zeekrewardsGood news for Zeek Rewards victims, not so good news for banks who think they can get away with providing financial services to Ponzi schemes.

As part of the Zeek Receiver’s ongoing efforts to hold accountable service providers and vendors who provided services to Zeek Rewards, a $10 million dollar settlement with NewBridge Bank has been reached.

The settlement sees NewBridge Bank deny ‘intentional or inadvertent wrongdoing‘. However the Receiver makes it clear the settlement is part of a broader effort to target merchants who breached fiduciary duties and enriched themselves.

The settlement reveals that NewBridge Bank provided financial services to Paul Burks and Rex Venture Group RVG) “for a number of years” prior to Zeek’s launch in 2011.

After Zeek Rewards’ launch and up until May 2012, NewBridge was Rex Venture Group’s only bank. Paul Burks also used the bank to manage personal finances.

As early as August 2011, NewBridge’s suspicions were aroused and the bank began to investigate RVG’s ‘dramatic growth in transaction volume and deposits‘.

RVG’s account balance went from approximately $1,000 in January 2011 to over $1,000,000 in August 2011.

By March 2012, RVG was NewBridge’s largest depositor, depositing $54 million in March 2012 alone.

According to the settlement, NewBridge’s initial investigations lead them to believe Burks might be operating an illegal business.

A “focused investigation” into the matter was launched in April 2012.

The Receiver contends that, by mid-April 2012, NewBridge executives knew, or should have known, that Burks was using RVG and its account(s) at NewBridge to conduct an illegal Ponzi and pyramid scheme.

To that end “a number of email communications” between Burks, RVG and NewBridge provided to the Receiver were designated “confidential” and sealed by the court.

What we do know though is that

on April 17, 2012, two NewBridge executives met with Burks and terminated NewBridge’s relationship with RVG, telling Burks to find another bank for RVG.

However, the Receiver also contends that, at the same time, with knowledge of the fraudulent nature of the ZeekRewards business, NewBridge entered into an agreement with Burks to continue to process RVG’s incoming deposits and outgoing “commission” checks, the lifeblood of the ZeekRewards scheme, until May 15, 2012.

At Burks’ request, NewBridge later extended the agreement and continued to pay “commission” checks drawn on RVG’s NewBridge account through June 2012.

Additionally, NewBridge’s executives agreed to keep NewBridge’s decision to terminate its relationship with RVG confidential to facilitate a quiet move of RVG’s accounts to another bank.

Remember, despite NewBridge providing crucial “lifeblood” services that permitted Zeek Rewards to carry out $850 million dollars in Ponzi fraud, the bank maintains it did no wrong.

The Receiver alleged that, as of April 17, 2012, NewBridge officers and executives were aware that Burks was a fiduciary to RVG, that Burks breached fiduciary duties to RVG by conducting the illegal ZeekRewards scheme using RVG’s account at NewBridge, and that payment of weekly “commission” checks was essential to continuance of the scheme.

As such, all checks paid by NewBridge after April 17, 2012 were paid with knowledge of Burks’ breach of fiduciary duty to RVG or, alternatively, were paid with knowledge of such facts that payment of the items was in bad faith.

After April 17, 2012, NewBridge paid approximately 26,000 “commission” checks drawn by Burks on RVG’s NewBridge account payable to RVG “affiliates” for approximately $31 million.

NewBridge also was aware of and processed other transfers, including transfers to insiders and to an RVG account at another bank.

The Receiver also asserted a number of common law claims arising from the circumstances described including negligence, facilitating fraud, aiding and abetting breach of fiduciary duty, and fraudulent transfer

Yeah, definitely “no wrong” there.

At this point you’re probably wondering why the Receiver didn’t sue NewBridge Bank for the full amount of stolen Ponzi funds that passed through their systems.

Well, it’s complicated.

Taking NewBridge to court would require ‘proof of claims against NewBridge requires proof of the Zeek scheme‘.

The Receiver alleges ‘legal claims to recover damages from NewBridge are strong and straightforward‘. However;

Zeek itself was an extraordinarily large and complex scheme which will unavoidably create complexity in the litigation to assert these claims.

Proof of claims against NewBridge requires proof of the Zeek scheme. The claims in this action are based on facts and circumstances occurring in NewBridge’s relationship with Burks and RVG, including personal communications and thousands upon thousands of individual transactions.

These claims, however, may have to be tried without the cooperation of Burks or other RVG insiders as witnesses.

Alternatively, these claims may in part depend upon, and could be undermined by, the cooperation, or lack thereof, of indicted or convicted felons.

As such, the Receiver believes that claims will have to be proved primarily, if not exclusively, through documents, email and adverse witness testimony from current and former NewBridge officers and employees.

In sum, there are likely to be issues of fact that preclude summary judgment in favor of the Receiver and pursuit of the claims to final judgment will be complex and protracted.

Not withstanding the cost to the Receivership of litigating what would no doubt be lengthy legal proceedings.

Because the amount of potential damages is large, the Receiver believes it is likely that a judgment in favor of the Receiver would be appealed and the same complex issues would be subject to review in the Fourth Circuit, such that the ultimate outcome on several substantive and evidentiary issues may remain uncertain for years.

While the Receiver believes there is a significant likelihood of success, the path to obtaining a judgment against NewBridge will not be quick or easy, damages though calculable are uncertain, litigation of the claims will be expensive and settlement of the claims without the expense and delay of litigation is worthwhile.

Oh, and did I mention NewBridge Bank doesn’t even exist anymore?

NewBridge was a public company. After executing the Settlement Agreement on February 29, 2016, NewBridge was merged into Yadkin Bank, a larger public company.

A combination of insurance and Yadkin Bank funds are fronting the $10 million settlement.

Should the Receiver pursue the estimated $31 million in awardable damages though,

whether NewBridge or its successor would in the future have the resources or insurance to pay a judgment in the maximum amount of a potential judgment is unknown to the Receiver.

The $10 million settlement either way is a tough call.

Take 32% now, or spend years in court and who knows much in legal fees fighting it out, with the risk that the company you’re litigating against might wind up not even being able to pay judgement.

The Receiver concludes that it is not in the best interests of the Receivership estate to forego the opportunity to collect $10,000,000 now against the prospect of an uncertain greater sum several years from now after litigation is complete.

It’d be great to see NewBridge Bank taken to court and upheld for the full $32 million… but yeah.

On March 16th Judge Mullen approved the NewBridge settlement. Sans ongoing Receivership costs, the $10 million in recovered funds is expected to be distributed out to Zeek victims later this year.

 

Footnote: Our thanks to Don@ASDUpdates for providing a copy of the previously sealed Settlement Agreement with NewBridge Bank (filed March 2nd), and subsequent March 16th order approving it.

 

Update 30th April 2016 – As of March 31st, 2016, NewBridge Bank have returned five million dollars to the Receiver.