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Entries in receiver (4)

Saturday
Nov102012

First Batch of Zeek Subpoenas Arrive; Victims Solicited For New 'Pay-To-Object' Venture

As promised last week, the court-appointed receiver tasked with recovering assets for the victims of the $600 million ZeekRewards Ponzi scheme (the "scheme") has begun sending out a first batch of 1,200 subpoenas to 'affiliates' that profited from the scheme.  The detailed subpoenas seek a variety of information ostensibly related to the location and/or use of scheme profits.  Meanwhile, the de facto voice of those leading the efforts to oppose the receiver, who earlier predicted that "there likely will be no clawbacks" and later characterized the subpoenas as "fishing for information", is now "offering" Zeek victims legal representation to object to the subpoenas...for a "simple and reasonable flat fee of $300."

Clawbacks and Subpoenas

In an update to victims last week, Kenneth Bell, the court-appointed receiver, indicated that he intended to vigorously pursue those who "profited most from from ZeekRewards."  According to Mr. Bell, more than 100,000 User ID's were fortunate enough to profit from their investment with Zeek, which purportedly amounts to "hundreds of millions of dollars."  Following that announcement, approximately 1,200 subpoenas were sent to those 'net winners' seeking a variety of information concerning their dealings with the scheme.  The subpoena was accompanied by a brief letter from Mr. Bell specifying an amount sought, as well as his not-so-subtle statement that he was

"committed to pursue the full court process necessary to obtain personal court judgments against "winning" participants and recover all money owed to the Receivership estate."

At the end of the letter, Mr. Bell indicated that he was open to discussing the return of any false profits without the institution of litigation, and provided contact details for those interested.

The subpoena is quite sweeping in nature, and requests numerous documents in twenty-six (26) different document requests.  A closer look suggests that the subpoena targets are not only Zeek investors, but also business partners, employees, and third-parties.  For instance, request 4 seeks documents related to any work or assistance provided as an employee, independent contractor, vendor, or agent of Rex Venture Group ("RVG"), which is the parent company of Zeek that was charged by the SEC.  Additionally, request 5 seeks documents related to any employment agreement or other contract with RVG, as well as any salary or compensation received.  

Not surprisingly, the majority of the subpoena requests concern the receipt and use of funds received from RVG or any of the related Zeek entities.  This includes copies of banking and financial statements, as well as documentation evidencing the purchase of assets with those funds such as boats, airplanes, real estate, household furnishings, jewelry, and any other assets exceeding $1,500 in value.  Because money is a fungible commodity, the deposit of "tainted" funds from the scheme into an individual's bank account theoretically taints the entire amount of funds in that account, and any subsequent use of funds up to the amount transferred in potentially "taints" the ownership rights in that asset.  

As is common in Ponzi scheme litigation, a receiver/bankruptcy trustee may seek possession of a high-ticket item without going through the litigation process if he is confident that the item was purchased with tainted proceeds from the scheme.  While that notion certainly has its critics, these actions are taken in the name of equity, and are designed to prevent clawback targets from shielding assets beyond the reach of potential creditors.  The scope and detailed nature of the subpoenas are no doubt implicitly designed to encourage settlement and avoid tedious (and expensive) litigation.  

Victims Solicited for 'Pay-to-Object' Arrangement

The group that has openly opposed the SEC and the receiver's mission has also interjected itself into the subpoena issue.  That group, Fun Club USA, earlier obtained approval to intervene in the SEC civil case as an interested party and appears to operate in tandem with another group, Zteambiz.  An individual associated with the two groups, Robert Craddock, who himself previously acknowledged being the target of a SEC subpoena relating to his relationship with RVG and Zeek, has provided ongoing updates to Zeek victims that are openly critical of the Receiver's duties.  

In a November 3, 2012 update, Craddock characterized the subpoenas as an effort to "fish[] for information" and "in my opinion, scare tactics."  Expanding on that assessment, Craddock stated that

Next, I have been instructed by the attorneys fighting for us to inform you that any request you have received to voluntarily turn over any monies earned is just that a request. You are not bound to turn over any money.  Why, you may ask and that is simple there has not been any judge ordering you to do so and the likelihood of that happening is slim to none.

