ZEEKREWARDS REVIEW
Len Clements © 2012
In the 21 years I have been analyzing and reviewing network marketing programs I don’t believe
I have ever received more requests for commentary on any single opportunity, over any six
month period, than I have for ZeekRewards. Nor do I believe there has been as many
assumptions, and as much conjecture and misinformation published about any single network
marketing program. ZeekRewards is confusing.
Let’s see if we can clear things up a bit.
The first challenge in reviewing ZeekRewards is that it has been in a constant state of
metamorphosis. It’s like trying to paint a portrait of a butterfly while it’s still in the cocoon. And
although we know it started out as a pretty ugly caterpillar, it’s still yet to be seen exactly what’s
going to emerge. But after closely following, researching and analyzing ZR for over three months
I think I’ve got a pretty good idea of what they are turning into – and it isn’t a beautiful butterfly.
More like a malformed, brown moth. But the real question is, will it fly, or die?
Let’s back up (so my larvae analogy will make more sense).
Rex Venture Group launched Zeekler.com, the non-MLM penny auction site, back on March of
2010. Then ZeekRewards launched in January of 2011. This quasi-MLM company offered penny
auction bids to be used over on Zeekler.com, and touted their “compounder” compensation plan.
ZeekRewards initially had more red flags sticking out of it than the Russian Consulate. One of
the largest was that they referred to their compensation plan as the compounder. Indeed, the
ZeekRewards caterpillar was guaranteeing a “125% return” on the amount you spent on bids,
and was routinely bragging about how your “bid account” would “compound daily”.1 Many reps
were blatantly referring to this as a “return on investment” or “ROI”.2
Let’s back up a little more.
Back in 1946 the Security & Exchange Commission (SEC) sued a company called the Howey
Company.3 The result of that lawsuit was the “Howey Test” which determines if something is a
security of not. Securities, like stocks and mutual funds, are illegal to sell, or even offer, without a
license and the company generating the return must be registered with the SEC. The Howey
Test defined a security as: 1) And investment of consideration (anything of value, but usually
money); 2) into a common enterprise (others are paying into the same enterprise); 3) where the
return is generated solely by the efforts of others (the investor takes no part in, nor has any
control of, the processes that generate the return). For example, you put your money into a
mutual fund. Somebody else does all the work in determining what stocks to invest in, move out
of, and in what amounts. It is also important to note that more recent legal actions have removed
the word “solely” and now seem to be requiring that someone else merely do most of the work.4
1
http://bit.ly/MV7i0c
Although ZeekRewards corporate has been accused of going so far as to use such terms, I can find no
reliable evidence of this.
3
http://supreme.justia.com/cases/federal/us/328/293/case.html
4
i.e. United Housing Foundation v. Forman, 421 U.S. 837 (1975),
2
So, asserting that you can simply buy a bunch of bids, kick back, and watch the cash roll in,
would clearly pass the Howey Test. And this is a test you want to get an F in! Okay, that wasn’t
exactly how it worked in even ZR’s larvae stage. But it was way too close. But now we’re getting
too far ahead.
Renovation Begins
Around August of 2011 ZeekRewards hired “the top MLM consultant in the industry, Dr. Keith
Laggos, PHD, and we hired the top MLM Law Firm, Gerald Nehra and Richard Waak, to analyze
everything we are doing in light of recent litigation and advise us where we might be vulnerable
to regulatory attack.”5 Soon after they also hired MLM attorney Kevin Grimes (Grimes & Reese),
and a few months later brought on Greg Caldwell6 as their COO to handle compliance training,
Peter Mingles7 as their Training & Incentives Coordinator, and Dr. Clifton Jolly8 to head up their
Public Relations. ZR founder and CEO Paul Burks described the motivation for hiring this Dream
Team by saying:
“Since we designed our pay system there have been some legal decisions that
involved other companies’ pay plans but, because of similarities that those other pay
plans had to ours we felt it was wise to get competent advise to avoid potential
problems down the road.”
Mr. Burks goes on to say they hired Laggos, Nehra, et al to, “analyze everything we are doing in
light of recent litigation and advise us where we might be vulnerable to regulatory attack.” I can
only assume what “legal decisions” and “recent litigation” Mr. Burks is referring to, but he was
not referring to any litigation against ZeekRewards. He’s most likely referring to the recent
BurnLounge case, although their comp plan wasn’t that similar. AdSurfDaily’s was, but that
litigation occurred well before the invention of ZR’s pay plan. This wouldn’t be the first time ZR
management would offer an explanation that didn’t quite jive with the facts. But again, I’m getting
ahead of myself.
One of the first things the new legal compliance team did was to enact a strict prohibition against
using any terminology suggesting buying bids was an “investment”, or would “compound”, or
generate a “return”, or any other such securities invoking lingo. To wit:
“Do NOT use the word compound or any variation of the term – ‘Compound’ is a
term used by Albert Einstein in a famous quote about ‘interest’ and is not allowed “9
Of course, trying to extract all this naughty nomenclature from cyberspace is like trying to excise
the fudge from a Rose Bowl size bucket of fudge swirl ice cream. Even ZR management
apparently couldn’t find every remnant of their own infractions, as evidenced by section 34 of
their current P&Ps where they offer a bounty of “10 compounding bids” for reporting violators,
and the still active URL Zeekrewards.com/CompounderReport_buckets.html.
5
6
7
8
9
http://zeekrewardsnews.com/2011/08/letter-from-zeek-ceo-paul-burks/
Owner & President of White Hat Solutions, a “Corporate Investigation & Security Consulting” company.
Founder & CEO of PM Marketing, a premier provider of leads and training to the MLM industry.
Founder & CEO of Advent Communications, a premier public relations firm serving the MLM industry.
http://zeekrewardsnews.com/2012/01/compliance-compliance-and-more-compliance/#comment-3351
Another bit of semantic romanticizing occurred when the previously titled “Retail Profit Pool” was
changed to the new “approved terminology” of “Retail Point Pool”, now involving “Retail Revenue
Shares”.
For the record, I am personal friends, to varying degrees, with Nehra, Waak, Grimes, Reese,
and Laggos, and would consider Grimes & Reese and Nehra & Waak to be among the top MLM
attorney’s in the country (along with Kevin Thompson). I do believe they’ve done the best they
can do with what they have to work with. Having said that, even Albert Einstein couldn’t make
1+1 equal three.
So about the time all the online chatter began about what ZeekRewards was and was not,
legally, structurally, and economically, was about the time it started to turn into something
different. My argument for not joining the debate during this time was that it was tantamount to
arguing whether this newly found species was going to be a beautiful, rainbow colored butterfly,
a fuzzy gray moth, or a malaria riddled mosquito, while it was still inside the cocoon. Unlike so
many other Zeek critics, I chose to wait to see what emerged rather than judge was it was, or
was in the process of changing from.
