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.

Convicted $195 Million Ponzi Schemer Offers $19 Million Check For 364-Day Sentence

A Minnesota man trying to avoid a likely-lengthy prison sentence for his role in a $195 million Ponzi scheme took the rather unorthodox approach of offering to deliver a $19 million check to the scheme's victims, but with a large catch - that he receive a one-year prison sentence.  Jason "Bo" Beckman, 42, filed a 68-page sentencing memorandum earlier this week containing the typical pleas for leniency: his wife was sick at home, his role in the scheme was insignificant, and he was a generous giver to charities. But Beckman did not stop there.  Additionally, in exchange for a 364-day sentence followed by a multi-year probation term and community service, Beckman would "arrange for the immediate delivery of a check for $19 million for payment to victims."  

Beckman is the latest to be sentenced for playing a role in the $194 million Ponzi scheme masterminded by Trevor Cook.  The scheme, ranking as the second-largest financial fraud in Minnesota state history, duped investors with the promise of extravagant returns through purported trading in commodities and futures.  Investors were told that Cook was able to achieve such above-average returns because one of his partner companies, Crown Forex, could take out interest-free loans by virtue of its Jordanian operators' adherence to Islamic sharia law that forbade charging interest.  Two of Cook's co-conspirators used their influence as Christian radio talkshow hosts to pitch the investment, while Beckman used his position as a money manager to recruit investors.

Unsurprisingly, the "investment" was too good to be true, and was instead a massive Ponzi scheme.  In total, over $200 million was raised from investors.  However, only half of that amount was actually used for currency trading, and rather than achieving exorbitant gains, resulted in massive trading losses of nearly $70 million.  The remainder was used for the payment of fictitious returns to investors, as well as to maintain extravagant lifestyles.  Cook was sentenced to twenty-five years in prison in August 2010.  

Unsurprisingly, prosecutors scoffed at the offer.  Instead, they took issue with Beckman's "breathtaking" conduct, alleging that 

"Mr. Beckman is the worst and most culpable of all of the criminals who participated in the currency program Ponzi scheme, including Trevor Cook.

Calling him a "very dangerous individual who is certain to hurt people if he is ever released," prosecutors argued that Beckam deserved a life sentence.  

Besides the obvious ethical problems with trying to buy sentencing leniency by offering money to his defrauded victims, the offer also raises questions as to the source and legitimacy of Beckman's apparently newfound riches.  While the nature of the offer suggested the money was in Beckman's possession, Beckman and his wife had earlier been forced to borrow several thousand dollars from the court-appointed receiver for living expenses after the court imposed an asset freeze.  Additionally, both the court-appointed receiver and federal authorities are likely to raise questions about the source of the money, as the receiver is tasked with locating and recovering assets traceable to the scheme and would likely take issue with Beckman's use of scheme proceeds to secure a favorable sentence.  

Ironically, this is not the first time that money has played a factor in the sentencing of a convicted Ponzi schemer.  Former boy band mogul Lou Pearlman, one-time manager of groups 'N Sync and Backstreet Boys but later found guilty of a $300 million Ponzi scheme, found himself on the opposite end of such a proposal in May 2008 at his sentencing before United States District Judge G. Kendall Sharp.  There, Judge Sharp handed down a 300-month sentence, but with the caveat that she would reduce the sentence by 1 month for each $1 million that Pearlman could pay back to investors.  With investor losses pegged at $300 million, Pearlman could have theoretically avoided jail time entirely had he come up with $300 million. Ultimately, Pearlman did not cooperate, and the Federal Bureau of Prisons currently estimates his release date as March 24, 2029.  

Beckman is scheduled to be sentenced on January 3, 2012.  

Zeek Receiver to Host Conference Call December 17th to Update Investors; Clawback Lawsuits Imminent?

The court-appointed receiver tasked with recovering assets for victims of the $600 million ZeekRewards Ponzi scheme has scheduled a conference call intended to update investors on the progress thus far, as well as provide a forum for investors to ask questions.  In a letter posted to the Receivership website today, receiver Kenneth Bell announced that he would host an hour-long web-based conference call on December 17th at 5:00 PM EST.  Additionally, the call comes days after Mr. Bell took actions necessary before he may proceed with filing 'clawback' lawsuits against those investors that profited from the scheme.

Perhaps intentionally, the call comes almost exactly four months to the day since the Securities and Exchange Commission ("SEC") took over Zeek's operations and asked United States District Judge Graham Mullen to appoint Kenneth Bell as receiver.  Since his appointment on August 16, 2012, Bell has undertaken the self-described 'herculean' task of attempting to recreate and digest the financial records and inner-workings of a scheme that is now estimated to have had as many as 2 million victims and collective investor losses totaling approximately $600 million.  

