Zeek Receiver Wins Approval To Pursue Class Action Clawbacks

A North Carolina federal judge has given the go-ahead for a court-appointed receiver to treat nearly 10,000 "net winners" of the $700 million ZeekRewards Ponzi scheme as defendants in a class-action lawsuit - a mechanism that the overseeing judge deemed as "the only means to reasonably and efficiently resolve the Receiver’s claims against 9,400 net winners.”  Kenneth D. Bell, the Receiver for Rex Venture Group, LLC d/b/a ZeekRewards.com ("ZeekRewards"), is seeking the return of fictitious "profits" from approximately 9,400 participants in the ZeekRewards scheme that were fortunate enough to realize $1,000 or more in returns from their involvement.  Allowing the pursuit of these net winners, as they are known in receivership parlance, as a class will not only greatly reduce the complications and redundancy in bringing the same claims against thousands of individuals, but in doing so will also preserve assets for future distribution to those victims who were not as fortunate.  

ZeekRewards was an online penny auction website that attracted users at an exponential pace due to a lucrative investment program that promised annual returns exceeding 200% and provided recruitment-based incentives to participants..  The program, masterminded by Paul Burks, attracted over one million participants before the Securities and Exchange Commission filed an emergency enforcement action in August 2012 alleging the venture was a massive Ponzi and pyramid scheme.  Following Bell's appointment, his subsequent investigation revealed that over 700,000 participants suffered collective losses exceeding $700 million.

Bell's investigation also showed that tens of thousands of participants had not only recouped their initial investment but also varying amounts of "false profits" that, by virtue of Zeek's operation as a Ponzi scheme, were simply the redistribution of investments by other victims.  Bell has instituted separate actions against the largest net winners not only in the U.S., but other countries such as Canada, New Zealand, and Australia.  

While some of the top net winners received more than $1 million from ZeekRewards, the vast majority of profiteers received a much smaller amount of false profits.  Bell employed a strategy whereby he sued the top ten U.S. net winners, who each received false profits of over $900,000, and sought to designate those net winners as class representatives for a much larger class of approximately 9,400 profiteers who had earned more than $1,000 from the scheme.  Bell argued that those class representatives would likely retain experienced counsel and mount a vigorous defense due to the large sums sought, and that these representatives would "fairly and adequately protect the interests of the class."  Pursuant to Rule 23(a) of the Federal Rules of Civil Procedure, Bell argued that the requisite requirements of numerosity, commonality, typicality, and fair and adequate representation had been satisfied.  Not surprisingly, Bell's request was opposed by the proposed class representatives, who claimed that certification was improper on the basis that it would deprive those individuals of certain due process rights.

The Court's decision first analyzed the four factors set forth in Rule 23(a).  While Defendants did not contest the numerosity requirement, it analyzed objections to the commonality and typicality factors.  First, the Court rejected Defendants' commonality arguments, finding that any potential dissimilarities did not impair the ability to reach a common resolution to the core issues of law and fact.  Next, the Court found that the proposed class representatives satisfied the typicality requirement on the basis that each participated in the same event and course of conduct that gave rise to the Defendant class.  Finally, the Court found that the proposed representatives fairly and adequately represented the interests of the 9,400 class members, finding that their issues were aligned and that the representatives were not likely to abandon their or return the substantial sums sought by the Receiver without engagement of competent counsel and mounting a vigorous defense.

The certification of the class will not only result in an efficient mechanism to pursue thousands of clawback claims, but also avoided the nightmare scenario of potentially having inconsistent results if the Receiver were forced to pursue each of the clawback defendants individually.  Additionally, doing so would have resulted in exponential costs to the Receiver that would serve only as a dollar-for-dollar reduction in assets that could potentially be later returned to victims.  Finally, allowing the receiver to pursue clawback claims in a class action also increases the total potential recoveries by allowing the receiver to target net winners with a lower threshold of clawback claims that might not have been a realistic target in the context of a separate action.  

