Authorities File Criminal and Civil Charges Against ZeekRewards Ponzi Employees (UPDATED)

Federal authorities announced the filing of criminal and civil fraud charges against an Arkansas woman and her stepson for their roles in the $600 million ZeekRewards Ponzi scheme that collapsed last summer. Dawn Wright-Olivares, one of the main spokespersons of ZeekRewards, and her step-son Daniel Olivares, were charged in separate criminal and civil actions unveiled today. According to court documents, the pair has entered into arrangements with criminal and civil authorities to settle the charges. While the details of the resolution of the criminal charges remain unclear, the SEC announced the pair had agreed to settle the civil fraud charges by agreeing to pay a settlement of over $11 million representing ill-gotten gains and prejudgment interest. It is likely that the fines and penalities paid in the civil and criminal cases will likely be distributed to victims.

According to the SEC's complaint, which is displayed below, Wright-Olivares worked as the chief operating officer or principal marketer for ZeekRewards, while her step-son Olivares worked as the master computer programmer. In 2010, Wright-Olivares and several others, including Paul Burks, formed Zeekler.com, which purportedly operated as a penny auction website offering merchandise such as personal electronics. Users participated in the auction by purchasing bids. While the operation was not particularly successful at first, the formation of ZeekRewards in 2011 quickly attracted many users through the establishment of various investment programs that promised astronomical returns by recruiting new investors.

These programs required the purchase of monthly subscription plans, enrollment of new customers, the sale and/or give-away of auction "bids," and the placement of ads. Satisfaction of these criteria allowed the Qualified Affiliate to receive a daily "award" of 1.5% of their investment - an astronomical rate of return. Rather than withdrawing these "awards" as cash, investors were encouraged to convert the awards into additional profit points that had a compounding effect. Another program, the Matrix, rewarded investors solely based on how many new investors they were able to recruit into the scheme.

According to the SEC, ZeekRewards did not start as a legitimate company, but instead was designed as a fraudulent scheme from inception. Wright-Olivares and Olivares are accused of learning that the daily "award" bore no relation to the company's net profits, but was rather the product of an arbitrary and unilateral determination by Burks. Despite this knowledge, neither Wright-Olivares nor Olivares disclosed this information to potential investors. Additionally, after learning that ZeekRewards was under investigation by state and federal law enforcement, Wright-Olivares and Olivares withdrew large amounts of money from the scheme or caused the forgiveness of previous loans made to them by the company. According to the SEC's press release, these ill-gotten gains were approximately $10 million to $11 million.

The charges are significant for several reasons. First, they mark the first criminal charges brought in the aftermath of Zeek's collapse last August, which resulted in losses in excess of $600 million and an estimated 600,000 victims. Notably, the scheme's alleged mastermind, Paul Burks, has not faced any criminal charges in the scheme despite being initially charged by the SEC when the company was shut down. It remains unknown as to whether or not this delay is due to Burks' cooperation or simply the building of a case by prosecutors. Indeed, little has been reported about Burks since he agreed to pay a $4 million fine in connection with the SEC's case. The charges are also significant in that they represent authorities' belief that others were criminally involved with operating the scheme.

UPDATE 1:53 P.M. EST: The criminal complaint filed against Wright-Olivares and Olivares charges each with two counts of criminal conspiracy. One of the conspiracy charges relates to conspiracy to commit investment fraud through ZeekRewards, while the second count alleges the pair conspired to commit tax fraud by reporting fictional income through submission of Form 1099's to the Internal Revenue Service. The criminal docket indicates that both Wright-Olivares and Olivares have entered into plea agreements with authorities. Those documents remain restricted and thus further details are unknown.

The docket also includes a motion seeking to have the court-appointed receiver in the SEC's civil enforcement action also oversee distribution of any ordered restitution through the already established receivership.

Prior Ponzitracker coverage of the ZeekRewards Ponzi scheme is here:

A copy of the SEC Complaint is below:

comp-pr2013-270 by jmaglich1

A copy of the Criminal Information (thanks Don at ASDUpdates!) filed against Wright-Olivares and Olivares is below:

Doc 1-main by jmaglich1

Ex-NFL Kicker And Recidivist Fraudster Pleads Guilty To $2 Million Ponzi Scheme

Eight years after serving a ten-year sentence for fraud charges stemming from a $30 million foreign currency trading scheme, a former college All-American and NFL kicker agreed to plead guilty to charges he orchestrated a Ponzi scheme that duped victims out of approximately $2 million.  Russell Erxleben, 56, pleaded guilty to a single count of wire fraud and a single count of money laundering - each of which carried a maximum twenty-year term of imprisonment.  Under the terms of the plea agreement, Erxleben and prosecutors agreed to a 90-month prison sentence, which remains subject to judicial approval.

