SEC Admissions Of Weakness In Zeek Case "Inaccurate"; Tactics and Motivations of Zeek Victim Group Questioned

On August 17, 2012, the Securities and Exchange Commission (“SEC”) filed an emergency enforcement action to shut down ZeekRewards (“Zeek”), calling it a massive $600 million Ponzi scheme.  According to the SEC, while Zeek promised participants a daily payout of “net profits,” these profits were nearly exclusively derived from the funds of new investors – the classic hallmark of a Ponzi scheme.  At the SEC’s request, the court then approved the appointment of Ken Bell as the receiver, who would be tasked with gathering and safekeeping assets for eventual distribution to victims. 

Emotions have run high since Zeek’s shutdown, as many lament their losses amid what was such a promising operation that seemingly defied the age-old “if it’s too good to be true..” mantra.  However, a select (and growing) group has taken their dissatisfaction to another level, soliciting the assistance of other victims to fight the “illegal” and “unlawful” actions taken by the SEC.  While their rousing rhetoric is critical of the SEC, recent representations made regarding the SEC's handling of the case may have crossed the line from opinion to misrepresentation.  Indeed, an SEC official briefed on the claims by Ponzitracker explicitly refuted such allegations.

Shortly after the SEC stepped in, several groups, including “Zeek Rewards Affiliates United Against The SEC” and “Zteambiz” were formed, and appear to operate in tandem.  Zteambiz describes itself on its website, www.zteambiz.com, as “a professional organization designed to secure competent legal counsel to prevent further damage caused by the actions of the SEC actions against Rex Venture Group aka, Zeek Rewards.”  Dave Kettner and Robert Craddock are several of the individuals behind these sites, as evidenced by multiple postings attributed to them.  Using the site, both have solicited Zeek victims to “donate” towards a fund being set up to retain a top law firm to fight the SEC’s allegations and reopen Zeek.   A September 5, 2012 update from Kettner implored victims to donate if possible to be added to the “protected group.”  The response seems to have been positive, and on August 30, 2012, a notice was posted indicating that SNR Denton, a well-known international law firm, had been retained:

“Important notice:

SNR Denton US LLP represents Fun Club USA and all inquiries about this representation should be directed to Fun Club USA at xxxxxxxxx. SNR Denton’s legal representation is limited to Fun Club USA; SNR Denton does not represent and does not have an attorney-client relationship with affiliates of Zeek, Zeek Rewards, Rex Venture Group LLC or with any individual or party that chooses to provide funds to Fun Club USA.”

The notice is seemingly at odds with representations contained in the "People Helping in the Legal costs” tab on Zteambiz, which indicated that those who had donated – numbering over 6,000 as of September 1, 2012 when it was last updated – were “now being represented by counsel, to protect their moneys (sic) earned by Zeek Rewards and monies currently held by Zeek Rewards.”  The notice, which has since been removed, was clear that “SNR Denton’s legal representation is limited to Fun Club USA."  A quick search on Florida’s Division of Corporations website yielded a “Fun Club USA Inc.” registered on August 28, 2012.  The President of Fun Club, as shown on its Articles of Incorporation?  Robert Craddock. 

Zteambiz has been vocal in its criticism of the SEC, alleging that “all the pages that were submitted…by the SEC that froze the assets of Rex Venture Group, LLC has all been one sided and what we believe to be a misrepresentation of the truth and facts of what Zeek Rewards was as a viable and legal business.”  Additionally, Zteambiz claimed that “the SEC mislead (sic) the judge” in securing an emergency asset freeze.

This past Saturday, an email from “Dave” updated recipients based on information recently learned from Craddock.  One of the first revelations was that SNR Denton had decided to no longer represent Zeek, reportedly due to the “tons of calls” received by the firm from victims that interfered with Denton’s “entire law firm operations.”  A new law firm was said to be in the works, whose identity would remain a secret until court filings were unveiled “early next week.”  What piqued the interest of many, however, were the representations made immediately after.  The paragraph is reproduced below:

Here is the great news...The law firm has already talked to the SEC and the NC DOJ. On Thursday, Robert got a call from one of our attorneys regarding the conversation that he had with the SEC. Here
is what he said:

The SEC acknowledged that there are a couple of problems with the case against Zeek Rewards and Rex Venture group. Here are the problems:
1.    We (the SEC) are not able to find a victim in this case. We are not able to find anybody at this time that has been harmed by Zeek Rewards.
2.    We (the SEC) are having a hard time finding a security. In the complaint, it said that Zeek was selling securities and was an investment scheme.
Based on their (the SEC) new knowledge of the Zeek Rewards business model, they are having a hard time moving forward in making their case. And they are now looking for a path or way to back out of this.

These apparent admissions by the SEC quickly spread over the internet, with dozens of websites frequented by the multi-level marketing community accepting the statements as fact and quickly proclaiming that the SEC was close to capitulating.  

The claims seem skeptical for several reasons.  First, it is highly unlikely that these kind of admissions would be made to a potentially adversarial party and/or attorney.  Second,  both Rex Venture Group and Paul Burks have each already entered into a consent judgment agreeing to waive any right of appeal, and, in Burk's case, paying a $4 million civil penalty.  Further, a link to an information page established by the SEC now features prominently on the SEC's homepage, www.sec.gov.  

