Paul Burks files criminal trial brief
Paul Burks’ criminal trial is now less than a week away.
Last week the DOJ filed a lengthy trial brief, going over their gameplan for the trial.
As per judicial procedure in the lead up to a criminal trial, Paul Burks has filed his trial brief too.
To avoid blowing out the length of this article, I’ve presented Burks’ trial brief in a similar manner to the DOJ’s below.
The defense anticipates presenting lay and expert testimony, and numerous exhibits, in support of a defense that goes to the heart of the charges against Mr. Burks.
The defense will dispute, among other things:
(1) that Mr. Burks made material misrepresentations regarding the ZeekRewards program;
(2) that Mr. Burks’ company, Rex Ventures Group, had no books and records;
(3) that ZeekRewards was a Ponzi or pyramid scheme; and
(4) that Mr. Burks ever intended to mislead ZeekRewards affiliates.
Statement of Facts
Burks’ “statement of anticipated facts” ignores the Ponzi nature of Zeek Rewards and maintains
RVG’s product was bids which were sold in the form of retail bids for the Zeekler penny auction or VIP sample bids for ZeekRewards affiliates.
Affiliates who purchased sample bids gave them away to promote the Zeekler penny auction, which in turn entitled the affiliates to participate in RVG’s Retail Profit Pool.
Paying what he (Burks) promised
Despite the DOJ and SEC uncovering evidence suggesting Burks simply made the daily ROI percentage up, Burks claims
Affiliates who met certain qualifying criteria (e.g., paying a subscription fee, giving away sample bids, and placing ads to promote the Zeekler penny auction) were promised up to 50 percent of RVG’s net daily profits.
Evidence at trial will show the company performed as promised.
You’re probably wondering what evidence Burks is going to produce to prove this.
Buggered if I know, but from the sounds of it he’s going to completely ignore reality.
From January 1, 2011, when the program began, until August 16, 2012, when the doors closed, RVG took in $938.8 million in cash from affiliates and auction customers.
During the same period RVG paid $499.5 million paid to affiliates in cash as the Daily RPP Award.
In other words, RVG made good on the core of its promise by paying out 53.2 percent of its revenues to affiliates.
First of all, due to compounding, most of that money didn’t exist.
Second of all in its final month, Zeek Rewards’ Ponzi liabilities saw the company paying out $45 million a day whilst only receiving $5 million.
That’s nowhere near 50% of the “net daily profits”. Furthermore Zeek’s invested fund reserves were being depleted at an alarming rate. A week or so more after the SEC shutdown and the company would simply have run out of money.
If Zeek Rewards was indeed paying 50% of its “net daily profits”, ROI liabilities could not have drained the system.
In addition to making up the daily ROI paid out, the compounding monopoly money that didn’t exist are the sole two reasons Zeek’s bank accounts were drained.
Moving on, we have the issue of Burks’ not keeping records.
The government has repeatedly asserted, and will continue to assert, that Mr. Burks kept no books or records.
Acceptance of this argument will require the jury to find that RVG’s SQL database contained no records.
In fact, the SQL database contained terabytes of data consisting of approximately 589 tables with hundreds of millions of rows.
The SQL database was accessed daily by Mr. Burks, the company’s technology personnel, as well as over 2 million ZeekRewards affiliates who relied on it to keep contemporaneous track of their accounts.
Through the SQL database affiliates accessed their respective back-offices to monitor their VIP Point balances, to place ads, to select the percentage of RPP Award they wanted as VIP bid repurchases versus cash award, to check their available cash balances, to request cash payments, and so on.
Similarly, the SQL database was at all times available to Mr. Burks and provided him the information he needed to run RVG, including the information he needed to determine each day’s Retail Profit Pool percentage.
This I don’t have much to say on, save that the Receiver has likely detailed the mess Zeek Rewards’ books were in when he was appointed.
I suspect this issue will come down to proving a disconnect between Zeek Rewards’ operation and what was in the SQL database.
The role of monopoly money within Zeek Rewards will probably play a large role in debunking the accuracy of the database.
Bid sales were final
VIP sample bids were not, as the government suggests, “represented as functioning like
shares of Zeekler stock.”
To the contrary, before participating in ZeekRewards, affiliates were required to sign a statement acknowledging the following:
Submitting this payment confirms that you understand you are purchasing VIP Bids to use as samples to give to potential retail customers.
