SEC shutdown of Traffic Monsoon: The Facts
Following the announcement of a TRO granted against Charles Scoville and his Traffic Monsoon Ponzi scam, we now take a look at the details behind the granting of the TRO.
The SEC’s filed memorandum accompanying their motion for a TRO is thirty-one pages long. I’ve broken down points of interest from the filing into relevant subheadings below.
Traffic Monsoon was a $207 million Ponzi scheme
Traffic Monsoon is a massive Ponzi scheme that relies on new investor funds to pay returns to earlier investors.
Of the $207 million dollars invested into Traffic Monsoon by over 160,000 paid investors, $60 million has been traced ‘in accounts located in the United States, Canada and the United Kingdom‘.
Over the last few months, Traffic Monsoon added around 175,000 new affiliates each month (most of which were free members).
90% of Traffic Monsoon’s investors are based outside of the US.
The program appears to be most popular in countries that are also some of the poorest in the world.
For example, the Traffic Monsoon website is the 385th most visited website in Bangladesh, 366th in Venezuela, and 517th most visited site in Morocco.
Funds invested into Traffic Monsoon topped out at $1 million a day in late 2015.
In December of 2015 Traffic Monsoon affiliates invested $28.94 million dollars into the scheme. In January 2016 they invested $26.26 million.
Traffic Monsoon could not meet its ROI obligations
Analaysis of Traffic Monsoon’s financial records revealed the company has taken in $207 million dollars in actual cash.
Due to reinvestment of funds by affiliates, on paper Traffic Monsoon had generated $738.5 million dollars in revenue.
This represents a ROI liability of $812.35 million.
There is no way known Traffic Monsoon could pay this with just $207 million dollars of actual money entering the scheme since it launched.
Traffic Monsoon’s adpacks accounted for over 99% of revenue
Although Traffic Monsoon purports to sell several products, its main product, and the one that accounts for over 99% of its revenue, is the Banner AdPack (“AdPack”).
Each AdPack costs $50, which price includes both certain exchange credits and website clicks as well as the opportunity to share in Traffic Monsoon’s profits.
The investor who purchases the AdPack purportedly earns those profits in small increments over time until he has earned $55, amounting to a return of 10% on the purchaser’s initial $50 investment.
Historically, the AdPack has always earned that return at the rate of $1 per day, providing a 10% return over a 55-day period.
If the investor continues to reinvest the returns in AdPacks on an ongoing basis throughout the year, he will realize an annual return of about 60%.
The revenue that makes up nearly the entirety of the investor’s return comes almost exclusively from new investors’ purchases of new AdPacks.
Traffic Monsoon has virtually no revenue from any other source.
Because all investor returns are funded through new investor contributions, the company operates as a classic Ponzi scheme.
PayPal froze $61 million dollars of invested Traffic Monsoon funds
What with Paypal being one of the largest payment processors in the world, millions of dollars in Ponzi fraud is naturally going to raise suspicion.
Up until early 2016, Traffic Monsoon had been using PayPal Holdings, Inc. (“PayPal”) to take in and pay out all funds.
At that time, however, PayPal noted the very rapid growth of the program, as well as other suspicious factors indicative of a Ponzi scheme, and froze the company’s funds – approximately $61 million.
The Paypal seizure was a significant setback for Traffic Monsoon, with the SEC revealing that ‘almost all member funds were kept in PayPal‘.
In March 2016 Scoville, through the Traffic Monsoon Facebook page, advised affiliates PayPal funds would be frozen for 180 days:
Paypal froze outgoing funds from Traffic Monsoon’s account on January 11th, 2016.
On January 12th, Scoville published a YouTube video ‘to offer an explanation to current and prospective members‘.
In the video he did not, however, disclose the PayPal freeze, saying only that for the sake of convenience he was planning to transition away from PayPal to eventually open a “Traffic Monsoon bank.”
PayPal completely froze Traffic Monsoon’s account on February 11th. The same day Scoville, for the first time, disclosed the fund freeze to Traffic Monsoon affiliates.
During the intervening month, because PayPal was allowing investor funds in but not allowing them to be withdrawn, members who bought advertising services (including, most prominently, new AdPacks) and transferred funds to Traffic Monsoon had no idea their funds would be frozen.