I also, unlike a lot of MLM critics and commentators, try to get my facts straight before making
any public commentary, and I try my best to get them from the company itself, with zero degrees
of separation. In that effort I began the arduous process of arranging an interview with a senior
member of ZR management on June 13th, 2012. After my eMail10 had garnered no response for
five days I tried again and received a prompt response from Chief Marketing Officer Dawn
Wright-Olivares saying that the earliest she would be available was “late July” after their
upcoming Red Carpet event. I responded that this was perfectly understandable (which it was –
ZR management was certainly in a state of overwhelm around this time, and likely still is), but
explained that I really needed to publish a review much sooner. In fact, and as I explained to Ms.
Wright-Olivares, I was already receiving emails suggesting I was paid “hush money” to not
comment on them, or was not commenting negatively because ZeekRewards was a corporate
member of the ANMP11, which I am a board member of. I asked if there was any other member
of ZR management that would be available for an earlier interview. Ms. Wright-Olivares never
responded to this follow up question. In was only after I passively/aggressively mentioned my
challenge in procuring an interview in a MarketWave Alert12 that I was contacted by COO Greg
Caldwell by phone message to arrange an interview with Paul Burks. That interview was
postponed to the following week, then postponed again. And again. The latter postponement
was understandable considering they had just received a CID (Civil Investigative Demand) from
the North Carolina (their home state) Attorney General’s office. More on that later. For now, I do
believe their intent to have me conduct an interview with Mr. Burkes with, at his request, Kevin
Grimes present, was sincere, and that they do have higher priorities right now than letting me
ask them a bunch of uncomfortable questions. But I can’t wait forever. So here we are.
10
11
12
To interviews@zeeklers.com
Association of Network Marketing Professionals; http://www.TheANMP.org
http://www.marketwaveinc.com/viewalert.asp?id=162
In the Beginning...
Rex Venture Group, founded and controlled by Paul Burks, has had a number of subsidiary
companies throughout it’s 14 year history, most offering some type of multilevel compensation.
These include New Net Mail, New Net Quest, Signed and Numbered International, Inc., Free
Store Club, FireShaker, Lighthouse America, and of course Zeekler and ZeekRewards. The
most prominent, and recent, Zeek predecessors were Free Store Club and New Net Mail, which
offered a subscription program for discounted name brand products for $9.95 to $49.95 per
month, with an initial buy in that reached $1,295.00. This got you a set of cookware, seven
“Courtesy Subscriptions”, and a “Gold Affiliate Free Store Club membership”. It paid overrides
based on a 2x21 matrix. Burks also promoted what he called the “Exact Marketing Method”
which he claimed had a “95% success rate”. It would appear that no competent MLM attorney
was working with Mr. Burks back then.
What’s a Penny Auction?
Basically, a penny auction is where there is a clock counting down the time the item is up for
auction, and every time someone places a bid the sell price of the item goes up one penny, and
20 more seconds are added to the timer. The object is to be the very last bidder when the time
runs out. Thus, it would make no sense to bid unless it was within the last few seconds before
time runs out. Penny auctions entice you with stories of bidders who purchased a $500 iPad for
$35, or a $2,500 HDTV for $300. How can the auction site afford to do this? Do the math. In
Zeekler (a separate entity from ZeekRewards) a “retail” bid cost 60 cents and a “VIP” bid cost
$1.00. High ticket items are usually offered only to VIP bidders, so at a penny a bid a sell price of
$300 means 30,000 bids were place. That’s $30,000 to Zeekler, thus a $27,500 gross profit on
the HDTV. And one very happy bidder, and hundreds of others who paid $27,500 for bids that
got them nothing.
Penny auctions in general, of which Zeekler is one of several dozen in the US alone, don’t seem
to be sliding in the right direction on the regulatory or media Good Will scale. Warnings are
popping up everywhere, including AARP13, the BBB14, and the FTC15, as well as other foreign
markets from Malta16, to Canada17, to New Zealand18. And I’ve been making the case for years
that it’s not just the FTC, FDA and SEC that you need to worry about, but rather the potentially
greater damage that can be caused by ABC19, NBC20 and CBS21. Or Fox22, or USAToday23.
13
http://www.aarp.org/money/scams-fraud/info-10-2011/online-penny-auctions-real-or-ripoffs.1.htmll
http://www.bbb.org/us/WWWRoot/preview.centralflorida.bbb.org/article/bbb-cautions-consumers-onpenny-auctions-285433
15
http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt041.shtm
16
http://www.timesofmalta.com/articles/view/20120803/local/mccaa-warning-on-penny-auctionwebsites.4313599
17
http://www.cbc.ca/news/canada/edmonton/story/2010/08/24/edmonton-penny-auctions-warning.htmll
18
http://www.3news.co.nz/Warning-over-penny-auctions/tabid/412/articleID/253617/Default.aspx
19
http://www.abcactionnews.com/dpp/money/consumer/dont_waste_your_money/consumer-reports:penny-auction-warning
20
http://www.nbc12.com/story/12744216/warning-about-online-penny-auction
21
http://newyork.cbslocal.com/2012/05/04/ask-asa-beware-of-penny-auctions/
22
http://www.youtube.com/watch?v=SA-gBR1AKOs
14
Most of the above news reports and warnings are asking the same question: Isn’t this just
gambling? Well, that’s the million dollar question. There is certainly some small amount of skill
involved, but not much more than there is in Blackjack or draw poker. Luck, and who has the
fastest computer processor and internet speed, seem to be the primary factor. But one things is
for sure. Penny auctions can be massively profitable.
What’s ZeekRewards?
ZeekRewards is the MLM program, separate from Zeekler.com, the auction site. ZR sells bids
that can only be used at Zeekler.com. There are free bids, Retail Bids (60¢) and VIP bids
($1.00). You can choose between monthly subscriptions of $10 (Silver), $50 (Gold), or $99
(Diamond). These subscriptions give you more business related tools and services, but do not
include bids. There is also a “Free Affiliate” option, but “Free Affiliates are able to watch their
bonus points increase but will not be awarded cash payments until they upgrade.”24 You can join
with an initial bid package of up to $10,000 – which appears to be a popular option.
The comp plan and rules have changed significantly, and frequently. Currently – with no
assurances this won’t be outdated by the time you read this – you can join as a “customer” first,
who are provided free bids by Zeekler.25 The ZR affiliate who enrolls you as a Customer can also
give you as many as 1,000 free bids to play around with.
There are six different income sources offered through the ZR compensation plan. The two most
controversial and potentially troublesome are the “Retail Points Pool” (a.k.a Retail Profit Pool)
and commissions from the 2x5 Matrix.26 Both require you to be a “Qualified Affiliate”, which
means you are on either the Silver, Gold or Diamond subscription program, have sponsored at
least two Retail Customers (or “joined the Customer Co-op”), have “given away” at least 10 free
bids as samples (must be VIP bids that you purchased), and has “placed a qualifying
advertisement for Zeekler.com for the current 24 hour period and submitted it through his or her
ZeekRewards back office”.