A copy of the Court's order is below:

Order Cert Class

Jury: Former Ambassador Must Return $700,000 To Stanford Receiver

A federal jury found that a former U.S. Ambassador to Ecuador must return more than $700,000 in compensation he received as an employee of Allen Stanford's massive $7 billion Ponzi scheme.  The case brought by a court-appointed receiver against Peter Romero, of St. Michaels, Maryland, was seen as a test case for more than a dozen similar trials scheduled for 2015 and 2016 against those who received transfers from Stanford's scheme either as an employee or investor.  Stanford is currently serving a 110-year prison sentence at a high-security Florida federal prison.

Romero worked at the State Department during the Clinton administration who, after leaving the State Department, subsequently signed on to work for Stanford as a consultant in the early 2000's.  According to the receiver, Romero's primary role was to recruit new investors to the scheme - trading on "his prior government service to become an ambassador for Allen Stanford." Romero traveled all over the world, interacting with media outlets as well as current and potential clients.  In addition to working with Stanford's marketing operations, Romero's activities included radio interviews and appearances to give speeches.  

The Court-appointed receiver, Ralph Janvey. originally sued Romero in February 2011 for the return of nearly $600,000 in compensation, and subsequently amended the suit to increase the amount sought to nearly $1 million.  Janvey alleged that Romero allowed Stanford to attract potential investors and curry favor with politicians by leveraging his reputation and government contacts.  Janvey has also recently alleged that Romero willfully destroyed evidence of his relationship with Stanford by deleting the email account he used to communicate with Stanford in the days following the revelation of the scheme in 2009.  Romero's lawyers denied Janvey's allegations, instead attempting to satisfy their affirmative defenses under TUFTA by alleging that "Romero was a good-faith transferee whose services as a member of the Stanford International Advisory Board for market-rate compensation constituted reasonably equivalent value."

Following the close of testimony, the Receiver, Ralph Janvey, submitted a Motion for Judgment as Matter of Law ("Motion for Judgment") seeking a judgment of more than $1 million: $725,000 in compensation from a Stanford entity, nearly $377,000 in investment redemptions, and almost $34,000 in expense reimbursements.  While the jury decided that Romero was required to return his compensation, they did rule in his favor in deciding that he was not liable for the return of the approximately $377,000 in redeemed investments before the collapse of Stanford's scheme in 2009.

A copy of the Receiver's Motion for Judgment is below:

Romero Motion for Judgment

Former Hockey Team Owner Gets 21 Years For $130 Million Ponzi Scheme

A Canadian man who once owned a hockey team in the Ontario Hockey League learned he will spend the next 262 months in federal prison for orchestrating a massive Ponzi scheme that took in at least $130 million from over 1,000 victims.  William Wise, 64, was sentenced by U.S. District Judge Edward Chen, who will decide in April how much restitution Wise should be ordered to pay to his victims.  Wise pleaded guilty last September to one count of conspiracy to commit mail and wire fraud, twelve counts of mail fraud, three counts of wire fraud, one count of money laundering, and one count of tax evasion.  With credit for good behavior, Wise will not be eligible for release until late 2033.

Beginning as early as 1999, Wise offered certificates of deposit (CDs) to potential investors that promised guaranteed annual rates of return of 16%. The CDs were offered by three entities: Millennium Bank, United Trust of Switzerland ("UTS"), and Sterling Bank and Trust ("SBT") (collectively, the "Millennium Entities").  Potential investors were told that the offered rates of return were made possible through overseas investments made by the Millennium Entities.  Wise opened offices in Napa, California and Raleigh, North Carolina, where he employed and oversaw salespeople who solicited investors.  Ultimately, nearly $130 million was raised from at least 1,200 investors.

