Howard Kaplan “gave bad legal advice” to $850M Ponzi
After suing tax attorney Howard Kaplan for legal negligence back in June, the Receivership received a Motion in Opposition a few weeks back.
In it, Kaplan trotted out the familiar “I knew nothing and therefore can’t reasonably be expected to bear any responsibility” argument we’ve come to expect from lawyers in the industry.
Prior to the Zeek Reward’s Receivership’s targeting of legal insiders in the $850M Ponzi case, MLM attorneys have seemingly operated under the assumption that they are untouchable.
Kaplan argues that despite his wrongful conduct he is effectively immune from liability because the court appointed Receiver for the company cannot bring claims against him.
Ignore the fact that even the most basic of due diligence would reveal the company in question to be fraudulent, provide whatever legal services are requested, collect your fees and then get out.
Scheme goes down for being one of the largest MLM Ponzi schemes in history?
Not having a bar of it though is the Zeek Rewards Receivership. And in his response to Kaplan’s opposition, the Receivership bluntly calls out Kaplan on his professionalism.
Or perhaps more accurately, the lack thereof.
Howard Kaplan is an attorney who was hired by RVG to provide accurate legal advice to RVG concerning tax matters.
Instead of fulfilling this important fiduciary duty, he gave RVG bad legal advice and actively participated in promoting a Ponzi and pyramid scheme that caused RVG enormous harm.
…and that’s just the opening paragraph.
One thing I’ve come to admire about Kennth Bell is his “no bullshit” approach to handling the Zeek Rewards case and its various characters.
In contrast to the TelexFree saga playing out, the direction of which is akin to navigating a minefield of uncertainty and lack of communication to the general public, Bell’s court-filed papers cut through rhetoric with succinct clarity.
One of the arguments Kaplan raised in his defense was that of “in pari delicto“.
In pari delicto, Latin for “in equal fault (better is the condition of the possessor)” is a legal term used to indicate that two persons or entities are equally at fault, whether the malfeasance in question is a crime or tort.
The phrase is most commonly used by courts when relief is being denied to both parties in a civil action because of wrongdoing by both parties.
The phrase means, in essence, that since both parties are equally at fault, the court will not involve itself in resolving one side’s claim over the other, and whoever possesses whatever is in dispute may continue to do so in the absence of a superior claim.
With Zeek Rewards being an $850M Ponzi scheme, Kaplan (right) essentially argues that any fault of his own is matched by Zeek Rewards itself, and therefore he cannot be sued for their alleged crimes.
Here’s the Receivership’s counter:
Kaplan’s claimed defense of “in pari delicto” does not bar a federal equity Receiver from asserting claims on behalf of the company he is appointed to oversee.
Indeed, there is a public policy exception to “in pari delicto” defenses in North Carolina law that does not allow those – like Kaplan – who failed their fiduciary duty and assisted company insiders in harming the company to evade justice.
Kaplan offered tax advice to Zeek Rewards in his capacity as an attorney. Naturally said advice was used by the company to “evade justice” for as long as possible, by maintaining the appearance of a legitimate business operation.
Further, the Receiver has adequately stated a claim for each of the causes of action asserted against Kaplan.
Accepting as true the facts alleged in the Complaint that Kaplan failed to give accurate legal advice, Kaplan was at least negligent in providing legal services to RVG and thus committed professional malpractice / breach of fiduciary duty under North Carolina law.
And it gets better,
Also, under the law of Nevada, RVG’s state of incorporation, (which applies to RVG’s internal corporate duties under North Carolina’s choice of law rules) Kaplan aided and abetted RVG’s insiders’ breach of their fiduciary duties by giving RVG and its victims bad legal advice as a cover for the Ponzi scheme and otherwise assisting in promoting the unlawful scheme.
Kaplan’s involvement in Zeek Rewards is bluntly called out for what it was.
Should he be permitted to profit from the “bad legal advice” he gave to Zeek to assist them in promoting their unlawful Ponzi scheme?
Finally, the Complaint states a claim for constructive trust against Kaplan because it would be inequitable for Kaplan to retain the funds that he received for his participation in promoting the Ponzi scheme and prolonging its existence.
Because Kaplan has received property which he“ought not, in equity and good conscience, hold and enjoy” a constructive trust should be
imposed on the funds Kaplan received.
Therefore, Kaplan’s motion to dismiss should be denied in all respects.
The Receivership’s response to Kaplan opposition was filed a few days ago on September 11th. A judge has yet to rule on the motion either way.
Footnote: Our thanks to Don @ ASDUpdates for providing a copy of the “Zeek Receivership’s response to Kaplan’s Motion to Dismiss”.
Update 3rd April 2018 – On March 15th Howard Kaplan entered into a $392,500 settlement agreement with the Receiver.
The proposed settlement was approved on March 16th.
I’m not very impressed with the reply to Kaplan’s “Motion to dismiss”. It managed to handle the in pari delicto defense properly, but it didn’t handle the underlying points about vagueness.
In pari delicto was probably used as a primary defense because it was “cheap to use”.