The Matrix pays from 25¢ up to $3.50 monthly on every paid Affiliate subscription in your matrix,
and also pays a matching bonus down two generations.
The (then titled) Retail Profit Pool distributes shares of up to 50% of the combined daily profits
generated by both ZeekRewards and Zeekler.com. ZR states, “The payout from the retail profit
pool will normally be from 0.5% to 2%, historically averaging about 1.2%...”. This is based on the
number of “VIP ProfitPoints” you have in your account. The points are acquired is several ways,
but primarily by purchasing non-free bids and giving them away.
Here’s an example provided by ZR (slightly paraphrased):
You purchased 1,000 VIP Bids ($1.00 each) and gave them away as samples to your own retail
23
http://www.usatoday.com/tech/columnist/kimkomando/2011-05-13-komando-penny-auctions_n.htm
http://www.zeekrewards.com/faq.asp
25
There is some confusion as to what the number of free bids is, but the most common amounts states
are 25, 100 or 250.
26
Two positions wide on the first level, five levels deep.
24
customers or to customers that were signed up for you by the Customer Co-op. Or, perhaps you
sold $1,000 worth of Retail Bids to a Zeekler.com customer. Either would give you 1,000 points
in your VIP Profit Points Balance. The company (today and at the end of each day) tallies the
days net profits and determines the day's VIP Profit Share Award. Let's say the company
determines that today's revenue allows for a 1.5% award. Assuming a 1,000 point balance, in
this example, it would give you a $15.00 award. Now let's assume that you have set your
preference to use 100% of your daily award to purchase more bids to give away as samples to
grow your business (and your VIP balance). When you go check your Retail Point Pool report the
next day, you will see that your account balance will now be 1,015 VIP ProfitPoints (assuming
the bids were given away to your retail customers).
Some, like your “Retail Store” and “The Shopping Daisy” appear to be throw ins that likely
provide no significant income. Basically, you earn a percentage of the small affiliate commission
paid by various online vendors, and your online shopping portal is one of literally tens-ofthousands that directly compete with one another.
There’s also “ZAP Commissions” which is essentially a type of fast start bonus where you earn
20% on all personally enrolled referred customer’s retail bid pack purchases from Zeekler.com.
Then there’s the “Retail Subscription Profits”. Here you can earn a 20% monthly “retail profit”
from all personal “retail sales” on personally sponsored affiliate’s subscriptions. This begs the
question, if the Silver, Gold and Diamond subscriptions have only one price – $10, $50 and $99
respectively – and contain only business related items that would be relevant only to ZR reps
(i.e. a non-participant customer would never purchase), how is anything “retailed” here?
Gratuitously slapping the word “retail” onto as many comp plan aspects as possible appears to
be legal window dressing. And there’s certainly a need for it here, as will be explained later.
Each subscription level offers a commensurate amount of Personal Volume, or “PV”, which is
used for rank qualifying. By paying for a Silver ($10, 10 PV), Gold ($50, 50 PV) or Diamond ($99,
100 PV) subscription each month you qualify as a Distributor (10 PV), Manager (50 PV) or
Executive (100 PV). There’s also a Senior Executive rank requiring 600 PV monthly. Of course,
this begs the question, Why not simply call each rank Silver, Gold, Diamond and then something
more valuable than diamond (why doesn’t any MLM company ever use Palladium? It’s spot price
is usually higher than platinum or diamond, and it’s a really cool title. But I digress).
Cancellations, Rejections and Apprehensions
ZeekRewards seems to have had a hard time maintaining loving, committed relationships, at
least on a corporate level.
Musical Credit Card Processors
First they got dumped by their credit card processor, allegedly due to an overabundance of
fraudulent transactions involving the creation of fake accounts using stolen credit cards. Now
they are running credit card payments through different foreign processors such as “Internet
Paygate Seoul" & "Global Kamba" (S. Korea), "ZonaLibre1" (Panama), “Lucky Star Design”
(Costa Rica), “Lamda EC” (Cyprus) and a processor in Hong Kong as well. Critics who question
why ZR and Zeekler can’t hook up with even one US based processor simply don’t understand
the challenges involved. I don’t consider this to be necessary suspicious, or deleterious. I know
from personal experience it is very challenging for any young MLM company to procure a credit
card processor without having to accept loan shark rates, let alone one with the stank of fraud
still wafting from it, regardless of ZR’s lack of culpability.
Double Bank Boot
But we’re still at the top of the list. Next CCBill, an international online payment gateway, gave
them the boot27, follow by both of their banks! ZR spun their spurning this way:
“Zeek is currently in the process of moving to a bank that can handle our growing needs
and while in transition will be closing our old accounts…”.28
“After many years of good, strong business relationship Rex Venture Group had to
move to a much larger bank that could handle our volume that has greater experience
with international business.”29
Although, technically, they don’t specifically say it was their decision to move to a larger bank
that can better “handle our growing needs”, they do appear to be trying to create that impression.
When I called both banks they would neither confirm nor deny that ZR was asked to take their
business elsewhere, but the circumstantial evidence of this is glaring. To wit:
“Please be sure to deposit or cash any commission checks immediately so they clear
before June 1st, 2012 or they will be returned to you with ‘account closed’ and will need
to be reissued.”30
This notice appeared on Monday, May 28th, leaving only four full business days to deposit all
outstanding commission checks. Not only does it appear these banks initiated ZR’s exit, but
required that it be expedited. If this transition was in the control of ZR why not simply leave
sufficient funds in the account to cover all outstanding checks?
“As you know, we are currently in the process of transferring accounts to our new
banks. While we will be able to resume check runs when the transfers are finalized, we
do not want to cause any additional delay to our affiliates who are waiting for their May
21st or 28th commission checks. Therefore we are going to be issuing a claw-back of
all requested checks into a special Zeek portal where any affiliate who is awaiting a
physical check can instead choose their preferred eWallet for their commission
payment.”31
Again, if ZR was voluntarily moving to a bigger bank, why not leave the old accounts open while
they set up the new account?
27
28
29
30
31
http://zeekrewardsnews.com/2012/04/ccbill-subscription-cancellation/
http://zeekrewardsnews.com/2012/05/happymemorialday/
http://zeekrewardsnews.com/2012/05/updates-and-announcements/
http://zeekrewardsnews.com/2012/05/happymemorialday/
http://zeekrewardsnews.com/2012/05/may-21st-and-28th-pay-runs/
Keep in mind that ZR and Zeekler were actually defraying their banking activity between two
separate banks: New Bridge Bank32 and BB&T33. Both are FDIC insured, publicly traded
companies with total assets of $2.1 billion and $174.6 billion respectively. NewBridge was, in
fact, a relatively small regional bank and alone probably could not have done the job. But BB&T,
founded in 1872 and with 31,800 employees, appears to have considerable “experience with
international business”34.