However, Wise failed to disclose that he controlled the Millennium Entities, and that the promised rates of return were not from overseas investments but rather from the funds of other investors - a classic hallmark of a Ponzi scheme.  In addition to using investor funds to make interest and principal payments, Wise misappropriated a stunning $50 million to support a lavish lifestyle that included:

• a $12,000 weekly allowance for his wife;
• a $6,000 - $10,000 monthly allowance for each of his girlfriends;
• $1 million on fine wine;
• $800,000 to build a hangar in Atlanta for his corporate jet;
• $450,000 for three boats;
• and the purchase of a property in St. Vincent and the Grenadines.

After the Securities and Exchange Commission filed charges and obtained a $75 million judgment against Wise, he was subsequently indicted in February 2012.  Wise turned himself in on April 17, 2012, and pleaded guilty in September 2012.

A court-appointed receiver identified over 300 investors that were fortunate enough to profit from their investment with the Millennium Entities, and subsequently filed suit against 200 of those so-called "net winners."  Ultimately, the Receiver was able to recover over $2.5 million in "clawback" settlements and judgments.   

A copy of the plea agreement is below:

Wise Plea Agreement

Hong Kong Bitcoin Exchange Suspected Of $387 Million Ponzi Scheme

A Hong Kong Bitcoin exchange that promised sky-high returns by purportedly engaging in bitcoin trading has reportedly closed its doors, leading to rampant speculation that the company may have been operating a massive Ponzi and/or pyramid scheme.  Bitcoin exchange MyCoin, which had earlier claimed it had over 3,000 clients who invested an average of nearly $13,000, was no longer accepting new users Monday morning. Additionally, Business Insider reports that the company's offices have been closed the last month for "renovation." Last week, over 30 alleged victims complained to a local member of Hong Kong's legislative council, and those victims are scheduled to make a statement to Hong Kong police on Wednesday.

MyCoin promised investors short-term returns exceeding 100% on an initial $52,000 investment, often hosting local events at luxury hotels.  Customers believed they were investing in "mining" contracts, which refers to the practice of utilizing powerful computers to create new Bitcoins.  Bitcoin "miners" receive Bitcoins for their work, and MyCoin promised investors that they could share in these returns through their investment.  By rolling over their investment contracts, which typically spanned four months, investors could purportedly receive a return of over 300% on an annual basis.  The company also attempted to incentivize the recruitment of new investors by offering prizes to top recruiters of cash or even a Mercedes-Benz.

Several recent events appear to be red flags that the company's operations were facing stress.  Investors were not provided with any written records documenting their investment; rather, they were only able to view their trading account on MyCoin's website.  In December 2014, the company modified its withdrawal rules by preventing customers from fully cashing in their accounts unless they were able to recruit more investors.  The company's website also quotes the price of one Bitcoin at $1.36; the actual market value is currently approximately $218.28 per Bitcoin. Tech in Asia quotes the founder of another Bitcoin exchange in reporting that MyCoin had no license and was not "habilitated" to take deposits from investors.  

Rothstein's "Independent Asset Verifier" Indicted On Wire Fraud Charges

A south Florida investment advisor who purportedly served as an "independent asset verifier" for investors in Scott Rothstein's massive $1.2 billion Ponzi scheme has been indicted on a dozen fraud charges. Michael Szafranski, 36, faces one count of wire fraud conspiracy and eleven counts of wire fraud in a newly-unsealed indictment that was returned by a grand jury several weeks ago.  The charges, which carry a potential sentence of up to decades in prison if Szafranski is convicted, are notable not only because of the sheer number of charges but also because they are the first to test prosecutors' theory that a ten-year, not five-year, statute of limitations applies.  

Scott Rothstein is currently serving a 50-year prison sentence in an undisclosed location after pleading guilty to the largest Ponzi scheme in Florida's history that ultimately took in more than $1 billion from investors.  Rothstein touted hefty returns from purported investments in confidential pre-suit settlements, using his position as chairman of one of the fastest growing law firms in south Florida to bolster his credibility while simultaneously flaunting his newfound wealth.  Rothstein fled to Morocco in late October 2009 when the scheme was on the verge of collapse - a country lacking an extradition treaty with the U.S. - only to later return to face the music.  His extensive cooperation with authorities ultimately led to his placement in the Witness Protection program, and his subsequent assistance has resulted in over two dozen additional arrests.