You also understand that this purchase is non-refundable and is not a “deposit” or “investment” and cannot be “withdrawn” later.
You affirm that you have read and understand the ZeekRewards Policies and Procedure and agree to all of their terms.
NO REFUNDS CAN BE MADE AFTER PAYMENT IS PROCESSED.
Completed and submitted bid purchase forms, of which there are thousands in number, will be presented to the jury
Seriously? Pseudo-compliance… that’s what Burks is going to present in court?
Mr. Burks made changes to the program in good faith based on the advice of experts
During the life of the ZeekRewards program, Mr. Burks retained a number of experts to advise him on complying with the myriad of laws governing the multi-level marketing industry.
Many of these experts (including accountants, attorneys, and others) had combined decades of experience in the industry and were regarded as leaders in their respective fields.
Many programmatic changes the government will claim were “cosmetic” were initiated not by Mr. Burks, but by those he had hired to advise him on how to run ZeekRewards.
Equally important, many of the changes Mr. Burks made did nothing to disguise how the ZeekRewards program operated.
Some of these changes Mr. Burks made included the following:
-Adding the requirement of giving away sample bids
-Instituting compliance courses for affiliates
-Upgrading the internal accounting system
-Eliminating lead generation programs
-Hiring a call center in Atlanta to respond to affiliate inquiries and complaints
The defense expects to call many of these experts as trial witnesses.
Again with the pseudo-compliance…
Burks did everything except address the only compliance that mattered: Newly invested funds were being used to pay off existing investors, making Zeek Rewards a Ponzi scheme.
Dealing with the challenges of explosive growth
Nobody could have foreseen how much the ZeekRewards program would grow in such a short period of time, approximately 18 months. As witness Kevin Walker has stated, the company “took off like a rocket ship.” Indeed, the growth in numbers of affiliates was staggering.
As of December 31, 2011—12 months into the life of ZeekRewards—the program had 57,597 distinct active usernames.
This figure increased to 208,601 by March 31, 2012 and 1.25 million by August 15, 2012.
In terms of revenue, average daily revenue went from $5,905 in the first quarter of 2011 to $8,429,626 in the third quarter of 2012. By August 16, 2012, Zeekler.com was the 890th most visited website in the world and ZeekRewards.com ranked 130th globally.
Growth of this magnitude was overwhelming. Despite Mr. Burks’ efforts to bring in additional personnel to address the problems that came with growth at this level, many of the problems RVG encountered—with banks, payment processors, and customer service—were attributable to growth at an unforeseeable rate.
Uh… and it had nothing to do with money laundering and operating a Ponzi scheme?
Good grief, the prosecution are going to have a field day.
The issuance of Forms 1099 was based on sound legal advice – and was anything but evidence of “lulling”
Mr. Burks was advised that it was appropriate—indeed, necessary—to issue 1099s to affiliates.
This created all manner of complaints and criticisms.
The reality for affiliates that they would have to pay taxes for money earned through ZeekRewards, even if they had chosen to repurchase bids in lieu of a cash payment, was a difficult one for some to accept. But it was the law according to Howard Kaplan, a tax attorney who had previously worked for the IRS and who was retained to advise RVG.
Mr. Kaplan’s advice was unambiguous. As he stated in an email, “I have also given this some thought and I concur that because of the way your plan is structured, there is constructive receipt because of the choice your affiliates have.”
Mr. Kaplan repeated the same in conference calls with affiliates. Mr. Burks is not a tax attorney. He relied on the assurances of the people he paid and hired.
Throwing your tax attorney under the bus? Not sure how that’ll play out.
The defense will offer, at a minimum, the testimony of four expert witnesses during the course of the trial.
The defense seeks to introduce expert testimony to address the allegations at the core of the Government’s indictment.
Specifically, the proffered expert testimony will rebut the government’s allegations that ZeekRewards was operated as a fraudulent Ponzi scheme, that Rex Venture Group did not maintain accounting records sufficient to calculate the daily Retail Profit Pool award, and that Mr. Burks fraudulently misrepresented taxable income on Forms 1099 issued.
Jose L. Velasquez, Jr. will testify regarding the contents of the RVG SQL database, and the flow of money in and out of RVG, which are central issues in the trial.
Mr. Velazquez, Jr. is a Director of Forensic Accounting & Advisory Services at Thacher Associates, a subsidiary of K2 Intelligence in New York.
