URGENT >> BULLETIN >> MOVING: Court Denies Zeek Winners’ Motions To Dismiss Clawback Actions, Upholds Jurisdiction
URGENT >> BULLETIN >> MOVING: (3rd Update 10:03 a.m. ET Dec. 10 U.S.A.) The federal judge presiding over clawback cases against alleged Zeek Rewards “winners” has dismissed jurisdictional challenges and a claim by the winners that Zeek was not selling securities under the Howey Test.
The rulings mean that clawback claims seeking millions of dollars from the winners remain intact.
Senior U.S. District Judge Graham C. Mullen of the Western District of North Carolina also has ruled that the receiver’s request to impose a constructive trust against the winners to prevent further dissipation of Zeek winnings was proper.
The clawback defendants, including Trudy Gilmond, Trudy Gilmond LLC, Jerry Napier, Darren Miller, Durant Brockett, Rhonda Gates, Innovation Marketing LLC, Aaron Andrews, Shara Andrews, Global Internet Formula Inc., T. Lemont Silver and Karen Silver, had contended the fact they performed some work to score their winnings took a Howey prong out of play because they did not expect profits based solely upon the efforts of others. Absent this prong, the winners argued, receiver Kenneth D. Bell could not prove Zeek was selling unregistered securities as investment contracts.
“Defendants’ emphasis upon the long hours they worked to recruit . . . others is misplaced,” Mullen ruled. “Without the essential managerial efforts of [Zeek President Paul] Burks and [Zeek operator Rex Venture Group], no profits would have been generated at all.”
And, Mullen added, “As the Court finds that it clearly has subject matter jurisdiction, it is unnecessary to address the Receiver’s ancillary and supplemental jurisdiction argument or his argument that the Court also has diversity jurisdiction.”
Meanwhile, Mullen ruled that the winners’ claims that Bell could not pursue fraudulent-transfer claims under North Carolina law were without merit.
“Defendants argue that this claim must be dismissed because neither the Receiver nor RVG (in whose shoes he stands) is a ‘creditor’ as defined in the North Carolina Uniform Fraudulent Transfer Act (‘NCUFTA’) and therefore he has no standing to pursue fraudulent transfer claims. Defendants’ argument is without merit.”
On the issue of the imposition of a constructive trust against the winners, Mullen ruled (italics added):
“Defendants’ argument that they should not be subjected to the imposition of a constructive trust because their own fraud is not the subject of the complaint fails. The Complaint sets forth allegations sufficient to show that ‘some other circumstance’ makes it inequitable for these Defendants to retain the funds they received . . . This ‘other circumstance’ is that Defendants received the funds from an admitted Ponzi and pyramid and that the funds are nothing more than other people’s money wrongfully diverted from RVG. Therefore, Defendants have received property which they ‘ought not, in equity and good conscience, hold and enjoy.'”
Zeek figures Dawn Wright-Olivares and Daniel Olivares pleaded guilty to investment-fraud conspiracy earlier this year.
From the ruling:
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Courts have flexibly applied Howey’s “solely through the efforts of others” formulation. See, e.g., Robinson v. Glynn, 349 F.3d 166, 170 (4th Cir. 2003) (explaining that “the Supreme Court has endorsed relaxation of the requirement that an investor rely solely on others’ efforts, by omitting the word ‘solely’ from its restatement of the Howey test”) (citing Int’l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 561 (1979)); Bailey v. J.W.K. Properties, Inc., 904 F.2d 918 (4th Cir. 1990) (observing that “[d]espite the restrictive language of the third prong of the test, later courts have explained that a program requiring some effort from the investor may still constitute an ‘investment contract,’ but the most essential functions or duties must be performed by others and not the investor”).
To hold otherwise would make it too “easy to evade [the Howey test] by adding a requirement that the buyer contribute a modicum of effort.” Turner, 474 F.2d at 482 (finding investment contract where investors were required to exert some effort to recruit new investors); see also Koscot, 497 F.2d at 480. Instead, courts have focused on whether promoters’ efforts are “undeniably significant” or “essential managerial efforts” driving the enterprise’s success or failure. Turner, 474 F.2d at 482.
The Court finds that the [clawback] Defendants predominantly relied on the managerial “efforts of others” ? namely Burks and Rex Venture ? to generate profits. Burks and Rex Venture contributed “significant” and “essential managerial efforts” to the enterprise. They created, updated, and operated the websites, handled all payments, managed the bank accounts and payment service providers, managed affiliate and customer accounts, managed all affiliate and customer services, oversaw and disbursed all bids, operated the auctions, created all advertisements, sponsored recruiting videos and calls, and decided the daily payout percentages for the Retail Profit Pool . . .”
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Patrick
I thought the “recruiting as work” excuse was busted back in the Glenn Turner’s “Dare to be Great” pyramid… Back in the 1970’s?