Zeek Rewards Update: Subpoenas Challenged, Affiliates Want ‘Examiner’ Appointed (And Paid) By Receivership

It has now been one month since the Receiver appointed in the wake of the $600 million ZeekRewards Ponzi scheme issued his October 31st update indicating he intended to subpoenas those investors that profited from the scheme by withdrawing funds in excess of their original investment. In the ensuing weeks, several notable developments have arisen, including a legal challenge to the legitimacy of those subpoenas (and the Receiver’s response), as well as the attempt by a ‘victims’ group to have an independent Examiner appointed (and paid with Receivership funds) to represent the collective voice of victims.  Each will be discussed below.

The Motion to Appoint Examiner

The most notable development was the Friday filing by Michael Quilling, who represents ‘victims’ group Fun Club USA, seeking the appointment of himself as an “Examiner” that would act as a representative on behalf of all “affiliates” (the “Examiner Motion“).  As stated by Mr. Quilling,

The Affiliates need representation of their interests in this case and Movants request that the Court appoint Michael J Quilling as Examiner in these proceedings to represent the collective interests of the Affiliates and all creditors of the receivership estate and that the Examiner and his counsel be compensated out of the receivership estate.

Not suprisingly, the Examiner Motion, along with a brief filed in support, is nearly devoid of legal support.  Mr. Quilling is only able to cite two cases, including one in which Mr. Quilling himself previously served as Receiver and recommended the appointment of an examiner.  In that case, the examiner received nearly $1 million for serving as a “voice” for investors.  Instead, the Motion appeals to the “equitable” powers of the Court, the emotional toll on victims, and delivers a passionate plea that “these people deserve a voice before the court.”  Ironically, the appointment of a representative for such a noble plight will likely serve only to deplete available funds for eventual distribution to the true victims – and at the request of those ‘victims’ who are fighting the Receiver’s efforts to collect their false profits from the scheme to add to those funds.  Indeed, Fun Club USA has been linked to Zteambiz, which has already collected over $100,000 in donations to fund its vague cause of fighting the receivership.

A potential issue with the Examiner Motion lies with the choice of Fun Club’s attorney, Michael Quilling, as Examiner.  Quilling has already entered his notice of appearance in the SEC enforcement proceeding on behalf of Fun Club, which is comprised of several individuals widely thought to have profited from their participation in Zeek.  Thus, those ‘net winners’ obviously have contrasting positions to those ‘net losers’ whose hopes of a full recovery rest in large part on the successful recovery of those ‘false profits’ paid to net winners.  This apparent conflict of interest is magnified when considering that the Examiner’s recommendation to the Court of the position of investors could, at the least, be questioned as having any apparent or direct bias towards those previous (or current) individuals who have opposed the Receiver’s efforts to pursue clawback litigation.

Indeed, in the Stanford case cited as an example in the Examiner Motion, the examiner appointed was required to first file an affidavit disclosing whether any grounds existed that prevented his appointment as judged under the statute governing the disqualification of a judge, justice, or magistrate judge in a proceeding.  That statute, 28 U.S.C. 455, not only encourages disqualification where “impartiality may be questioned”, but also in the following circumstance:

(1) Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding;
(2) Where in private practice he served as lawyer in the matter in controversy, or a lawyer with whom he previously practiced law served during such association as a lawyer concerning the matter, or the judge or such lawyer has been a material witness concerning it;

Here, the nominated Examiner, Michael Quilling, not only currently serves as a lawyer in the matter in controversy for a particular victim group as described in subsection (2), but could also be characterized as having a “personal bias” or “personal knowledge of disputed evidentiary facts concerning the proceeding” stemming from his attorney-client relationship with Fun Club. At least one of the reputed Fun Club members is an individual who delivers regular updates to certain victims and who also disclosed that he was the target of an SEC subpoena concerning his relationship with Zeek.

Interestingly, unlike the ABC Viaticals case where the receiver recommended the appointment of an examiner, here the Receiver has indicated that he opposes the appointment of an examiner.   While the Receiver did not expand on his position, it is likely that he will oppose the Examiner Motion on the grounds that it is unnecessary, and will serve only to duplicate and complicate the Receiver’s efforts. Additionally, while the SEC was contacted to inquire as to whether they were unopposed, they did not immediately provide their position. The Receiver is expected to provide his position in a later response.

