zeekrewardsPaul Burks’ criminal trial is a go for July 5th.

As per judicial procedure, the DOJ has filed a 49 page trial brief. The brief lays out the DOJ’s gameplan for court.

In the brief the DOJ provide ‘a summary of some of the points that the Government anticipates are
likely to arise at trial‘, pretty much spanning everything they want to nail Burks for.

The entire brief is too much to cover in lengthy detail so I’ve put together excerpts that highlights the important bits.

I’ve previously gone over every angle of Zeek Rewards’ Ponzi fraud. That was a few years ago though, with the DOJ’s trial brief serving as a convenient and timely refresher.

Introduction

On October 24, 2014, a federal grand jury returned a four count Bill of Indictment (“the indictment”) charging Paul Burks with mail and wire fraud conspiracy, one substantive count of each of mail fraud and wire fraud, and tax fraud conspiracy.

Two of Burks’ co-conspirators have entered into plea agreements in connection with their role in the scheme: Dawn Wright Olivares, and Daniel Olivares.

Burks entered a plea of not guilty.

Trial is currently scheduled to begin July 5, 2016. The Government anticipates at this time that its case-in-chief will take approximately one to two weeks.

Facts the DOJ expect to prove at trial

The United States expects to prove the following facts at trial:

Zeek Rewards’ fake Ponzi ROIs

Defendant Burks and co-conspirators Dawn Wright Olivares, Daniel C. Olivares, D.D., R.P., and others represented that, through ZeekRewards, victim-investors, referred to as “Affiliates,” could participate in what came to be known as the Retail Profit Pool or RPP (“Zeek’s profits”) which supposedly allowed victims collectively to share up to 50% of Zeek’s daily net profits.

The co-conspirators falsely represented that Zeek was generating massive retail profits.

Indeed, the co-conspirators claimed that they calculated and shared with investors the “daily net profit,” which supposedly represented half of each day’s net retail profit.

In truth and fact, the “daily net profit” was not half the net retail profit of Zeekler and had no relationship to actual penny auction revenues or profits.

Moreover, the co-conspirators did not keep books and records needed to calculate such a figure.

Defendant Burks simply made up the “daily net profit” without any reference at all to profits.

The true revenue from the scheme, approximately 98% of all incoming funds, came from victim-investors.

Zeek Rewards investment was “bogus”

Victims invested in Zeek through the purchase of “VIP Bids” in increments of no greater than 10,000.

Each VIP Bid was sold for $1. Initially, the victim-investors were promised that they would receive a return on investment of 125% on each VIP Bid purchased.

Thus the VIP Bids were represented as functioning like shares of Zeekler stock.

Each share entitled the victim-investor to a pro rata share of up to 50% of the supposed net profits of Zeek.

By rigging the “daily net profit” figure, the co-conspirators ensured that the shares returned or even exceeded the promised 125% return on investment.

During the relevant time period, the co-conspirators fraudulently obtained over $800 million from victims for VIP Bid purchases as well as over $96 million from subscription fees.

The co-conspirators used this money, in Ponzi-like fashion, to pay other victim-investors in the scheme and to personally enrich themselves.

In order to further the Ponzi scheme, Defendant PAUL Burks and others took numerous steps, including encouraging victim-investors not to withdraw their purported earnings and encouraging victim-investors to recruit new participants
through commissions.

Ads Zeek Rewards affiliates published were pointless

In order to participate, victim-investors were also required to pay a monthly subscription fee and to place a daily ad to purportedly attract new participants to the penny auctions.

The co-conspirators wrote the ads themselves and directed the victim-investors on where to post them, and implemented an automated program so that top affiliates did not even have to place ads, so that investors could easily meet the daily ad requirement.

The co-conspirators did not track whether the ads actually increased traffic, or bidding, on Zeekler.

There were attempts to disguise the Zeek Rewards Ponzi scheme

As the Ponzi scheme grew in size and scope, the co-conspirators took several steps to conceal its true nature and to prevent scrutiny by regulators by making a series of cosmetic changes.

For example, the co-conspirators initially called the Retail Profit Pool the “compounder” and touted it as way to obtain a 125% “rebate” or “return on investment” on the purchase of “compounding bids.”

Over time, the co-conspirators attempted to eliminate references to the terms “compounder,” “compounding bids,” and 125% “return on investment,” to conceal the true nature of the Ponzi scheme and to prevent scrutiny by regulators.

