BULLETIN: Federal prosecutors handling the criminal case against TelexFree figure and alleged co-owner James Merrill have asked a judge not to release $4 million Merrill says he needs to pay for his criminal defense.
On July 1, Merrill asked for an evidentiary hearing aimed ultimately at securing “an order returning the identified funds” to him.
TelexFree might be the largest MLM HYIP pyramid- and Ponzi scheme in U.S. history, based on global reach, dollar volume and the number of affected recruits. Regulators have called it a cross-border fraud that gathered more than $1.2 billion.
Prosecutors contended today that the “funds Merrill asks the Court to release, however, are investor funds — money victims gave to TelexFree during the course of the alleged fraud.”
The funds were seized via warrants on April 24. Thirty-seven TelexFree-related seizure warrants were applied for that day, after an undercover probe led by Homeland Security Investigations, an arm of the U.S. Department of Homeland Security. TelexFree had declared bankruptcy 11 days earlier. At least five of the seizure warrants were targeted at Merrill accounts holding more than $4.18 million, according to court filings.
In cases involving assets alleged to be forfeitable, prosecutors typically argue that the assets should be preserved until a trial occurs and a verdict on the alleged underlying crime that led to the seizures is returned. If such assets are returned prior to trial, they will be dissipated and thus lost to victims in the event of a finding of guilt.
Beyond that, prosecutors contended, Merrill is not automatically entitled to an evidentiary hearing on the release of the funds and has not made a threshold showing that he lacks access to other funds to pay for his defense.
“[Merrill] fails to submit any evidence in support of his bald assertion that the United States cannot establish probable cause as to forfeitability of the seized assets, and such failure is fatal to his request for a hearing,” prosecutors argued to U.S. District Judge Timothy S. Hillman of the District of Massachusetts.
Boston-based attorney Robert M. Goldstein is defending Merrill.
“[T]he government cannot establish probable cause to believe that the assets in dispute are traceable or otherwise sufficiently related to the crime charged in the criminal complaint,” Goldstein argued on July 1.
Prosecutors asserted today that probable cause to seize the funds already had been established and that Merrill was trying to get a “sneak preview” at the criminal case against him. Merrill currently faces a single charge of wire-fraud conspiracy brought via criminal complaint in May.
A grand jury has been impaneled, which means that other criminal charges are possible. Some TelexFree members have alleged that the company was a racketeering enterprise.
Merrill’s co-defendant in the existing criminal case charging wire-fraud conspiracy is alleged TelexFree co-owner Carlos Wanzeler, described by prosecutors as an international fugitive who first ducked out of the United States through Canada on April 15 and ultimately fled to Brazil. April 15 was the date of a federal raid on TelexFree’s office in Marlborough, Mass.
Prosecutors from the office of U.S. Attorney Carmen Ortiz of the District of Massachusetts are handling the criminal cases against Merrill and Wanzeler.
It’s one of those things almost too bizarre to contemplate: The stock price of Cynk Technology Corp. increased tens of thousands of percent over a period of days — except the Belize company supposedly in the social-networking business reportedly has no revenue and no assets.
The SEC halted trading in Cynk stock this morning, citing “concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in CYNK’s common stock.”
Summary of Todd Disner’s alleged Zeek winnings. Source: Exhibit by court-appointed receiver.
Zeek Rewards “winner” Todd Disner owes the receivership estate $2,079,757.88, according to a motion asking the court clerk to enter a default judgment.
Receiver Kenneth D. Bell filed for the judgment July 9 in federal court for the Western District of North Carolina, seeking not only Disner’s alleged Zeek haul of $1,800,037.06, but also interest of $279,720.82.
Zeek’s records show that Disner paid $11,810.49 into the “program,” beginning with an initial outlay of $480 on March 4, 2011, shortly after Zeek started business.
From that initial outlay and others, $1,811,847.55 flowed back to him, the receiver advised Senior U.S. District Judge Graham C. Mullen and the court clerk. The lion’s share of Disner’s outlay — $10,000 — was paid to Zeek on July 6, 2012. Zeek collapsed six weeks later, on Aug. 17, 2012.
Disner’s last Zeek withdrawal totaled $102,617.73 and occurred on July 30, 2012, less than three weeks prior to the SEC action that spelled doom for the “program.” His largest withdrawal, according to the receiver’s filing, was for $177,026.27 on July 9, 2012.
A former AdSurfDaily Ponzi pitchman who once sued the United States for alleged misdeeds in the ASD case, Disner regularly withdrew tens of thousands of dollars at a time from Zeek, according to the receiver’s filing.
Zeek operated as part of Rex Venture Group.