Challenge to Clawback Subpoena and the Receiver’s Response

In his October 31st update, the Receiver announced that he had identified more than 100,000 “User ID’s” that had profited from the scheme, and indicated that he was preparing to send subpoenas to 1,200 of those investors presumably that had made the largest withdrawals.  In disclosing that those clawback targets had withdrawn “hundreds of millions of dollars” in false profits, it became apparent that the use of clawback litigation to recover those funds for the benefit of victims could potentially result in a near-total recovery.

When the subpoenas began arriving by mail following the update, some in various ‘victims’ groups that have opposed the Receiver’s efforts began circulating the opinion that the subpoenas had not been served properly under the Federal Rules of Civil Procedure, and were thus illegitimate.  Indeed, because each of the subpoena recipients was alleged to have handsomely profited from the scheme at the expense of other less-fortunate victms, the incentive to delay and/or impede the clawback efforts was quite high.

Shortly thereafter, at least one apparent recipient vocalized these opinions in a court filing.  On November 20, 2012, Nathaniel Woods filed his “Motion of Non-Party to Quash Subpoena (“Motion to Quash“),” claiming that the “alleged subpoena was not served in person” as required under Federal Rules of Civil Procedure.  Oddly, despite Mr. Woods’ status as a Florida resident and the Receivership court’s location in the Western District of North Carolina, Mr. Woods cites a 15-year old case from New York supporting this argument.  Additionally, because the subpoena was “bogus,” the Receiver and his team were alleged to have committed a third-degree felony under Florida Statutes Section 834.0855.

On November 29, 2012, the Receiver filed his response in opposition (the “Response“) to the Motion to Quash.  Before specifically addressing Mr. Woods’ claims, the Receiver first explained that he had determined to issue the subpoenas by mail, rather than certified mail or Federal Express, because of the time and cost efficiencies.  Indeed, service by certified mail or federal express would have cost “more than five times as much.”  Next, the Receiver noted that Mr. Woods, who is alleged to have profited by more than $500,000 from the scheme, admittedly received the subpoena, and had filed the Motion to Quash simply as a delay tactic.  Nevertheless, rather than engaging in further litigation over the legitimacy of his service of the subpoena, the Receiver indicated that he had already re-served Mr. Woods by Federal Express and certified mail with a subpoena issued by the Middle District of Florida, thus rendering the Motion to Quash moot.

While the Receiver declined to address the substance of the Motion to Quash, several factors weigh in favor of the Receiver’s position. First, the Court is vested with broad equitable powers in supervising the Receiver.  The Receiver indicated it was his goal to proceed with the subpoena process in both the most efficient and cost-effective manner, and stated that only 26 out of the 1,200 subpoenas were returned as undeliverable.  Moreover, the use of Federal Express and/or certified mail to deliver the subpoenas would have resulted in much higher costs, which are satisfied out of funds earmarked for eventual distribution to victims.  Additionally, it has been an emerging trend in legal jurisprudence that personal service of a subpoena is not required, and instead finding that Rule 45 of the Federal Rules can be satisfied through service by mail.  See Codrington v. Anheuser-Busch, Inc., 1999 WL 1043861, * 1 (N.D. Fla. 1999) (service by mail upheld); Cohen v. Doyaga, 2001 WL 257828, * 3 (E.D.N.Y.  2001) (same).  In light of supporting legal authority and the fact that approximately 98% of the subpoenas were delivered without incident, quashing of the subpoenas on a procedural basis would appear unlikely.

Jordan Maglich is an attorney at Wiand Guerra King P.L. in Tampa, Florida whose practice includes white-collar crime and securities and financial litigation.  He  covers Ponzi schemes on his blog, PonziTracker, and writes a column for Forbes.com on White Collar Crime.  Follow him on Twitter at @PonziTracker.

About Jordan Maglich

Jordan Maglich is an attorney at Wiand Guerra King, P.L. in Tampa, Florida. He is considered an expert on Ponzi schemes and white collar crime, and his practice includes complex commercial litigation, receiverships, Foreign Corrupt Practices Act litigation, and civil regulatory matters, with a focus on securities and financial services litigation. He represents securities broker/dealers, investment advisors, and their associated persons in federal and state court and in arbitration. Additionally, Jordan is currently part of the team that represents the court-appointed receiver nominated by the SEC in the Arthur Nadel $400 million Ponzi scheme. Jordan authors the Ponzitracker blog, and is also a contributor at Forbes.com where he writes about white collar crime.