At some point, instead of specifically promising a 125% return of investment on each dollar invested through the purchase of a VIP Bid, the co-conspirators published bogus daily figures of Zeek’s profits, averaging approximately 1.4% a day, to reach the 125% goal.

The supposed daily Zeek’s profits figure was not based on any actual computation of daily profit.

Indeed Zeek lacked the books and records that would be necessary to compute such a number.

Instead, Defendant Burks made up the RPP to artificially reach the originally advertised 125% return of investment.

These bogus daily net profit figures were generally provided by Defendant Burks to Daniel Olivares to be manually entered into the Zeek computer system and
were always approximately 2% for Monday through Thursday and approximately 1% for Friday through Sunday.

For example, on July 27, 2012, Defendant PAUL Burks asked Daniel C.
Olivares, “Did you already guess an RPP percentage? If not, use .0191.”

Daniel C. Olivares responded to Defendant PAUL Burks, “I did, I used…0.0191.”

Additionally, the co-conspirators later conditioned the receipt of payments for some investors on giving away VIP Bids.

However, just as with the ad requirement, the coconspirators designed and implemented various automated programs so that investors could instantly give such bids away upon the purchase of a VIP Bid by merely pressing a button on the website.

Additionally, just as with the ads, the co-conspirators did not do any research to determine whether or not the bids supposedly given away by victim-investors provided any discernable value, such as increased traffic, or bidding, on Zeekler.

In fact, the vast majority of these “given-away” bids were never used.

How new investors were “lulled” into Zeek Rewards

The co-conspirators attempted to lull victim-investors and to bolster the credibility of Zeek by hiring attorneys, and touting their advice and approval of the legality and legitimacy of Zeek to victim-investors and others, including banks, in emails, letters, and conference calls.

In reality, these attorneys could not have reviewed the actual books and records of Zeek, which were non-existent, nor otherwise made any determination of whether or not the profits were legitimate, which they were not.

Additionally, co-conspirators hired accountants and tax attorneys and touted their advice and approval of the legality and legitimacy of Zeek to victim-investors and others in emails, letters, and conference calls, with regard to issuing Forms 1099s for all constructive income received.

In reality, these accountants and attorneys could not have reviewed the actual books or records of Zeek, which were non-existent, or otherwise made any determinations of whether or not the profits were legitimate, which they were not.

Zeek Rewards’ collapse

As the Ponzi scheme grew in size and scope, banks and other financial institutions began to question the co-conspirators about the fraudulent appearance of the scheme and many shut down or refused to open Zeek bank accounts.

However, Defendant Burks and other co-conspirators falsely told victim-affiliates that Zeek had merely outgrown its banks.

As the scheme continued and the number of victim-investors grew, the outstanding liability to victims resulting from the bogus 125% return on investment continued to rise beyond control.

Indeed, by August 16, 2012, there were approximately 3 billion outstanding VIP Bid points in the RPP, which the co-conspirators fraudulently represented to victims as their earnings.

Yet, the co-conspirators had no accurate books and records to even determine how much cash on hand was available to redeem the victims’ VIP Bid points.

In truth and fact, by August 17, 2012, the co-conspirators had only $320 million (approximately 11% of $3 billion) in actual funds to pay out to victim-investors, and much of that money was not even accessible.

In 2011 alone, Burks received approximately $11 million in income from ZeekRewards out of total revenue of approximately $37 million.

Tax Fraud

Defendant Burks and others paid themselves large salaries and other payments from victim-investors’ funds and did not keep accurate and complete records of the payments.

Defendant Burks and others used multiple bank accounts and internet based electronic payment services (“e-wallets”), including e-wallets located outside of the United States, to deposit funds from victim-investors and to make Ponzi payments to victim-investors and did not keep accurate and complete records of these accounts and services.

Rex Venture Group, ZeekRewards, and Zeekler failed to file any corporate tax returns or to make any corporate tax payments to the IRS.

For tax year 2011, Defendant Burks, and others issued many IRS Form 1099s to victim-investors that purportedly reported the “income” received by the victim-investors for their participation in the scheme.

Defendant Burks also engaged attorneys and tax professionals to legitimize the issuance of the 1099s.

However, in truth and fact, the vast majority of income reported to the IRS was fictional and had neither been earned nor received by the victim-investors.

In total, Defendant Burks, and others, reported to the IRS supposed income by the victim-investors of over $96 million for the year 2011 on the 1099s issued, while ZeekRewards actually paid out less than approximately $13 million in cash to victim-investors during that year.