Bell also filed today for clerk’s default judgment against alleged winners David Sorrells and Michael Van Leeuwen. The receiver is seeking $1,197,241.12 from Sorrells, including $157,672.63 in interest. Meanwhile, he is seeking $1,617,444.99 from Van Leeuwen, including $213,012.07 in interest.
Disner’s unsuccessful lawsuit against the United States for allegedly violating his right to privacy in the ASD case was docketed on Nov. 7, 2011.
Bell’s filing shows that Zeek paid Disner $7,199.49 on the same day.
In February 2014, the PP Blog reported that TelexFree had planned a purported “international convention” in Spain in early March.
The pitch for the convention, hosted in Madrid, was voiced by Sann Rogrigues, whom the U.S. Securities and Exchange Commission successfully had sued in 2006 amid allegations he was operating a pyramid scheme and engaging in affinity fraud aimed at the Brazilian community.
Rodrigues, now accused of securities fraud and a defendant in the SEC’s TelexFree civil case announced in April, reportedly was one of TelexFree’s top hucksters and had “earned” millions of dollars.
As the PP Blog reported in February (italics added):
The promo [for the Madrid convention] curiously is playing against the backdrop of an image of the Pyramids of Giza. For good measure, images of other famous world landmarks are thrown in. These include St. Basil’s Cathedral (near the Kremlin) in Moscow; Big Ben in London; The Eiffel Tower in Paris; the Empire State Building and the Statue of Liberty in New York; the Leaning Tower of Pisa; and the Burj al Arab Hotel in Dubai.
Despite the fact TelexFree was under investigation in Brazil and almost certainly knew its days were numbered in the United States because investigators were closing in, TelexFree proceeded with the Madrid event. The confab was held under a cloud growing increasingly black. On Feb. 28, the eve of the convention, the PP Blog reported that Massachusetts securities regulators were investigating TelexFree, the first confirmation of such a probe by a regulator in the United States.
James Merrill, TelexFree’s former president, attended the Madrid event with at least two other TelexFree executives or managers: Carlos Wanzeler, now described as an international fugitive who’d engaged in a criminal wire-fraud conspiracy with Merrill, and Steve Labriola, another defendant in the SEC’s fraud case.
Here is part of what Merrill said from the stage in Madrid, as reported by the PP Blog on March 3, 2014 (italics added):
Carlos Wanzeler was up here talking about Carlos Costa . . . two of the greatest leaders that I’ve met in my life,” Merrill said. “They’re very strong. They’re courageous, and they’re fighting for you. And I want you all to know that they didn’t join my team, I joined their team. OK. They’re great leaders.”
Racketeering allegations later would surface in the United States, questioning the greatness of all three men. MLM attorney Gerald Nehra, billed as an honoree at the Madrid convention, is another defendant named in the RICO actions, which were brought as prospective class-action lawsuits by TelexFree members.
Despite the fact Nehra had been billed as a star attraction of the Madrid confab, he appears not to have shown.
Instead, Labriola, who suggested from the Madrid stage that TelexFree was suited for the impoverished people of Haiti, strolled out to accept Nehra’s award.
“I was asked to come up and receive this for Jerry,” Labriola told the crowd.
Labriola did not say who asked him to accept the award for Nehra. Precisely how long TelexFree had been operating in Spain remains unclear. But only in MLM La-La Land does the juxtaposition of the images of a recidivist securities violator-in-waiting (Rodrigues) and an MLM lawyer (Nehra) make sense in marketing materials, especially since TelexFree promoters were claiming $15,125 sent to the firm returned $57,200 in a year without the need for members to sell a single product.
Now, El Pais, Spain’s largest newspaper, is reporting that TelexFree might have fleeced 50,000 Spanish investors.
Read the El Pais story. (Use the Chrome browser for a translation from Spanish to English or another language or access Google’s translation tool here.)
NOTE: Our thanks to a longtime PP Blog reader who provided the El Pais link.
ALSO: Coming soon on the PP Blog: a Special Report titled “How TelexFree’s ‘Big Revolution’ Dragged The MLM Trade, Lawyers, Payment Vendors And Service-Providers Into A La-La Land Rabbithole.”
Here’s a snippet (italics added):
On at least one occasion — in March 2014 — undercover [Homeland Security Investigations] agents were in the same conference room as TelexFree “speakers,” including alleged owners James Merrill and Carlos Wanzeler, both of whom were charged criminally in May with wire-fraud conspiracy. The room was part of the Marriott Copley Place Hotel in Boston, according to an affidavit. It turned out that, on the same date agents were in the room, a TelexFree speaker claimed from the stage that certain affiliates had been provided a private jet and that the jet had flown between the Dominican Republic and Haiti. Passengers on the jet were said to have been greeted by “the Prime Minister of Haiti’s motorcade.” The rep was pitching a TelexFree-related credit-repair “program.” Just two days earlier, on March 7, a TelexFree-related Blog falsely claimed that the TelexFree “program” at large had gained “SEC Approval from USA.”
