Update From ZeekRewards Receiver: Claims Process Coming, Potentially “Hundreds of Millions of Dollars” In Clawback Lawsuits

The receiver appointed to recover assets for victims of the $600 million ZeekRewardsPonzi scheme has posted a letter on his website providing an update to investors and indicating that he intends to vigorously pursue those who received profits from the scheme – profits he estimates are in the hundreds of millions of dollars.  Kenneth E. Bell, appointed by United States District Judge Graham Mullen, disclosed that the total amount recovered thus far exceeds $300 million and is likely to increase while he pursues additional funds being held in financial institutions.  Additionally, Mr. Bell indicated that once victims completed a court-approved Official Claim Form, he would proceed with a preliminary and partial distribution rather than make one final distribution at the conclusion of the Receivership.

Pegging the number of true victims who lost more in the scheme than they were able to withdraw as approximately 800,000, the Receiver estimated that total losses ranged from $500 million to $600 million.  For those victims, the Receiver indicated that an Official Claim Form will be posted to his website once he received Court approval.  There will likely be a deadline for victims to submit their completed Form, after which the Receiver indicated he will proceed with a preliminary and partial distribution.  It appears as if the affiliate User ID’s will be used as a method of identification for victims, as Mr. Bell refers to those IDs several times in his letter.

While the updates on Mr. Bell’s intent to proceed with a claims process are similar to what he has indicated in prior updates, today’s update provides a wealth of new information surrounding those investors whose withdrawals/distributions from Zeek exceeded their initial investment.  In a Forbes article I posted shortly after the scheme was uncovered, I estimated that the prospect of “clawback” lawsuits was “amost certain” once the Receiver had completed his initial investigation.  While Mr. Bell laterconfirmed that he would be pursuing those affiliates “who took more out of Rex Ventures than they put in,” he did not provide specific numbers on the amount of potential clawback victims or recovery.

Apparently having completed his initial investigation, the Receiver disclosed that “there are more than 100,000 User IDs” that took more out of the scheme than they invested.  While declining to provide specifics on the potential amount of clawback recoveries, Mr. Bell did disclose that the ‘false profits’ enjoyed by these individuals numbered in the “hundreds of millions of dollars.”  Mr. Bell indicated that subpoenas would be sent out “this week” to approximately 1,200 of these likely clawback targets, seeking documentation of financial dealings with the scheme and, if necessary, depositions and litigation.

While not mentioned in the letter, it is likely that these 1,200 individuals received the highest amount of distributions from the scheme.   Additionally, in an attempt to allow settlement without litigation, a letter will also be included with the subpoena offering the possibility of negotiating the voluntary surrender of profits without litigation.  While the letter does not elaborate, it is likely that a slight discount will be offered as an incentive to avoid litigation costs.  These 1,200 likely represent the first batch of clawback targets, as Mr. Bell also indicated that subpoenas and demand letters will be served on “thousands more” in the upcoming weeks.

With over $300 million in the bank and an estimated “hundreds of millions of dollars” in potential clawback recoveries, there is an increasing possibility that Zeek victims could eventually recover an amount close to, if not equal to, their net investment.  While Mr. Bell was quick to caution against counting on a 100% recovery, he stated that “if we don’t it won’t be for lack of trying.”

The Receiver’s letter is here.

Zeek Receiver Files Preliminary Liquidation Plan With Updates on Asset Recovery, Clawbacks, and Claims Process

Today, Receiver Kenneth Bell filed his Preliminary Liquidation Plan with the Court, and he provides an abundance of information on asset recovery to date, clawback possibilities, and the upcoming claims process.  A comprehensive article on Forbes.com outlining the Plan, as well as a link to download the Plan itself, is available here.

Clawback Litigation Likely

The receiver appointed to recover assets in the $600 million ZeekRewards Ponzi scheme announced today that he had recovered nearly $300 million in assets for eventual distribution to the estimated one million victims.  The receiver, Ken Bell, also estimated that “tens of millions of dollars more” are still unaccounted for, and hinted at their eventual recovery as well.  While victims certainly should be optimistic about the developments to date, Mr. Bell urged patience going forward, stating that “this process will take months, if not longer.”

