Ponzitracker

"Unbeknownst to its investors, ZeekRewards is, in reality, a massive Ponzi and pyramid scheme. "

-SEC

The Securities and Exchange Commission ("SEC") announced late Friday that it had filed suit against ZeekRewards, alleging it operated a $600 million Ponzi scheme that had gained a cult-like following for its seemingly consistent and above-average returns through the operation of a penny auction website. The company has been the focus of fervent speculation as of late by many who questioned the legitimacy of its operations. According to the SEC, the payouts by ZeekRewards had no relation to the company's "profits", and in fact, the operation was on the verge of collapse, as its total investor cash payouts in July were nearly even with July infusions of investor funds. The SEC's complaint charges the company's founder, Paul R. Burks, as well as Rex Venture Group, which does business as ZeekRewards. Both are charged with multiple violations of federal securities laws, including the unregistered offering and fraudulent sale of securities. Additionally, the SEC is seeking injunctive relief, disgorgement of all ill-gotten gains, and civil monetary penalties. The SEC also announced that Burks had agreed to settle the charges against him, without admitting or denying guilt, by relinquishing his interests and assets in the company and paying $4 million in the form of a civil penalty.

According to the complaint, Burks has operated through Rex Venture since 1997. In 2010, he formed zeekler.com, which operated as a penny auction website offering participants the ability to place incremental bids on merchandise in one-cent increments. Individuals were required to purchase "bids" in lots, usually at a cost of $.65 per bid, in order to participate in the auctions. Burks launched ZeekRewards in January 2011 as an "affiliate advertising division" of Zeekler. Participants were then solicited to become investors, or affiliates, in ZeekRewards in the form of investment contracts called the "Retail Profit Pool" and the "Matrix." None of these investments were registered with the SEC or any state regulatory authorities.

The Retail Profit Pool promised investors the chance to earn lucrative daily returns of "up to 50% of the daily net profits" after completing a process that involved enrolling in a monthly subscription plan, soliciting new customers, selling or purchasing ten Zeeker.com "bids", and placing one free ad daily for Zeeker.com. According to the ZeekRewards website, a daily commitment of "no more than five minutes per day" was required to share in daily profits. The daily "award" was usually 1.5% of the individual's 'investment'. Due to the compounding nature of these "Profit Points", as they were called, the cumulative amount of outstanding Profit Points now numbers nearly $3 billion. Assuming a 1.5% daily "award", this would require daily cash outflows of $45 million should all investors seek to receive their "award" in cash.

In addition to the Retail Profit Pool, investors could also participate in the "Matrix", which was a form of multi-level marketing that rewarded investors for each "downline" investor within that investor's "Matrix". The Matrix consisted of a 2x5 pyramid, and each person added to an investor's Matrix qualified that investor to receive a bonus.

While ZeekRewards represented to investors that the operation was extremely profitable, in reality, the company's revenues and payments to investors were derived solely from funds contributed by new investors - a classic hallmark of Ponzi schemes. Thus, the scheme could only stay afloat so long as new investor contributions were sufficient to satisfy the amount of outflows. According to the SEC, ZeekRewards had paid out nearly $375 million to investors to date, and currently holds roughly $225 million in various domestic banking institutions. With only $225 million on hand, the company would quickly be unable to satisfy investor redemptions if it was forced to make daily payouts of $45 million, which is the daily cash "award" value of the approximately 3 billion outstanding Profit Points. To prevent the funds' rapid depletion until a receiver is appointed, the SEC is seeking an emergency asset freeze.

Burk, as principal of Rex Ventures and Zeek Rewards, is alleged to have withdrawn approximately $11 million from the operation, of which only $4 million remains.

The company's headquarters in Lexington, North Carolina was shut down this morning. Visitors to the company's website were informed that "Zeek Rewards is currently unavailable. More information will be available shortly on this website."

The North Carolina Attorney General's office has set up a hotline for concerned investors at (919) 716-6046.

A copy of the SEC's complaint is here.