The South China Morning Post is reporting that police raiding a “pyramid-selling gang” in Guangyuan were attacked with knives.
At least two officers were stabbed when trapped in a room, the publication reported.
From the South China Morning Post, paraphrasing a report on the state-influenced People’s Daily website and information from the municipal public security bureau (italics added):
Witnesses said they saw the two policemen being carried from the room and their uniforms were bloodied. It appeared that they had been stabbed with knives.
The bureau said the policemen were mobbed by members of the pyramid-selling group and their batons and guns were taken from them.
BULLETIN: (UPDATED 9:55 A.M. EDT, JULY 3, U.S.A.) The court-appointed receiver in the Zeek Rewards Ponzi- and pyramid case has moved for default against alleged Zeek winner Todd Disner. Disner, of Miami, also was a pitchman for the 2008 AdSurfDaily Ponzi scheme, a $119 million fraud that put ASD operator Andy Bowdoin in federal prison.
Disner received more than $1.875 million through Zeek, receiver Kenneth D. Bell alleged. Zeek launched after the U.S. Secret Service exposed the ASD Ponzi scheme. ASD was a 1-percent-a-day scam. Zeek, according to court filings, sucked in participants with claims payouts averaged more than 1.4 percent a day over the course of a week.
Bell said in court filings today that Disner was among a number of Zeek winners who have failed to plead or otherwise defend against the clawback lawsuits filed against them in February. June 30 was the deadline for filing responsive pleadings.
The receiver also is seeking default against alleged Zeek winner and clawback defendant Michael Van Leeuwen, also known as “Coach Van,” of Fayetteville, N.C., and David Sorrells of Scottsdale, Az. Van Leeuwen allegedly received more than $1.4 million through Zeek, and Sorrells allegedly received more than $1 million.
Meanwhile, Bell also is seeking default against alleged Zeek insider Darryle Douglas of Orange, Calif.
Douglas received more than $1.975 million from Zeek, Bell said in court filings in February.
From a promo for Zeek online in 2012. The “program” operated through Rex Venture Group and later was charged by the SEC with selling unregistered securities as investment contracts.
EDITOR’S NOTE: On Feb. 5, 2014, Zeek figures and alleged insiders Dawn Wright-Olivares and Daniel Olivares pleaded guilty to federal crimes. Wright-Olivares pleaded guilty to investment-fraud conspiracy and tax-fraud conspiracy. Olivares pleaded guilty to investment-fraud conspiracy. Federal prosecutors in the Western District of North Carolina are maintaining an information site here.
Kenneth D. Bell, the court-appointed receiver in the SEC civil case, also is the special master in the criminal prosecution. The charging document in the criminal case references unnamed “co-conspirators” who are “known and unknown” to federal prosecutors.
UPDATED 5:10 P.M. EDT U.S.A. In court filings apt to find favor in MLM HYIP Ponzi Land, some alleged “winners” in the Zeek Rewards “program” have tried to turn the tables on the court-appointed receiver by claiming he owes them “treble” damages for alleged violations of the North Carolina Unfair and Deceptive Trade Practices Act.
Similar claims were made from the sidelines of the AdSurfDaily MLM Ponzi scheme in 2008. Some ASD members contended that then-Florida Attorney General Bill McCollum should be charged with Deceptive Trade Practices, apparently for having the temerity to bring a pyramid-scheme action against ASD.
Other ASD members contended at the time that federal prosecutors and a U.S. Secret Service agent should be investigated and charged with crimes for their roles in the ASD Ponzi prosecution.
Among the alleged winners in Zeek who’ve filed a counterclaim against receiver Kenneth D. Bell are Rhonda Gates of Nashville, an alleged winner of more than $1.425 million; Durant Brockett of Las Vegas, an alleged winner of more than $1.72 million; and Aaron and Shara Andrews of Lake Worth, Fla., alleged winners of more than $1 million through a Florida shell entity known as Innovation Marketing.
In addition to claiming Bell owes them damages for Deceptive Trade Practices, the counterclaimants assert Bell interfered in contracts with payment processors such as Payza and NXPay and violated their rights under the Fourth Amendment to the U.S. Constitution.
Bell sued them in late February, alleging in a clawback action that their gains were illicit because Zeek was illicit. He also sued several other Zeek alleged winners, including former ASD members Todd Disner of Miami and Jerry Napier of Owosso, Mich. Disner allegedly received more than $1.875 million through Zeek; Napier allegedly received more than $1.745 million.