But to be fair, ZR was churning up millions of dollars in weekly cash flow, not to mention just as
many phone “inquiries” by curious, anxious, or furious ZR reps (using only slight hyperbole).
Even BB&T was only a small-to-medium sized bank compared to Chase, Bank of America or
Wells Fargo (each with assets over $1 trillion and more than 250,000 employees). According to
a very reliable source, ZR at one time claimed to have letters from each bank confiding their
inability to effectively meet ZR’s growing needs. I was told those letters would be made public to
end any speculation as to who asked for the divorce (i.e. ZR decided to leave since their banks
admitted they couldn’t handle their growth). That was over a month ago and, to my knowledge,
no such letters have been revealed. Nor do I believe they ever will. Consider: Would a publicly
traded business ever communicate to their shareholders, even indirectly, that they had a client
who was capable of significantly increase their revenue, profits, and share value, but instead of
expanding their capabilities to satisfy this client they instead chose to inform them of their
inability to serve their growing needs, thus tacitly suggesting they may want to take their
business elsewhere? Or, might the letters have explained the concerns the banks had with ZR,
and directly told them to take their business elsewhere? Quickly.
International Contraction
Then there were the ZR members in several foreign countries who were abruptly informed that
their accounts were being closed and their Retail Point Pool points would be lost (although they
were offered refunds on the bids they recently purchased). ZR subsequently offered the
following cryptic explanation to a Serbian rep during a live chat:
“We do not have total knowledge of what happened. What I do know is that it is
something with your countries government policies (not the Serbian people itself), that
has required us to not list your country anymore.”
Allegedly, individuals requesting clarification have received the following email response
from ZR:
“We apologize for the difficult position that this creates for you and us, but we are not
able to do anything more than refund whatever purchases and subscriptions you have
paid. We are being advised that we can not make any further comments about the
issue. It is unfortunate political situation and we are all affected by it. We wish you well.
thank you for contacting Zeek!”
32
33
34
http://www.newbridgebank.com
http://www.bbt.com
http://www.bbt.com/bbtdotcom/business/commercial-institutional/international-services/default.page
Which was followed by this formal announcement by CEO Paul Burks on ZR’s official news site
(emphasis is mine):35
“Lately there has been some online comments concerning some Zeek affiliates whose
accounts were recently deactivated and a lot of speculation about why this was done. I
just want to set the record straight about this unfortunate situation.
The United States Government has established an Office of Foreign Assets Control
(OFAC) through the US Treasury Department. This Federal agency maintains a list of
“sanctioned countries” that is published on this website:
http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx
Under US law it is illegal for a US based individual or company to do business with
individuals of companies in those countries. The penalties for violating these sanctions
range from very large fines up to 30 years imprisonment.
When we became aware that there were affiliates in our system who were from these
prohibited countries we had no choice but to remove them from the program. It is
understandable that they and their sponsors are frustrated and unhappy with this action
but we had no other choice.”
Now let’s actually set the record straight – none of this is true.
Although ZR has never formally identified these “sanctioned countries” that they “had no
choice” but to abandon, there were six countries that were removed from the pull down
menu on the ZR application right when ZR reps from some of those counties began to
complain. Those countries were Serbia, Croatia, Slovenia, Belarus, Egypt, and Macedonia.
The problem is, there are no sanctions of any kind that prohibit anyone from the United
States from enrolling someone from these countries as ZR affiliates. There are certain
prohibitions against doing business with specific entities and individuals within specifically
Belarus36, but the other five countries are not even on the list that ZR linked to!
Furthermore, Avon and Oriflame currently operating in all six countries, Herbalife in all but
Serbia, Amway is in Croatia and Slovenia, and Vemma is in Serbia, Croatia and Slovenia.
I contacted the Office of Foreign Assets Control (OFAC) and confirmed the response that
others claimed they had received. There is a “Specially Designated Nationals List” (SDN)37
that defines restrictions and prohibitions against doing business with specific entities and
individuals in several countries, but the Office of Foreign Assets Control (OFAC) “...does
not currently administer comprehensive sanctions programs against the countries listed in
your email... There are no broad-based sanctions against the countries listed below.” I
listed the six countries ZR claimed they “had no choice” but to pull out of, because it was
“illegal” to do business there.
35
36
37
http://zeekrewardsnews.com/2012/04/update-on-banned-countries-and-more/
http://www.treasury.gov/resource-center/sanctions/Documents/belarus.pdf
http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx
To be clear, I would completely understand a company’s decision not to do business within
those countries. They are havens for internet fraudsters, and if there’s even a one-in-one million
chance of inadvertently hooking up with one of the “Specially Designated Nationals” on OFAC’s
list, well, zero-in-a-million is better than one-in-a-million. Just don’t have them on the list to begin
with, so innocent people don’t have to get terminated, and if you do have to eliminate these
countries later, why not just tell the truth about why you’re doing it? Why make up some easily
debunked story about how the government made you do it?
Sans a Montana
ZeekRewards is open in 49 states – all but Montana. They were open in Montana up until early
June, 2012, when residents who tried to enroll (or upgrade) allegedly got this message:
“Sorry, this service is currently unavailable in Montana. The State of Montana has a unique
set of laws and our lawyers have said no enrollments there until we get in compliance with
Montana law.”
There is no mention of the Montana closure within Zeek Reward’s news site, and their Policies &
Procedures still reference Montana as an open state. The only other official response from
anyone within ZR management has been brief statements during live calls or interviews where
they site Montana’s “unusual” regulations pertaining to MLM companies, and the extra “hoops”
they have to go through.
Montana’s “Office of the Commissioner of Securities & Insurance”38 tells a somewhat different
story.
Let’s start with the supposedly unusually restrictive regulations within Montana. Within the
Montana Code39 they define a “multilevel distribution company” as a person that:
(i) sells, distributes, or supplies goods or services through independent agents, contractors,
or distributors at different levels of distribution;
(ii) may recruit other participants in the company; and
(iii) is eligible for commissions... bonuses, refunds, dividends, or other consideration that is or
may be paid as a result of the sale of goods or services or the recruitment of or the
performance or actions of other participants.
They go on to define a “pyramid promotional scheme” as one that does not include a sales plan
or operation that:
(i) subject to the provisions of subsection (6)(c)(v), provides compensation to a participant
based primarily upon the sale of goods or services by the participant, including goods or
services used or consumed by the participant, and not primarily for obtaining the
participation of other persons in the sales plan or operation and that provides
compensation to the participant based upon the sale of goods or services by persons
whose participation in the sales plan or operation has been obtained by the participant;”
38
39
http://sao.mt.gov/
http://data.opi.mt.gov/bills/mca/30/10/30-10-324.htm
They go on to define “compensation”, as it relates to pyramid schemes, as not including:
(i) payments to a participant based upon the sale of goods or services by the participant to
third persons when the goods or services are purchased for actual use or consumption; or
(ii) payments to a participant based upon the sale of goods or services to the participant that
are used or consumed by the participant.”
