under the definition of a security as defined under §2(a)(1) of the Securities Act of 1933. Instead, the filing continually makes the case that the Retail Profit Pool and the Matrix, central parts of Zeek, were actually

"contractual rights entitling independent contractors to a share of a company’s profits in return for their efforts in promoting the company."

The definition of a security was established in the seminal case SEC v. Howey, 328 U.S. 293 (1946), and was set forth in a four-part test:

  1. investment of money due to

  2. an expectation of profits arising from

  3. a common enterprise

  4. which depends solely on the efforts of a promoter or third party

Id. at 298. In disputing that the investment contracts did not satisfy this four-part test, the motion strenuously argues that, rather than simply expect profits from the actions of others, Zeek participants took numerous "time-consuming" actions to "earn" those profits, such as enrolling in a monthly subscription plan, recruiting customers, selling penny auction bid packages, and purchasing VIP bids that were to be given away. Indeed, according to Gilmond's affidavit, she spent "twelve to fourteen hours each day working for ZeekRewards." The motion also argues that the profit points earned by affiliates were not shares of stock, as alleged by the SEC.

Importantly, the motion makes no attempt to address the contention that Zeek ran a Ponzi scheme or explain the discrepancy between the amount of profits actually generated by the scheme and the amount represented to participants that was used to determine their "share" of daily profits. As alleged in paragraph 5 of the SEC complaint,

Approximately 98% ofZeekRewards' total revenues, and correspondingly the purported share of "net profits" paid to current investors, are comprised of funds received from new investors

Instead, the motion seeks to spotlight the "work" involved in recruiting new investors that entitled each participant to a share of the daily profits. Simply, while playing up the roles of the scheme participants, the motion does nothing to dispute the central fact - that the advertised payouts and funds used to make those payouts were made possible through the use of investor funds, rather than legitimate profits.

Courts analyzing whether a scheme fits the parameters of a Ponzi scheme have observed that "the definition of a Ponzi scheme is broad and flexible." In re Bayou Group, LLC, 362 B.R 624, 633 (Bankr. S.D.N.Y. 2007). Under this definition, this involves "any sort of inherently fraudulent arrangement under which the debtor-transferor must utilize after-acquired investment funds to pay off previous investors in order to forestall disclosure of the fraud." Id. Thus, rather than a one-size-fits-all approach, courts have held that "there is no precise definition of a Ponzi scheme, and courts look for a general pattern, rather than specific requirements." In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 12 (S.D.N.Y. 2007).

While the motion faces a difficult probability of success, it will not go unnoticed, as it clearly challenges the authority of the SEC and the legitimacy of the receivership. While the motion takes issue with the characterization that no work was performed, it remains, unless proven otherwise, that Zeek was a massive fraud that promised unrealistic returns payable only by using funds from new investors to pay existing investors - the hallmark of a Ponzi scheme. Proceeding under this assumption, and given the large amount of 'false profits' the Recever is seeking from Gilmond and King, the two likely recruited hundreds, if not thousands, of participants into the scheme. Indeed, according to the receiver, Gilmond and King realized a profit of $1.5 million on an investment of less than $5,000 - a return of 30,000%. According to an unnamed source familiar with King and Gilmond, the two were often present at official Zeek "Red Carpet" events to accept their hefty distribution checks. Meanwhile, according to the receiver, possibly over 1 million participants lost some or all of their investment.

The Receiver and the SEC are expected to file their position shortly with the court.

A copy of the Motion is here.

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Reader Comments (2)

Just two more parasites/profiteers that want to keep stolen money. Unfortunately for them the noose is coming and one size fits all. I hope they spend much money on attorney fees before the noose hangs them. I think the Messiah warned about the love of money. Nothing has changed, but fortunately justice will prevails. Judge Mullen and Mr. Bell have my full support.

December 15, 2012 | Unregistered Commenterbob mercer

What I don´w understand is why the heck zeek affiliates are being prosecuted and the BIG attorneys that were outsourcing to the company are so quiet and never had any citation in court.
Mr. Gerald Nhera and his associate Robert Waak, which were one of the main reasons people trusted zeek to be a legal company, were one of the biggest responsible´s for people to believe this to be a legit business.
As everyone knows, they were contracted to analyse the company and point the changes need to be made so the operations would not have any legal issues.
It´s of public knowledge the they pointed some changes to be made. Were they all implemented? If not, they should have got away from the company and identify the reasons why they have done it.
They never did.
Then we have Kevin and Grimes, another couple of attorneys which even created a compliance training course every zeek affiliate was made to attend, otherwise their accounts would be canceled.
Tell me of another MLM Ilegal company which created a compliance course to educate their affiliates!
But it doesn´t stops here.
Mr. Troy Dooly was featuring Zeek over and over again.
And Dr. Keith Lagos, publisher of Network Marketing Business Journal the man who wrote the "MLM Bible" as Troy stated. It was his mentor, he said...
Dr. Keith Lagos based on is own investigation, made an article on his Journal stating that everything was legit, that the money came from sales, etc, etc...
And this was featured again by Troy Dooly, the one that now takes Zeek down, like it was a cockroach plague.
Of course, Mr. Troy Dooly forgot to say at that time, that Dr. Keith was a Zeek Afiliate and that Zeek was Troy´s Client...
So, 4 high level attorneys (Gerald Nhera, Rober Waak, Kevin and Grimes), an MLM Investigator (Troy Dooly) and an MLM Reporter/expert (Dr. Keith Lagos) all featuring positively Zeek Rewards, and now the affiliates are the ones to be made responsible???
How can people point their fingers to the so called net-winners when all they did was to trust all these high trusted entities and pass the word so more and more people could benefit from this financial oxygen balloon?
I am not even discussing if I believe zeek to be a Ponzi a Pyramid or a legit business.
I wonder however how it is possible for someone of 65 Years old, with 14 Years of experience in Internet Marketing, to build a Ponzi scheme on his little birth town, were he lives with his friends and family.
One may say that he got crazy...
What to say then about the 6 "experts" that feature them?...

December 26, 2012 | Unregistered Commentergrilo falante

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