Disner, in 2011, sought unsuccessfully to sue the United States for alleged violations of his Fourth Amendment rights in its prosecution of the ASD Ponzi case. His co-plaintiff in the case was Dwight Owen Schweitzer, whom filings by Bell described as a Zeek winner of more than $1,000. Several alleged Zeek winners ventured into the “program” after earlier stints at ASD, including Terralynn Hoy, a Florida MLMer who moderated a forum that called purported “sovereign” being Curtis Richmond a “hero” for his efforts to derail the civil-forfeiture action against ASD-related assets.
Richmond, a Californian, was a member of a “sham” Utah “Indian” tribe that once sought to have U.S. Marshals serve bogus arrest warrants against federal judges. ASD figure Kenneth Wayne Leaming later was arrested by an FBI Terrorism Task Force, after allegedly harboring federal fugitives from a separate home-business caper, being a felon in possession of firearms and filing false liens against a judge and prosecutors involved in the ASD case.
Other alleged Zeek winners sued by Bell in clawback litigation include Trudy Gilmond of St. Albans, Vt. (more than $1.75 million); Darren Miller of Coeur d’Alene, Idaho (more than $1.635 million); Michael Van Leeuwen, also known as “Coach Van” of Fayetteville, N.C. (more than $1.4 million); David Sorrells of Scottsdale, Az. (more than $1 million); T. Le Mont Silver Sr. of Orlando, Fla. (more than $773,000 under at least two user names, and more than $943,000 through a Florida shell entity known as Global Internet Formula Inc. with one or more Zeek user names); Karen Silver, Silver’s wife (more than $600,000); David and Mary Kettner of Peoria, Az. (more than $930,000 via one or more user names and shell companies known as Desert Oasis International Marketing LLC and Kettner & Associates LLC); and Lori Jean Weber of Land O’Lakes, Fla. (more than $1.94 million through a shell company known as P.A.W.S. Capital Management LLC.)
Whether other alleged winners would join Gates, Brockett and Aaron and Shara Andrews in asserting claims for damages against Bell was not immediately clear.
What is clear is that a legal war has broken out over Zeek, with alleged winners challenging Bell’s clawback claims by asserting Zeek wasn’t selling unregistered securities as alleged in 2012 by the SEC, that they worked for the money they received or were due, that the alleged winners were not investors, that the SEC’s case against Zeek cannot withstand scrutiny under the “Howey Test” for what constitutes a security, that the SEC had a duty to catch Zeek much earlier — and, in any event and if all else fails, attorneys Bell sued last week and Bell himself are to blame for the unpleasantness.
From Brockett’s June 30 “affirmative defenses” to the receiver’s clawback claims (italics added):
The Receiver has filed suit against two attorneys who provided legal advice to [Zeek operator Rex Venture Group] and Affiliates, including Brockett. Brockett relied on that advice in concluding that RVG was a legitimate business and in committing over $100,000 in his personal resources to grow his now defunct business. Because Brockett’s damages were caused in part by the conduct of the two lawyers, Brockett is entitled in equity at and at law to a credit for all money the Receiver recovers from the two attorneys as a result of his claims against them.
Also from Brockett’s “affirmative defenses” (italics added):
On information and belief, the SEC knew or should have known of the RVG Ponzi scheme, but delayed unreasonably in its prosecution of claims against RVG. Alternatively, the SEC knew for some time that RVG was operating as a Ponzi scheme but intentionally delayed disclosing that information to Affiliates and to the public. That unreasonable delay has prejudiced Brockett because he has paid taxes on the money he earned working on behalf of RVG, contributed a significant portion of his earnings to his retirement plan, and has incurred business expenses as a part of his work on behalf of RVG. The Receiver in this action stands in the SEC’s shoes and also delayed to Brockett’s detriment and now seeks return of all monies Brockett earned in connection with RVG, with no credit for the taxes or business expenses that Brockett legitimately paid, but that could have been avoided had the SEC or the Receiver timely advised Brockett of RVG’s true nature or acted in a more expeditious manner.
And from Brockett’s counterclaims against the receiver (italics added/editing for space performed):
On information and belief, RVG was not involved in the sale or marketing of any securities, so the SEC was without jurisdiction and the Court did not have subject matter jurisdiction over the SEC Action. Consequently, the appointment of the Receiver was void and of no effect, and all of the Receiver’s actions in his capacity as receiver for RVG have been unlawful and without justification . . .
RVG’s and the Receiver’s conduct described above and in the Complaint constitutes unfair methods of competition, unfair trade practices, and deceptive trade practices in violation of the North Carolina Unfair and Deceptive Trade Practices Act, N.C. GEN. STAT. § 75-1.1, et seq.
The conduct was illegal, offends public policy and is immoral, unethical, oppressive, unscrupulous, and deceptive.
Bell, the Zeek receiver, is a former federal prosecutor who once received a prestigious award from the U.S. Department of Justice for his work prosecuting a Hezbollah terrorist cell operating in North Carolina.