As a result, individual victim-investors filed false tax returns with the IRS reporting phantom income that they never actually received, and Burks, and others were able to use the false tax notices to perpetuate the Ponzi scheme by making the phantom money seem like it actually existed.

Count 1: Conspiracy

Defendant Burks is charged in Count One with conspiracy to commit mail fraud and wire fraud in furtherance of a scheme to defraud victims in violation of Title 18, United States Code, Section 371.

That statute provides as follows: “If two or more persons conspire . . . to commit any offense against the United States . . . and one or more of such persons do any act to effect the object of the conspiracy, each shall be [guilty of a felony].”

Agreement

The Government first must prove that an agreement existed to do something which the law prohibits.

Although the agreement is the heart of the crime of conspiracy, the agreement need not be expressly stated or be in writing or cover all of the details of its execution.

The existence of the agreement may be proved by inference from the actions and statements of the conspirators themselves, and from the circumstances of the particular scheme.

Here, Defendant Burks worked within an organization, of which he was the head, pursuant to a common purpose.

His conduct and communications are replete with Burks working in agreement with Dawn Wright-Olivares and Daniel Olivares and others to perpetuate the scheme.

Thus, there should be no dispute at trial regarding the first element, or as to the existence of the conspiracy.

Knowing Participation

The Government must also prove “knowing and willing participation by the defendants in the agreement.” Hedgepeth, 418 F.3d at 420.

Whether his participation in the conspiracy was willing and voluntary should be a non-issue in the trial.

There can be little argument that the defendant was an involuntary member of the conspiracy. No mind control or coercion was present in this case.

Rather, the crux of this case likely will center on whether the defendant was a knowing participants in the conspiracy.

He likely will argue that he was an unwitting participant who was duped, ignorant of the fraudulent aims of the conspiracy.

The Government may prove knowledge by willful blindness, although such hardly will be necessary here.

There will be more than enough evidence to show that Defendants Burks was a knowing participant in the conspiracy.

As discussed above, the simplest proof of Defendant Burks intent is that he daily created a false statement about Zeek’s profits – a false statement that Burks knew would be distributed to thousands of investor-victims, and which he knew would result in more victims parting with their money.

Furthermore, the jury will hear Burks, in his own words and in his own voice, tell victim-investors that the “profits” related to the penny auctions, which was not true.

Put simply, Burks lied daily to obtain hundreds of millions of dollars for the scheme. Proof of knowledge should be overwhelming.

Evidence of Motive

As noted, Burks took over $11 million from the scheme for himself and his family members.

Indeed, without evidence of Defendant’s motive, the jury may be left confused as to why Defendant engaged in the fraud.

Accordingly, this evidence of Defendant’s financial motive should be admitted.

Burks was aware of fraudulent nature of the scheme

Burks was aware that ZeekRewards had numerous similarities to a known fraud. Prior to the launch of ZeekRewards in January 2011, the SEC shut down a company called AdSurfDaily, Inc. (ASD) in 2008.

In fact, in November 2010, the owner of ASD, Thomas “Andy” Bowdoin, Jr. was indicted for wire fraud and securities fraud for the operation of ASD.

ASD purported to be a multilevel marketing business in which individuals could buy advertisements on their “network”, and earn a lot of money watching and clicking ads.

Participants were known as advertisers, and purchased “ad units.”

“Advertisers” could “earn income” by watching and clicking on the ads, and referring other “advertisers.”

The income was supposedly totaled daily as “rebates” up to 8%.

ASD, like ZeekRewards, was promoted as an “income opportunity” wherein members would be paid a so-called “rebate” of “up to 125%” of the money that members paid in, and provided that members to a very brief task (in ASD this was logging onto ASD’s website and spend a few minutes each day looking at other member’s websites).

Burks and his co-conspirators were very aware of ASD and of the fact that it was shut down.

For example, on March 26, 2011, a few months after the owner of ASD was indicted, Burks and Dawn Wright-Olivares emailed regarding an affiliates advertisement for ZeekRewards that included in the title, “[i]f you were in ASD or AVG then you will know how good this is.”

And in the same email, the conspirators showed that they knew the import of ASD.

The affiliate was told to be “careful with [her] subject line” and Wright-Olivares added:

“We cannot have ZeekRewards compared to ASD or AVG EVER for ANY REASON.

They were both shut down. We are very very different from both companies.”