Several days later, victims received an update stating that a Charlotte, NC law firm would handle subpoena objections for a flat fee of $300.  This came as a surprise to some who were part of the group that had initially responded to a Zteambiz request to raise funds to retain legal representation to "allow us to hire one of the best if not the best firm in the country to protect us." This effort was apparently quite successful, for a chart on Zteambiz (since removed) indicated that over 6,000 victims had contributed at least $120,000.  Besides the Notice of Appearance filed on behalf of "Fun Club USA," there has been no update or accounting for those funds.

However, a closer look at the engagement agreement to obtain legal representation for the "simple and reasonable flat fee of $300" raises several issues which should be considered by victims and could result in the incurrence of thousands of dollars in subsequent legal fees.  Specifically, the agreement makes clear (in bold print) that the $300 fee only covers the preparation of an initial objection to the subpoena. However, the filing of an objection to the subpoena is likely the beginning, rather than end, of involvement with the Receiver.  Under federal rules of civil procedure, the receiver may then set the matter for a hearing and/or serve an additional filing known as a "Motion to compel" which takes issue with the objections and allows the receiver to seek attorney's fees and further relief if the asserted objections are deemed by a Judge to be frivolous or designed to frustrate the receiver's purpose. Additionally, the next likely step after the subpoena, assuming the issues are not resolved, is the institution of litigation against clawback targets.

The retainer agreement is seemingly aware of this, and states that in the event the aforementioned events do happen, the "simple and reasonable flat fee of $300" does not cover representation in those instances.  Instead, the client would be responsible for the attorney's services at standard hourly billing rates ranging from $200 to $375.  Additionally, potential clients are informed that the fees generated may be shared with the same law firm that currently represents Fun Club USA.  

Craddock has also provided a link to the Objection filed on his behalf, which consists of nearly nine pages of general and specific objections to nearly every subpoena request.  Appearing to not provide any responsive documents, the Objection instead provides that, because Craddock had previously complied with requests from the SEC for documents, that Mr. Bell may contact the SEC for those documents.  

Monday
Aug202012

ZeekRewards Victims: What Happens Next


"“It's a process...We're going to try to gather as much money as we can and figure out who deserves what.”

Kenneth Bell, Court-appointed Receiver of ZeekRewards


The Securities and Exchange Commission ("SEC")'s shutdown of ZeekRewards last Friday left many of the estimated one million victims shocked and confused, with many still refusing to believe that they had fallen victim to one of the largest Ponzi schemes in history. With the SEC alleging that Zeek's cash reserves were far insufficent to cover the nearly 3 billion "profit points" accumulated by members, it will be up to the court-appointed receiver to begin the arduous task of trying to recover assets for the benefits of victims. The Receiver has already indicated that the process will likely "take a long time." A court-ordered asset freeze on the $225 million currently held by Zeek in various financial institutions ensures that victims can be assured of at least some recovery.

The establishment of a receivership is common in the wake of an exposed Ponzi scheme. Usually simultaneously with the filing of charges, the SEC also requests the appointment of a receiver. In this case, the SEC chose Kenneth Bell, a North Carolina attorney with law firm McGuireWoods who is experienced in white collar fraud. According to Lexington newspaper The Dispatch, Bell visited Zeek headquarters for the first time today. There, Bell likely took possession of investor files and office computers, which he will try to use to piece together to fully understand the scheme. Bell also announced that he will be establising a website, www.zeekrewardsreceivership.com, where he will communicate with all concerned parties. At the time this article was published, the website was not yet live.

Likely due to the staggering amount of victims, Bell also stated that communications with investors would be through email only, and provided this address for victims: info@ZeekRewardsReceivership.com. Before any distribution process can be established, it is likely that Bell will first provide the court with a report on his investigation and findings. This process will likely take weeks or months.

In addition to any funds recovered by the Receiver, both the SEC and Department of Justice ("DOJ") allow for any funds forfeited or paid as penalties to be returned to investors. In the context of an SEC proceeding, this is known as a "Fair Fund", while the DOJ process to return funds to victims is known as remission. For those familiar with the AdSurfDaily Ponzi scheme, which was similar to ZeekRewards in that it purported to pay investors daily returns in exchange for visiting websites daily, those investors received approximately $55 million in funds seized by the Department of Justice from foreign bank accounts.