But some of the alleged Zeek winners now describe him with adjectives that could peel paint.
And as they do this, they seek to gut or circumvent the SEC’s authority to prosecute HYIP schemes while contending the agency fumbled the ball in investigating and prosecuting Zeek — that is, if anything was worth investigating and prosecuting at all.
It is a narrative apt to go over well in MLM HYIP Ponzi Land, the latest major expression of which is TelexFree, a rabbit hole case if ever there was one.
UPDATED 10:48 P.M. EDT U.S.A. A plaintiff bringing a prospective class-action lawsuit in Massachusetts federal court has accused 10 TelexFree figures of committing crimes and — as a group — committing racketeering violations through an “association-in-fact enterprise.”
Unlike other prospective TelexFree-related class-actions, this one names neither attorneys nor banks nor TelexFree itself defendants. Rather, it pins the onus of the conduct exclusively on James Merrill, Carlos Wanzeler, Steve Labriola, Joe Craft, Fabio Wanzeler, Sann Rodrigues, Santiago De La Rosa, Randy Crosby, Faith Sloan and Carlos Costa.
Costa, a Brazil-based TelexFree figure, is described in the complaint as the “mastermind of the TelexFree pyramid scheme of fraud.” The complaint further asserts Costa conducted business in Massachusetts, where TelexFree operated an entity known as TelexFree Inc.
Olavo F. Magalhaes of Milford, Mass., is the plaintiff. The complaint says Magalhaes invested more than $209,000 in TelexFree LLC, the Las Vegas-based TelexFree business that operated in a Massachusetts office suite.
The crimes alleged against the defendants include fraud, securities fraud, wire fraud and conspiracy. Violations of civil law also are alleged.
On the racketeering front, the complaint alleged, the members of the “association-in-fact enterprise” associated together between January 2012 and April 15, 2014, “for the purpose of conducting an illegal pyramid scheme and wrongfully enriched themselves” at the expense of Magalhaes and others.
“Each member of the enterprise played a role in the targeting of victims, advertising and working together to make the TelexFree enterprise work,” the complaint alleged.
Fabio Wanzeler is the brother of Carlos Wanzeler, an alleged international fugitive accused criminally by federal prosecutors of wire-fraud conspiracy in the United States. Carlos Wanzeler is believed to be in Brazil.
Fabio Wanzeler, formerly of Worcester, Mass., is believed also to be in Brazil, according to the Magalhaes complaint.
In other TelexFree news, a federal judge has denied a motion by Faith Sloan to make more than $15,000 available to her.
URGENT >> BULLETIN >> MOVING: (11th Update 9:43 p.m. EDT U.S.A.) The court-appointed receiver in the Zeek Rewards Ponzi- and pyramid case has sued MLM attorney Kevin Grimes and the Grimes & Reese law firm, alleging malpractice, negligence and breach of fiduciary duty.
In the Grimes action, the receiver is seeking “an amount in excess of $100 million.”
In another action concerning a professional who worked for Zeek or was associated with purported “opportunity,” the receiver has sued attorney and tax consultant Howard N. Kaplan. Zeek operated an MLM “program” tied to a purported penny auction.
As is the case in the Grimes action, the receiver is seeking a sum of more than $100 million against Kaplan for alleged damages.
Both Kaplan and Grimes should have known better, but nevertheless helped Zeek thrive while helping Zeek gain unwarranted credibility by lending their professional reputations to a fraud scheme that gathered hundreds of millions of dollars, receiver Kenneth D. Bell alleged.
“By virtue of his knowledge of [Zeek operator Rex Venture Group] and ZeekRewards and his legal expertise, Grimes knew or should have known that RVG was perpetrating an unlawful scheme which involved a pyramid scheme, an unregistered investment contract and/or a Ponzi scheme. Despite this knowledge, Grimes actively encouraged investors to participate in the scheme by creating a so-called ‘compliance’ program that provided a false façade of legality and legitimacy and knowingly allowed his name to be used to promote the scheme,” Bell said in the complaint against Grimes.
Bell accused Grimes of turning a “blind eye” to markers of fraud at Zeek such as unusually consistent payout percentages.
“This fake consistency should have, at a minimum, caused reasonably diligent legal counsel to inquire further about the validity of the alleged profits,” Bell alleged. “Indeed, the program publicly advertised historical average returns of 1.4% per day, which no legitimate investment could accomplish. But, Grimes deliberately turned a blind eye to these incredible claims and chose not to seek further information.”
And Kaplan, Bell alleged, “knew or should have known that insufficient income from the penny auction business was being made to pay the daily ‘profit share’ promised by ZeekRewards.
