Ad Surf Daily: Parallels With The CEP Ponzi Case
Friday, September 5, 2008
Quite a few myths about Ad Surf Daily are flying around the Web. One of these is that ASD has to prove its innocence if criminal charges are filed.
That's not the way it works. The government has to demonstrate beyond a reasonable doubt that ASD is guilty of a crime or crimes. ASD doesn't have to prove anything. ASD, for example, doesn't have to call a single witness if it desires not to. This doesn't mean ASD won't call witnesses and won't try to refute the government's case with evidence of its own. It simply means the burden of proof is on the government.
The standard is less rigid on the civil end. Instead of "reasonable doubt," it is "preponderance of the evidence" that ASD acted unlawfully. In essence, prosecutors must show it is more likely than not that ASD was an illegal enterprise.
This standard is cited in the CEP Ponzi scheme case. In that case, a receiver forced CEP into bankruptcy. A federal bankruptcy judge later ruled CEP a Ponzi and ordered major participants to turn over profits. In short, the major participants were told their earnings were fruit from a poisonous tree.
Two of the promoters exercised their 5th Amendment rights against self-incrimination because they feared the case could morph from the civil realm into the criminal, meaning they might be charged with a crime and face prison time if convicted.
One CEP parallel with ASD is that some participants are worried about the case morphing from the civil realm to the criminal. Another is that the government is arguing that ASD is insolvent. Yet another is assertions by ASD members that ASD had meaningful revenue streams beyond advertising fees.
Here is part of what the CEP judge said after hearing both sides of the case. The judge specifically is responding in these passages to the assertion that CEP had outside revenue streams and that the CEP receiver, a forensic accountant, didn't dig deeply enough to determine if CEP had significant income streams beyond incoming revenue from members (editorial comments and emphasis added).
"Through his own investigations and his review of information divulged by individuals connected with Debtors in the SEC Action, Mr. Perkins [the receiver] identified some outside sources of income, but the amount of cash these sources brought in was minimal, inadequate for full capitalization of the Debtors, and far below the amounts that would have been required in order to pay out participants' percentages with that income alone.
Comment: It is common for so-called autosurf companies to claim outside sources of revenue. Ordinarily the references are vague, perhaps even uttered to create the appearance that everything is on the up-and-up. (CEP judge's summary continues below.)
"Two of these outside sources of income were interest earned in CEP Trust's interest-bearing bank account totaling $3,000 to $4,000 and online advertising revenue of approximately $1,000 from Google.com.
Comment: In the ASD case, members trumpeted a special business relationship with Google. This very likely was hyperbole concerning Google's Adsense program. In the CEP case, the receiver found only about $1,000 in Adsense revenue -- revenue from people clicking on Adsense ads. In the ASD case, there is evidence to suggest that ASD members encouraged click fraud against Google to create a revenue stream. (CEP judge's summary continues below.)
"Debtors, either in their names or the Websites' names, and insiders held accounts at the
online payment processor E-Gold, which was dropped by Debtors as a payment processor for its own programs in 2006. Based on documents released by E-Gold to the SEC, Mr. Perkins
determined that Debtors, their websites or insiders had used E-Gold accounts to invest
$140,546.41 from the CEP Trust Bank Accounts in twenty-six (26) different online investment programs (primarily autosurfs) for a net return of $114,466.66 and a net loss of $26,079.75.
Comment: This is part of the madness of autosurfs and speaks compellingly about why they are dangerous. Note that CEP had "invested" in 26 highly questionable ventures, primarily autosurfs, and managed to lose more than $26,000. It is common for autosurfs to "invest" in other autosurfs. ASD actively promoted at least two other autosurfs, according to prosecutors. The real madness is that the companies typically claim to be "advertising services" but the assertion is self-defeating because participants clearly view them as investments. (CEP judge's summary continues below.)
"At trial, Mr. Perkins conceded that he had not subpoenaed records from certain other payment processors with which Debtors and insiders had or may have had accounts. Defendants argued that Mr. Perkins had failed to investigate such other online payment processors sufficiently, asserting that those accounts might have cash from successful investments. Mr. Perkins had determined through his financial analysis, however, that the amounts of cash that might have been invested through those other payment processors were so small as to have a negligible impact on Debtors' finances."
Comment: The reason we've included this passage from the judge's ruling is to demonstrate that all persons involved in litigation have a point of view, as argued by their attorneys. Sometimes the point of view sounds electrifying or even fatal -- i.e., the assertion in the CEP case that the receiver didn't do his homework and that CEP quite possibly was everything it said it was. (CEP judge's conclusion is below.)
"Defendants have not shown that Mr. Perkins ignored any promising avenue of investigation likely to produce evidence of assets or other income of the Debtors during the relevant period. Their contention that Mr. Perkins failed to fully investigate Debtors' financial affairs misses the point that he conducted a thorough investigation that shows that it is more likely than not that Debtors did not have during the relevant period any legitimate business.
"The burden of going forward with evidence of other assets shifted to Defendants, who offered no evidence on that point. Hence, the Court rejects the contention of Defendants that Plaintiffs failed to carry their burden of proof on the issues of fraud arising from a Ponzi scheme and solvency."
Labels: ASD and CEP Ponzi cases, online Ponzi schemes. William Perkins CEP case. ASD criminal case
posted by Patrick Pretty @ 8:53 AM,