[All underline emphasis above and below is mine, and not original within the Code]
The “provisions of subsection (6)(c)(v)” cited above refers to the specific refund policies required
of all MLM operations pertinent to residents of Montana, which simply “...allows a person at least
15 days to cancel... participation in the sales plan or operation”, and if they do cancel within that
15 day period they are “entitled to a refund” for any purchase they made of “required items”.
This section also requires that a refund of “not less than 90%” be refunded for “any currently
marketable goods or services sold to the participant within 12 months... that have not been
resold or consumed by the participant.” This includes “Sales plan or operation promotional
materials, sales aids, and sales kits... if they are a required purchase for the participant or if the
participant has received or may receive a financial benefit from their purchase.”
In ZR’s P&Ps at the time of the closure (and as of this writing), specific to Montana, they offer a
90 day return policy, and a full 100% refund on all funds paid within 15% of cancellation.
Not only is none of this particularly or exceptionally challenging, Montana’s explicit recognition of
personally consumed product by distributors as being commissionable40 arguably ranks them
among the easier to qualify for registration in41 (among the five states that require MLM
companies to register42). It would appear ZR merely has to extend the return policy to 12
months, and make some other minor language changes to satisfy this section of the code. This
would suggest there’s something else preventing Zeek from getting past Montana’s gatekeeper.
I contacted the Montana Attorney General’s office and after being transferred five times I reach
the Commissioner of Securities and Insurance which, I was told, was the department reviewing
ZR’s case. Their Communication’s Director, Lucas Hamilton, confirmed that ZeekRewards had
“not complied with the state’s security regulations”. He went on to say, “Our law requires that
representative make more money from selling goods than from recruiting”. The implications
made here will become clearer in the upcoming section related to legal concerns, where the
Montana situation will be revisited within that context.
North Carolina Discredit Union
On August 2nd, 2012, reports started to appear online that the North Carolina State Employee’s
Credit Union (NCSECU) had begun issuing warnings to their customers that Rex Venture Group
was “fraudulent”. Allegedly the NCSECU was initiating these contacts, and in some cases by
telephone. Here is an example of one such emailed warning:
40
While most states are moot on this point (and no state has specifically declared distributor purchases
as non-commissionable), Texas, Kentucky, Oklahoma, South Dakota, Louisiana, and Ohio have also
specifically declared personally consumed products by reps as being a bona-fide sale to an end user.
41
http://data.opi.mt.gov/bills/mca/30/10/30-10-326.htm
42
Montana, Louisiana, Georgia, Massachusetts and Wyoming.
“ZeekRewards is indeed a fraudulent company. Please refrain from entering into any
type of business with this company as there have been several claims of fraudulent
activity reported with ZeekRewards. Numerous reports of fraud have been given to the
Better Business Bureau and other reports of fraud are listed on scam reporting
websites. Please visit the links below to familiarize yourself with the company and some
of the things that have been said about them. -- Jeremy Pittman, 801 E Team
Leader/AO, mlo# 784404, 801 Contact Center” (phone number and email address,
which has been redacted).
When I first saw this, on a Zeek-critic website, I immediately questioned the validity of the
email. It was hard to fathom that someone in a professional capacity would blatantly refer to
a business as “indeed a fraudulent company” and discourage their patronage. He might as
well have added an addendum, “Please have ZeekRewards attorneys send their lawsuit to
this address...”. Instead he added a link to RipOffReport.com, suggesting he actually
believes this is a reliable source of information.
After others emailed the NCSECU regarding this issue, Mr. Pittman began responding with
this commentary:
“It has come to our attention that our responses about ZeekRewards are being used to
present arguments concerning the company. We have officially taken the position that
NCSECU is not confirming our denying fraud, but that we’ve received several reports of
fraud. One of our internal departments has conducted research on the company and
received several negative findings. It is the credit union’s stance that we should always
try to keep our members’ best interests at heart.
The information is not to bash or incriminate ZeekRewards, but merely to inform our
membership of the potential dangers of investing in their company.
One of our Senior Vice Presidents had the following to say about the company:
‘SECU has not indicated that Rex Venture Group is fraudulent. SECU recommends to
members that they always conduct due diligence in investor education, and we are
advising members to conduct due diligence of Rex Venture Group.’
Additionally, SECU recommends that members contact the NC Attorney General’s
office with consumer complaints or the NC Secretary of State’s office with any investor
concerns. ”
Jeremy J. Pittman, 801 E Team Leader/AO, mlo# 784404, 801 Contact Center.”
I have contacted the NCSECU and confirmed that Jeremy Pittman does work for them (but
not in their “Risk Management” department), and the above email exchange has been
verified by investigator Troy Dooly.43
43
Troy Dooly has been a great source of objective information about ZeekRewards – you can find his
commentary here: http://mlmhelpdesk.com.
ZR’s COO Greg Caldwell has been in contact with the NCSECU and has published this
response (in part):
“...the person responsible admitted he really didn’t know anything about the laws
regarding direct selling or how to identify a legitimate network marketing company or
opportunity. Like all our critics, he was behaving unprofessionally by acting on false
information.”
This might explain Mr. Pittman’s drastic change in tone from “ZeekRewards is indeed a
fraudulent company” to “the information is not to bash or incriminate ZeekRewards”, and
why all requests for comment from the NCSECU is now answered with this statement from
Leigh Brady, their media liaison:
“SECU works closely with the NC Attorney General’s Office and the Secretary of State’s
office to encourage consumer and investor education. We will always suggest that our
members perform due diligence on any possible investment. While SECU has not
indicated specifically that ZeekRewards or its affiliates are fraudulent, we are
encouraging members to perform such due diligence on this company and its affiliates.”
Obviously, someone at the NCSECU jumped the gun here. To unilaterally warn their clients that
a company is a “fraud” and should be unconditionally avoided, and to initiate those warnings
unprovoked, is highly irresponsible. While the matter will now likely rest with the NCSECU’s
final, tamer stated position, you can’t unring the bell. And in cyberspace, they ring forever.
North Carolina Attorney General
When an AG’s office begins an investigation of an MLM company, or takes formal action against
one, it can sting like hell, but it’s rarely deadly – unless it’s the AG of your home state. The other
49 are like branches of the tree. You can lop one off and, as long as it’s not the one most of your
leaves are attached to (i.e. your California, Florida or Texas branch) you can survive, at least for
a while. But your home state is where you’ve planted roots, and I’m sure you know what
happens to a tree when you cut off the roots.
I’m not at all suggesting the NC AG, specifically the “Department of Justice”, is going to do
anything to kill the ZR Money Tree. But they may. They’ve recently issues a Civil Investigative
Demand (CID) asking a lot of questions about how ZeekRewards works.
I contacted the NC DOJ regarding this issue and received this response from Noelle Talley, their
Public Information Officer:
“So far we have received 8 complaints and 23 inquiries about ZeekRewards and related
companies as well as numerous phone calls. The complaints generally seek refunds
and say the company has not lived up to its promises.
