Citing the "unprecedented" document discovery that has included millions of documents and multiple terabytes of electronic data, attorneys for a North Carolina man accused of masterminding the massive ZeekRewards Ponzi scheme recently successfully obtained yet another delay in the ongoing criminal trial schedule. Paul Burks, who is currently facing charges of wire fraud, mail fraud, conspiracy, and tax fraud conspiracy relating to his role in ZeekRewards, asked the court in a recent unopposed motion to again delay the trial schedule so that Burks' team could continue poring through the approximately 8 million documents produced to date by the government. Burks' team indicated in the motion that they hope to file a joint motion in mid-April 2015 seeking a "peremptory" trial date. Burks has maintained his innocence.
Burks 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 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 numbered nearly $3 billion in August 2012 when the Securities and Exchange Commission filed an emergency action to halt the ongoing fraud. Assuming a 1.5% daily "award", the outstanding Profit Points would have required 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 a Ponzi scheme. 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 steadily increased, reaching approximately $2.8 billion in August 2012 despite available 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 was 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 or is convicted of the fraud, which would 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, Burks also faces 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.
A copy of the Motion to Continue is below. Thanks to ASDUpdates.