On Friday, the Securities and Exchange Commission leveled charges and an emergency asset freeze on the perpetrators of an alleged $600 million Ponzi scheme that was on the verge of collapse.
In the SEC's third such case in recent days, the charges allege that online marketer Paul Burks of Lexington, N.C., and his company, Rex Venture Group, raised money from more than one million Internet customers nationwide and overseas through the Web site ZeekRewards.com, in what purported to be a rewards program but was actually a classic Ponzi scheme.
The site, which was launched in January 2011, offered several ways to earn money through the ZeekRewards program, two of which involved purchasing securities in the form of investment contracts. The securities offerings were not registered with the SEC as required under federal law.
The SEC alleges that investors were collectively promised up to 50 percent of the company's daily net profits through a profit-sharing system in which they accumulated rewards points that they could use for cash payouts. However, the Web site fraudulently conveyed the false impression that the company was extremely profitable when, in fact, the payouts to investors bore no relation to the company's net profits. Most of ZeekRewards' total revenues, according to the SEC, and the "net profits" paid to investors have been comprised of funds received from new investors.
"The obligations to investors drastically exceed the company's cash on hand, which is why we need to step in quickly, salvage whatever funds remain and ensure an orderly and fair payout to investors," said Stephen Cohen, an associate director in the SEC's Division of Enforcement. "ZeekRewards misused the power of the Internet and lured investors by making them believe they were getting an opportunity to cash in on the next big thing. In reality, their cash was just going to the earlier investor."
The SEC's complaint alleged that the scheme is teetering on collapse with investor funds at risk of dissipation without its emergency enforcement action. Last month, ZeekRewards brought in approximately $162 million, while total investor cash payouts were approximately $160 million.
Burks has agreed to settle the commission's charges against him without admitting or denying the allegations, and agreed to cooperate with a court-appointed receiver.
According to the SEC's complaint, ZeekRewards has paid out nearly $375 million to investors to date and holds approximately $225 million in investor funds in 15 foreign and domestic financial institutions. Those funds will be frozen under the emergency asset freeze granted by the court at the SEC's request.
Meanwhile, Burks has personally siphoned off several million dollars of investors' funds while operating Rex Venture and ZeekRewards, and he distributed at least $1 million to family members. Burks has agreed to relinquish his interest in the company and its assets, as well as paying a $4 million penalty. Additionally, the court has appointed a receiver to manage and distribute the remaining assets for return to investors.
The SEC's investigation was conducted by Brian M. Privor and Alfred C. Tierney in the SEC's Enforcement Division in Washington, D.C. The SEC also received assistance from the Quebec Autorite des Marches Financiers and the Ontario Securities Commission.
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