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: