Zeek Ponzi pimp clawback motions to dismiss denied
In an effort to get out of paying back the millions they collectively stole from Zeek Rewards victims, the scheme’s top profiteers filed a series of motions to dismiss mid 2014.
They then attempted to use the filing of these motions to stop the Receivership performing discovery (such as learning where they’d stashed their winnings).
A decision on that motion has been forthcoming, however with a recent ruling made on the filed motions to dismiss – it would now seem redundant.
Named as having filed respective motions to dismiss in the order are Trudy Gilmond, Trudy Gilmond, LLC, Jerry Napier, Darren Miller, Durant Brockett, Rhonda Gates, Innovation Marketing LLC, Aaron Andrews, Shara Andrews, Global Internet Formula, Inc., T. Lemont Silver, and Karen Silver.
Summarized in the order is the gist of the net-winner’s reasons for filing their motions to dismiss:
Defendants argue that this case must be dismissed for lack of subject matter jurisdiction pursuant to Rule 12(b)(1).
The SEC Action, from which the Receiver derives his authority to file the instant lawsuit, is based upon violations by RVG of federal securities statutes.
The Defendants contend that there is no subject matter jurisdiction in this case because RVG was not involved in the sale or marketing of any “securities.”
Basically they argue Zeek didn’t offer securities, and as such the SEC action, by which the Receievership “derives his authority” from, is null and void.
As per the court order, here’s why that’s a load of horseshit:
Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act define a “security” to include an “investment contract.”
The Supreme Court has defined an “investment contract” as: (1) the investment of money; (2) in a common enterprise; (3) with an expectation of profits to be derived solely from the efforts of the promoter or a third party.
In the case of Zeek Rewards (a common enterprise), affiliates invested funds into VIP bids on the expectation of a 90 day ROI, funded by newly invested affiliate funds.
Quite clearly the participation of Zeek’s top pimps fits the definition of an “investment contract” described above.
The order continues;
The Howey test is a “flexible” principle “capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”
The Supreme Court has explained that Congress intended the application of the Securities Act and Exchange Act “to turn on the economic realities underlying a transaction, and not on the name appended thereto.”
Enter the Howey test, designed to cut through the semantic bullshit we often see accompanying Ponzi schemes, by way of a series of prongs.
Courts have applied the Howey test to define a wide range of Ponzi schemes, pyramid schemes, and multi-level marketing schemes― including internet-based
schemes― as securities.
The same holds true even if not all aspects of a scheme constituted securities, and even where some aspects of a scheme may have been legitimate.
In Zeek Rewards you had retail bids, which were sold through Zeekler. Completely irrelevant and dwarfed by the Ponzi VIP bids being purchased, but made available to the general public nonetheless.
Not surprisingly, the offering of retail bids means dick if the opportunity is operating as a Ponzi scheme.
This argument usually manifests itself as “but we sell a product or service!” when Ponzi schemes and their investors are challenged on the relevancy of any such offerings.
In the case of Zeek Rewards, here are the arguments its top Ponzi pimps floated in their respective motions:
Defendants implicitly concede that the Retail Profit Pool and the Matrix meet the first two elements of the Howey test, requiring an investment of money in a common enterprise.
Defendants’ argument is that they did not expect profits based solely upon the efforts of others; rather, they worked hard for the money they received.
Defendants have filed affidavits stating they worked many hours to:
(1) drive new customers to the penny auction site,
(2) promote the penny auction by placing daily advertisements on the internet,
(3) network with other marketing professionals to gain greater exposure for Zeekler and ZeekRewards,
(4) set up personal websites in an effort to drive traffic to Zeekler and ZeekRewards,
(5) recruit customers to the penny auction and new members to ZeekRewards,
(6) participate in training programs and leadership calls; and
(7) participate in mandatory compliance programs sponsored by ZeekRewards.
Courts have flexibly applied Howey’s “solely through the efforts of others” formulation.
And here’s what happens when said arguments are presented in a court of law:
Courts have flexibly applied Howey’s “solely through the efforts of others” formulation.
To hold otherwise would make it too “easy to evade [the Howey test] by adding a requirement that the buyer contribute a modicum of effort.”
Instead, courts have focused on whether promoters’ efforts are “undeniably significant” or “essential managerial efforts”driving the enterprise’s success or failure.
Before we continue, observe that none of the seven points raised above had anything to do with the daily ROI Zeek Rewards paid out. The sole requirement needed for Zeek to continue operating was an influx of newly invested affiliate funds.
The Court finds that the Defendants predominantly relied on the managerial “efforts of others” ―namely Burks and Rex Venture― to generate profits. Burks and Rex Venture contributed “significant” and “essential managerial efforts” to the enterprise.
They created, updated, and operated the websites, handled all payments, managed the bank accounts and payment service providers, managed affiliate and customer accounts, managed all affiliate and customer services, oversaw and disbursed all bids, operated the auctions, created all advertisements, sponsored recruiting videos and calls, and decided the daily payout percentages for the Retail Profit Pool.
It’s a bit long-winded, but the order is clarifying that the so-called effort Zeek’s top pimps claim they exerted, was ultimately irrelevant. They relied on Zeek Rewards (Rex Venture Group) to continue to receive new investment to pay them with.
Investors, on the other hand, could participate in the Retail Profit Pool and the Matrix with minimal effort.
For example, participating in the Retail Profit Pool required:
(i) purchasing a monthly subscription;
(ii) purchasing and giving away VIP Bids or selling Retail Bids;
(iii) placing one free online advertisement daily; and
(iv) enrolling penny auction customers, all of which could be accomplished via automated programs developed by Burks and Rex.
The ZeekRewards website boasted that copying and pasting free ads created by Defendants should take no more than five minutes per day.
Placing more than one ad per day, or working to create improved ads, had no impact on the daily award percentage earned by a qualified affiliate.
Similarly, participating in the Matrix required:
(i) purchasing a monthly subscription; and
(ii) recruiting at least two investors to enroll in the monthly subscription plan, after which that investor was eligible to receive commissions on every additional
paid subscriber within his or her “downline.”
This minimal effort does not change the fact that investors relied primarily on the efforts of Burks and Rex for the profits they sought to share.
Indeed, courts have held that the “efforts of others” element of Howey is met where, as here, investors accrue profits primarily by recruiting new members.
Defendants’ emphasis upon the long hours they worked to recruit other others is misplaced. Without the essential managerial efforts of Burks and RVG, no profits would have been generated at all.
For the reasons stated above, Judge Mullen dismissed the net-winner’s claims that the Receivership had no authority in the matter (subject matter jurisdiction).
Basically Zeek was a Ponzi scheme that was involved in offering unregistered securities – and publishing ads (which was largely automated in any case) for said Ponzi scheme does not constitute significant effort towards the ROIs received.
Indeed the only thing that mattered when it came to the ROI was RVG’s shuffling of new affiliate funds to pay off existing investors (identified above as RVG’s “managerial efforts”).
Next up, the claim that the Receiver failed to “state a claim upon which relief can be granted”.
Here the court, despite the net-winner’s claims that no claims were stated, outlines the Receivership’s claims for relief:
In his First Claim for Relief, the Receiver seeks recovery of funds paid out to the Net Winners, alleging that these funds are the result of fraudulent transfers that are avoidable by the Receiver and recoverable from the Defendants.
Defendants argue that this claim must be dismissed because neither the Receiver nor RVG (in whose shoes he stands) is a “creditor” as defined in the North Carolina Uniform Fraudulent Transfer Act (“NCUFTA”) and therefore he has no standing to pursue fraudulent transfer claims.
Defendants’ argument is without merit. The NCUFTA defines “creditor” as a person who has a claim.
Basically the net-winners tried to argue RVG and the Receivership was not a creditor under North Carolina law.
Judge Mullen however found that North Carolina law ‘defines “creditor” as a person who has a claim’.
Quite clearly the Receivership has a claim here, and so the net-winner’s argument is baloney.
Specifically as to why it’s baloney,
it is well-settled that a Receiver has standing to assert claims for fraudulent transfer under the UFTA because the Receivership entity was harmed by the diversion of those assets. See Scholes v. Lehmann, 56 F.3d 750 (7th Cir. 1995).
In Scholes, the defendants, who included a net winner in a Ponzi scheme, argued that the receiver’s fraudulent transfer claims belonged to the creditors rather than the receiver.
The Seventh Circuit rejected this argument and found that because the corporate entities were harmed when assets were diverted through the fraudulent transfer, the receiver, as holder of claims belonging to the corporations, had standing to assert those claims.
This Court has also adopted the reasoning of the Scholes court. (various cases cited)
In those cases, the court-appointed receiver brought a suit to recover funds fraudulently transferred to the defendants in connection with a Ponzi scheme.