Licensed as a Certified Public Accountant (CPA) and a Certified Fraud Examiner (CFE), he has over 12 years of experience in audit and accounting.
Mr. Velazquez specializes in financial forensics, fraud examination, and litigation support.
John White will testify that the available data demonstrates that the Daily Retail Profit Pool Awards were not arbitrarily assigned.
He will also testify that ZeekRewards was not a Ponzi scheme for a number of reasons, including the following: (1) affiliates did not make “investments” in the company, (2) returns to affiliates throughout the ZeekRewards program increased as time passed, and (3) the company maintained sufficient funds to meet its obligations to affiliates at all times during its operation.
Mr. White is qualified as an expert in accounting and fraud investigation based on his specialized knowledge, experience, and education.
He is licensed as a Certified Public Accountant and a Certified Fraud Examiner. Mr. White has earned a Master of Business Administration in Accounting, completed advanced graduate studies in Accounting, and has taught Accounting, Auditing, and Finance courses at the collegiate level.
He is a member of the American Institute of Certified Public Accountants, the American Society of Appraisers, the Association of Certified Fraud Examiners, and the Institute of Business Appraisers.
Mr. White is also qualified to testify as an expert by virtue of having extensive experience consulting with large privately held and publicly traded corporations.
He was a founder and managing director of White Giordano & Associates Ltd., a Scottsdale, Arizona-based business valuation, litigation support, consulting, and CPA firm, and previously led the business valuation practice of the largest Arizona-based CPA firm.
White’s testimony will be of particular interest. I for one can’t wait to hear his explanation for how using newly invested funds to pay off existing investors isn’t a Ponzi scheme, in addition to how affiliates depositing funds on an expected 125% ROI isn’t an investment.
Should be a blast!
Morris Aaron will testify that Rex Venture Group maintained an accounting system sufficient to calculate the daily profit.
He will testify that the company’s SQL database included data that would permit the calculation of the Daily Retail Profit Pool Award; that RVG’s efforts to process cash were reasonable; and that the characterization of bid purchases as “investments” is unsupported.
Mr. Aaron is nationally recognized and highly regarded as an expert in the business advisory industry, with over 25 years of experience in corporate finance, mergers & acquisitions, capital formation, and restructuring.
He is a Certified Public Accountant, holds a B.S. in Accounting, and earned an M.B.A. in Management and Finance. Mr. Aaron’s “specialized knowledge” in the field of corporate finance, his 25 years of experience, and his certification as a Certified Public Accountant, all properly qualify him as an expert under Rule 702.
Ditto Aaron’s explanation for bid purchases not being investments…
Curtis Elliot will testify that Mr. Burks properly and reasonably relied on the doctrine of constructive receipt when calculating affiliates’ gross income as reported on Forms 1099.
Mr. Elliott is qualified as an expert based on his 33 years of experience practicing tax law and litigating federal tax controversies.
He is a Fellow and Member of Board of Regents of the American College of Tax Counsel, a past Chair of the ABA Tax Section’s Committee on Court Procedure and Practice, and a past Chair of its Committee on Appointments to the U.S. Tax Court.
He graduated from the University of South Carolina School of Law and earned his LL. M. in taxation with highest honors from George Washington University National Law Center.
Evidence regarding the “Follow Me 1×2” should be excluded
If you’re not familiar with the Follow Me 1×2 scheme, refer to the DOJ’s trial brief.
Evidence of “FollowMe 1×2,” a short-lived venture undertaken by Dawn Wright Olivares, should not be admitted into evidence at trial because it is irrelevant.
According to investigative reports provided to the defense thus far, Mr. Burks was “not in favor” of “FollowMe 1×2” and thought the concept was a “straight pyramid.”
Thus, the evidence is irrelevant.
This requested exclusion is interesting for two reasons.
The first is it establishes that Paul Burks could readily identify a pyramid scheme. This is important within the context of Zeek Rewards’ own matrix commissions, which functioned as a recruitment-driven pyramid scheme.
The second is the Follow Me 1×2 matrix existed, that’s undeniable. And it existed as part of RVG, which Burks owned and operated.
A smaller pyramid scheme existing within a larger pyramid Ponzi hybrid? How the hell is that not relevant?
Evidence regarding “Ad Surf Daily” should be excluded
This case is about Paul Burks, Rex Venture Group, Zeekler.com, and ZeekRewards.com.