Szafranski, who once worked for the now-defunct brokerage Bear, Stearns & Co., Inc., was hired in or around 2008 by several New York hedge funds to act as an "independent asset verifier" to verify the authenticity of the deals Rothstein was peddling.  However, Szafranski soon allegedly switched from his position of impartiality to become close cohorts with Rothstein and actively began soliciting investors for the scheme.  Rothstein himself testified during 2011 depositions that he paid Szafranski handsomely, including several million dollars in post-dated checks, and extensively wined and dined him.  According to Rothstein,

"There was a point in time when he [Szafranski] had a pretty good idea. There was a point in time when he absolutely knew, and then there was a point in time when he was bringing in investors into something he knew didn't exist."

As an example, Rothstein recounted a time during 2008 when Szafranski questioned him about similarities between signatures in legal documents.  In another instance, Szafranski is said to have accompanied Rothstein and another familiar cohort, Stephen Caputi, to a TD Bank branch where Caputi masqueraded as a bank official.  The indictment alleges that Szafranski ultimately was responsible for bringing more than $200 million of new investments into Rothstein's scheme.  

First Test of Extended Statute of Limitations For Fraud "Affect[ing] a Financial Institution?"

Szafranski becomes the first person charged after the five-year anniversary of the collapse of Rothstein's scheme this past October - a noteworthy event not only because of the duration since Rothstein's scheme, but also because many had speculated that the five-year statute of limitations governing many of the likely criminal charges some of Rothstein's co-conspirators might face might also expire.  However, prosecutors indicated their intent to rely on 18 U.S.C. 3293, which provides for an extended 10-year statute of limitations for certain offenses, including wire fraud and mail fraud, that "affect a financial institution."  

The operative question thus becomes whether or not Szafranski's conduct "affects a financial institution."  Court decisions attempting to elucidate the meaning of this directive have largely done so in a boroad context; the test is not whether any actual loss resulted to a financial institution, but rather whether the conduct caused an "increased risk of loss."  As the 7th Circuit so eloquently observed, 

‘‘[j]ust as society punishes someone who recklessly fires a gun, whether or not he hits anyone, protection for financial institutions is much more effective if there’s a cost to putting those institutions at risk, whether or not there is actual harm.’’

United States v. Serpico, 320 F.3d 691, 694-95 (7th Cir. 2003).  However, such breadth is not unlimited; the more attenuated or or remote one's conduct is in relation to the institution can have a corresponding effect on the viability of such a claim.  

Rothstein's scheme is unique in that a national banking institution, T.D. Bank, played a key role in the scheme.  Rothstein has testified that his relationship with a T.D. Bank Vice President, Frank Spinosa, was essential to perpetuating and legitimizing the scheme. Spinosa was charged in October 2014 with six fraud counts for his role in the scheme, and T.D. Bank has paid hundreds of millions of dollars in legal costs and settlements.  Given the integral role T.D. Bank played in Rothstein's scheme, it certainly may serve as the basis for prosecutors' argument that the fraud materially "affect[ed] a financial institution."

Szafranski's next court appearance is scheduled for February 17, 2015.  While Szafranski becomes the 29th person to be charged in the wake of Rothstein's scheme, some expect further arrests.  Chuck Malkus, author of a best-selling book chronicling Rothstein's rise and fall, has indicated his sources expect several more arrests in the coming months.  According to Malkus, "this Rothstein web could easily hit three dozen [arrests]."

A snippet of emails between Szafranski and Rothstein, excerpted from a lawsuit filed against Bank of America by certain of Rothstein's victims, is embedded below.

Emails by jmaglich1