This Court explicitly relied on the Scholes decision in finding that the receiver had standing to bring the fraudulent transfer claims against the defendants based on the loss of funds that caused harm to the receivership entity.
Defendants’ position is contrary to the weight of authority and the Court finds that the Receiver does have standing to assert a claim under the NCUFTA.
Then we have the assertion from the net-winners that the Receivership
has failed to plead the NCUFTA claim with the specificity required by Rule 9(b).
Specifically, Defendants contend that the Complaint:
(1) fails to make a single factual allegation against any of the named Defendants (other than alleging their places of residence and that they were Net Winner Affiliates);
(2) constitutes a bare recital of the statutory elements of fraudulent transfer; and
(3) fails to identify the dates or amounts of any fraudulent transfers allegedly made by any of the named Defendants.
Right. The Receivership “failed to make a single factual allegation against any of the named Defendants”, y’know… other than naming them as net winners in a $850 million Ponzi scheme.
*cue twilight zone music*
In support of their argument, Defendants cite two unpublished cases, one from the Eastern District of North Carolina, and one from the Bankruptcy Court for the Middle District of North Carolina.
Neither case contains an articulation of the court’s reasoning for applying Rule 9(b) to a NCUFTA claim.
Courts that have closely analyzed the issue have found that fraudulent transfer claims pursuant to the UFTA are subject to Rule 8’s pleading standard.
As these courts explain, a claim for fraudulent transfer involves no allegations of fraud on the part of the defendant transferee, but only by the non-party
transferor (the Insiders here).
Consequently, where a complaint does not allege that the defendants themselves committed fraudulent acts, Rule 8 applies.
Based upon the persuasive reasoning of these courts, the Court finds that Rule 8 governs the fraudulent transfer claim.
And the whole “waah the Receivership didn’t explicitly detail each and every ROI transaction from Zeek!” argument is then also tossed out the window:
Defendants contend that even if the Court applies the pleading requirements of Rule 8, the Complaint nevertheless fails because the Receiver makes only threadbare recitals of the elements of a NCUFTA claim supported by mere conclusory statements.
The Court has reviewed the Complaint, which sets forth in great detail the existence of the RVG Ponzi scheme, the manner in which it operated, the amount of funds transferred to the named Defendants, and the general timeframe of the transfers.
Defendants would have the Receiver allege the specific dates and amounts of each of the 690+ transfers from RVG during the life of ZeekRewards.
The Court finds such specificity to be unnecessary and unwarranted.
You received Ponzi ROIs from a Ponzi scheme and that’s enough to warrant a claim against you. Obvious would appear to be obvious… well, except to Zeek Rewards’ net-winners.
Taking all the Complaint’s allegations as true and drawing all reasonable inferences in Plaintiff’s favor, the Court finds that the Complaint states a plausible claim for relief for violation of the NCUFTA.
Accordingly, Defendants’ Motion to Dismiss this claim is denied.
The Receivership also made the claim against the net-winners under “common law fraudulent transfer”.
Defendants assert that this claim must be dismissed because the claim does not exist in North Carolina.
The Receiver contends that his common law fraudulent transfer claim is asserted in the alternative.
To the extent that the Receiver cannot assert claims under the NCUFTA, he argues that he is entitled under common law to recover the fraudulent transfers made by RVG to the Defendants.
The Court agrees. Defendants’ Motion to Dismiss this claim is likewise denied.
The last claim made by the Receiver was that under “constructive trust”.
A constructive trust is not an actual trust by the traditional definition. It is a legal fiction that is used as a remedy for unjust enrichment.
Hence, there is no trustee, but the constructive trust orders the person who would otherwise be unjustly enriched to transfer the property to the intended party.
Unjust enrichment in this case of course being the transfer of newly invested affiliate funds to Zeek’s top investors.
The Defendants move to dismiss the Receiver’s claim for constructive trust, arguing that “constructive trust” is an equitable remedy, not a cause of action.
Moreover, Defendants argue that North Carolina case law is clear that a constructive trust is an equitable remedy that is only available if there is no adequate legal remedy.
Here’s how that argument held up:
North Carolina law holds that a constructive trust may be requested as a claim or in the prayer for relief.
The Court finds that the Receiver has properly requested a constructive trust, regardless of whether it is technically considered a claim or a remedy.
