The court-appointed receiver for the $600 million Zeek Rewards Ponzi scheme has filed suit against two well-known multi-level-marketing attorneys that provided legal services to the company, alleging the attorneys knew or should have known that the company "was perpetrating an unlawful scheme which involved a pyramid scheme, an unregistered investment contract and/or a Ponzi scheme. Kenneth D. Bell, the Receiver, named Howard N. Kaplan in one lawsuit and Kevin D. Grimes and Grimes' law firm, Grimes & Reese, P.L.L.C., in a second lawsuit. Each suit contains legal a legal malpractice/negligence/breach of fiduciary duty claim, an aiding and abetting breach of fiduciary duty claim, and a claim for constructive trust, while the suit against Grimes also includes an unjust enrichment claim.
The Securities and Exchange Commission filed civil fraud charges against RVG Venture Group, LLC d/b/a ZeekRewards ("Zeek") in August 2012, alleging that the company was operating a $600 million Pyramid and Ponzi scheme that was on the verge of collapse. After Bell's appointment as Receiver, his subsequent investigation confirmed that Zeek's more-than 800,000 victims had likely lost between $500 million and $600 million. Including money that authorities were able to seize following the charges and Bell's recovery efforts, more than $300 million has been recovered for the benefit of investors, and Bell has sought to make an interim distribution at the end of September.
As part of Bell's recovery efforts, he commenced "clawback" lawsuits against net winners that were fortunate enough to realize a profit off of their investment - a profit that was, in reality, simply the redistribution of funds belonging to other investors. Additionally, Bell indicated throughout his quarterly status reports that he and his team continued to investigate:
claims against RVG's third-party advisors, vendors, and other service providers that knew or should have known of the inappropriate nature of RVG's activities and yet facilitated those activities for their own gain.
While Bell has explicitly said that these third parties included financial institutions, this is the first confirmation that Zeek's former legal advisors have also been under Bell's scrutiny.
The lawsuits allege that Kaplan and Grimes "played an indispensable role in the scheme." Grimes is a well-known attorney in the multi-level-marketing arena, operating www.mlmlaw.com and touting his firm as the "premier law firm servicing the direct sales industry." Kaplan is a tax attorney whose website states that "taxes are a necessary evil, [and] [p]aying too much in taxes is avoidable with good counsel." Both of the men are alleged to have served as counsel to Zeek beginning no later than January 2012 up to August 2012 when the Commission's enforcement action was filed.
Grimes, according to the complaint, despite allegedly knowing that Zeek was a Pyramid/Ponzi scheme that was selling unregistered securities, created a "compliance course" specifically designed to encourage investors and potential investors that completion of the course somehow bestowed an air of legitimacy to the scheme. According to Bell, Zeek charged each affiliate $30 for the course - of which $5 was paid to Grimes. Bell expands on his claim that Grimes knew Zeek was selling unregistered securities by pointing to an email purportedly authored by Grimes that stated, in part,
I am still in the process of getting my arms around the program, but I have some SERIOUS concerns that it very likely meets the definition of an "investment contract."
If Zeek was, in fact, an investment contract (as tbe Commission alleged), it would constitute a security that was subject to federal and state securities laws, including registration requirements and exemptions. According to Bell, Grimes discarded these concerns to profit from the creation and marketing of the compliance course.
Bell also alleged that Grimes, a well-known figure in the multi-level marketing world, knowingly allowed Zeek to use his association with the company as an implicit endorsement of the company's legitimacy in order to attract more investors. This not only included Grimes' participation in Zeek conference calls with investors, but the use of his name in marketing and promotional materials disseminated to prospective investors.
While the allegations against Kaplan are not as thorough, Bell similarly alleged that Kaplan ignored that Zeek's compensation plan could only be classified as an investment. As Zeek's "tax advisor," Kaplan appeared on multiple conference calls with investors to provide tax advice related to classification of their gains. The suit also alleges that Kaplan allowed Zeek to use his association as an implicit endorsement of the legitimacy of the scheme, and that this served to prolong the scheme and the resulting financial losses.
The lawsuits assert multiple causes of action against Kaplan and Grime, seeking not only more than $100 million from each but also the award of punitive damages for their conduct.
Previous Ponzitracker coverage of ZeekRewards is here.
The lawsuits are included below (special thanks to ASDUpdates):