Erxleben was a college All-American while attending the University of Texas in the late 1970s, and later had the distinction of being only one of three kickers drafted in the first round of the NFL draft.  However, after playing six seasons in the NFL, Erxleben turned to investing.  He was later arrested and charged with securities fraud after authorities accused him of masterminding a foreign currency trading scheme in which investors lost tens of millions of dollars.  In 1999, he received a ten-year prison sentence and was ordered to pay $28 million in restitution to defrauded investors.

However, after being released from federal prison in 2005, Erxleben again became involved in the investment business, forming several companies under a main entity Erxleben Entities that promoted various investment opportunities including the ability to profit from post-World War I German government gold bearer bonds.  Investors were solicited to purchase the bonds for $1,000 apiece, after which Erxleben would place the bonds in trust and create securities that would then purportedly be in high demand by outside investors.  While the scheme lasted several years, investors ultimately never received the bonds or any associated returns.

After the German bond venture fizzled out, Erxleben began soliciting investors in 2009 for another venture, Gauguin Partners LLC ("Gauguin").  According to Erxleben, he had in his possession a rare painting commissioned by Paul Gauguin, a 1800's French artist.  Investors were told that if the painting could be certified as authentic - a process that cost $75,000 - the painting could then be sold for nearly $60 million.  Again, investors saw no returns, and instead their funds were diverted by Erxleben for the payment of personal expenses.

Erxleben was arrested in January 2013 and charged with five counts of wire fraud, two counts of money laundering and one count of securities fraud.  Prosecutors then successfully argued for Erxleben to remain in custody pending trial on the basis that he was a flight risk.  A federal magistrate judge later issued an order concluding the absence of any conditions for Erxleben's pre-trial release, citing Erxleben's propensity for posing a financial danger to others, as well as testimony by a former inmate that Erxleben had attempted to hire him to intimidate a key witness.  

Erxleben still shares the record for the longest field goal in NCAA history, kicking a 67-yard field goal in 1977.

A copy of the indictment is below:

US v. Russell Erxleben Indictment by jmaglich1

Authorities Charge Two More Sales Agents With Aiding $415 Million "Mini-Madoff"

Federal authorities unveiled criminal charges against additional former sales agents of convicted Ponzi schemer Nicholas Cosmo, accusing the ex-employees of soliciting investors whilst ignoring numerous tell-tale signs of fraud.  Brian Arias, 40, and Shamika Luciano, 31, were charged with several fraud counts, while additional charges were levied against existing defendants Anthony Ciccone, Diane Kaylor, and Jason Keryc.  Each of the fraud counts carries a maximum term of twenty years in prison.

Authorities arrested Cosmo in January 2009, charging him with operating a $415 million Ponzi scheme. According to authorities, Cosmo used his companies, Agape World Inc. and Agape Merchant Advance LLC (collectively, Agape), to solicit investors by promising high returns through purportedly making private bridge loans to commercial real estate companies and builders.  The scheme used a network of agents that received lucrative commissions in exchange for soliciting investors.  After pleading guilty in October 2010, Cosmo received a 25-year sentence in October 2011.  

After Cosmo was sentenced to prison, authorities began investigating the scheme's use of commissioned agents to attract investors.  This included an assortment of false claims made to lure investors, including the safety of an investment, the intended use of investor funds, and the attractive rate of return. Authorities soon zeroed in on alleged misrepresentations and omissions made by agents in 2008 despite learning that previous bridge loans made in 2007 were either in default or on extension.  Cosmo's sales agents were richly rewarded for their efforts; Cosmo paid more than $50 million in commissions during the scheme's existence.  

The sales commissions paid to both Arias and Luciano pale in comparison to their co-defendants.  While Arias earned approximately $1.7 million in commissions and Luciano received $275,000, their co-defendants Ciccone, Kaylor and Keryc allegedly received $10.7 million, $4.75 million, and $16 million, respectively. While irrelevant for charging purposes, the disparities in commissions would likely be a factor in any resulting sentences.

A copy of a prior civil enforcement action filed by the Securities and Exchange Commission against the sales agents is below:

comp-pr2012-112 by jmaglich1

Ohio Man Pleads Guilty to $100 Million Ponzi Scheme

A Cincinnati man has agreed to plead guilty to criminal charges that he masterminded a massive Ponzi scheme that took in at least $100 million from investors.  Glen Galemmo agreed to plead guilty to one count of money laundering and one count of wire fraud according to documents filed by federal prosecutors.  Each count carries a potential maximum prison sentence of twenty years, as well as a monetary penalty.  Galemmo's attorneys are seeking a sentence of 8 - 10 years, while prosecutors are seeking a lengthier term of 12.5 to 15 years.

Galemmo operated Queen City Investment Fund ("Queen City"), along with a dozen other investment entities.  Touting himself as an experienced trader, Galemmo promised lucrative returns to potential investors through investments in stocks, bonds, futures, and commodities.  Investors were provided with promotional materials indicating Queen City had enjoyed a streak of consistently above-average returns, including a return of nearly 20% in 2008 when the S&P 500 experienced a -38.49% loss. Potential investors were assured that Galemmo obtained annual audits of Queen City, and were provided with monthly statements showing steady returns.  In total, Galemmo raised at least $100 million from individuals, trusts, and even charitable organizations.