Also of note in the letter was Mr. Bell’s most pointed statements to date that he intends to pursue clawback litigation against those “affiliates who took more out of Rex Ventures than they put in.”  While many victims received few, if any, distributions and instead chose to re-invest their gains, some affiliates were rumored to have withdrawn tens or even hundreds of thousands of dollars in excess of their initial contribution.  Citing principles of equity, Mr. Bell declares that “in order to make everyone as whole as possible, those who profited from participating should surrender their gains.”  Courts routinely approve the use and legal theory surrounding clawbacks, and they are very difficult to defend.

It also appears that the beginning of a claims process is near.  Mr. Bell indicated that an “information template” will be posted to the Receivership website soon that, while it will not function as an official claims form, will allow the Receivership to begin collecting victim information and also enable an accurate method of communication as the case proceeds.

Finally, and likely in response to increased and rampant speculation over recent comments made by some affiliates in which they purported to have spoken to the Receiver or the SEC about the negative merits of the case, the Receiver made a categorical denial.  According to Mr. Bell, False information is being circulated by these claimants.”  Going forward, Mr. Bell urged victims to consider only what the SEC posts on its website for its position on the matter.

Ponzitracker published an article several days ago echoing Mr. Bell’s comments after having been forwarded an email that purported to contain comments attributed to the SEC concerning the “weakness” in Zeek’s case.  In a conversation with a top SEC official involved in the litigation, Ponzitracker was able to confirm that the statements being circulated were false.

SEC Admissions Of Weakness In Zeek Case “Inaccurate”; Tactics and Motivations of Zeek Victim Group Questioned

The update below was prepared by Zeek Recovery contributor, Jordan Maglich. In summary, we strongly encourage everyone to be patient with the process. Zeek Rewards is NOT coming back. There’s no value in donating money to cover someone else’s legal bill. This is especially true if you lack information regarding the personal benefits of the effort (assuming there are any), lack information regarding how the money is spent and lack information regarding the law firm being retained. If it’s possible, we suggest you request a refund for your donation made pursuant to this effort. As we’ve written in the past, there’s no benefit for a group of people to retain a law firm and negotiate en masse. The receiver is going to treat all victims equally, regardless if a few hundred or thousand have retained a similar lawyer. In the event of class action litigation, the benefits will be distributed evenly to the entire class, regardless if the victims have “donated” to the effort. +Kevin Thompson

Jordan’s article is below:

On August 17, 2012, the Securities and Exchange Commission (“SEC”) filed an emergency enforcement action to shut down ZeekRewards (“Zeek”), calling it a massive $600 million Ponzi scheme.  According to the SEC, while Zeek promised participants a daily payout of “net profits,” these profits were nearly exclusively derived from the funds of new investors – the classic hallmark of a Ponzi scheme.  At the SEC’s request, the court then approved the appointment of Ken Bell as the receiver, who would be tasked with gathering and safekeeping assets for eventual distribution to victims. 

Emotions have run high since Zeek’s shutdown, as many lament their losses amid what was such a promising operation that seemingly defied the age-old “if it’s too good to be true..” mantra.  However, a select (and growing) group has taken their dissatisfaction to another level, soliciting the assistance of other victims to fight the “illegal” and “unlawful” actions taken by the SEC.  While their rousing rhetoric is critical of the SEC, recent representations made regarding the SEC’s handling of the case may have crossed the line from opinion to misrepresentation.  Indeed, an SEC official briefed on the claims by Ponzitracker explicitly refuted such allegations.