The issue of whether or not the net-winners engaged in any wrongdoing was also raised in this argument. The matter was addressed as follows:
Defendants further contend that the Complaint fails to allege any wrongdoing by any of the named Defendants sufficient to give rise to the imposition of a constructive trust.
“A constructive trust . . . is a trust by operation of law which arises contrary to intention . . . against one who . . . in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy.” Roper v. Edwards, 373 S.E.2d 423, 425 (N.C. 1988)
Defendants’ argument that they should not be subjected to the imposition of a constructive trust because their own fraud is not the subject of the complaint fails.
The Complaint sets forth allegations sufficient to show that “some other circumstance” makes it inequitable for these Defendants to retain the funds they received.
This “other circumstance” is that Defendants received the funds from an admitted Ponzi and pyramid scheme, and that the funds are nothing more than other people’s money wrongfully diverted from RVG.
Therefore, Defendants have received property which they “ought not, in equity and good conscience, hold and enjoy.”
Key is that the issue of whether they engaged in fraud (wrongdoing) is infact a non-issue for the purpose of establishing collective trust. The mere fact that they received new investor funds in a Ponzi scheme is sufficient enough.
Lastly, Defendants argue that a constructive trust is an equitable remedy that is only available if there is no adequate legal remedy.
Defendants contend that the Receiver’s allegation that he has “no adequate remedy at law” is a naked legal conclusion, and must be supported by factual allegations to be viable.
Judge Mullen yet again shoots down the net-winners’ argument:
Contrary to Defendants’ argument, a review of the Complaint reveals that the Receiver has alleged sufficient facts which, viewed in the light most favorable to the Receiver, demonstrate that there is no adequate remedy at law.
Defendants, as some of the top-dollar ZeekRewards net winners, were early adopters of the ZeekRewards scheme.
As a result, these named Defendants may have already dissipated much of their net winnings, which without a constructive trust would be impossible for the Receiver to trace and secure.
The Receivership will likely never be able to pay victims of the ZeekRewards scheme the full amount of their losses.
Without a constructive trust and the ability to trace fraudulently transferred Receivership Assets, the Receiver’s remedy at law is inadequate.
Therefore, the Complaint contains sufficient allegations to warrant the imposition of a constructive trust against the Defendants.
All in all, not one argument raised by the net-winners in their motions to dismiss was upheld. The motions were dismissed in their entirety.
So, what happens now?
As I understand it, discovery will now take place and the case will move forward. I don’t see any other roadblocks in place (these motions to dismiss have been hanging over the case for nearly six months), so hopefully we’ll see things move along at a much faster speed.
As to the Ponzi pimps themselves; You had a good run and although all of your arguments were poorly thought out and presented, did manage to stall proceedings against you for half a year.
Time to pay up.
Buried in a footnote in Judge Mullen’s order is, what I believe, a taste to come:
The Defendants themselves have not admitted that ZeekRewards was a Ponzi or pyramid scheme.
However, the principal, Paul Burks, and certain insiders have made such an admission and have agreed to plead guilty to securities fraud.
But please net-winners, feel free to continue the “Zeek Rewards wasn’t a Ponzi scheme” charade. I’ve stocked up on the popcorn and am entirely looking forward to the next episode of “disillusioned Ponzi pimps meet reality”.
Footnote: Our thanks to Don @ ASDUpdates for providing a copy of Judge Mullen’s December 8th order.
Update 11th December 2014 – An amended order was issued by Judge Mullen yesterday, slightly changing the wording of the last quote appearing in the above article.
It now reads:
To be clear, the Defendants themselves have not admitted that ZeekRewards was a Ponzi or pyramid scheme.
However, the principal, Paul Burks, and certain insiders have made such an admission. In addition, management insiders Dawn Wright-Olivares and Danny Olivares have pleaded guilty to engaging in a securities fraud conspiracy.
Update 12th December 2014 – Another amended order has been published today, further correcting the above footnote.
It now reads:
To be clear, the Defendants themselves have not admitted that ZeekRewards was a Ponzi or pyramid scheme.
However, certain insiders have made such an admission. In addition, management insiders Dawn Wright-Olivares and Danny Olivares have pleaded guilty to engaging in a securities fraud conspiracy.
The issue seems to be whether or not Paul Burks has made an admission that Zeek Rewards was a Ponzi scheme.
Whether Judge Mullen made a mistake in acknowledging Burks had made an admission or accidentally revealed the contents of otherwise sealed court filings is unclear.