After the Receiver completes his initial investigation, he will then begin the process of recovering assets for the benefits of victims. These efforts may include securing or disposing of property owned by Zeek and/or Burks. Additionally, there is also the possibility that the Receiver could employ the use of "clawback" lawsuits, which target those investors that withdrew funds in excess of their initial investment. This will especially be important in the context of Zeek, where those that invested early in the scheme and grew their "downline" affiliates likely received exponential returns exceeding their original investment. Mr. Bell said that it was still unclear as to whether clawback lawsuits were likely. He may also look to financial institutions or other third parties who were involved with Zeek that ignored or should have noticed "red flags" relating to the scheme.

In the near future, many will simply be waiting for word from the Receiver as to his initial findings. Some investors have already begun to secure legal representation as well. Kevin Thompson, a well-known attorney in the direct sales industry who operates themlmattorney.com, indicated that he had already been contacted by 2,000 victims seeking help whose losses ranged from $500 to $70,000. Many of these stories, according to Thompson, were "heartbreaking", and involved many victims who had cashed out their retirement accounts to invest in Zeek. Thompson estimated that there could potentially be up to 1.2 million victims.

The North Carolina Attorney General's ("NCAG") office has also warned Zeek's victims to be wary of "reload scams", which purport to "help them replace the income they were receiving from Zeek Rewards." Some of these programs even refer to themselves as the "Zeek rescue program." The NCAG urged investors to cut their losses rather than lose even more.

The Receivership website will be established at www.zeekrewardsreceivership.com. All investors seeking to contact the Receiver should email info@zeekrewardsreceivership.com.

A statement released by the Receiver this evening is here.

Friday
Aug172012

SEC Shuts Down Zeek Rewards, Alleges It Was $600 Million "Massive Ponzi Scheme" On Verge Of Collapse

"Unbeknownst to its investors, ZeekRewards is, in reality, a massive Ponzi and pyramid scheme. "

-SEC

The Securities and Exchange Commission ("SEC") announced late Friday that it had filed suit against ZeekRewards, alleging it operated a $600 million Ponzi scheme that had gained a cult-like following for its seemingly consistent and above-average returns through the operation of a penny auction website. The company has been the focus of fervent speculation as of late by many who questioned the legitimacy of its operations.  According to the SEC, the payouts by ZeekRewards had no relation to the company's "profits", and in fact, the operation was on the verge of collapse, as its total investor cash payouts in July were nearly even with July infusions of investor funds.  The SEC's complaint charges the company's founder, Paul R. Burks, as well as Rex Venture Group, which does business as ZeekRewards.  Both are charged with multiple violations of federal securities laws, including the unregistered offering and fraudulent sale of securities.  Additionally, the SEC is seeking injunctive relief, disgorgement of all ill-gotten gains, and civil monetary penalties.  The SEC also announced that Burks had agreed to settle the charges against him, without admitting or denying guilt, by relinquishing his interests and assets in the company and paying $4 million in the form of a civil penalty.

According to the complaint, Burks has operated through Rex Venture 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.  Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows.  According to the SEC, ZeekRewards had paid out nearly $375 million to investors to date, and currently holds roughly $225 million in various domestic banking institutions.  With only $225 million on hand, the company would quickly be unable to satisfy investor redemptions if it was forced to make daily payouts of $45 million, which is the daily cash "award" value of the approximately 3 billion outstanding Profit Points.  To prevent the funds' rapid depletion until a receiver is appointed, the SEC is seeking an emergency asset freeze. 

Burk, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn approximately $11 million from the operation, of which only $4 million remains.  

The company's headquarters in Lexington, North Carolina was shut down this morning.  Visitors to the company's website were informed that "Zeek Rewards is currently unavailable. More information will be available shortly on this website."

The North Carolina Attorney General's office has set up a hotline for concerned investors at (919) 716-6046.

A copy of the SEC's complaint is here.