If it had worked, the complaint would have been dismissed without any need to go into further details about Howard Kaplan’s questionable actions. So it may have looked like a very good idea from Kaplan’s POV.
Howard Kaplan actually gave some bad tax advices to the affiliates, but some other ones than those described in the complaint. People can’t clearly point out why “Schedule D” will be a better choice than “Schedule C”.
The only logic used to support the use of “Schedule D” is Irving M. Brenner’s ideas about that Kaplan “knew or should have known that ZeekRewards was a Ponzi and pyramid scheme”.
“Schedule D” is a conclusion based on other vague conclusions. Legal logic should normally be strictly about applying logic to facts. It normally goes like this:
A: Identify the relevant facts
B: Identify and interpret relevant legal sources (rules)
C: Apply the rules to the facts –> draw a legal conclusion
All the elements must be in place. The conclusion C must point to both B and A, or it must logically derive from those two points.
You can of course draw valid conclusions based solely on facts. That’s why I specified “legal logic” as something specific.
I don’t think anyone will be able to explain logically why “Schedule D” would be a “good tax advice”, while “Schedule C” was a bad one.
“Schedule D” is about “Capital gains and losses”, while “Schedule C” is about various business related income and expenses. “Schedule D” doesn’t clearly pop up as a “good choice”.
THE REAL TAX PROBLEM
Howard Kaplan actually gave some “bad tax advices” to the affiliates, but the one described in the Complaint seems to be an imaginary one.
The real problem was that affiliates accepted “phantom payouts” as reportable income for the tax year 2011. Real payouts and “phantom payouts” were treated as one and the same.
RVG wouldn’t have managed to get people to accept that tax logic (at least SOME would have complained and checked the details with professionals). Howard Kaplan was needed to get people to ACCEPT that tax logic.
The bogus tax advice was about “accrued income”, where he claimed money had been made available to the tax payers in the back office, “it was taxable because people had a CHOICE for whether they wanted to withdraw the money as cash or if they wanted to buy more bids”.
“Schedule C” was a part of that same solution, for how to handle deductions. But it wasn’t a bad tax advice in itself. The Complaint is flawed in that part and in other parts, they have simply not managed to identify the problem correctly.
I’m thinking the Receivership might have been intentionally vague to see what Kaplan responded with.
Bell seems to know what he’s doing so I wouldn’t be surprised if specifics were trotted out at a hearing.
As for the motion to dismiss, it didn’t contain any additional specifics disputing the claim. On that front if Bell was hoping Kaplan might implicate himself (or explain why the advice he gave wasn’t good), then that didn’t happen.
In parli delicto was interesting in that it acknowledges Zeek as a Ponzi scheme. Rather than vindicate himself of his own involvement in the promotion of Zeek however, Kaplan instead argues he can’t be held accountable for what Zeek did.
I’d side with Bell on that one, it’s professional misconduct that needs to be held accountable. Kaplan’s a tax attorney for crying out loud.
Only 2 paragraphs in the Complaint are pointing DIRECTLY to something Howard Kaplan “knew or should have known”.
They’re about the e-mail he sent to Dawn, and that he carefully avoided using any comparisons to investments in the leadership calls and in the FAQ.
Other paragraphs are using “Howard Kaplan knew or should have known” masqueraded as facual statements, but not supported by something he reasonably should have known. Legal conclusions != factual statements.
Some arguments are circular, e.g. “because of his knowledge, he knew or should have known”.
Other arguments are pointing to factors which cannot easily be identified as something he knew or should have known, e.g. the compensation plan, how “Coach Van” presented Zeek Rewards, how other affiliates were marketing ZR, the revenue from Zeekler, etc.
A tax lawyer can’t reasonably be expected to know details like that. I’m pretty sure some of the insiders didn’t have that knowledge either, but some of them did.
I’m testing those arguments LOGICALLY and as a SALES MAN, e.g. “Would I have been able to convince people about that?”. I wouldn’t have felt comfortable if those arguments were the only arguments I had.
THE “BAD TAX ADVICE”
I would have felt much more comfortable presenting MY version of the “bad tax advice”. My version can be explained in an understandable way to non-professionals, e.g. I can point out exactly what it was about and how it affected the situation.
Irving M. Brenner’s “bad tax advice” is rather constructed and hypothetical. It will probably not be understood by anyone, neither by professionals nor by non-professionals.
My version have some key elements people easily can understand and ACCEPT as a problem, e.g. I have pointed out “phantom payouts” as a problem = people had to pay taxes for money they never received in the tax year, money they COULDN’T receive without causing the scheme to collapse.
“False tax reports from an employer” is a problem people easily can identify as “their own problem”, something that also could have affected themselves negatively if they had been in the same situation. You can even get people to accept it as a type of malpractice, or as a type of “breach of trust”.
The Complaint is rather constructed. It will be difficult to “sell” to other people (a jury or a judge).
The Complaint has probably been written from the wrong part of the brain, from the “true believer” part of it. “True believers” will REPEAT ideas over and over again, and will not TEST how rational those ideas are.
The Complaint demonstrates there is a possibility that the allegations are true. Its a showing of reasonable cause and there is plenty of that to go around.