Jordan Maglich of PonziTracker.com and contributor at Forbes reported today today on what Kenneth D. Bell’s Liquidation Plan for Rex Venture Group, LLC, aka Zeek Rewards means for the former Zeek Rewards affiliates… Victims and Promoters.
The court-appointed receiver overseeing the $600 million ZeekRewards Ponzi scheme has filed a preliminary liquidation plan providing the most detailed look thus far of ongoing efforts to recover assets for victims, as well as the implementation of a claims process and “clawbacks” against certain investors. Kenneth D. Bell, with Charlotte law firm McGuireWoods LLP, was appointed by a North Carolina federal court on August 17, 2012 in the wake of an emergency action filed by the Securities and Exchange Commission (“SEC”) to halt what it called a “massive Ponzi scheme.” The scheme has been pegged as one of the most complex Ponzi schemes to date in light of the estimated millions of victims. In the Preliminary Liquidation Plan (the “Plan”), Bell provides updates on assets recovered, the claims process, and efforts to recover funds from investors who profited from the scheme.
Since assuming control, Bell has retained several third-party forensic and data consultants to assist with re-constructing Zeek’s financial records. His investigation thus far has revealed that there were approximately 2.2 million unique users in Zeek, with 1 million of those users having paid money into the ZeekRewards program. While Bell disclosed at an earlier press conference that the initial damage estimate of $600 million was likely low, an updated estimate of investor losses was not contained in the Plan.
To date, the Receiver has recovered approximately $293.7 million for the benefit of defrauded investors. This includes nearly $200 million in domestic financial institutions including Global E Telecom, First Premier Bank, and Bank of America. Additionally, nearly thirty million dollars were seized from foreign accounts and payment processors. The Receiver also disclosed that he had presented nearly 61,000 non-negotiable financial instruments (such as cashier’s checks and/or money orders) totaling approximately $100 million for deposit. However, over 10,000 items totaling approximately $30 million were unable to be deposited, with Bell disclosing that a majority had been returned following the issuance of stop payments. The issue has since been resolved.
While the Receiver has primarily focused on locating and securing assets since his appointment, he has indicated that he intends to begin focusing on “recovery efforts to include claims against officers, employees, participants, professionals, and others who benefited from the Scheme.” The “professionals” the Receiver alludes to include individuals or entities that provided services to Zeek and helped to facilitate its operation, such as banks, law firms, or accountants. Additionally, Bell issued his strongest statement to date that he intends to pursue those “net winners” who profited from the scheme, stating that
These claims will include common law claims and “clawback” claims under applicable fraudulent transfer statutes against those who ran the operations and “net-winner” participants, i.e. those who received back more (of other Affiliate-Investor’s money) than they paid into the [Scheme].
As I wrote back in August, any clawback efforts are likely to be expensive and complex due to the estimated tens (or even hundreds) of thousands of potential clawback targets, and I had hinted that Mr. Bell would possibly consider “pre-litigation” efforts to allow the return of profits without instituting litigation. This speculation is seemingly confirmed in the Plan, with Mr. Bell stating that he plans “to offer those who are required to return money to the Receivership Estate the opportunity to do so cooperatively in an effort to avoid costly litigation for all concerned.” In similar receivership proceedings, this offer is often accompanied by a small “discount” to encourage settlement and avoid litigation expenses.
The Receiver continues to work towards implementing a claims process, noting that he is working to enhance the receivership website and has not yet decided on the appropriate method to accept claims. He notes that he has received communications regarding the claims from various creditors, including “organized groups of affiliate-investors of the receivership defendant.” While the Receiver has taken note of those needs, none of that information will function as a valid submission of a claim until a formal claims process has been established. Once a decision has been made on the claims process and the appropriate basis to calculate the allowed amount of claims, the Receiver will then seek court approval and permission to distribute forms to investors. These issues, as well as the types of allowed claims, will be fully addressed in a to-be-filed Plan of Liquidation. It remains to be seen what method the Receiver will adopt to calculate claims, though it is highly likely that the “net investment method” will be used. That method deducts any withdrawals from the total amount contributed to arrive at a calculated amount.
Finally, the Receiver informed the Court that it was unlikely he would seek to convert the receivership proceeding into a bankruptcy filing. According to Bell, a receivership provides more efficiency and cost savings than a bankruptcy, which would also result in substantial transition costs and no real advantage in recovery of assets compared to a receivership. While the Receiver indicated this decision remains under consideration, it seems highly unlikely that Zeek would be converted to a bankruptcy proceeding.
In closing, the Receiver reiterated that the investigation remained ongoing, and that he was facing a “time-consuming” process in reconstructing over 18 months of “missing or incomplete” financial information. The scheme’s complexity, coupled with the high number of transactions and investors, will “require additional and significant investigatory efforts.” Bell expects to file a quarterly status report by October 30, 2012.
Jordan Maglich is an attorney at Wiand Guerra King P.L. in Tampa, Florida whose practice includes white-collar crime and securities and financial litigation. He also covers Ponzi schemes on his blog, PonziTracker. Follow him at @PonziTracker.