Feds Crush $600 Million Internet Ponzi Scheme

The Securities and Exchange Commission (SEC) on Friday said that it took actions to halt what they are saying was a $600 million Internet-based Ponzi scheme.

The SEC said that it took “emergency actions” and froze assets controlled by Paul Burks of Lexington, North Carolina and his company, Rex Venture Group, operator of the website ZeekRewards.com.

“The emergency action assures that victims can recoup more of their money and potentially avoid devastating losses,” the SEC said.

The SEC alleges Burks and his Rex Venture Group, raised money from more than a million Internet users through ZeekRewards.com dating back to January 2011.

According the complaint filed by the SEC, customers were offered several ways to earn money through the ZeekRewards program, two of which 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, the SEC said.

“Individuals taking part in the ZeekRewards program investors were allegedly promised up to 50 percent of the company’s daily net profits through a profit sharing system in which they accumulate rewards points that they can use for cash payouts,” an SEC statement said.

According to the ZeekRewards website (before it was seized), “Each night after the close of the business day the company tallies its sales and shares up to 50% of its net profits with its qualified affiliates.”

However, the SEC claims that ZeekRewards 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 and the ‘net profits’ paid to investors have been comprised of funds received from new investors in classic Ponzi scheme fashion,” the SEC said.

While not to the level of a Bernie Madoff-like scheme, the levels of money flowing through the site was a hefty sum.

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 banks around the world. But in July, ZeekRewards brought in approximately $162 million while total investor cash payouts were approximately $160 million, the SEC said, something that sparked concern over a scenario that could occur if customers increasingly chose to take cash payouts rather than reinvesting their money to reach higher levels of rewards points.

“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 also alleges that Burks had personally siphoned millions of dollars of investors’ money while operating Rex Venture and ZeekRewards, and that he distributed at least $1 million to family members.

Burks has agreed to settle the SEC’s charges against him without admitting or denying the allegations, and surrender his interest in the company. He will also pay a $4 million fine.

The court has appointed a receiver to collect, marshal, manage and distribute remaining assets for return to investors.