Yes, we do have concerns about ZeekRewards and related companies and have said
so publicly. Our Consumer Protection Division has asked them to provide us with
documents so we can examine their business practices.”
Greg Caldwell’s response (as published on Troy Dooly’s website44) essentially states that only 8
complaints, all of which have been addressed, is actually a low number considering the size and
growth that ZR has experienced. And he’s absolutely right.
If the NC DOJ examines the Zeek X-Ray close enough and finds all the same dark spots that I
have, this won’t end well for ZR. If they just say, eh, it might be a smudge, let’s watch it and see
if it gets bigger (as government officials are prone to do), then ZR will be okay for a while. Until it
gets bigger.
Better Business Bureau
Rex Venture Group and its affiliate companies currently have an “F” grade with the BBB, which
should be given very little weight. I won’t rehash my exposé of the BBB grading system here45,
except to say it’s blatantly rigged to favor those who pay for BBB “accreditation”, and unjustly
disfavors MLM companies. In fact, within the section that explains an MLM company’s low grade
they will often site “the industry in which the company operates”. Unless, of course, they pay for
BBB membership. Then they amazingly have absolutely no problem with “the industry in which
the company operates” and routinely award an “A” or “A-“ grade. The BBB also does not like to
be ignored. If they request “basic information” and you do not respond, expect to be docked at
least a full grade.
However, this does beg the question, why doesn’t ZeekRewards simply pay the $500 to be
accredited, or at the very least, provide the BBB with the basic information they have requested?
ZR does have 37 complaints within the last 36 months, 35 of which they’ve satisfactorily
resolved, or attempted to resolve.46 Most (25) relate to “Problems with Product/Service”. To
place their total in perspective, this would place them 17th among the top 100 MLM companies
who’s BBB files I analyzed in December of 201047 and tied for 16th in my May, 2009 analysis.48
So unlike the number of complaints filed with the NC AG, this total, although not an exceptional
amount, is relatively high. What’s also curious is that, according to the BBB’s Rex Venture
Group profile page, “37 complaints closed with BBB in last 3 years” and “37 closed in last 12
months”. This would suggest that virtually all 37 complaints occurred within the last 12 of ZR’s
17 months of existence. What’s more, the total was 10 on April 7th, 14 as of June 8th and 29 on
July 28th, just 15 days ago. Although I do believe most could be easily explained by the “growing
pains” ZR has experienced over that time, they’ve been lamenting their growing pains for
months now. While it’s expected the total number of complaints will rise as the total number of
participants do, the rate of increase should begin to slow eventually, not expand geometrically.
44
http://mlmhelpdesk.com/breaking-zeek-rewards-news-the-facts-behind-the-nc-doj-investigation-zeekrewards-recording/
45
http://www.marketwaveinc.com/viewalert.asp?id=148
46
http://www.bbb.org/northwestern-north-carolina/business-reviews/multi-level-selling-companies/rexventure-group-in-lexington-nc-12000422
47
http://www.marketwaveinc.com/docs/bbbdata%2812-10%29.pdf
48
http://www.marketwaveinc.com/docs/bbbdata%285-09%29.pdf
With Friends Like These...
As if ZR didn’t have enough PR challenges to deal with, now they have to console their already
nervous reps who have been told the FTC is going to close down all penny auctions within the
next six months. This was the claim by Dr. Keith Laggos49, on a recent ZeekRewards
conference call. Dr. Laggos claimed:
“The FTC has been taking action against all 32 penny auction sites. They put out letters
to the top big four banks asking them not to, to encourage them not to open up
accounts for penny auctions. They call them illegal gambling. [The FTC] consider it
illegal gambling online and they’re trying to stop it... [The FTC] sent notices to all the
major [credit card] processors in the US [telling them] that they do not want them to
process a penny auction site as of July 5th.”
Here’s what is most bizarre about these allegations. Keith Laggos was hired by ZR as their
MLM/compensation plan consultant, was still working in that capacity at the time of the call, and
claimed to be earning over $40,000 per month as a ZR affiliate. Laggos fully acknowledged at
the beginning of the call that the audience was “all in Zeekler”, and then proceeds to pitch
Lyoness to all those on the call! Laggos asserted that:
“If you put $10,000 in Zeekler [and] if nothing happens over the next year you’ll probably
make 30 or 40 thousand dollars if that’s all you do... You put the same amount of money
in Lyoness and not doing anything else... you could probably make a quarter-million
dollars.”
During the Q&A section of the call Laggos stated:
“If you put someone in for $10,000 [in] bids... make sure you tell them that there is a
future challenge lurking in the near future. I do [that] when I sponsor someone into
Zeekler for that reason. I have business ethics.”
Dr. Laggos commented on a ZR training call that “Penny Auctions are low cost, and can make or
save you money”.50 While technically true, it doesn’t account, of course, for the hundreds or
thousands of losers that participate in each auction where one person “made or saved” money.
On the same ZR training call Laggos claimed that ZR’s second “Company of the Month”
feature51 will focus on their “long term focus”, and “that’s your insurance... that you can not only
make money in the short term, but in the long term... year after year after year, for the rest of
your life.”52
Of course, both of these comments were made back in February, before Keith started promoting
Lyoness to ZeekRewards affiliates on their calls.
49
Publisher of Network Marketing Business Journal and author of the textbook “Direct Sales: An
Overview”.
50
ZR Monday Training Call; 2-6-12; 14:58 mark.
51
Vol. 27 Issue 4, April, 2012.
52
ZR Monday Training Call; 2-6-12; 7:15 mark.
When asked if he had made ZR corporate aware of the FTC’s campaign against penny auctions,
and the pending FTC closure of them, Laggos replied:
“I given them a dozen emails and texts about all this stuff, and we’ve had a couple of
conversations about it... Paul [Burks] didn’t know, for some reason, that the FTC was
putting an edict [for] shutting down the processing on July 5th until I told him.”
Considering the circumstances in which this information was imparted, and that it was obviously
designed to scare ZR reps into joining him in Lyoness, I’d normally take such information with a
lake of salt. However, considering it’s coming from Keith Laggos I have to believe there is some
truth to what he is saying. Having said that, how, when, where, and to whom he said it to I find
shocking and appalling.
Needless to say, Dr. Laggos is no longer a paid consultant to ZeekRewards. No word yet from
ZR’s compliance department as to whether or not he violated section 38 of the ZR Policies &
Procedures53:
“REX Representatives shall not sell or represent non-REX products or represent
marketing opportunities from other companies to other REX Representatives. Non-REX
products or opportunities may not be promoted in any way at official REX events,
meetings, conventions or other gatherings.”
Legal Issues
There are a number of legal issues to consider here involving a lot of legal theory and
precedent. Obviously the big three are, is ZeekRewards a Ponzi scheme, a pyramid scheme
(which is technically and legally different that a Ponzi) and/or an unregistered security? But there
are some peripheral issues to be considered as well.