These suspicions were confirmed today after Ponzitracker spoke with a top SEC official familiar with the case.  After reviewing the allegations, the official, who declined to be named, labeled the statements as "inaccurate" and "false".  Additionally, it would be highly impractical for the SEC to make such moves and statements without allowing the receiver to complete his initial investigation and make appropriate recommendations.

Craddock is no stranger to controversy in his affiliation with Zeek and Rex Venture Group.  Several months before Zeek was shut down by the SEC, a blogger who goes by the name of KSChang posted an article presenting a detailed look into the legitimacy of Zeek.  The article contained a wealth of information about Zeek, its past, and, perhaps most prescient, asked whether "ZeekRewards [is] a Ponzi Scheme?". However, shortly after the article was published, the site's administrator received a letter from a person purporting to act on behalf of Rex Venture Group alleging that:

It has come to our attention that your website Hubpages.com is broadcasting and delivering content that is both copyrighted and, Trademark Protected. In addition, the content constitutes a tortuous interference with us and our 1.2 million independent advertising reps around the world.

The following page was brought to our attention yesterday (July 21, 2012) and we would request this page to be removed before greater damage is done to our business model and reputation. 

The author of the letter?  Robert Craddock, on behalf of Rex Venture Group LLC.  The letter succeeded temporarily, as the article was removed by the site administrator while the claim was investigated.  Apparently not satisfied with the allegations, the article was allowed back online after six days.  KSChang provided a summary of his efforts while the site was down:

When I requested details from this person, he said he couldn't POSSIBLY create a list of what's untruthful or libelous and why about the hub by Monday. (I contacted him on THURSDAY). When I pressed for more details, he replied with veiled legal threats about "pursue all legal venues".

Less than three weeks later, the SEC confirmed the article's skepticism and shut down Zeek.  

The 9/8/2012 email is here.

The Fun Club USA Articles of Incorporation are here.

The "takedown" letter sent by Craddock is here.

Recent Zeek Coverage:

ZeekRewards Update: Banks Report Account Balances, Receiver Takes Fight For Cashier's Checks To Court

ZeekRewards Victims: What Happens Next

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

Man Who Operated Charity As Ponzi Scheme Sentenced to Eight Years in Prison

A federal judge handed down an eight-year prison term to a man who duped investors out of millions of dollars in a Ponzi scheme that masqueraded as a charitable organization.  Joseph Angelo Sivigliano, 80, received the sentence from United States District Judge David Russell after a federal jury convicted Sivigliano earlier this year of forty-six criminal charges that included conspiracy, wire fraud, and money laundering.  While investors were told that investment proceeds would be used to benefit philanthropic ventures, in reality, Sivigliano operated an elaborate Ponzi scheme that ultimately took in nearly $4 million from investors.  Sivigliano was also ordered to pay more than $2.21 million to victims as restitution.

According to authorities, Sivigliano operated Helping Hearts and Hands ("HHH"), based in Bethany, Oklahoma.  Potential investors were assured that HHH was a 501(c)(3) charitable organization, and that profits earned from investments in real estate ventures would be used for humanitarian ventures such as the support of a Christian childcare facility known as "Teaching Little Hearts and Hands."  Aided by co-conspirators Dwight Pimson and Venus Marie Pimson, nearly 70 investors eventually entrusted $3.8 million to the operation.

However, rather than use investor funds to operate his "charity", prosecutors accused Sivigliano of operating a classic Ponzi scheme in which new money was used to pay returns to existing investors.  Additionally, investor funds were siphoned off for a variety of unauthorized purposes, including propping up several Sivigliano-owned businesses including Celebrity Limo and Valet and MC Productions, Inc.  Unbeknownst to investors, Sivigliano also failed to register himself and HHH  with Oklahoma securities regulators.  Victims were estimated to sustain total losses of approximately $1.7 million in the scheme.

Both Dwight and Venue Pimson agreed to plead guilty and cooperated with prosecutors in the case against Sivigliano.  Dwight Pimson later received a five-year prison term, while Venus Pimson was sentenced to a thirty-month term.  Each was also ordered to pay more than $2 million in restitution to victims.  

Reno Man Indicted For Alleged $2.1 Million Ponzi Scheme That Preyed On Elderly

A Nevada man was arrested Friday for what authorities described as a long-running Ponzi scheme targeting elderly investors that may have bilked victims out of at least $2 million.  Gary Harrison Lane, 59, was charged with twelve counts of mail fraud, as well as five counts of tax evasion, in a federal grand jury indictment unsealed in early August.  Mail fraud carries a maximum potential prison sentence of twenty years per offense, while tax evasion carries a maximum 5-year term. 

According to authorities, Lane was a long-time financial advisor at Bank of America Investment Services, which later merged with Merrill Lynch.  There, beginning in at least May 2002, Lane targeted inexperienced elderly investors with the promise of steady annual returns of six percent through investments in United States treasury bonds with maturities of two years or less.  Based on these representations, Lane convinced twelve elderly investors to entrust him with $2.1 million.  After he received the money, Lane would then send each investor written documentation purportedly confirming the purchase of the promised treasury bond(s). 