Thursday
Nov242011

Congress: SIPC Needs to Decide Whether it Will Provide Coverage to Victims of Stanford Ponzi Scheme

Nearly six months after the Securities and Exchange Commission ("SEC") issued a formal request to the Securities Investor Protection Corporation ("SIPC") for coverage of losses suffered by victims of R. Allen Stanford's $7 billion Ponzi scheme, investors are still waiting to hear whether SIPC will heed the SEC's request and begin proceedings to return some or all of investor losses.  The SEC made findings in a report released in mid-June that Stanford's broker-dealer, Stanford Group Company ("SGC"), had failed to meet its obligations to customers, and as a result of its membership in SIPC, was the proper subject of a customer protection liquidation and thus entitled to compensation from SIPC.  Should SIPC fail to take appropriate action, warned the SEC in a thinly-veiled directive, the SEC Division of Enforcement was prepared to institute legal action against SIPC to compel such a proceeding.  With no decision yet issued, pressure has continued to mount on SIPC from several fronts, and a recent letter from Congress has demanded a "satisfactory update" or decision on the matter by December 15.

The Securities Investor Protection Act of 1970 ("SIPA") mandated the creation of SIPC, which it saw as a way to allay investor fears and save the securities market in a time of crisis.  While the creature of congressional legislation, SIPC is unique in that it is funded through membership fees paid by member institutions, which by statute are all persons registered as broker-dealers under Section 15(b) of the Securities Exchange Act of 1934.  From 1996 until 2009, these member assessments were pegged at $150 per institution - regardless of the size of the firm's securities business.  Thus, financial titans such as Goldman Sachs or JP Morgan paid $150 to sustain a fund used in the event of financial collapse.  However, after the recent financial crisis, SIPC bylaws were adjusted as of April 1, 2009 to peg member assessments as the greater of $150 or ¼ of 1% of net operating revenues from the securities business.  The $150 minimum requirement was later eliminated upon the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010.  Firms such as Goldman and JPM, whose securities businesses generate tens of billions of dollars in annual revenues, now face SIPC membership fees in excess of tens of millions of dollars.

When a member broker-dealer fails, SIPC acts to organize the distribution of customer cash and securities to investors.  To the extent that customer cash or securities are unavailable, a SIPA liquidation would provide insurance coverage of up to $500,000 of the customer's brokerage balance, including up to $250,000 in cash. Should a customer's investment exceed the compensation afforded by SIPC, a SIPA trustee would then be tasked with recovering further assets to satisfy the difference.

SIPC coverage is not all-encompassing, however, and generally does not apply to investments such as commodity of futures contracts, investment contracts, and oil/gas/mineral leases unless those investments are registered with the SEC.  Most types of securities, such as stocks, bonds, certificates of deposit, and notes are generally covered by SIPC.  According to its website, 

no fewer than 99 percent of persons who are eligible have been made whole in the failed brokerage firm cases that it has handled to date.

Since its inception in 1970, SIPC has advanced $1.6 billion as part of wider efforts to enable the recovery of $109.3 billion in assets for nearly 750,000 investors.  

SIPC has played an instrumental role in the ongoing liquidation of Bernard Madoff's failed brokerage firm.  Of the $7.3 billion of claims allowed by trustee Irving Picard, SIPC has provided nearly $800 million in advances to customers of Madoff's fraud.  In Picard's motion for approval of a first interim distribution to investors, he revealed that SIPC advances alone fully satisfied the claims of 868 Madoff victims.  

Stanford's scheme advised clients from 113 countries to purchase more than $7 billion in certificates of deposit ("CDs") from the Stanford International Bank in Antigua.  The SEC instituted civil proceedings in February 2009, and a receiver, Ralph Janvey, was appointed to marshal assets for victims.  A criminal indictment soon followed in June 2009.  Soon after his appointment, Janvey inquired as to whether Stanford's victims qualified for SIPC coverage.  Responding to Janvey's letter in August 2009 (the "August 2009 Letter"), Stephen Harbeck, the President of SIPC, gave several reasons for the decision that "there is no basis for SIPC to initiate a proceeding under SIPA," which included:

  • The SEC had not formally notified SIPC of the need to act;
  • The CDs were issued by Stanford International Bank Ltd. ("SIBL"), which is not a SIPC member;
  • SGC did not issue purchase confirmations for the CDs, nor were the CDs held at SGC's clearing firms;
  • Investors received custody of their CDs after purchase; and
  • Antiguan liquidators believed that substantive consolidation was not warranted.