Let’s take these in ascending order of importance, starting with a picked nit.
Important Legal Stuff
ZR includes a substantial section of text titled “Important Legal Stuff” near the bottom of their
corporate site’s home page. However, it is all displayed in a barely visible dark gray font on a
black background. If it’s so important, why deliberately present it in such a way as to make it
virtually unreadable?
Lack of Transparency
Besides ZR’s penchant for not giving complete or accurate explanations for various things they
do, one of the most eyebrow raising is their prohibition against “public meetings”. In a January
10th, 2012 post54 on the ZR news website they exclaim:
53
54
http://www.zeekrewards.com/policyprocedure.html
http://zeekrewardsnews.com/2012/01/compliance-compliance-and-more-compliance/#comment-3351
“NO Public Meetings. If it is not a corp sponsored event…there are absolutely NO
public meetings allowed. We cannot ensure compliance and so therefore we
STRICTLY PROHIBIT them. Any affiliate reported as having public meetings will be
permanently removed from the program.”
Hmm. How is the content of the presentation relevant to the venue? You can make violative
claims just as easily in the living room of your home as you can in the meeting room of a Holiday
Inn. It would seem the only difference is that public meetings can be monitored more easily by
the media, law enforcement, and the company, thus demands more prudence and
accountability. Such an unusual policy can create the perception – to the media and law
enforcement – that they have something to hide.
Compensation Plan
The original ZR plan was a 2x21 matrix, meaning no one can have more than two positions on
their first level, and pays down 21 levels (thus each level down holding a maximum of 2, 4, 8,
16, etc.). Historically the “forced matrix” has had a horrible track record with only one company,
Melaleuca, achieving any significant, long term success with it.55 The biggest knock on the
matrix is that it can force you to place a good builder several levels deep in your downline if your
first few levels are filled, thus potentially losing several levels of their sales volume that will be
pushed beyond the bottom pay level. The matrix plan, and to a lesser extend the binary, are
also vulnerable to “spill over” hype, where the claim that “your upline can build your downline for
you” by having to place all their enrollees under you. Due to the SEC’s afore mentioned “Howey
test”, you never want to suggest anyone can make money by simply joining, then letting
someone else do all the work. Keep that in mind for later.
What’s odd here is that about the time ZR hired their attorney/consultant All-Star Team they
changed their plan from a 2x21 matrix to a 2x5, allegedly at the behest of Keith Laggos.
According to Paul Burks56:
“A 2X21 Matrix, by itself, can possibly be seen as violating Interstate lottery laws.
Especially with no qualifiers in place where someone who is lucky enough to have an
active upline can get enough spillover to earn thousands of dollars a month for doing
nothing.”
This is odd on multiple levels (slight pun intended). First, I have never seen a single example of
a compensation plan paying down too many levels causing any kind of legal action by a state or
federal regulator. Not one. Ever. I have seen them go after companies for hyping the spill over,
but that still applies whether it pays down 21 levels or 5 levels. In fact, you can still receive
“thousands of dollars a month” from a five level downline built primarily by your upline if you’re
“lucky enough to have an active upline”. Yes, ZR did add personal qualifiers to prevent you from
doing literally nothing, but those qualifiers could have been added to the 2x21 matrix. What’s
more, ZR added two generations of matching bonuses to the new 2x5 plan creating the potential
for it to actually now pay deeper than 21 levels!
But this is nothing more than a curio. Let’s get to the important stuff.
55
56
Arguably Nutrition For Life could be included, which did survive from 1989 to 2003 with a matrix plan.
http://zeekrewardsnews.com/2011/08/letter-from-zeek-ceo-paul-burks/
5cc Program Cancellation
ZR affiliates have always been encouraged to give away the bids they purchase. When you
purchase bids you convert them to points in your Retail Points Pool by selling them or giving
them away. Not only is the emphasis on giving them away, they are often referred to as “sample
bids”. Bids purchased at retail from Zeekler do not apply to the ZeekRewards pay plan. Affiliates
must purchase such “sample bids” from ZeekRewards for the bid volume to count.
So, to facilitate this massive bid give-away ZR would collect and distribute the contact
information of people who requested free bids to play around with on Zeekler.com. So if you
didn’t know anyone who wanted free bids, or you had given away the maximum amount to all
those who did, you could tap into the 5cc Program and buy your “customers”.
Then, on February 27th ZR announced that they would be discontinuing the 5cc Program.
However, they would still be collecting these freebie bid seekers, only now you could get access
to them for free by qualifying for them. The initial qualifier was the enrollment of two Preferred
Customers (who stayed a PC and did not enroll as an Affiliate for 30 days).
“We will no longer be charging 5cc subscribers for 5cc customers... The reason for that
is that federal law has changed and we have been informed that we are no longer
legally allowed to provide customers or leads for purchase.”57
Where to begin.
Let’s start with the admittedly nit-picky fact that the “New Business Opportunity Rule” was not a
“law”. A law needs to be approved by Congress. This was an FTC rule, or regulation. Yes, it
essentially has the same effect as creating new law, only without an act of Congress, and that’s
certainly something for constitutional scholars and libertarians to rant about, but not relevant
here.
Secondly, the 112 page NBOR58 not only clearly and repeatedly cited the exemption of all “multilevel marketing” operations from the Rule, they specifically declared and/or defined this
exclusion 29 times!59 Yes, the FTC did narrowly define a “seller assisted” biz op as one where
the seller (ZR in this case) is “providing outlets, accounts, or customers to the prospective
purchaser”. I’m thinking that if someone were to bring an MLM company who is selling leads
and/or customers to the attention of the FTC, they’d probably point out the twenty nine times
where they said “We don’t mean MLM companies!”.
Thirdly, providing customers is not illegal. In fact, there is not one word within the entire final rule
that even remotely suggests illegality in the offering of leads or customers by an MLM company
to its distributors. The repercussions to having the NBOR applied to an MLM company is that it
would be subject to additional disclosure. Nothing more. Basically, the company would have to
provide disclosures similar to those required of franchisors.
57
58
59
http://zeekrewardsnews.com/2012/02/goodbye-5cc-hello-prc/
http://www.ftc.gov/os/2008/03/R511993business.pdf
http://www.marketwaveinc.com/viewalert.asp?id=98
Fourthly, the NBOR did not say a company had to “sell” leads or customers, it merely had to be
“providing”, “furnishing” or “assisting” in the procurement of leads or customers. So when ZR
announced, “you can receive customers though us…FOR FREE!” by qualifying for them, this
didn’t even resolve the threat, albeit infinitesimal, of having the NBOR applied to them!
Here’s where it get’s even weirder. In the same post on the corporate controlled ZR news site
(footnote 47) the writer, identified only as “Zeek”, states:
“I am attaching the law and the article written by Atty. Rick Waak to support your
education and understanding on this matter.”
