A North Carolina federal judge issued an order approving the claims procedures proposed by the court-appointed receiver to, among other things, begin making distributions to victims of the $600 million Zeek Rewards Ponzi scheme. In an Order entered March 26, 2014, United States District Judge Graham C. Mullen granted receiver Kenneth D. Bell's Motion for an Order Approving Distribution Procedures and Certain Other Related Relief (Motion). Notably, the Order also specifically rejected the objection lodged by a subset of ZeekRewards victims seeking to allow third parties – namely, their lawyers – to process any distributions (and presumably apply a 25% contingency fee pursuant to their retainer agreements).
The Receiver sought Court approval for a claims process in March 2013, approximately seven months after the Securities and Exchange Commission alleged that ZeekRewards was a massive $600 million Ponzi scheme. After the Court approved commencement of a claims process in May 2013, victims were given a September 2013 deadline to submit claims. Ultimately, over 174,000 claims were received asserting total losses of nearly $600 million.
Claim Objection Procedures
Following close of the claims process, the Receiver proposed certain procedures to efficiently and effectively deal with claim determinations, methodology, delivery, and objections. For example, of the approximately 174,000 claims received, a portion of those claims will inevitably be denied and/or result in a different claim determination by the Receiver When those determinations result in an objection by the claim holder, the Receiver proposed the appointment of a special master, retired Federal Judge Frank W. Bullock, Jr., to decide disputed claims through a hearing process. In evaluating the request, the Court found that an exceptional condition existed warranting the appointment of a special master. The Order also approved the priority procedures proposed by the Receiver, which included priority afforded to claims submitted by the receiver and holders of secured claims, followed by pro-rata distributions to investors to be paid out of the Receivership Estate.
Claim Determination Procedures
The Order also approved the Receiver's request to use a rising tide methodology to make claim determinations. The request to use a rising tide method is notable, as another method, the net investment method, is typically the predominant method used to determine and calculate claims in Ponzi scheme proceedings. The differences between the two methods are significant: while the net investment method uses a pro rata distribution tied to the ratio of each victim's net losses to their total investment, the rising tide method factors withdrawals made by the investor in an attempt to equalize distributions. Essentially, under the rising tide method, withdrawals made by an investor during the course of the scheme are considered as distributions, and are therefore deducted from the amount distributed by the receiver or bankruptcy trustee. Only when the distributions equal the pro rata amount withdrawn by the investor does that investor become entitled to participate in the distribution process. The rationale behind the rising tide method is that, due to the Ponzi nature of the scheme, those withdrawals made by investors were nothing more than fictitious profits comprised of other investor's funds.
In his last update, the Receiver indicated that he was continuing to make claim determinations. While the next step would typically be the filing of a motion seeking approval of claim determinations, the Order includes a portion allowing the Receiver to stipulate to allowance of a claim without Court approval as long as the approved claim did not exceed the amount originally maintained in the ZeekRewards database by $10,000. Additionally, the Order allows the Receiver discretion to make interim distributions.