Similarly, on June 28, 2011, over skype, Wright-Olivares told Burks that changes needed to be made to the program to make it sustainable; Burks retorted:

“I’m the one with my neck in the noose… not you… If the swat team shows up it’s MY ass in the can…”

Wright-Olivares responded, “[i]’ll be there too… they will seize it all and we are liable ask the ASD people.”

Evidence that a defendant was on notice to the fraudulent nature of his scheme based on his knowledge of the fraudulent nature of similar schemes is obviously admissible to prove knowledge.

Count 2: Mail Fraud

Count Two charges Defendant Burks with committing mail fraud in violation of Title 18, United States Code, Section 1341.

“In order to prove mail fraud, the Government must prove that the defendant (1) knowingly participated in a scheme to defraud and (2) mailed, or caused to be mailed, anything for the purpose of executing such scheme.” United States v. Pierce, 409 F.3d 228, 232 (4th Cir. 2005)

Knowing Participation in Scheme to Defraud

The Government first must prove that Defendant Burks knowingly participated in a scheme to defraud.

The scheme to defraud here is the same scheme alleged to have been the subject of the conspiracy alleged in Count One, and discussed above.

Likewise, proof of his knowing participation in the scheme to defraud is the same as the proof that he was a knowing participant in the conspiracy.

Accordingly, the points made above are not repeated here.

Use of Mails to Execute Scheme

The Government also must prove use of the mails or a private carrier to execute the scheme.

Any argument from Defendant Burks that he did not mail anything personally would be irrelevant (as well as false).

Defendant Burks knew that documents would be mailed in the ordinary course of his business and fraud scheme.

For example, Defendant Burks knew that victim-investors were mailing checks and money-orders from all over the country to purchase VIP bids so that they could participate in the retail profit pool of ZeekRewards.

As another example, Defendant Burks knew that the false Forms 1099 were mailed to numerous victim-investors from Charlotte, North Carolina.

Count 3: Wire Fraud

Count Three charges Defendant Burks with committing wire fraud in furtherance of the scheme to defraud, in violation of Title 18, United States Code, Section 1343.

Wire fraud has “two essential elements: (1) the existence of a scheme to defraud and (2) the use of . . . wire communication in furtherance of that scheme.” United States v. Curry, 461 F.3d 452, 457 (4th Cir. 2006)

Scheme to Defraud

As with the mail fraud count, for the wire fraud count, the Government first must prove that Defendant Burks knowingly participated in a scheme to defraud.

The scheme to defraud here is the same scheme alleged to have been the subject of the conspiracy alleged in Count One, and discussed above.

Likewise, proof of his knowing participation in the scheme to defraud is the same as the proof that he was a knowing participant in the conspiracy.

Accordingly, the points made above are not repeated here.

Use of Wire Communication

The Government also must also prove that Burks used a wire communication in furtherance of the scheme.

Here, there will be no true dispute on this point. The conduct involved numerous emails, wires, phone calls, and internet transmissions.

Count 4: Tax Fraud Conspiracy

Count Four charges Defendant Burks with tax fraud conspiracy, otherwise known as a “Klein” conspiracy.

A Klein conspiracy is comprised of three elements:

(1) the existence of an agreement,

(2) an overt act by one of the conspirators in furtherance of the [agreement’s] objectives, and

(3) an intent on the part of the conspirators to agree, as well as to defraud the United States.

The offense comprehends any conspiracy for the purpose of impairing, obstructing, or defeating the lawful function of any department of government.

Agreement

As with Count One, for Count Four, the Government first must prove the existence of an agreement.

Here, as noted, Defendant Burks and others agreed to paid themselves large salaries and other payments from victim-investors’ funds and did not keep accurate and complete records of the payments, agreed to use multiple bank accounts and e-wallets, and to make Ponzi payments to victim-investors and did not keep accurate and complete records of these accounts and services.

Burks and others also agreed to issue IRS Form 1099s to victim-investors that reported the bogus “income” neither earned nor received by the victim investors.

Accordingly, there will be overwhelming evidence of an agreement.

Overt Act

The Government next must prove that one of the conspirators committed an overt act in furtherance of the agreement’s objective to defraud the United States.

This too will be easily shown.

As alleged in the indictment, during 2012, Defendant Burks and his co-conspirators filed or caused to be filed false IRS Forms 1099 in the names of victim-investors with the IRS which reported fictional income.

Likewise, during 2011 and 2012, Defendant Burks and others in the agreement opened numerous bank accounts and used e-wallets, including e-wallets based in foreign countries, to receive and disburse the fraudulent payments in the scheme.