However, Galemmo's touted prowess as a savvy trader was pure fiction.  Galemmo was able to pay the promised outsized rates of return not through trading stocks and bonds, but from using incoming investor funds to pay existing investors - a classic sign of a Ponzi scheme.  Nor was the Queen Fund audited; rather, Galemmo simply listed the name of an audit firm that had not had a relationship with Galemmo or his fund since 2003.  Galemmo also created fictitious trading and account statements that were distributed to investors.  Investor funds were diverted by Galemmo for a variety of unauthorized uses, including the purchase of real estate, the payment of fictional interest and principal distributions, and even to operate other businesses such as entertainment complexes.  

As outlined in the criminal charging document, authorities are also seeking forfeiture of Galemmo's assets traceable to the fraud, including more than $1.7 million from bank accounts, the fund's former office building, two homes in Cincinnati and Florida, and five automobiles.  

A copy of the criminal charging document is below:

Glen Galemmo Information by jmaglich1

JP Morgan Reportedly Agrees to $2 Billion Fine For Madoff Role

“JPMorgan doesn’t have a chance in hell of not coming up with a big settlement...There were people at the bank who knew what was going on.” 

-Bernard Madoff, 2011

Banking giant JP Morgan Chase has reportedly reached an agreement with Justice Department officials to pay a $2 billion fine - and avoid pleading guilty to criminal charges - over allegations it failed to report suspicious activity in accounts held by convicted Ponzi schemer Bernard Madoff.  According to the New York Times, settlement talks between JP Morgan and federal prosecutors have resulted in an agreement in principle that not only calls for a fine of approximately $2 billion, but will also include a deferred prosecution agreement allowing JP Morgan to avoid criminal charges upon satisfaction of certain conditions.  An official announcement, which could come as early as this week, would mark the first time a DPA was used in a case against a major Wall Street bank.

JP Morgan served as Madoff's primary banker for several decades, overseeing the flow of billions of dollars in and out of Madoff's accounts.  Despite the massive flow of money, virtually none of those funds were used to trade securities - an event that may have triggered obligations under the Bank Secrecy Act ("BSA") to file a suspicious activity report ("SAR") with federal regulators.  According to Irving Picard, the bankruptcy trustee appointed to oversee asset recovery efforts for Madoff victims, Madoff's use of his JP Morgan accounts to "wash" investor funds violated the bank's anti-money laundering guidelines.  In addition to providing banking services to Madoff's firm, Bernard L. Madoff Investment Securities, JP Morgan also sold structured products tied to various BLMIS "feeder funds."  In total, JP Morgan's profits from its relationship with Madoff were nearly $500 million.

While the Justice Department's action will mark an important step in holding financial institutions accountable for failing to detect or prevent financial fraud, it comes as trustee Irving Picard is currently appealing his ability to hold the bank civilly liable for its role in Madoff's fraud.  The bank, along with other banks with ties to Madoff including HSBC and UBS, has successfully obtained dismissal of the suits from a New York district and appellate court in part based on the theory that Picard lacked legal standing to pursue claims other than clawback claims for return of principal and profit distributions.  This meant that Picard's lawsuit seeking nearly $20 billion against JP Morgan was, effectively, moot with the exception of approximately $425 million in clawback claims.  Earlier this year, Picard asked the Supreme Court to reverse the lower court decision and allow him to pursue the case against JP Morgan.  It is unknown whether the Supreme Court intends to take up the case.

One of the developments that seems to have spurred an agreement is the agreement by authorities not to insist that JP Morgan plead guilty to criminal charges.  The decision, which was reportedly a serious consideration by U.S. Attorney Preet Bharara, was likely prompted by the drastic consequences that could result.  Indeed, while the use of a deferred prosecution agreement has many of the same punitive effects as a guilty plea, the actual act of pleading guilty to a criminal charges can have significant effects on a company, and even potentially put the company out of business.  Under the DPA, JP Morgan will have to comply with certain conditions, including the likely appointment of an independent monitor to ensure compliance, in order to have the criminal charges ultimately dismissed.

While the exact details of the purported $2 billion fine remain unavailable, it is believed that at least a portion of the fine will be used to compensate Madoff victims, who to date hold more than $17 billion in approved claims against the BLMIS bankruptcy estate.  One of the determining factors will be the exact composition of the federal agencies included in the settlement.  In addition to the U.S. Attorney's office, JP Morgan has also been under investigation by the Office of the Comptroller of the Currency ("OCC") as well as a unit of the Treasury Department.  It has been reported that at least $1 billion of the fine will be added to the pool of assets set aside to compensate Madoff victims.  

A copy of Picard's lawsuit filed against JP Morgan is below:

Madoff Trustees 2011 Jpmorgan Suit by jmaglich1