“A rose will always be a rose, because it is a rose” (Traffic Monsoon)
One of the key points of contention at the upcoming preliminary injunction hearing, is whether Charles Scoville’s pseudo-compliance will hold up in court.
Scoville represents Traffic Monsoon’s Ad Packs were not securities because he never used the word “investment” on the Traffic Monsoon website.
Traffic Monsoon affiliates referenced the opportunity as an investment scheme, however because Scoville himself didn’t, he argues Ad Packs aren’t securities.
Scoville and the SEC have been going back and forth on this point, with the last filing by the SEC on the matter before the trial next week echoing my own thoughts on the matter.
Irrespective of what Scoville himself referred to Ad Packs, how he described them and/or told Traffic Monsoon affiliates to describe them, the SEC argue;
AdPacks are securities, and thus AdPack buyers are investors,
because the AdPacks satisfy the three-part test for investment contracts outlined in SEC v. W.J. Howey & Co., 328 U.S. 293, 301 (1946).
To reiterate what has already been argued at length, Traffic Monsoon’s AdPack involved (1) an investment of money, (2) in a common enterprise, (3) with a profit derived from the efforts of others.
Whereas the SEC’s basis for defining Traffic Monsoon’s Ad Packs is based on legality, Scoville provides no precedent where pseudo-compliance trumped US securities law.
The considerations included in this legal analysis (the three part test) do not include what label the seller places upon the instrument or what the buyer agrees it should be called.
Because the AdPack satisfies all three prongs of the Howey test, it is legally irrelevant whether Scoville insisted that it be called a product, or whether he can identify one or many investors who are willing to agree that they didn’t consider themselves investors.
A Rose will always be a Rose, after all, because it is a Rose. That is true irrespective of whether someone insists that it should be called a Daisy.
Another point of contention is Scoville’s claim
that customers weren’t investors because “thousands of AdPack purchasers never qualified and therefore clearly valued only the advertising, not the opportunity to obtain commissions.
The SEC dispute this claim by quoting a declaration by Ray Strong (made in support of one of Scoville’s filings);
The Declaration of Ray Strong demonstrates that worldwide, of the 107,057 individuals that purchased AdPacks, 105,925 qualified to earn a return by clicking ads. That is 99% of all AdPack buyers.
In the United States the number is even more dramatic. Of the 7,656 AdPack buyers, 7,620 qualified for a return by clicking ads.
Only 36 people that purchased an AdPack in the U.S. failed to qualify by clicking ads.
Of course this makes sense, as the advertising services embedded in the $50 AdPack were available for $11 if purchased separately.
It would have made no sense, and would have been a waste of money, for them to spend the extra $39 to purchase the advertising services via an
The AdPack buyers purchased the instrument for the opportunity to earn a return.
As such, they were investors, and they were purchasing securities.
Traffic Monsoon affiliates who had no interest in participating in the income opportunity had absolutely no reason to click on ads.
That 99% of them did completely puts Scoville’s assertion that “thousands” of Traffic Monsoon affiliates just for the advertising into context.
That context being while thousands of affiliates might not have qualified for commissions, that figure represents 1% of Traffic Monsoon affiliates.
If you’ve been following Scoville’s sporadic attempts to justify Ponzi fraud through his Facebook account, a common theme is his own personal representation of Traffic Monsoon.
This brings us back to Scoville’s “I never marketed Traffic Monsoon as a Ponzi investment scheme so therefore it can’t be one” flawed logic.
Taking it one step further, on top of debunking the logic itself, the SEC go on to clarify that
although Scoville may have made, and almost certainly did make, material misrepresentations regarding his business operations and how he was funding investor returns, those misrepresentations, at least at this stage of the litigation, are not central to the Commission’s case.
Rather, the central focus of the Commission’s case here is Scoville’s
scheme, practice, and course of business that operated as fraud upon Traffic Monsoon investors.
It is sufficient that the Commission has alleged that Scoville conducted a fraudulent scheme, practice, and course of business in his operation of a Ponzi scheme.
And finally we come to whether or not Traffic Monsoon was solvent.
Scoville claims Traffic Monsoon was solvent at all times. Through selective math that completely discards funds Traffic Monsoon represented to affiliates it had paid them, Scoville makes this claim based on being able to pay back affiliates only what they initially invested.
That is to say if you signed up as a Traffic Monsoon affiliate with $500 and used to your ROI to reinvest into the thousands, Scoville is arguing he has enough money to pay you back.
This is of course localized to US investors, who Scoville says he Traffic Monsoon has more than enough more to return.