There will be evidence of numerous specific examples of this conduct introduced at trial.

Intent to Agree and to Defraud the United States

Finally, the Government must prove an intent to agree and to defraud the United States.

As Courts have explained, “where the conspirators have effectively agreed to falsify IRS documents to misstate or misattribute income . . . the factfinder may infer a purpose to defraud the government by interfering with IRS functions.” United States v. Mubayyid, 658 F.3d 35, 57 (1st Cir. 2011).

Here, to take just one example, Burks knew the income he reported on the 1099s to victims was illusory, yet he still issued them.

Zeek Rewards victims will be called to testify

The Government will necessarily call victims to testify about the representations made to them, why they provided money to the scheme, and whether they were victimized.

Zeek Rewards lawyers, accountants and/or consultants may be called as “fact witnesses”

Some of the Government’s lay fact witnesses may testify as to their personal understanding and involvement with the scheme or its players, and may discuss their own understanding of accounting or multilevel marketing in the context of their involvement.

These may include lawyers, accountants, and or consultants who worked with Defendant Burks and Zeek, as well as co-conspirators.

Witnesses personally involved with Zeekrewards will provide factual testimony about how they acted and viewed matters, and how those actions and views may have been different had they known the full facts.

Expert Witnesses

The United States may call two expert witnesses: Tucker Greer of Price Waterhouse Coopers, who examined the servers of Rex Venture Group and reconstructed the data therein, and economist Peter Vander Nat, who is an expert in economic analysis specifically in the context of multi-level marketing.

Mr. Greer examined the servers and computers of Rex Venture Group and recreated the systems and data utilized by Defendant Burks and his co conspirators during the course of the fraud scheme.

Mr. Greer will testify as to his training and background, the nature of the examination that he undertook, and the methods and/or software used to assist in the re-creation.

Mr. Greer will testify as to data extracted from these servers, including an analysis of dollars paid into the program; the number of victim-investors; the gains and losses to victim-investors; the source of incoming funds, including whether those funds represented VIP bid purchases, membership fees, or retail auction bids; profits obtained by Rex Venture Group; and profits relative to the auctions.

Additionally, Mr. Greer will testify as to how commissions, point balances, placement of advertisement, giving away of bids, and other transactions operated within the RVG servers.

Mr. Greer will also summarize information obtained in the Back Office of the victim-investors; RPP data; and number/type of outstanding bids.

Dr. Vander Nat may be called as a witness to testify based on his expertise in economic modeling.

He will analyze the purported percentage of shared profit stated in ZeekRewards and opine as to whether such profits are economically feasible.

Dr. Vander Nat will further opine on what rate of growth would be economically necessary to pay the profit share promoted by ZeekRewards and whether such rate of growth would be economically feasible; this analysis will involve purely mathematical computations regarding the purported growth rate that ZeekRewards would have to achieve in order to pay the promoted RPP.

Vander Nat may further opine that ZeekRewards affiliates had point balancing growing at an exponential rate, that over time became more and more unfunded based on historic rates of repurchase, such that over time, it would become impossible to pay liability for the accrued rates of return that, causing harm to all but a small percentage of affiliates.

Burks shouldn’t be allowed to “blame the victims”

Defendant Burks should be precluded from arguing that negligence by his victims somehow excuses his own fraudulent conduct.

For example, Burks might argue that his victims should have known that he was engaging in fraud.

As discussed below, this argument is legally irrelevant to the question of Burks’s guilt because it is in no way relevant to the ultimate issue at trial: whether Burks intended to provide materially false and misleading information to his investors.

Burks should be precluded from making any argument or offering any evidence concerning negligence on the part of any of the defendant’s victims.

“But they did it too!” is not a defense

“But they did it, too,” is not a defense. Accordingly, the Court should prevent Defendant from introducing evidence or argument about other employees or advisors or contractors for ZeekRewards who were not prosecuted to distract from his own crimes.

The sole question in this trial is whether Defendant committed the crimes with which he is charged.

Burks’ family is irrelevant

Defendant should not be permitted to draw attention to his family at trial, including their need for support, either financial or emotional, nor the effect of a conviction upon them.

This kind of information is irrelevant and amounts to nothing more than an appeal to the sympathy of the jury.

Paul Burks has yet to file his own case brief. With the trial less than two weeks away, a filing is expected any day now.

Stay tuned…

 

Footnote: Our thanks to Don@ASDUpdates for providing a copy of the DOJ’s Trial Brief (filed June 24th).