“Kaplan knew or should have known that the money used to fund ZeekRewards’ distributions to Affiliates came almost entirely from new participants rather than income from the Zeekler penny auctions,” Bell continued. “Further, Kaplan knew or should have known that the alleged ‘profit percentage’ was nothing more than a number made up by [Zeek operator Paul R.] Burks or one of the other Insiders. Rather than reflecting the typical variances that might be expected in a company’s profits, the alleged profits paid in ZeekRewards were remarkably consistent, falling nearly always between 1% and 2% on Monday through Thursday and between .5% and 1% on the weekends, Friday through Sunday.”
From Bell’s complaint against Kaplan (italics added):
Instead of properly informing Affiliates of the different tax implications they would face if their Zeek payments were properly characterized as coming from an ‘investment’ rather than a ‘trade or business,’ Kaplan failed to inform Affiliates, either on the calls or in his FAQs, of the material fact that payments to Affiliates should be characterized as investment income for tax reporting purposes.
For example, in the FAQs that he drafted and allowed ZeekRewards to post to its website, Kaplan advised that Affiliates should use IRS Schedule C (“Profit or Loss from Business”) to record their income, making no mention of the fact that they shoulduse IRS Schedule D (“Capital Gains and Losses”) . . . If Kaplan had candidly disclosed the material fact that Affiliate income would be properly characterized by the IRS as capital gains, the obvious negative tax implications would have caused many Zeek Affiliates to remove their cash earnings from the program rather than reinvesting them, short-circuiting the scheme much earlier. Since he did not, Affiliates were placated in their misguided belief that ZeekRewards was a lawful program.
It has been a remarkably awkward time for MLM attorneys. Gerald Nehra, Richard Waak and their law firm have been accused by plaintiffs in TelexFree-related litigation with racketeering and violations of the federal securities laws. TelexFree plaintiffs have asserted Nehra also counseled Zeek.
From the Zeek receiver’s complaint against Grimes and Grimes & Reese (italics added):
Defendants played an indispensable role in the scheme. Because of the lucrative, seemingly ‘too good to be true’ claims being made by RVG and ZeekRewards, many potential investors were skeptical of whether the scheme was legal and legitimate. So, RVG enlisted the aid of Grimes and other legal counsel to assist in promoting and legitimizing the scheme.
Grimes helped in several ways. First, despite his knowledge that ZeekRewards was a fundamentally flawed and unlawful pyramid and/or Ponzi scheme and was selling unregistered securities, Grimes offered to create and did create a so-called ‘compliance course’ specifically designed to encourage investors and potential investors to believe that if they satisfied the course then it would be a lawful enterprise.
Thus, Grimes knowingly allowed Zeek to portray a false appearance of legality through his bogus ‘compliance’ course.
Grimes profited personally from the compliance courses while allowing ZeekRewards yet another source of investor money. Upon information and belief, Grimes received payments from ZeekRewards not only for his legal counsel, but also for sales of his compliance course to Affiliates. Upon information and belief, Grimes provided the compliance course to ZeekRewards for $5 per affiliate, while allowing ZeekRewards to charge affiliates $30 each for the course, personally profiting from it and allowing RVG yet another means of extracting money from unsuspecting Affiliates.
Zeek collapsed in August 2012. The SEC and federal prosecutors now say the “program” gathered on the order of $850 million in less than two years. Two months after the collapse, two members of Zeek sent Senior U.S. District Judge Graham C. Mullen a copy of the “compliance” certification allegedly provided by Grimes (pictured below):
Both Grimes and Kaplan were aware that the Zeek “program” raised issues about the sale of unregistered securities, but nevertheless marched forward, Bell alleged.
In February 2012, Bell said, Grimes emailed a Zeek adviser, saying, “I am still in the process of getting my arms around its program, but I have some SERIOUS concerns that it very likely meets the definition of an ‘investment contract.’ It may have other issues as well, but I’m still reviewing their documents.”
By June 2012, according to Bell, a Zeek participant contacted Grimes, saying, “I have completed your compliance course with Zeek and really loved it. I am a great advocate of Zeek and have signed up 31 people whom I feel responsible for. . . . One of my downline is asking questions . . . there is a tremendous amount of income going into Zeek and he is concerned the profit share is coming from the new affiliates – which would make it a ponzi scheme. Can you direct me as to what is the best way to confirm this is not a ponzi scheme[?]”
In response, Grimes emailed Zeek executive Dawn Wright-Olivares, stating, “Do you want me to forward these types of communications to you or anyone else, or would you prefer that I simply discard them? I get several of these each week.”
Grimes, Bell alleged, appeared to have “no concern” about the affiliate’s email.
The MLM lawyer “took advantage of the situation, creating and marketing a compliance training course as window dressing for this illegitimate scheme, allowing the course to be sold to the Affiliates for his own profit,” Bell alleged.
