by T. GormanPosted on Posted in SECActions

ZeeksRewards is the case that just keeps on giving. The multi-level pyramid and Ponzi scheme has generated two prior SEC enforcement actions. One involved the company, Rex Ventures Group, LLC, and its principal, Paul Burks. SEC v. Rex Venture Group, LLC, Case No. 3:12-cv-519 (D.N.C. Filed Aug. 17, 2012). There a receiver was appointed and Mr. Burks settled. A second action was brought against two other firm employees. SEC v. Wright-Olivares (W.D. N.C. Filed December 20, 2013). That action settled with the two employees consenting to injunctions based on the registration and antifraud provisions of the Securities Act and the payment of disgorgement and prejudgment interest that will be made in a parallel criminal action brought by the U.S. Attorney’s Office in the Western District of North Carolina.

The Commission has now instituted a third action. This case names as a defendant Trudy Gilmond, a field liaison for ZeeksRewards who operated Team Fired UP to solicit new investors. SEC v. Gilmond, Civil Action No. 3:15-cv-00591 (W.D.N.C. Filed December 4, 2015).

ZeeksRewards traces to 2010 when Paul Burks and others created Zeekler.com as a penny auction website. It offered items ranging from personal electronics to cash. The auctions required participants to pay a non-refundable fee to purchase and place incremental bids on merchandise sold through auction. While not that successful, Mr. Burks and his company, Rex Venture Group, LLC, and others launched ZeekRewards in January 2011.

The new program was a private, invitation only affiliate advertising division of Zeekler. It was a multi-level marketing program that offered subscription memberships to affiliates. Those recruited then brought in other new affiliates and purchased and gave away samples or sold packages of bids for the penny auction website.

Ms. Gilmond was a network marketer who participated in a number of multi-level marketing programs. She operated a full time business soliciting new affiliates and helping her recruits solicit others. No effort was made to determine the financial wherewithal to invest or the experience level of customers.

Over a period of about one and a half years, beginning in January 2011, the firm raised about $850 million through the offer and sale of securities through the Retail Profit Pool and the Matrix to approximately one million domestic and international investors.

Through what was called the Retail Profit Pool, affiliates were told the company would share up to 50% of the daily net profits. To become Qualified Affiliate investors were required to: 1) enroll in the monthly subscription plan and make the required payments which varied in amount but began at $10; 2) enroll new penny auction customers; 3) sell retail, or purchase and give away as samples, a minimum of ten Zeekler.com bids; and 4) place one free advertisement daily for Zeekler.com and submit proof to ZeekRewards. Qualified Affiliates had the option to receive their daily award as cash or additional Profit Points or a combination. By the time the operation was shut down Qualified Affiliates had almost 3 billion Profit Points.

ZeekRewards also employed the Matix. This acted like a pyramid scheme by rewarding investors for recruiting others to join the scheme.

In fact ZeeksRewards was as a fraudulent scheme. The average 1.5% daily dividend to Qualified Affiliates was selected to sustain the false impression that the business had returns of 125% every 90 days. Profits from the penny auctions were miniscule and the daily awards could only be supported by funds from others.

From her efforts Ms. Gilmond received $461,964 in Matrix commissions and $1,300,074 in daily dividend payments and bonuses based on her purchases and compounding payments in the Retail Profits Pool.

Although Zeeks Rewards paid out hundreds of millions of dollars, by July 2012 it had insufficient deposits to satisfy future awards. The scheme was thus nearing collapse by the time it was shut down in August 2012. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 15(a). The case is pending. See Lit. Rel. No. 23421 (December 8, 2015).

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by T. GormanPosted on Posted in SECActions

The EB-5 program was designed by Congress to stimulate job creation and capital investment by foreign investors. In return for an initial investment of $1 million in a new commercial enterprise that creates or preserves at least 10 full time jobs, or $500,000 if the area is high unemployment, investors may obtain a green card. While the program has been successful it has also resulted in a number of enforcement actions by the SEC.

The Commission filed eight actions against lawyers or their firm tied to the program. Seven of those cases fit within the “broken windows” approach to enforcement. They are based on the lawyer or firm acting as an unregistered broker in violation of Exchange Act Section 15(a). See, e.g., In the Matter of Kefei Wang, Adm. Proc. File No. 3-16987 (December 7, 2015)(Section 15(a) action settled by attorney whose firm is now defunct in which the attorney effectuated transactions in EB-5 securities, acting as a liaison between the program investment officers and investors and received transaction based compensation; settled with a cease and desist order and the payment of disgorgement and prejudgment interest).

One action, however, centered on fraud allegations based on undisclosed conflicts. SEC v. Feng, Civil Action No. 2:15-cv-09420 (C.D. CA. Filed December 7, 2015). The defendants in the action are attorney Hui Feng and his firm, Law Offices of Feng & Associates P.C. Defendants began promoting the EB-5 program in 2010. Typically, Mr. Feng wrote retainer agreements with clients requiring the payment of legal fees that ranged from $10,000 to $15,000. As part of the firm’s services the most reliable EB-5 investment projects would be recommended following due diligence.

Defendants recommended clients invest in the offerings of at least five different EB-5 promoters. Mr. Fang facilitated client investments in the programs by obtaining the required documents and having clients execute them. In some instances defendants acted as a conduit for investment funds to promoters. Commissions were paid by the promoters that ranged from $15,000 to $70,000 per transaction. In addition, if the clients petition was approved the firm was paid additional compensation.

Neither Mr. Feng nor his firm disclosed to their clients that they were paid commissions from the promoters. Likewise, the conflict of interest this presented was not disclosed, although if clients specifically inquired they were told.

Beginning in May 2013 some promoters told Mr. Feng that they would not wire commissions to a U.S. bank “as part of an apparent effort to avoid running afoul of the broker-dealer registration requirements of the federal securities laws,” according to the complaint. Mr. Feng circumvented this prohibition by using nominees to whom the payments were made but who secretly acted on his behalf. The representations to the promoters were thus materially false.

From March 2011 through April 2015 Defendants or their nominees received at least $1.1 million in commissions from the five promoters. In addition, defendants are contractually entitled to receive, directly or indirectly, at least $3.1 million more in commission payments upon approval of the pending investor petitions. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The action is pending.

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