Based on this Scoville wants the court to ignore Traffic Monsoon’s Ponzi fraud elsewhere in the world, dissolve the Receivership and limit the asset freeze to about $15 million (enough to return to US investors what they initially invested).
The problem with Scoville’s logic is that, dollar for dollar, Traffic Monsoon does not have enough money to pay back all investors.
Returning funds to US investors, even if you discard the Ponzi ROI balances they amassed, leaves an even bigger gaping hole with respect to Traffic Monsoon affiliates globally.
This is of course rooted in the simple math of each $50 deposit with Traffic Monsoon generating a $55 ROI liability.
If even one affiliate owning an Ad Pack position was paid $55 (and indeed, many were), Traffic Monsoon mathematically does not have enough money to return to each affiliate what they initially invested.
Scoville’s motion has yet to be ruled on by the court (that will likely happen at the November 1st hearing), however the SEC has directly addressed the solvency claim.
Scoville and Traffic Monsoon were not solvent at any time they operated the business – a hallmark distinction of an ongoing Ponzi scheme.
At the outset, for each $50 investment by a customer, Traffic Monsoon owed the customer back $55 (the original $50, plus a $5 return).
Traffic Monsoon therefore was immediately in the hole $5 to each investor – it generated no income from the $50 investment and in fact lost money through the transaction.
This problem compounded with each “repurchase” of an AdPack, as Traffic Monsoon owed each investor an additional $5 for each repurchase, without having taken in any new funds.
For example, after the initial purchase and two additional “repurchases,” Traffic Monsoon would owe an investor $65, the initial $50 plus an additional $15 in returns.
And this doesn’t even take into consideration the additional $5 referral commission payments Scoville paid to many Traffic Monsoon investors.
If Traffic Monsoon had any meaningful revenue stream to draw from to pay these returns it would be one thing, but approximately 99% of all Traffic Monsoon revenue wasderived exclusively from the sale of AdPacks (over $173 million from AdPacks out of $175.9 million in total revenue).
It was simply not making money through any other means.
Clearly, the only source from which Traffic Monsoon could draw to pay these compounding returns and referral payments was the sale of new AdPacks – thus further multiplying the cascading obligations owed to Traffic Monsoon investors.
From its very first sale of an AdPack, and its obligation to pay back the sale price plus a $5 return, Traffic Monsoon was insolvent.
By the time the Commission filed this action, it had become stupendously insolvent.
It had created a hole so deep it could never have gotten free, and it was only a matter of time before the entire operation failed – as all such schemes are destined to do.
Traffic Monsoon was dependent upon future sales of AdPacks to finance the returns it was paying to previous AdPack purchasers.
It therefore “utilized after-acquired investment funds to pay off previous investors,” thereby operating as an insolvent Ponzi scheme.
The SEC close by reiterating that the Utah Securities Division communication to Scoville regarding Ad Hit Profits “should be disregarded”;
Scoville asks the Court to trust him in saying that he “received a request from Brandon Dally of the Utah Division of Securities into the business
practices of the AdProfits and the sale of AdPacks.”
Importantly, there is nothing in the record, other than Scoville’s self-serving testimony, that in any way documents what issue the Division of Securities was looking into or what evidence it obtained and considered.
There are no document requests or subpoenas, no informal requests, no email communications (other than the one attached to his initial declaration that provides no helpful information), no attempts to demonstrate what information was provided to or obtained by the Division, nothing at all that bears on this matter.
Did the Division of Securities actually look into the similar product, or was it looking at some other aspect of the business operations or products?
Did it know that the company was offering a profit sharing position that (apparently) constituted all of the revenue of the company?
Did sales of that product in fact constitute all of the revenue of the company, or was there (unlike the case here) another revenue source?
Did Scoville provide any testimony in connection with the inquiry?
These are but a few of the many questions that are raised in connection with Scoville’s argument, none of which can be answered here.
Because of this, any reference or allusion to the Division of Securities’ inquiry into AdHitProfits is, in fact, irrelevant to this matter and should be disregarded.
And asks the court to deny Scoville’s Motion to Set Aside (the) Receivership;
Scoville was selling a security. His customers were investors who purchased the AdPacks in order to obtain a return.
The operation was an insolvent Ponzi scheme that was destined to fail when, not if, Scoville ran out of investors who were willing to infuse the scheme with new revenue.
In operating a Ponzi scheme, Scoville is legally deemed to have the requisite scienter to support the Commission’s fraud claims here.
For all of these reasons, Scoville’s Motion should be denied.
Next Tuesday the SEC and Scoville go head to head in court. Stay tuned…