Shortly after the SEC stepped in, several groups, including “Zeek Rewards Affiliates United Against The SEC” and “Zteambiz” were formed, and appear to operate in tandem.  Zteambiz describes itself on its website, www.zteambiz.com, as “a professional organization designed to secure competent legal counsel to prevent further damage caused by the actions of the SEC actions against Rex Venture Group aka, Zeek Rewards.”  Dave Kettner and Robert Craddock are several of the individuals behind these sites, as evidenced by multiple postings attributed to them.  Using the site, both have solicited Zeek victims to “donate” towards a fund being set up to retain a top law firm to fight the SEC’s allegations and reopen Zeek.   A September 5, 2012 update from Kettner implored victims to donate if possible to be added to the “protected group.”  The response seems to have been positive, and on August 30, 2012, a notice was posted indicating that SNR Denton, a well-known international law firm, had been retained:

“Important notice:

SNR Denton US LLP represents Fun Club USA and all inquiries about this representation should be directed to Fun Club USA at xxxxxxxxx. SNR Denton’s legal representation is limited to Fun Club USA; SNR Denton does not represent and does not have an attorney-client relationship with affiliates of Zeek, Zeek Rewards, Rex Venture Group LLC or with any individual or party that chooses to provide funds to Fun Club USA.”

The notice is seemingly at odds with representations contained in the “People Helping in the Legal costs” tab on Zteambiz, which indicated that those who had donated – numbering over 6,000 as of September 1, 2012 when it was last updated – were “now being represented by counsel, to protect their moneys (sic) earned by Zeek Rewards and monies currently held by Zeek Rewards.”  The notice, which has since been removed, was clear that “SNR Denton’s legal representation is limited to Fun Club USA.”  A quick search on Florida’s Division of Corporations website yielded a “Fun Club USA Inc.” registered on August 28, 2012.  The President of Fun Club, as shown on its Articles of Incorporation  Robert Craddock. 

Zteambiz has been vocal in its criticism of the SEC, alleging that “all the pages that were submitted…by the SEC that froze the assets of Rex Venture Group, LLC has all been one sided and what we believe to be a misrepresentation of the truth and facts of what Zeek Rewards was as a viable and legal business.”  Additionally, Zteambiz claimed that “the SEC mislead (sic) the judge” in securing an emergency asset freeze.

This past Saturday, an email from “Dave” updated recipients based on information recently learned from Craddock.  One of the first revelations was that SNR Denton had decided to no longer represent Zeek, reportedly due to the “tons of calls” received by the firm from victims that interfered with Denton’s “entire law firm operations.”  A new law firm was said to be in the works, whose identity would remain a secret until court filings were unveiled “early next week.”  What piqued the interest of many, however, were the representations made immediately after.  The paragraph is reproduced below:

Here is the great news…The law firm has already talked to the SEC and the NC DOJ. On Thursday, Robert got a call from one of our attorneys regarding the conversation that he had with the SEC. Here
is what he said:

The SEC acknowledged that there are a couple of problems with the case against Zeek Rewards and Rex Venture group. Here are the problems:
1.    We (the SEC) are not able to find a victim in this case. We are not able to find anybody at this time that has been harmed by Zeek Rewards.
2.    We (the SEC) are having a hard time finding a security. In the complaint, it said that Zeek was selling securities and was an investment scheme.
Based on their (the SEC) new knowledge of the Zeek Rewards business model, they are having a hard time moving forward in making their case. And they are now looking for a path or way to back out of this.

These apparent admissions by the SEC quickly spread over the internet, with dozens of websites frequented by the multi-level marketing community accepting the statements as fact and quickly proclaiming that the SEC was close to capitulating.  

The claims seem skeptical for several reasons.  First, it is highly unlikely that these kind of admissions would be made to a potentially adversarial party and/or attorney.  Second,  both Rex Venture Group and Paul Burks have each already entered into a consent judgment agreeing to waive any right of appeal, and, in Burk’s case, paying a $4 million civil penalty.  Further, a link to an information page established by the SEC now features prominently on the SEC’s homepage, www.sec.gov.  

These suspicions were confirmed today after Ponzitracker spoke with a top SEC official familiar with the case.  After reviewing the allegations, the official, who declined to be named, labeled the statements as “inaccurate” and “false”.  Additionally, it would be highly impractical for the SEC to make such moves and statements without allowing the receiver to complete his initial investigation and make appropriate recommendations.