Additionally, even had Stanford implied that SIPC would protect the underlying value of the CDs, Mr. Harbeck stated that this had no impact on his analysis.  

Following the August 2009 Letter, a consortium of nearly fifty members of the U.S. Senate and House of Representatives sent a letter to then-SEC Chairwoman Mary Shapiro, requesting that the SEC take immediate action to order a liquidation proceeding of SGC and examine the possibility of extending SIPC coverage to Stanford victims.  Over the next two years, ten more letters (available here) followed from various members of Congress urging the SEC to expedite its review of the applicability of SIPC coverage.  At one point, United State Senator David Vitters (R., La.) threatened to block two nominees to the SEC until the agency released its decision.  (The SEC released its decision the next day).  

On June 15, the SEC issued its decision, finding that SGC had failed to meet its obligations to customers, and "that the statutory requirements for instituting a SIPA liquidation are met here." The main point of dispute centered on the interplay between SGC - a SIPC member - and Stanford International Bank - a non-SIPC member.  In the Stanford scheme, investors with accounts at SGC purchased SIBL CDs by depositing funds with SIBL.  SIPC had taken the position that coverage was not appropriate because investors purchased the CDs from SIBL, not SGC.  However, the SEC's analysis focused more on the substance of the transactions, rather than the form, in finding that disregarding the separate corporate form of the Stanford entities was appropriate.  Thus, by purchasing CDs from SIBL, customers were effectively depositing money with SGC.  The SEC also likened any result to the contrary as consistent with the goals of the fraudster, saying

Based on the totality of the facts and circumstances, the Commission has concluded that investors with brokerage accounts at SGC who purchased SIBL: CDs through SGC should be deemed to have deposited cash with SGC for purposes of SIPA coverage.  Doing otherwise on the facts of this case would elevate form over substance by honoring a corporate structure designed by Stanford in order to perpetrate an egregious fraud.

SIPC pledged to review the SEC's findings "as quickly as possible" and declared that it would provide a decision by September 15.  However, after September 15 came and went, SIPC Chairman Orlan Johnson issued a statement on September 16 stating that SIPC was "continuing its careful review" of the Stanford case and did not have a decision to announce.  

In response to SIPC's continuing silence, a group of Congressional members sent a letter on November 22, stating that "after more than 22 weeks, the Stanford victims and the American people want and deserve answers." In offering their assistance, the Representatives also noted that the lack of a final decision or satisfactory update on SIPC's progress by December 15th - six months after the SEC decision and three months after the SIPC board meeting - would result in the recommendation to the House Financial Services Committee for the intitiation of a formal inquiry into SIPC's handling of the matter.  SIPC has not issued a response to the letter.

The court-appointed receiver for the Stanford entities, Janvey, has been criticized for the failure to recover more assets for victims.  Indeed, a June filing by a group of Stanford investors accused Janvey's legal team and associated experts of collecting nearly all of the $120 million recovered to date in fees.  A federal judge later expressed his concerns that Janvey's search for additional resources was duplicative of ongoing efforts by the Department of Justice, and asked when a claims process might be instituted for victims.  Janvey recently filed papers seeking approval for a proposed claims process, although he declined to speculate as to the amount that investors could expect in an initial distribution. 

A decision by SIPC to provide coverage to Stanford victims, as urged by the SEC, would be a welcomed move. At present, the victims stand to receive pennies on the dollar for funds lost to Stanford's scheme.  However, a look at the effect of SIPC intervention in the Madoff proceeding shows that over 1/3 of the approximately 2,425 allowed claims were fully satisfied as a result of SIPC advances.  While such a system differs slightly from typical Ponzi proceedings where all victims are promised a pro rata share in any recovered proceeds, a SIPC-involved proceeding would aim to compensate each investor equally - at least up to the first $500,000 of losses.

A copy of the August 14, 2009 letter from SIPC to Janvey is here.

A copy of the SEC decision directing SIPC coverage is here.

A copy of the Congressional letters sent to the SEC in support of the decision on SIPC coverage is here.

A copy of the November 22, 2011 letter from Congress is here.