Over two years after the Securities and Exchange Commission accused ZeekRewards of being a massive Ponzi and pyramid scheme, a grand jury indicted the company's founder on a multiple fraud charges. Paul Burks, 67, was charged with mail fraud, wire fraud, mail and wire fraud conspiracy, and tax fraud conspiracy. Burks is expected to appear in federal court in the coming days to make his initial appearance. If convicted and sentenced to the maximum term, Burks could face decades in federal prison.
Burks has operated Rex Venture Group, LLC ("RVG") since 1997. In 2010, he formed zeekler.com, which operated as a penny auction website offering participants the ability to place incremental bids on merchandise in one-cent increments. Individuals were required to purchase "bids" in lots, usually at a cost of $.65 per bid, in order to participate in the auctions. Burks launched ZeekRewards in January 2011 as an "affiliate advertising division" of Zeekler. Participants were then solicited to become investors, or affiliates, in ZeekRewards in the form of investment contracts called the "Retail Profit Pool" and the "Matrix." None of these investments were registered with the SEC or any state regulatory authorities.
The Retail Profit Pool promised investors the chance to earn lucrative daily returns of "up to 50% of the daily net profits" after completing a process that involved enrolling in a monthly subscription plan, soliciting new customers, selling or purchasing ten Zeeker.com "bids", and placing one free ad daily for Zeeker.com. According to the ZeekRewards website, a daily commitment of "no more than five minutes per day" was required to share in daily profits. The daily "award" was usually 1.5% of the individual's 'investment'. Due to the compounding nature of these "Profit Points", as they were called, the cumulative amount of outstanding Profit Points now numbers nearly $3 billion. Assuming a 1.5% daily "award", this would require daily cash outflows of $45 million should all investors seek to receive their "award" in cash.
In addition to the Retail Profit Pool, investors could also participate in the "Matrix", which was a form of multi-level marketing that rewarded investors for each "downline" investor within that investor's "Matrix". The Matrix consisted of a 2x5 pyramid, and each person added to an investor's Matrix qualified that investor to receive a bonus.
While ZeekRewards represented to investors that the operation was extremely profitable, in reality, the company's revenues and payments to investors were derived solely from funds contributed by new investors - a classic hallmark of Ponzi schemes. Indeed, authorities alleged that 98% of all incoming funds were derived from the funds of new investors. Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows. However, because investors were actively encouraged to "roll-over" their "profit points" back into the scheme, the number of outstanding liabilities to investors steadilty increased, reaching approximately $2.8 billion in August 2012 despite availabie cash reserves of less than 4300 million. Due to the likelihood that those funds would soon be exhausted, the Commission initiated an emergency enforcement proceeding and sought an asset freeze in August 2012.
Burks, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn over $10 million in investor funds for the benefit of himself and his family members.
Timing of Charges
Burks becomes the third person to be charged in connection with the scheme after Dawn Wright Olivares and Daniel Olivares were charged in December 2013 and currently await sentencing. The indictment of Burks has not only been rumored for some time, but also comes as the court-appointed Receiver, Kenneth D. Bell, begins his quest to recover "false profits" from thousands of victims that were fortunate enough to profit from their investment. The receiver's efforts to recover these "false profits" will become markedly easier in the event that Burks pleads guilty to the fraud, since the guilty plea or conviction of a Ponzi schemer allow the use of the "Ponzi presumption" that significantly simplifies the burden of proof required in the so-called "clawback" actions.
Tax Fraud Conspiracy
While mail fraud and wire fraud charges are commonly brought against individuals associated with Ponzi schemes, the Burks indictment also includes a tax fraud conspiracy charge that centers around the issuance of IRS Form 1099's to victims that reported fictional income derived from the scheme. While 1099's and/or K-1's are often issued by Ponzi schemers to investors as part of the quest to lend legitimacy to the scheme, the filing of tax fraud conspiracy charges is certainly unusual and it remains to be seen whether this may lead to similar charges in future actions.
More Ponzitracker coverage of ZeekRewards is here.
The indictment is below (h/t to ASDUpdates):