ZeekRewards Update: Banks Report Account Balances, Receiver Takes Fight For Cashier’s Checks To Court

It has now been over one week since Ken Bell, the court-appointed receiver overseeing ZeekRewards (“Zeek”), held a press conference to brief various members of the media about his progress thus far and plans for the near future. In his remarks, Bell indicated that one of his main priorities going forward was to continue gathering assets for eventual distribution to victims. This included cashiers checks deposited, but not cashed, by Zeek investors just before the scheme’s collapse. Following the press conference, Mr. Bell posted an update to his website that included a letter updating investors and additional answers to investor questions.

Since that meeting, a review of the court docket reveals that the recovery of assets continues to be the focus of Mr. Bell and his team. In the past ten days, various financial institutions have submitted sworn statements in response to the court’s earlier asset freeze indicating how much, if any, Rex Venture Group (“RVG”) maintained in bank accounts. RVG is the parent company of ZeekRewards. Those reports, from institutions such as Charles Schwab and NewBridge Bank, showed that tens of millions of dollars were currently being held in the name of RVG or Paul Burks, Zeek’s founder. Additionally, the Receiver’s lawyers have sparred with Burks in an attempt to gain control of his personal assets.

While this information does not answer the most pressing question of when the victims will be paid, these recent filings provide a glimpse into the Receiver’s focus: securing all assets. These recent filings do, however, address the issue of cashier’s checks that were sent immediately prior to Zeek being shut down.

Shortly after the Securities and Exchange Commission (“SEC”) filed suit against Zeek, United States District Judge Graham Mullen issued an order appointing Mr. Bell as receiver. That order listed the various assets over which Mr. Bell would have authority over, including assets held or fraudulently transferred by RVG. These orders are standard in receivership proceedings, and their wording rarely varies. However, Zeek was somewhat unique, in that it highly encouraged the use of cashier’s checks to fund a new investor’s account. Different from personal checks, a cashier’s check operates like cash upon endorsement by the maker. According to the receiver, “numerous” cashier’s checks and other forms of payment potentially totaling several million dollars were received either on or after the date the SEC shut down Zeek, Because of this, Mr. Bell sought the Court’s approval (the “Motion”) to clarify the language of the order appointing receiver to explicitly include those forms of payment as receivership assets. The Motion can be viewed here.

The Motion also sought to freeze assets in possession of Burks and other third parties, including his family members. In support, Bell noted that while Burks was estimated to have secretly misappropriated roughly $11 million from Zeek, nearly $7 million of that sum was no longer in Burks’ possession or control, including $1 million transferred to certain family members.

Not surprisingly, while Burks did not object to the inclusion of uncashed cashier’s checks into the receivership estate, he strongly opposed any attempts to now “include Mr. Burks’ personal accounts.” His objection can be found here.

Apparently swayed, Judge Mullen declined to grant the receiver’s request to include Burks’ personal accounts in the asset freeze, but did allow the amendment of language in the order appointing receiver to include cashier’s checks and other forms of payment as receivership property. The Judge’s order can be viewed here. However, the receiver certainly has the ability to bring future lawsuits against Burks and/or his family members once he has completed his analysis of Zeek’s financial records and been able to trace the flow of assets in and out of Zeek. This investigation is expected to take weeks, if not months, to complete.

Letter from the Receiver

Update From Zeek Receiver: Outside Lawsuits Likely To Be Stayed

Disclaimer: The information and materials on this blog are provided only for general informational purposes. No attorney-client relationship is formed nor should any such relationship be implied. By using this website or subscribing to our Zeek e-mail alerts, you acknowledge that your receipt and use of such information does not create an attorney-client relationship. In the future, we may make formal offers for legal representation; however, at this time it is our opinion that litigation and/or other action is premature.

This post is authored by Jordan Maglich, Forbes contributor, associate at Wiand Guerra King and creator of the Ponzi Tracker website.