Through several previous updates provided to investors, Bell has begun the transition from the initial phase of securing existing assets in his possession for the benefit of the Receivership Estate to the second phase of recovering assets not in his possession that rightfully belong to the Receivership Estate. One of Bell's highest priorities has been the identification of individuals (or, as Bell refers to them, Affiliate ID's) that were fortunate enough to receive distributions of principal and/or interest in excess of their original investment.  Bell has indicated that he intends to seek these "false profits", as they are commonly referred to in legal parlance, "from those who took out of Rex Venture more than they put in."  

Following up on his promise, Bell has already issued approximately 1,200 subpoenas to those individuals who withdrew the largest amounts of money from the scheme.  These subpoenas, containing wide-ranging demands for information concerning the use and location of profits obtained from the scheme, are expected to represent only the first wave of subpoenas to what Bell estimates are over 100,000 'affiliate ID's' that received false profits.

Additionally, the Receiver has also initiated the process required to acquire jurisdiction over individuals from whom he intends to recover funds or property representing proceeds traceable to the fraud.  As reported on ASDUpdates, after obtaining an Order Reappointing Receiver, Mr. Bell then initiated over 60 actions in various federal districts across the United States serving as notice of Bell's appointment as Receiver.  This process is required under 28 U.S.C. 754, which requires that a receiver seeking jurisdiction and control over property in a specific federal district must, within ten days after being appointed receiver, file copies of the complaint and order of appointment.  Importantly, these actions indicate that clawback lawsuits may be imminent.  

The conference call is scheduled for 5:00 PM EST on Monday, December 17, 2012.  Further information, including login information, is located here.  Additionally, callers are encouraged to email their questions to Mr. Bell ahead of the call at zeekrewardcall@mcguirewoods.com.

Judge Rejects "Too Sick For Prison" Defense, Sentences Ponzi Schemer to 41 Months

A Connecticut man who scammed victims out of more than $500,000 in a classic Ponzi scheme is not too sick to serve time for his crimes, despite pleading from his attorneys that a sentence of home confinement was more appropriate.  United States District Court Judge Vanessa Bryant sentenced Stephen Blankenship, 64, who came to be known as "Danbury's Bernie Madoff" for the toll on his victims, including elderly members of his church, in three states.  Blankenship was also ordered to pay restitution to his victims, although the state of his finances remains unknown.

From at least 2002, Blankenship solicited customers to invest their funds through Deer Hill Financial Group, LLC ("Deer Hill"), a company owned and operated by Blankenship.  Blankenship served as a financial advisor at several broker-dealers, and used his position to lure many of his customers to transfer their holdings to Deer Hill by telling them they could achieve a greater rate of return.  According to Blankenship, investor funds would be placed in established securities such as mutual funds or equities.  Blankenship also courted investors from his church, where he served as an elder.  In turn, investors were provided with regular account statements showing purported gains in their holdings.  

However, Blankenship never invested funds with Deer Hill as promised.  Instead, he ran the classic Ponzi scheme, misappropriating investor funds for his own personal use that included luxurious travel, grocery shopping, and mortgage payments on his home.  

After the scheme collapsed in late 2011, Blankenship was arrested.  He pled guilty in September to one count of mail fraud and one count of security fraud, and faced a maximum sentence of twenty years in prison.  The Securities and Exchange Commission has also filed a civil enforcement proceeding against Blankenship seeking the return of all ill-gotten gains.

A copy of the SEC Complaint is here.

Civil Prosecution of Ponzi Schemer That Committed Suicide Pays Off As Investors Set to Receive $9 Million

When a New York man suspected of masterminding a $35 million oil-and-gas Ponzi scheme committed suicide in 2010, authorities were forced to drop pending criminal charges.  However, after the United States Attorney's Office continued with a civil prosecution focused on recovering assets tied to the scheme, victims are now set to receive approximately $9 million in funds recovered from that effort.  

According to authorities, Ashvin Zaveri operated a Ponzi scheme from April 2003 to March 2009 that, while purporting to offer lucrative returns from investments in oil and gas partnerships, collected over $35 million from investors that was largely used to pay fictitious returns and sustain Zaveri's extravagant lifestyle.  In December 2009, a federal grand jury indicted Zaveri on sixteen criminal charges including mail fraud, wire fraud and money laundering.  Less than a year later, while the criminal prosecution was still pending, Zaveri killed himself.

After Zaveri's death, the ongoing criminal prosecution ended.  However, authorities continued to pursue the civil recovery of assets that were traceable to proceeds of the fraud.  According to United States Attorney William Hochul, this included the pursuit of a civil forfeiture action, as well as the proceeds of two life insurance policies and the balance in a bank account controlled by Zaveri.  These efforts proved successful, as approximately $9 million was recovered that authorities were able to trace to Zaveri's fraud.

The announcement by the Federal Bureau of Investigation indicates that the United States Department of Justice Asset Forfeiture and Money Laundering Section ("AFMLS") will be in charge of returning funds to victims, likely through a process known as remission.  This process operates similar to that run by a court-appointed receiver, in which victims submit claims setting forth their claimed losses and which are either approved, approved in part, or denied.  Once the claims have been determined, a distribution will likely occur.  While further details were not provided, the AFMLS homepage is located here.