However, according to authorities, a treasury bond with a maturity of two years or less never had an annual return of anywhere close to six percent during the relevant time period.  Additionally, there was no record of Lane purchasing the investments through his employer.  Instead, Lane is alleged to have diverted investor funds to his wife, who would then in turn deposit the funds into an E*Trade owned by her.  Lane never purchased any treasury bonds as promised, said authorities; instead, the purported "confirmations" were fictitious and investor funds were used for Lane's personal expenses or to make Ponzi-style payments to existing investors. 

Financial advisors often face strict procedures for ensuring compliance with securities laws and regulations.  These include regular disclosure of any outside business activities or unauthorized sales of securities, as well as prohibitions on targeting inexperienced or susceptible investors.  These duties are serious matters for brokerages and broker-dealers, who can face liability for failure to adequately supervise rogue financial advisors.  Indeed, several lawsuits appear to have already been brought and settled against Lane's former employers accusing them of failures to supervise Lane.  As such settlements are often accompanied by confidentiality agreements, specifics are unavailable.  

Miami Accountant Gets Seven Years For $5 Million Ponzi Scheme

A Miami man received a seven-year sentence in federal prison for masterminding a Ponzi scheme that took in $5 million from victims.  Juan Carlos Rodriguez, 49, faced up to twenty years after pleading guilty to wire fraud in June.  In addition to the sentence, United States District Judge William Dimitrouleas ordered Rodriguez to pay nearly $1.1 million in restitution to his victims, along with a $10,000 fine. Before being taken into custody, Rodriguez apologized to Judge Dimitrouleas and pledged to satisfy his restitution obligations.  

Rodriguez operated Vares Tax, which performed various accounting work for clients.  Using those connections, Rodriguez solicited his clients to invest with him through his investment business, MDN Financial, Inc. ("MDN").  Potential investors were promised monthly returns ranging from twenty to fifty percent through investments in stocks, bonds, and other securities - promises which resulted in approximately 116 investors entrusting nearly $5 million.  Offering 6-month to 1-year investment periods, Rodriguez encouraged investors to "roll-over" their acquired gains into a new investment, to which most investors complied.  Some investors also received regular "annuity" payments in an effort to lend an air of legitimacy to the scheme.  

However, Rodriguez's operations - purporting to pay annual returns exceeding 400% - were nothing more than a Ponzi scheme, with Rodriguez failing to invest as advertised and instead using investor funds for a variety of unauthorized purposes.  This included hundreds of thousands of dollars in mortgage, credit card, and car payments.  In October 2010, as investor redemption requests faced increasing delays, Rogriguez vanished from his office, and the scheme collapsed.  According to authorities, victim losses were pegged at $1.9 million.

Prosecutor Robert Luck termed Rodriguez's promise to repay victims as "comical" and suggested that victims would likely only receive pennies on the dollar.  

Authorities Charge Scott Rothstein's Wife With Concealing $1 Million Of Jewelry

The wife of convicted Ponzi schemer Scott Rothstein was charged by authorities on Thursday with concealing over $1 million of assets purchased with proceeds of her husband's $1.4 billion Ponzi scheme. According to charging documents, Mrs. Rothstein and several others conspired to withhold numerous pieces of jewelry from the federal government after Rothstein's scheme was uncovered, including a 12.08 carat diamond ring.  In a criminal information, Kim Rothstein was charged with conspiracy to commit money laundering, obstruction of justice, and witness tampering.  While the charges carry possible maximum sentences of at least 5 years, the choice of charging document suggests that a plea deal has been reached or is in the works.

According to authorities, Rothstein and two others, including her former attorney Scott F. Saidel, took steps to prevent numerous pieces of jewelry from being turned over to federal authorities that was purchased with tainted proceeds of her husband's scheme.  In addition to the mentioned 12.08 carat diamond ring, other withheld pieces of jewelry included:

• An engagement ring and wedding band with 18 emerald cut diamonds;
• 10 watches, including a Rolex with leopard design, a woman's Piaget and a platinum/diamond Pierre Kunz;
• 5 sets of earrings, several necklaces, and a variety of gold coins;
• Pearl, diamond, and sapphire cufflinks, and 50 1-ounce gold bars

After the items were withheld from authorities, Rothstein and two others attempted to sell several of the pieces to local jewelers, two of which were also charged by authorities.  Additionally, Scott Rothstein was also pressured to lie to investigators about the whereabouts of the missing jewelry.  

Besides Rothstein and Saidel, three others were charged.  The two jewelers, Eddy Marin and Patrick Daoud, had charges filed against them in a type of charging document that does not suggest a forthcoming plea deal.  Indeed, Daoud's attorney, Fred Haddad, has indicated that his client will be fighting the charges against him, which include obstruction of justice and perjury concerning the 12-carat ring.  

In a 2010 story from NBC Miami, it was reported that Kim Rothstein forfeited approximately 300 pieces of jewelry to authorities worth nearly $1 million after the scheme collapsed.