In the wake of the SEC’s shutdown of ZeekRewards and the court’s appointment of a receiver, many have expressed frustration at the perceived lack of progress. In an apparent effort to “jumpstart” the recovery, at least one class action lawsuit has been filed by investors against ZeekRewards and Paul Burks. On another front, a group of Zeek affiliates appear to be soliciting “donations” from investors to fund litigation against the Securities and Exchange Commission in an effort to “reinstate” Zeek. While victims may mean well, it is likely that neither suit will yield any benefits.

When the North Carolina federal court appointed Ken Bell as receiver, it issued an “Order Appointing Receiver” (the “Order”) that spelled out Mr. Bell’s duties and responsibilities. Among these, Mr. Bell was directed to marshal and preserve all of Zeek’s assets. Additionally, the Western District of North Carolina was designated as the exclusive forum for any claims brought against Zeek or Burks. Besides giving Mr. Bell the sole authority to bring claims on behalf of the receivership entities, Paragraphs 32 – 34 of the Order also specifically stayed any litigation involving the Receiver, Receivership Property, the Receivership Entities, or previous employees. Courts in which those actions are filed must defer to the exclusive jurisdiction of the Western District of North Carolina before proceeding.

The Receiver also brought this up during his conference call with various members of the media today. I was fortunate enough to be permitted to listen. While stating that he had not been provided with any copies of the filed lawsuits, Mr. Bell alluded to the court-imposed litigation stay, opining that the stay likely encompassed those actions. Mr. Bell’s viewpoint is likely shared by Judge Mullen, as receivership courts do not take lightly to encroachments on their jurisdiction. If you’re wondering what a court-imposed “Stay” means, it’s a ruling by the court that halts further legal process in a case.

During the conference call today, Mr. Bell was clear that he intended to recover every possible source of funds for eventual return to victims, and the existence of competing litigation for these funds is not likely to sit well with both Mr. Bell and the federal judge presiding over the case. In addition to the unambiguous language in the Order, principles of equity also require that a small group of investors should NOT be allowed to essentially “leapfrog” the rest of investors to recover funds that rightfully belong to the receivership estate. The goal of a receivership is to treat similarly-situated victims alike, and allowing some investors to recoup a larger part of their total investment than others is contrary to this vision. If people are encouraging you to “unionize” and demonstrate “strength in numbers,” it’s certainly within your rights. However, I feel it will not yield any meaningful benefits that you are not already entitled to receive.

In short, investors are urged to have patience as Mr. Bell completes his initial investigation. A court is very unlikely to allow outside litigation to proceed that has the professed goal of enriching some investors to the detriment of others. Additionally, any funds recovered from Zeek Rewards and/or Burks are the property of the Receivership Estate for the benefit of all victims, and not just a select subset. Victims must simply sit tight while the receiver’s investigation continues and stay tuned for future updates.

In a future post, we’ll explain the likelihood of Clawback Litigation against some of the investors that actually profited from the program. Based on the receiver’s comments, it seems possible that Ken Bell will pursue this avenue to bolster the cash accounts at Zeek. In the meantime, if you have not done so already, please subscribe to receive our email updates.

What can I do NOW to get my money back?

Unfortunately, there is nothing immediate that you can do or file right now. The receiver will take a few months to ramp up its operation and we don’t expect a formal claims process to start for a while. The best thing you can do now is stay informed. The e-mail updates and blog posts on this website will be a great source of information regarding news updates and claims deadlines. Also, start gathering your paperwork for the eventual claims process.

The claims will certainly require your Zeek membership information and account numbers. The claims will likely also require you to document the exact amount of investment that you made in Zeek. Gather bank statements, wire transfers, credit card receipts or other information that evidences the amounts you paid into Zeek. The claims form will likely also ask you to report any disbursements or commissions that you received from Zeek. It would be a good idea to gather this information as well. Once you’ve gathered the above information, secure it in a safe place and wait for the claims process to start. When the claims process starts, we will have a better idea of timing and sense of when you might receive a distribution from the receiver. Watch for our e-mail updates. If you have not subscribed already, please provide your email address on our subscription page.