The SEC’s memorandum reveals the PayPal freeze expired on July 11th.
Instead of paying investors however, Scoville instead began transferring funds to his personal bank account.
Scoville transferred $25.6 million out of the PayPal account into a separate Traffic Monsoon account held at JPMorgan Chase Bank (“Chase”), and immediately transferred $21 million of those funds into his own personal Chase account.
He attempted to transfer additional funds out of the PayPal account, but PayPal precluded additional transfers.
Sworn testimony by Scoville provided to the SEC, reveals Scoville intended to transfer these funds to “offshore entities”.
Based on these transactions, it is appears that Scoville is making efforts to take control of tens of millions of dollars of investor funds, apparently for his personal use.
Had the SEC of not stepped in, Scoville and the funds would have likely disappeared.
The SEC have requested the appointment of a Receiver
With millions of dollars seized and over a hundred thousand victims, the SEC has requested a Traffic Monsoon Receiversip be established.
The SEC has proposed Mary Margaret Hunt of Dorsey Whitney LLP be appointed Receiver.
In line with other Ponzi scheme Receivership’s, if appointed Hunt will marshal what’s left of Traffic Monsoon’s assets.
She will also investigate the whereabouts of any other funds attached to the scheme, as well as explore the possibility of clawback litigation.
Eventually seized funds will be distributed to Traffic Monsoon victims.
Charles Scoville attempted to manipulate Traffic Monsoon’s Alexa rank
The advertising side of Traffic Monsoon was a pseudo-compliance sham.
Traffic Monsoon’s website sells purported internet advertising services.
It is a combination of an internet traffic exchange, where exchange users browse other users’ websites, and a pay-per-click program, where users are paid to click on other users’ website banner ads.
The majority of the traffic to Traffic Monsoon member sites now comes from inside Traffic Monsoon, meaning that members are simply clicking on other members’ ads.
Initially and order to qualify for a daily ROI, Traffic Monsoon affiliates had to view eachother’s ads for 5 seconds.
Until very recently the requirement was that the investor click on 10 ads for 20 seconds each.
Scoville made the change to increase Traffic Monsoon’s Alexa rank.
Alexa rankings are a broad indicator of investment activity in an online Ponzi schemes.
By manipulating Traffic Monsoon’s Alexa rank, Scoville would be able to create an artificial sense of investment activity taking place, which in turn instills investor confidence.
Charles Scoville knew the SEC was investigating Traffic Monsoon
To the best of my knowledge Charles Scoville never disclosed to Traffic Monsoon affiliates that the scheme was under SEC investigation.
The SEC’s memorandum contains several references Scoville’s sworn testimony to the SEC. Infact 79 pages of sworn testimony from Scoville are included an attached exhibit with the SEC’s memorandum.
The memorandum also notes Scoville’s participation the SEC’s investigation.
During the course of its investigation, Scoville provided the Commission with two databases that included, for Traffic Monsoon since inception,
(1) every transaction in Traffic Monsoon account balances; and
(2) all funds coming into Traffic Monsoon from outside the company.
This confirms Scoville knew he and Traffic Monsoon were under regulatory investigation, well before yesterday’s granting of a TRO.
Traffic Monsoon’s AdPacks were a joke
Each AdPack sold by Traffic Monsoon was supposed to provide 1000 visitors to a website.
Scoville stated in an e-mail to the Commission on May 16, 2016, that Traffic Monsoon had sold 15,225,689 AdPacks. The current figure is undoubtedly higher.
For each such AdPack, however, Scoville must deliver 1,000 visitors, amounting to 15 billion visitors total.
Since it launched, Traffic Monsoon has only delivered 1.5 billion visits period. In addition to this, Scoville purchased 435 million visits from a third-party merchant for $239,701.
All things considered, it would still take Traffic Monsoon over ten years to deliver purchased visits, not withstanding exponential growth within the scheme.
Traffic Monsoon is a classic Ponzi scheme in which investors are paid from money contributed from new investors, and there is little real business activity.
A preliminary injunction hearing has been scheduled for August 5th. Stay tuned…