It is not a referendum on direct selling or multi-level marketing programs. The trial of this case is not the time, or the place, for a jury to render a verdict on these types of companies or programs, which are perfectly legal yet regularly criticized.
Perfectly legal? I suppose that’s why the DOJ won their case and AdSurfDaily owner Andy Bowdoin is sitting in jail.
Yup, Burks’ attorney just claimed ad-credit Ponzi schemes are “perfectly legal”.
It is also not about corporate malfeasance or wrongdoing by others, which is precisely what the Government seeks to convey to the jury by referencing ASD.
Accordingly, the Government should be barred from any reference ASD, or any other entity whose conduct is completely irrelevant to the facts of this case.
Even if there is some limited relevance to ASD (it is mentioned in government witness interviews), the Court should bar any mention of ASD since the limited probative value of such evidence is substantially outweighed by a danger of unfair prejudice, confusion, being grossly misleading, and inviting a trial-within-a-trial.
As far as I can see there is no question as to the legality of AdSurfDaily. Within the context of pointing out similarities between ASD and Zeek Rewards, to establish Burks knew what he was doing was illegal, I don’t see the problem.
Regulators regularly compare existing schemes to former scams when they file litigation. Zeek Rewards has come up a few times in TelexFree litigation and BurnLounge came up in the FTC’s Vemma case if I recall correctly.
Still, it will be on the DOJ to argue this point and how they proceed will be interesting.
Government witnesses should be prohibited from opining as to Mr. Burks’ state of mind
The government will likely call two cooperating witnesses: Dan Olivares and Dawn Wright Olivares (now Dawn de Brantes).
The Court should prohibit any attempt to elicit testimony regarding Mr. Burks’ state of mind from these witnesses as improper.
To the extent there may be limited probative value, such testimony would be substantially outweighed by a danger of unfair prejudice, confusion, and being misleading.
Mr. Burks’ past failure to file tax returns should be excluded
Taxes were withheld from Mr. Burks’ wages prior to ZeekRewards, although he failed to file timely tax returns.
Prior to any knowledge of a criminal investigation, he engaged accountants in an effort to file returns for prior years.
Evidence of failing to pay individual tax returns does not prove motive, opportunity, intent, preparation, knowledge, identity, or lack of accident.
Why would the owner of a legitimate business seek to hide income from the IRS?
I can’t see a legitimate reason for Burks’ failing to file tax returns and I don’t think his attorney will be able to come up with on either.
The alleged tax fraud conspiracy occurred from about January 2010 to August 2012; thus records of Mr. Burks’ earlier pre-2010 personal tax records are irrelevant to the instant charges.
To the extent there may be limited probative value, such testimony would be substantially outweighed by a danger of unfair prejudice, confusion, and being misleading.
Misleading my ass. The government will allege Burks’ failure to file returns was part of the Zeek Rewards fraud. I don’t see why Burks can’t address this through testimony.
References to Tin Fulton Walker & Owen or Simpson Thacher & Bartlett should be excluded and/or redacted
Undersigned counsel have represented Mr. Burks since before he was indicted. For a period of time pre-indictment, Simpson Thacher & Bartlett also represented Mr. Burks.
While these matters have been previously discussed between the parties and addressed to some extent before Magistrate Keesler shortly after Mr. Burks’ indictment, the parties should make every effort to properly advise witnesses and redacted all references to the above-mentioned firms and lawyers therein.
This seems to be in line with what the DOJ have requested, in that Burks’ attorneys can’t reference themselves or have witnesses do it because they represented Burks prior to the indictment.
The presence of government attorneys at interviews, debriefs, or proffers should not be referenced
The role of the AUSA at trial is as an advocate, not as a witness with personal knowledge.
Thus, it is not proper for an AUSA to voice his or her opinion of the evidence during trial, or to suggest that the jury can trust the prosecution’s “inside” knowledge.
Lay opinion testimony that Mr. Burks committed “fraud” or made representations that were “fraudulent” should be prohibited
Lay opinion witness testimony that Mr. Burks committed “fraud” or made representations that were “fraudulent” or the equivalent is highly likely to confuse or mislead the jury.
If the DOJ can establish, through evidence, that Burks made up the daily ROI, what’s wrong with having a witness recount what Burks told them?
Hell, Burks is still making “fraudulent representations” about the daily ROI despite evidence to the contrary (emails between himself and RVG staff explicitly discussing making up a daily ROI percentage).