MLM attorney Gerald Nehra, his law partner Richard Waak and their law firm are now lawyered up in the TelexFree bankruptcy case.
Groups of TelexFree members have sued them in bankruptcy court, alleging violations of the federal racketeering (RICO) statute and violations of federal securities laws. TelexFree filed for Chapter 11 bankruptcy protection on a Sunday evening in April, just prior to fraud actions filed by securities regulators.
Attorneys Christopher F. Robertson and William J. Hanlon, partners in the Boston office of Seyfarth Shaw LLP, entered appearance notices for Nehra, Waak and the firm yesterday.
Also named defendants in some or all of the actions are TelexFree, alleged officers or executives James Merrill, Carlos Wanzeler, Carlos Costa, Steve Labriola and Joe Craft, alleged promoters Sann Rodrigues, Randy Crosby, Santiago De La Rosa and Faith Sloan, and several alleged financial vendors or service-providers.
In a complaint filed May 3, 2014, plaintiffs accused Nehra of counseling TelexFree “on methods to evade United States securities laws that were intended to offer, in part, protection from pyramid Ponzi schemes; all to enrich himself financially and serve his own selfish interests.”
He further was accused of encouraging unknowing TelexFree members to “participate in the evasion of federal and state securities laws.”
Sloan, in response to fraud allegations against her filed by the U.S. Securities and Exchange Commission, said she “believed what [SEC Co-] Defendants Carlos Wanzeler, James Merrill, Steve Labriola and their attorney, Gerald Nehra, had told her, until TelexFree continued to miss the deadlines for the launch of its new products.”
Nehra, Waak and the law firm are not defendants in the SEC action. Nor are they defendants in a TelexFree-related securities action by the Massachusetts Securities Division. Sloan, who later was accused by the SEC of violating the asset freeze against her in the SEC case by sending thousands of dollars to another “program” and transferring her interest in a real-estate trust to her mother, is a longtime HYIP huckster.
In a separate criminal case that alleges wire-fraud conspiracy against Merrill and Wanzeler, Merrill has signaled that he intends to use a defense of reliance on Nehra’s lawyering. The Massachusetts Securities Division has described TelexFree as a “financial pariah” and a combined pyramid- and Ponzi scheme that had gathered more than $1.2 billion. The SEC likewise has accused TelexFree of hatching a billion-dollar pyramid-and Ponzi scheme, saying it was aimed largely at Brazilians and Dominicans.
Nehra, according to plaintiffs suing him in in at least one of the TelexFree-related actions in bankruptcy court, advised at least two other “programs” regulators accused of operating massive pyramid or Ponzi schemes: Zeek Rewards (2012/$850 million) and AdSurfDaily (2008/$119 million).
Sloan is known to have promoted Zeek Rewards. Some HYIP promoters move from scheme to scheme to scheme, piling up purported “earnings” alleged to be fraudulent along the way.
“Attorney Nehra’s extensive experience in multi-level marketing, and particularly his involvement with the Ponzi schemes involving Ad SurfDaily and Zeek Rewards, armed him with the knowledge of what constitutes violations of United States securities law,” plaintiffs alleged. “Indeed, Attorney Nehra was well aware that the use of semantics and obscured phraseology to obfuscate securities laws fails to legitimize TelexFree’s illegal Pyramid Ponzi Scheme.”
Zeek-related actions still are winding their way through the courts. The Zeek “program” was back in the news yesterday, with the court-appointed receiver alleging that an affiliate who appears to have invested $10 filed a claim for $30 million and that a vendor alleged to have aided Zeek wanted nearly $15 million.
BULLETIN: (5th Update 9:20 p.m. EDT U.S.A.) How absurd and abusive is HYIP Ponzi Land?
The court-appointed receiver in the Zeek Rewards Ponzi- and pyramid case says a Zeek affiliate who appears to have invested only $10 has filed a claim seeking $30 million.
Receiver Kenneth D. Bell asserted in a court filing today that the $30 million claim is the highest encountered in the case. Precise details about the claim, whose denial is pending, were not immediately available.
Viewed another way, a Zeek member who invested $10 appears to believe he or she is entitled to tens of millions of dollars that otherwise would go to thousands of Zeek victims.
A separate claim for $14.9 million filed by an asserted Zeek vendor known as Plastic Cash International LLC (PCI) may have a gall factor nearly as high, court filings by Bell today suggest.
The $14.9 million claim by PCI was the second-highest in the Zeek case, exceeded only by the affiliate seeking $30 million on an apparent $10 investment, Bell said.
