zeekrewardsYesterday saw the Zeek Rewards Receivership file a request for permission to “file separate actions against” two of Zeek’s attorneys.

Explaining the request, the Receiver wrote

After careful analysis of RVG’s written and electronic records, extensive document review and numerous interviews with relevant witnesses, the Receiver has concluded that two attorneys hired by RVG (and their related entities) caused significant damages to RVG by their negligent and other wrongful conduct.

The order was granted on the same day in a North Carolina District Court, after which the Receiver went on to file his actions.

Named as defendants in the actions are attorneys Kevin Grimes and Howard Kaplan and their respective law firms.

howard-N-kaplan-tax-attorney-zeek-rewardsHoward Kaplan (right) is a tax attorney who operates out of the US state of Nebraska. Kaplan advertises his law firm on the website “Kaptax”, where he writes

Taxes are a necessary evil.  Paying too much in taxes is avoidable with good counsel.  My mission is to provide the best counsel possible to solve your tax problems.

In relation to Zeek Rewards,

Howard N. Kaplan served as legal counsel to RVG from around January 2012 until August 2012, when RVG was placed into receivership.

Zeek Rewards was an $850 million Ponzi scheme, shut down by the SEC in August 2012.

In filing his lawsuit against Kaplan, the Zeek Rewards Receiver claims

By virtue of his knowledge of RVG and ZeekRewards and his legal expertise, Kaplan knew or should have known that RVG was perpetrating an unlawful scheme which involved a pyramid scheme, an unregistered investment contract and/or a Ponzi scheme.

Despite this knowledge, Kaplan actively encouraged investors to participate in the scheme by promoting ZeekRewards through providing tax advice to current and prospective investors in the program and knowingly allowed his name to be used to promote the scheme.

As with other MLM professionals hired by Zeek Rewards to offset Ponzi scheme concerns,

Kaplan played an indispensable role in the scheme.

Because of the lucrative, seemingly “too good to be true” claims being made by RVG and ZeekRewards, many potential investors were skeptical of whether the scheme was legal and legitimate.

So, RVG enlisted the aid of Kaplan and other legal counsel to assist in promoting and legitimizing the scheme.

Kaplan helped in several ways. Very early in his representation of RVG, Kaplan knew or should have known that ZeekRewards was an unlawful program.

He was aware that the program advertised historical average returns of 1.4% per day, which no legitimate investment could accomplish.

Nonetheless, Kaplan appeared on two Affiliate “Leadership Calls” with Dawn Wright-Olivares to promote ZeekRewards.

In addition, he provided a “frequently asked questions” document (“FAQ”) for use on ZeekRewards’ website and made himself available to affiliates for follow-up tax questions via email.

Proof that Kaplan was fully aware of potential compliance issues surrounding Zeek Rewards’ compensation plan is provided via email communications between Kaplan himself and Dawn Wright-Olivares, Zeek’s Chief Operating Officer.

In February 2012, Wright-Olivares wrote to Kaplan about “potential securities issues” with Zeek Rewards’ compensation plan.

Kaplan replied,

I concur that because of the way your plan is structured, there is constructive receipt [of affiliate income] because of the choice your
affiliates have.

Perhaps it can be compared to dividend reinvestment, where one chooses to buy more stock rather than cash out the dividends.

Working with Wright-Olivares to perpetuate the “we are not an investment if we don’t mention the word investment” psuedo-compliance that was rife in Zeek Rewards,

Kaplan quickly came to understand that Wright-Olivares prohibited the characterization of Zeek as an “investment,” since that word raised securities and SEC implications.

As a result, Kaplan refrained from mentioning on the leadership calls or in his FAQ the tax implications that would arise if Affiliate payments were treated by the IRS as an “investment.”

Instead of properly informing Affiliates of the different tax implications they would face if their Zeek payments were properly characterized as coming from an “investment” rather than a “trade or business,” Kaplan failed to inform Affiliates, either on the calls or in his FAQs, of the material fact that payments to Affiliates should be characterized as investment income for tax reporting purposes.

And it this tax advice that Kaplan provided Zeek Rewards and his affiliates, that the Receivership nails him on:

In the FAQs that he drafted and allowed ZeekRewards to post to its website, Kaplan advised that Affiliates should use IRS Schedule C (“Profit or Loss  from Business”) to record their income, making no mention of the fact that they should use IRS Schedule D (“Capital Gains and Losses”).

By all means characterize taxes as “evil” and work to reduce your client’s legal tax liabilities… but instructing Zeek Rewards affiliates to lie to the IRS?

Oh dear.

Calling a spade a spade, the Receivership holds Kaplan responsible for the perpetuation of Zeek’s Ponzi activities:

If Kaplan had candidly disclosed the material fact that Affiliate income would be properly characterized by the IRS as capital gains, the obvious negative tax implications would have caused many Zeek Affiliates to remove their cash earnings from the program rather than reinvesting them, short-circuiting the scheme much earlier.

Since he did not, Affiliates were placated in their misguided belief that ZeekRewards was a lawful program.

Exactly how much sooner Zeek Rewards might have collapsed had Kaplan not of been lying to affiliates about their tax obligations is unclear, however it’s clear the Receivership believes Kaplan’s lies to be a primary factor in putting off the collapse.

Moreover, by allowing ZeekRewards to use his name in providing Affiliates the false perception that ZeekRewards was a lawful enterprise and by serving as a resource in answering Affiliates’ tax questions via email, Kaplan assisted in prolonging the scheme, deepening RVG’s insolvency and causing significantly more loss to RVG than it otherwise would have incurred.

In the months before the SEC shut it down, Zeek Rewards was hemorrhaging money and was on the brink of organic collapse.

For his part in directly impacting and prolonging the scope of fraud carried out by Zeek Rewards via their Ponzi scheme, the Receivership is holding Kaplan responsible for

  • legal malpractice
  • legal negligence
  • breach of fiduciary duty and
  • aiding and abetting breach of fiduciary duty (by Zeek Rewards and its management)

The Receivership claims Kaplan’s actions resulted in damages of ‘an an amount in excess of $100 million’, and asks the court to

Enter Judgment against the Defendant for the losses suffered by RVG in an  amount to be determined at trial.

Award the Receiver just and reasonable attorney fees, subject to Court approval, which are justified in light of the costs to the Receivership Estate in bringing this action.

Award prejudgment and post-judgment interest, costs and such other and further relief as the Receiver is entitled to recover.

The other attorney named in the Receivership’s initial request for permission is Kevin Grimes. Grimes is facing similar charges in a separate lawsuit also claiming $100 million in damages.

 

Footnote: Our thanks to Don@ASUpdates for providing a copy of the Receiver’s lawsuit.