CHARLOTTE, N.C. (CN) - The owner-operators of ZeekRewards, an online penny auction site, used it as a brazen pyramid scheme that took more than $700 million from as many as 700,000 victims, a court-appointed receiver claims in Federal Court.
The lawsuit from receiver Kenneth D. Bell is one of two through which he hopes recover ill-gotten gains and repay at least some of the losses to the alleged victims.
Defendants Dawn Wright Olivares, chief operating officer of the now defunct ZeekRewards.com, and Daniel Olivares, its senior technology officer, pleaded guilty on Feb. 5 to participating in the scheme.
They agreed to forfeit $11.4 million as part of a civil settlement agreement with the SEC.
Defendant CEO Paul Burks, whom The Associated Press described as a "former nursing home magician," also settled with the SEC. He was forced to pay $4 million in fines, but has not been charged with a crime.
In August 2012, the SEC shut down ZeekRewards and its parent company, Rex Venture Group, after concluding that they had raised nearly $850 million through sales of unregistered securities.
"Although the specifics and the terminology of the ZeekRewards 'Compensation Plan' changed from time to time as Burks and other insiders tried to prolong and prop up the scheme, the two pillars of the plain for most Affiliates were always: (1) 'profit' sharing ... and (2) the multi-level marketing pyramid that paid Affiliates a 'commission' on the membership fees paid by recruiting 'downline' Affiliates," Bell says in the 40-page lawsuit.
"Affiliate" was the defendants' term for investors in the scheme.
As described in Bell's complaint, ZeekRewards' Affiliates' primary money making tool was the 'Compounder.' To participate in the Compounder, Affiliates purchased 'compounding' bids, which earned Affiliates one point for each bid they purchased from the company.
"As the inducement to purchase these 'compounding' bids, ZeekRewards told Affiliates that the company would give a portion of the company's daily earnings or profits (often claimed to be 50%) to point-holding Affiliates. The size of the daily 'profit sharing' payments each affiliate received through the Compounder was based upon the number of points the affiliate held in his or her account,' Bell says in the complaint.
"(T)o maintain the program for as long as possible and generate the most income, ZeekRewards actively discouraged Affiliates from requesting actual payment of all their profit awards in cash. Instead, Affiliates were encouraged to let their balances 'compound' and only take 20 percent or less of their 'earnings,'" Bell claims.
The SEC determined that these so-called "earnings" were nonexistent, and that as much as 98 percent of ZeekRewards' revenue and payouts were derived from new investors becoming enmeshed in the scheme-a classic Ponzi scheme.
Bell seeks compensatory and punitive damages from the defendants, who include Alexandre De Brantes, Darryle Douglas, Beth Plyler and James Quick.
He alleges fraudulent transfer, common law fraud, breach of fiduciary duty, conversion, unjust enrichment, and breach of constructive trust.
Bell is an attorney with McGuireWoods LLP in Charlotte.