SEC FILES SUIT ALLEGING COMBINED PONZI AND PYRAMID SCHEME

FROM: SECURITIES AND EXCHANGE COMMISSION

On August 17, 2012, the Securities and Exchange Commission filed suit in the United States District Court for the Western District of North Carolina against Rex Venture Group LLC d/b/a ZeekRewards.com and Paul R. Burks, alleging that the defendants had been operating a combined Ponzi and Pyramid scheme. According to the Complaint, online marketer Paul Burks of Lexington, N.C. and his company Rex Venture Group raised more than $600 million from more than one million Internet customers nationwide and overseas through the website ZeekRewards.com, which they began in January 2011.

The Complaint alleged that defendants solicited investors through the Internet and other means to participate in the ZeekRewards program, a self-described "affiliate advertising division" for the companion website, Zeekler.com, through which the defendants operated penny auctions. The ZeekRewards program offered customers several ways to earn money, two of which – the "Retail Profit Pool" and the "Matrix" – involved purchasing securities in the form of investment contracts. These securities offerings were not registered with the SEC as required under the federal securities laws.

According to the Complaint, defendants promised investors a share of the company’s daily net profits in the form of daily profit share awards. The defendants represented that those daily awards were calculated by dividing up to 50 percent of the company’s "net profits" by the number of "profit points" outstanding among all "qualified affiliates," with those purported calculations consistently resulting in daily dividends averaging approximately 1.5 percent per day, fraudulently conveying the false impression that the company was extremely profitable. In fact, the investor payouts bore no relation to the company’s net profits. Most of ZeekRewards’ total revenues and the "net profits" paid to investors were comprised of funds received from new investors in classic Ponzi scheme fashion.

The Complaint further alleged that the scheme was 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. If customers had continued increasingly to elect to receive cash payouts rather than reinvest their money to reach higher levels of rewards points, ZeekRewards’ cash outflows would have quickly exceeded its total revenue.

The Commission alleged that the defendants offered and sold securities in violation of the registration and antifraud provisions of the federal securities laws. The Complaint requested permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against the defendants. In addition, the Commission filed motions asking the Court to freeze Rex Venture’s assets and appoint a receiver over the company and its assets.

Without admitting or denying the Commission’s allegations, and simultaneously with the filing of the Complaint, the defendants consented to permanent injunctions against future violations of the registration and antifraud provisions. Burks also agreed to relinquish his interest in the company and its assets, and to pay a $4 million civil penalty. On Friday afternoon, August 17, 2012, the Court entered the consented-to judgments imposing the foregoing relief, and also ordered an emergency asset freeze and appointed a receiver, both as requested by the Commission. According to the Complaint, ZeekRewards holds approximately $225 million in investor funds in 15 foreign and domestic financial institutions. Those funds have been ordered frozen under the emergency asset freeze granted by the court at the SEC’s request. Additionally, under the Court’s order, the receiver has been tasked to collect, marshal, manage and distribute remaining assets for return to harmed investors.