Lay opinion testimony that certain accounting or record keeping practices were “improper” or “wrong” or “fraudulent” should be prohibited
Lay opinion witness testimony that accounting or record keeping practices of Rex Venture Group or Paul Burks were “improper” or “wrong” or “fraudulent” or the equivalent is highly likely to confuse or mislead the jury.
Lay opinion testimony concerning “Ponzi”, Ponzi scheme”, “pyramid”, or “pyramid scheme” should be prohibited
The terms “Ponzi,” “Ponzi scheme,” “Pyramid,” or “Pyramid scheme” are misleading and unfairly prejudicial.
Lay witness testimony found in the government’s discovery contains several assertions that Mr. Burks and others operated a “Ponzi,” “Ponzi scheme,” “Pyramid,” or “Pyramid scheme.”
The government has not, however, provided Mr. Burks with sufficient foundational evidence to support any such allegations.
Further, potential characterization by lay witnesses of something as a “Ponzi,” “Ponzi scheme,” “Pyramid,” or “Pyramid scheme” substantially outweighs any probative value by creating a danger of unfair prejudice, confusing the issues, and misleading the jury, all in violation of Federal Rule of Evidence 403.
Unfortunately for Burks the terms “Ponzi scheme” and “pyramid scheme” have actual definitions. Definitions which fit the operation of RVG.
And who ever heard of a Ponzi trial in which the term “Ponzi scheme” wasn’t used? Imagine if every murder suspect demanded “murder” was prohibited.
Ponzi and pyramid schemes… they are what they are and they’re obviously going to come up in the courtroom.
Reference to the criminal prosecution and conviction of Jaymes Meyers should be prohibited
The government’s discovery contains various references to Jaymes Meyers, the former CEO of Preferred Merchants LLC, a financial services company based in Napa, California.
For a refresher of Meyer’s criminal conduct, see “Criminal charge filed against Zeek payment processor“.
Although there is no evidence that Mr. Burks was aware of Mr. Meyer’s criminal conduct, or that he in any shape or form approved of it, there is a substantial risk that Mr. Burks’ jury might well assume such a thing given Mr. Meyer’s proximity to Rex Venture Group and the subject matter of the indictment. Because such evidence is highly likely to confuse or mislead the jury.
That Burks and RVG had to resort to using criminally tainted payment processors isn’t relevant? Cmon now.
Representations by unspecified or vague sources within Rex Venture Group, Zeekler and ZeekRewards that a witness asserts he or she relied upon should be prohibited
The government has provided interview reports that contain assertions by potential witnesses that they heard or learned about certain information from some unspecified or vague source from within Rex Venture Group, Zeekler, or ZeekRewards.
The Government should be prohibited from eliciting such assertions, which are practically impossible to confront and defend since the sources are unspecified or vague.
This one I kind of agree with, in that witnesses should be able to pinpoint an exact source. Otherwise there’s too much room for “some guy told me…” etc., which has no place in a courtroom.
The defense will ask the court to dismiss count four at the close of the government’s evidence and/or after the defense case
Pursuant to Federal Rule of Criminal Procedure 29(a), the defense will move for a judgment of acquittal on Count Four at the close of the government’s evidence.
The court already denied Burks motion to dismiss count four, based on the strength of the government’s evidence.
I don’t think the government presenting their evidence in court is going to help Burks dismiss the count.
Taking both trial briefs into account, Burks definitely feels like it relies a lot on pseudo-compliance. The sort of stuff that’s easily debunked and meaningless in light of what was actually happening.
Within the context of Zeek Rewards’ compensation plan and supporting documentary evidence, stuff like “we made affiliates sign agreements that said bids weren’t an investment” is going to be laughed out of court.
Still, it is a trial and we can’t dismiss Burks’ defense entirely.
The DOJ’s claims meanwhile are grounded in evidence (of which there is no shortage) and principally focuses on how Zeek Rewards actually functioned.
I’ve maintained Zeek Rewards was a Ponzi scheme since November, 2011 – so it’ll definitely be interesting to see how this all ultimately plays out.
Burks’ trial is scheduled to kick off next Tuesday on July 5th and is expected to take a few weeks. Stay tuned…
Footnote: Our thanks to Don@ASDUpdates for providing a copy of Paul Burks’ Trial Brief (filed June 28th, 2016).