What is a Receivership?

Receivership statutes are very complex and are often misunderstood, even by experienced attorneys. A receivership is similar to a bankruptcy proceeding, but with a few important differences. First, unlike bankruptcies, receiverships can be filed in either state court or federal court. In a receivership, the person appointed to take control of the assets (the “receiver”) is generally bound by the powers and restrictions contained in the court’s receivership order. In Zeek’s case, the receiver is Ken Bell.

IF I AM OWED MONEY BY A COMPANY IN RECEIVERSHIP, IS IT JUST GONE?

Not necessarily. While each receivership is different, many receiverships return money (called a “distribution”) to its creditors. If you’re reading this, it’s likely that you’re a “creditor” looking for answers regarding your piece of pie. Some receiverships result in a 100% distribution; others result in little or no distribution. A receiver is charged with protecting all receivership assets, liquidating those assets, evaluating all claims filed by the receivership’s creditors, and making a distribution to all legitimate creditors. The receiver is also charge with pursuing assets from some of the “winners” in the scheme i.e. investors that pulled out significant gains. This is known as “Clawback Litigation.” The receiver may also file suit against third-party vendors that profited by supporting the scheme. The receiver ordinarily files periodic reports with the court, updating it on the value of the receivership’s assets and the amount of money spent by the receiver in carrying out his or her duties. A distribution is normally made near the conclusion of the receivership matter, which can be months or even years into the proceeding. In this case, we expect this to be a very long and complicated matter.

IF I AM A CREDITOR OF A RECEIVERSHIP, WHAT CAN I DO TO PROTECT MYSELF?

First, try to stay well-informed. Carefully read any notice or update that you receive from the court or the receiver. If other information is readily available, keep yourself updated on the status of the receivership case. Most importantly, it is vital that you complete a proof of claim form within the timeframe established by the receiver. If you are a creditor of a receivership, you should receive a claim form and instructions in the mail once the claim process has been approved by the court. It is critical that you carefully and accurately provide all of the information requested (including supporting documentation) and return it within the time allotted by the receiver. If you fail to submit a claim, if you submit incorrect or incomplete claim forms, or if you fail to submit the claim form in a timely manner, the receiver may refuse to allow your claim and you may miss out on a distribution.

What is the receiver’s current obligation?

On August 17, 2012, Kenneth Bell was appointed as the receiver over Rex Venture Group, which does business as ZeekRewards (“Zeek”). In his capacity as Receiver, Mr. Bell essentially functions as an arm of the Securities and Exchange Commission, and is tasked with gathering and eventually distributing assets to victims. This involves investigating the location of Zeek’s assets, as well as deciding whether to pursue those who received money from Zeek in excess of their original investment or without giving value in exchange. The staggering number of victims involved indicates that this will likely be a complicated and lengthy process.

Upon his appointment, Mr. Bell’s first objective was to take control of the business and prevent the concealment or dissipation of company assets. After securing control of the business, Mr. Bell’s focus will turn to obtaining and reviewing company records as part of his investigation. Once Mr. Bell gains an understanding of Zeek and its true nature, he will submit the results of his investigation to the Court. This report will also detail his efforts to recover assets for victims, as well as a proposed course of action.

According to the SEC, more than $200 million remained in Zeek’s bank accounts when the fraud was alleged, and has since been subject to an asset freeze. After the Receiver has conducted his initial investigation, he will then petition the court for the establishment of a claims process, which will include the court’s approval of a Proof of Claim Form (“Form”) to be distributed to victims. This Form will typically ask for a victim’s total investment, as well as total withdrawals, in order to determine the net loss. After the court’s approval, victims will then have a period of time in which to submit their completed Forms, which will then be evaluated by the Receiver. After the Forms have been reviewed, the Receiver will then seek court permission to make an initial distribution. Depending on the Receiver’s efforts to recover additional assets for victims, there could possibly be additional future distributions.