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.