PCI “was a trade creditor of the Receivership Defendant that processed credit card payments from Affiliates for the Receivership Defendant,” Bell said in court filings. “The processed payments were deposited into an account to be held for the benefit of the Receivership Defendant. PCI contends that it should be permitted to ‘retain’ funds that it collected for the Receivership Defendant in its role as a trade creditor.”
Bell said in court filings today that PCI had a “role in perpetuating the ZeekRewards Ponzi Scheme,” but now was behaving disingenuously — in part by asserting in had no knowledge of the asset freeze ordered by a federal judge in 2012.
The proposition that PCI did not know about the freeze was “absurd,” Bell said.
From Bell’s filings (italics/carriage returns added):
As disclosed in the PCI Claim, PCI acted as a credit card processor for the Receivership Defendant for the two-month period from June 2012 to the appointment of the Receiver. The PCI Claim further asserts that PCI either held a security interest in the funds that it held for the benefit of the Receivership Defendant or, in the alternative, PCI owned all of the amounts that it had collected for the Receivership Defendant pursuant to its contracts with the Receivership Defendant.
No disclosure regarding the amounts collected by PCI during the time it acted as a credit card processor for the Receivership Defendant was made in the PCI Claim.
Prior to the filing of the PCI Claim, the Receivership Team did not know that PCI had been involved in perpetrating the ZeekRewards Ponzi Scheme, nor did the Receivership Team know that PCI held Receivership Assets generated by the ZeekRewards Ponzi Scheme. The filing of the PCI Claim caused a preliminary investigation into the assertions made in the PCI Claim.
This initial review of the records of the Receivership Defendant did not show any significant economic relationship between PCI and the Receivership Defendant because no payments were made by PCI to the Receivership Defendant in the two-month period in which PCI was operating for the Receivership Defendant.
Moreover, the Receiver never received any funds from PCI or accounts held by PCI upon entry of the Freeze Order.
Subsequent investigation unearthed a relationship between SecureNet and PCI, leading to a bank account at Eagle Bank that, even though it was held in SecureNet’s name, held approximately $812,433.96 (the “Eagle Bank Account”) in Receivership Assets. Upon its discovery, the United States Secret Service sought and obtained a seizure warrant to recover those funds. The United States Secret Service thereafter seized all of the funds contained in the Eagle Bank Account.
At that time, PCI did not identify any additional accounts that were involved in the RVG transactions that PCI processed, and it represented that it did not hold any additional Receivership Assets. When the Receivership Team subsequently interviewed PCI’s counsel, the Receivership Team specifically asked about any additional accounts that held RVG [Rex Venture Group] funds or through which RVG funds flowed. PCI failed to identify any additional accounts.
As the Receivership Team investigated further and obtained documents from PCI, the Receivership Team determined that PCI had collected approximately an additional $8.9 million over the two-month period in which they acted for the Receivership Defendant. This $8.9 million was held and/or distributed from Los Angeles Firemen’s Credit Union n/k/a Firefighters First Credit Union (the “Firemen’s Account”).
PCI never paid any of the approximately $9.8 million in Receivership Assets it collected to the Receivership Defendant or the Receiver. Only $812, 433.96 of the $9.8 million in Receivership Assets has been recovered, and those assets were recovered solely through a seizure by the United States Secret Service.
Moreover, PCI never informed the Receiver that it held such Receivership Assets. Instead, after the entry of the Freeze Order, PCI remained silent regarding the funds it held and i) withdrew or otherwise expended approximately $4.5 million of the Receivership Assets in the Firemen’s Account to allegedly pay certain processing fees, alleged fines, alleged chargebacks, and “commissions” to its insiders; and ii) converted the remaining approximately $4.5 million for its own uses (this $4.5 million was removed from the Firemen’s Account by PCI and has never been accounted for) on the alleged theory that such withdrawals were covered by the governing contracts, which the Receiver disputes, and their contractual rights are somehow superior to the express terms of the Freeze Order.
And, Bell advised Senior U.S. District Judge Graham C. Mullen:
“It is disingenuous for PCI to assert that it did not have notice of the Freeze Order or that it was not somehow constrained from dissipating the Receivership Assets in its care. It is beyond reason that PCI would not inquire as to why thousands of credit card transactions that it was processing and generated revenue of in excess of $4.5 million per month would suddenly cease. Moreover, the Receiver caused a notice reflecting the entry of the Freeze Order to be published across the United States. Finally, significant transfers from the account that held Receivership Assets just prior to and after the freeze order suggests that PCI was on notice of the freeze and was seeking to avoid the constraint to its revenue stream. Any assertion that PCI did not know of the pendency of the Freeze Order is absurd.”
Bell further contended today that efforts by PCI to inject itself into the distribution plan proposed to the court in which distributions to victims would begin Sept. 30 should be short-circuited by Mullen.
Bell said the receivership already has denied PCI’s claim.
