Efforts by the court-appointed receiver for the $600 million ZeekRewards Ponzi scheme for court approval of a process to distribute assets to victims are currently on hold as a group of lawyers representing a small subset of victims has objected on the basis that the proposed process, which seeks to make distributions directly to victims, will prevent the lawyers from first deducting their 25% fee from each claim. Claiming that the receiver’s decision “would violate said Claimants’ Constitutional rights to Due Process,” a Louisiana lawyer wants future distributions to over 700 victims made payable solely to his law firm – a position characterized by the receiver, Kenneth Bell, as “at least questionable.”
Authorities sued ZeekRewards back in August 2012, alleging the penny auction venture was nothing more than a massive Ponzi scheme that had drawn in hundreds of thousands of victims and was on the verge of collapse. After Mr. Bell’s appointment, his subsequent investigation revealed that hundreds of millions of dollars remained in Zeek bank accounts for eventual distribution to victims. Bell later obtained court approval to conduct a claims process for investors to be implemented through an online claims portal, citing the inherent difficulties and financial strain of coordinating a typical claims process by U.S. mail because of the hundreds of thousands of victims. The Receiver characterized the online claims process as “user-friendly,” provided a “frequently asked questions” section, and assured victims that they were only expected to supply information they remembered or had access to. In total, nearly 200,000 individuals ended up submitting claims.
However, a small subset – approximately 740 – of victims had originally entered into contingency fee agreements with a Louisiana law firm (the “Louisiana Firm”) that filed a class action lawsuit against ZeekRewards that was later halted by the court, which deemed the lawsuit “ill-timed” and noted it was filed in violation of the stay provision of the order appointing Mr. Bell as Receiver. Pursuant to that fee agreement presumably, the Louisiana Firm later “filed individual Claims on behalf of each and every one of the 740″ victims.
In December 2013, the Receiver sought court approval for distribution procedures, which included, among other things, a provision that payments would be made directly to victims. The Louisiana Firm filed a sharply-worded objection (the “Objection”), characterizing the Receiver’s decision as a refusal to consider their client’s claims and a violation of the victims’ constitutional due process rights. In his response, the Receiver dismissed the Louisiana Firm’s claims, noting that the fee agreement had been procured as part of a class action that had been filed in violation of the stay order, and taking issue with the attorneys’ right to such a “large” fee simply for filling out an online claims form:
whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.
The Objection characterized the dispute as a constitutional rights issue, and unsurprisingly made little reference to the fact that making the payments directly to the Louisiana Firm would allow the deduction of the 25% contingency fee rather than being forced to contact each client to obtain that amount. Considering that the average claim amount was approximately $3,100, and the fact that the Louisiana Firm claimed 740 clients, this would represent a average per-claim fee of $775, and cumulative average total fee of over half a million dollars for simply assisting victims in filling out a claim form. (Obviously, the number could fluctuate based on the actual dollar amounts of the claims of the 740 victims.)
In his response, the Receiver enclosed a representative fee agreement, which not only put victims on the hook for 25% of any claim recovery and 33% of any lawsuit recovery, but also included an agreement that victims would be responsible for all costs and expenses incurred in prosecuting the class action, including
long distance telephone charges, photocopying ($0.10 per page), postage, facsimile costs, Federal Express or other delivery charges, Westlaw or other legal research charges, deposition fees, expert fees, subpoena costs, court costs and filing fees, sheriff’s and service fees, travel expenses and investigation fees.
Thus, it is quite likely that victims could be subject to even more than a 25% deduction from any claim distribution based on any incurred costs and expenses. In summary, the Receiver stated that it is “outside the scope of and inconsistent with his duties to facilitate or enforce any attorneys’ fee agreements between claimants and their counsel.”
Because of the Objection, the Court must decide how it wants to proceed, including whether a hearing is necessary. In the spirit of allowing distributions to go forward with the unaffected 99% of submitted claims, it is also possible the Court could proceed with approving distribution procedures for those claims while reserving ruling on the affected claims.
A copy of the Louisiana Firm’s motion is below (h/t to ASDUpdates):