zeekrewardsThe conviction of Paul Burks appears to have left Zeek Rewards’ top scammers without a legal leg to stand on.

Back in July, the Zeek Receiver filed for summary judgement against the Zeek net-winner class.

In total, Zeek’s “net winners” (those who received more money from Zeek than they paid in to Zeek) received over $282 million in net winnings, with the largest winners each receiving well over a million dollars.

Yesterday the motion was granted, paving the way for clawback collection efforts to begin.

Despite the fact that the defendant class had conceded Zeek Rewards was a Ponzi scheme, they’d continued to argue that ‘the Court should not grant summary judgement in favor of the Receiver‘.

These arguments were based on the contention that there was a one-year limitation provision in Zeek Rewards’ Terms of Service.

The Zeek TOS required a “cause of action” to be filed within one year after the claim or action arose.

The argument was that the Receiver’s clawback litigation fell well outside of this one year limitation and should therefore be barred.

Defendants’ position is that because the Receiver stands in the shoes of RVG, he is bound by the TOS and its limitations provision.

Essentially, Defendants are arguing that a subsequently appointed receiver’s fraudulent transfer claims can be barred by the terms under which the scheme was implemented.

I know, sounds ridiculous but that’s what the net-winners came up with.

And here’s how it went down in court;

Contrary to Defendants’ argument, a receiver is not bound by an agreement that the fraudster, “acting with the intent to defraud, signed on behalf of” the company in receivership.

As is readily apparent, it “would create a perverse incentive . . . for a court to rule that a party who fraudulently enters into an agreement subsequently bars a trustee or receiver from bringing an action to recover the funds fraudulently transferred pursuant to that agreement.”

I mean hey, why not start a Ponzi scheme and include a provision in the TOS that outright prohibits litigation against net-winners and insiders altogether then?

If the terms implementing a fraudulent scheme could shorten the limitations period to eliminate or cut off a receiver’s claims at an earlier date, a fraudster would have a strong incentive to include a limitations period much shorter than the statutory period (here one year instead of four) as a means to protect investors in his scheme from clawback actions down the road.

Indeed, adopting Defendants’ position would create a ready-made roadmap for fraudsters to protect anyone who won money in their scheme, thus further encouraging participation and enhancing the scheme.

Such a result would undermine a receiver’s ability to perform his duties and severely weaken his ability to serve his role.

Survey says… nope.

The Receiver’s clawback complaint asserted the net-winners accused Zeek’s net-winners of violating the North Carolina Uniform Fraudulent Transfer Act NCUFTA, Common Law Fraudulent Transfer and Constructive Trust.

These allegations were also addressed in the November 29th order.

The NCUFTA permits a receiver to avoid a transfer made “with the intent to hinder, delay, or defraud any creditor of the debtor” within four years after the transfer was made.

Many courts have held that the intent to defraud can be presumed when transfers are in furtherance of a Ponzi scheme.

A majority of federal courts have held that proof of operation of a Ponzi scheme is sufficient to establish actual intent to hinder, delay, or defraud creditors to permit avoidance of a fraudulent transfer.

Transfers in furtherance of a Ponzi scheme “have achieved a special status in fraudulent transfer law” from which intent of actual fraud may be inferred.

Courts in the Receivership context outside bankruptcy also routinely apply the Ponzi scheme presumption to avoid fraudulent transfers.

There is no genuine issue of material fact that ZeekRewards operated as a Ponzi scheme.

Accordingly, the law considers transfers from the scheme to be fraudulent transfers that may be avoided under the NCUFTA.

The net-winners defense to the alleged NCUFTA violations was that they

acted in good faith and provided “reasonably equivalent value” in return for their net winnings.

In other words, a rehashing of the “spamming the internet and recruiting new investors is work!” argument.

This argument has consistently been shot down since AdSurfDaily, with the November 29th decision being no different.

(Net-winners) liken themselves to “internet marketing specialists” and contend that they provided more than reasonably equivalent value for the payments they received.

Actual participants and investors in a Ponzi scheme cannot establish that they gave “reasonably equivalent value” for their winnings through their efforts participating in and recruiting others to the scheme.

Nearly all the courts that have considered this issue have determined that participants and investors may be entitled to a return of their principal investment, but must return the amount received beyond that investment.

Moreover, courts have routinely and specifically held that there is no value in recruiting new investors to a fraudulent scheme.

Establishing net-winners provided no value during the course of their scamming, saw the good faith argument also tossed out (providing value is a prerequisite to the defense).

A number of cases the net-winners cited to support their argument pertained to

innocent trade creditors or third-parties providing “legitimate” services in the ordinary course of business.

Defendants are actual participants/investors in the Ponzi scheme, not third-party service providers.

Ouch.

Conclusion?

The Court finds that here is no genuine issue of material fact that Defendants did not provide “reasonably equivalent value” for their winnings.

Accordingly, the Court grants summary judgment in favor of the Receiver on the NCUFTA claim.

Arguing against Constructive Trust, the net-winners claimed

constructive trust is only available when a fiduciary relationship exists and there is no adequate remedy at law.

They also contend that a constructive trust requires a traceable or identifiable res, and the Receiver bears the burden of proving traceability.

Citing Variety Wholesalers, the Receiver correctly points out that a fiduciary relationship is not required for imposition of a constructive trust. All that is required under that decision for a constructive trust is an “inequit[y]” or “unconscientious matter.”

Here, the Ponzi scheme easily qualifies as inequitable and unconscientious.

Moreover, as this Court has previously noted, Defendants were early adopters of the ZeekRewards scheme and as result, these named Defendants may have already dissipated much of their net winnings.

Without a constructive trust it would be impossible for the Receiver to
trace and secure these fraudulently transferred Receivership Assets.

Thus, the Receiver’s remedy at law would be inadequate.

Finally, allowing the lack of traceability to defeat the Receiver’s constructive trust claim would create a perverse incentive for every net winner of any Ponzi scheme to spend any proceeds received from the scheme before a receiver could start to unwind it and then claim that
the assets were gone.

Imposing a constructive trust under the circumstances herein furthers the
Receiver’s ability to recover the assets of the ZeekRewards Ponzi scheme and distribute them to the net losers, thus making the victims as whole as possible.

Accordingly, summary judgment in favor of the Receiver is appropriate.

Thought you were being clever and hiding your assets?

Nope. You’re still going to have to deal with a forensic accounting investigation.

As per the Receiver’s own November 29th press-release;

As I have previously stated, the next step will be for the Receiver and counsel for the Net Winner Class to confer and then ask the Court to approve a process to determine the amount of judgment, or money owed, by each of the class members (other than the named defendants who have already been found liable for the full amount of their net winnings) to the receivership.

This process is expected to take several months, but the entry of summary judgment is a significant event for the receivership and claimants.

The face value of these claims is in excess of $200 million. How much of that we will be able to collect for distribution to claimants with allowed claims is uncertain at this time.

However, we will pursue collection of these judgments vigorously, and expect the ultimate amount collected will be a substantial sum.

The certified net-winner class contains approximately 9400 scammers, each of whom stole $1000 or more from Zeek Rewards victims.

It begins…