But not only does the small section of the “law” that is quoted make no mention, even indirectly,
of illegality in the providing of customers, neither does the article by attorney Richard Waak. I
spoke to Mr. Waak regarding this matter and although his commentary was restricted by his
attorney/client relationship with ZR, he did confirm that there was nothing illegal about providing
customers, nor has he ever suggested otherwise, to anyone. When I asked if he had ever
advised ZR in such a way as to cause them to believe otherwise, he said only that his article
“speaks for itself”. And it does.
To be clear, I have no issue with the discontinuation of the 5cc program. Even if this does create
even a remote possibility that the NBOR could be invoked, the disclosures and other paperwork
required are laborious and potentially costly. Again, a zero-in-a-million chance of having it apply
is better than a one-in-a-million. So the advice of their attorney’s to just drop the 5cc program
was sound. I just don’t get the point of doing it when you’re alternative puts you right back where
you were, and I don’t understand how this could have been so badly misinterpreted as to be
falsely presented as a legal requirement due to a change in the law. Keep in mind, this isn’t just
a simple, one time, misunderstanding, or misstatement in this one post on their news site. Dawn
Wright-Olivares reiterated during a March, 2012 interview that the 5cc program was dropped
because, “We don’t want to be breaking any laws.”60 My original theory was that the fib, “We
have no choice but to drop the 5cc program because the new law makes it illegal” (paraphrase)
sounds a lot better than the more truthful, “We chose to drop the 5cc program because there’s a
slim chance it may cause us to have to provide more disclosure”. But then, why would ZR do this
and then, within the same announcement, link to a section of the NBOR and an article by one of
their attorney’s that completely exposes their fib?
Taxing Tax Issues
Let’s say you had 5,000 points and $10,000 in your ZR account, the latter from 6,000 VIP bids
you purchased and gave away (thus adding 6,000 points to your account), and $4,000 from pool
points you earned, carried forward (i.e. didn’t withdraw) and converted to points, and you have
withdrawn $2,000. Also, 3,000 points just got flushed, because points only stay in your account
for 90 days. What amount will be added to your total income on your 1099 at the end of the
year?
Based on a February 20th training call I listened to (three times), it seems their resident tax
expert, Howard Kaplan, isn’t even sure. Near the beginning of the call Dawn Wright-Olivares
opines about the exceptionally large incomes that have been reported on affiliate’s 1099s and all
60
http://www.youtube.com/watch?v=ySL_i81uF7o
the questions they have received about how this number was determined, and how to report it.
When Mr. Kaplan begins the Q&A section of the call he specifically states that the 1099 income
does, in fact, include all points received, even those that are cycled out after 90 days.61 “It’s all
there, you earned it, but you had to give it back”, he says, therefore it’s okay to record retired
points as an expense on your return. Dawn then interjects that, “Points are something that you
earn for giving away or selling bids... But points are not earning.” She goes on to clarify, “What is
in your 1099 is what you earned in dollars. It has nothing to do... with the points that you earn.”
So points are counted as earnings on a 1099, and expired points are a deduction in your
schedule C as an expense, according to their tax expert, but their then COO62 claims points are
not at all earnings, and not included in any 1099, even though you “earn” them. This exchange
is then followed by Mr. Kaplan doing a complete reversal on his original response and agreeing
with Dawn.63 Then, the entire exchange is transcribed on the ZR news site64 where the answer
to the question “Do I claim the bonus points?” is “Yes”.
I’m no tax expert, but here’s what I think they both should have said: We don’t know!
To my knowledge there is no tax code, nor case precedence, as to how “points” accumulated in
an MLM penny auction program, that are used as the basis for determining commissions, should
be accounted for on a tax return. The answer will eventually be determined by the IRS, but until
that happens it is, in my opinion, irresponsible to give a definitive answer to such questions.
I do know enough about tax law to know that the IRS considers Taxable Income to be a lot more
things than just cash. For example, someone who wins a new car on a game show has to
include the fair market value of that car as income. Even U.S. Olympic athletes who win a gold
medal have to pay taxes on the value of the metal (about $675)! The IRS publication dealing
with Miscellaneous Income65 doesn’t address bid points, obviously, but does cite “Prizes and
Awards.” In IRS publication 525, Taxable and Non-Taxable Income,66 the closest they come is
this section regarding “Prize Points”:
“If you are a salesperson and receive prize points redeemable for merchandise, that are
awarded by a distributor or manufacturer to employees of dealers, you must include
their fair market value in your income. The prize points are taxable in the year they are
paid or made available to you, rather than in the year you redeem them for
merchandise.”
No, this is not precisely what ZR is doing, but considering it’s at least in the ballpark, and the
IRS is moot on what ZR is doing, it at least provides us with a clue as to what their thinking
might be when this is inevitably challenged.
Consider this equation, with “P” representing your Points, and “SP” your “Share Percentage”.
P X SP = Income
61
62
63
64
65
66
At 14:00 minute mark.
Dawn Write-Olivares is now ZR’s Chief Marketing Officer.
Discussed at the 35:00 minute mark.
http://zeekrewardsnews.com/2012/02/questions-answers-call-schedule-this-week/
http://www.irs.gov/newsroom/article/0,,id=175963,00.html
http://www.irs.gov/pub/irs-pdf/p525.pdf
If you have 1,000 Points and the Share Percentage today is 1.0 %, you earn $10.00. If the
Share Percentage doubled to 2.0% tomorrow, you earn $20.00. But, what if SP stayed 1.0% and
only your Points doubled (because you bought and gave away another $1,000 in sample bids)?
You would now earn $20.00. In fact, not only do both values on both sides of the equation have
a monetary value, the Point side is equally influential in your actual earnings. One percent of
anything gives you 1% of that thing, One percent of an apple is 1% of an apple. One percent of
a chicken results in 1% of a chicken. And in the above example 1% of a “point” does not result in
1% of a point, it results in 1% of one thousand dollars!
How is this any different than any MLM company who pays 10% on all the BV, or “Bonus
Volume” – that is, the points – in the weakest leg in a binary plan, or on a certain level in a
Unilevel? Points that were generated by the purchasing or selling of product.
It seems extremely clear to this logic wielding, third grade math applying, non-tax expert layman
that of course the points have a monetary value – and Mr. Kaplan actually got it right the first
time.
So here’s the bottom line, literally: Is ZR counting the total points earned on 1099s, or only the
cash amounts withdrawn? If the latter, will the IRS agree that earned points are not earned
income?
If it’s the former, then there’s going to be many more ZR affiliates questioning why their 1099
income was so much higher than the cash amounts they withdrew – and not claiming the full
amount of their earnings on their 1040. In ZR’s defense, it appears many affiliates don’t
understand that when they reinvest their earnings (i.e. don’t withdraw all or part of their Point
Pool income and allow it to accumulate in their account), that this is still income. This would
apply to anyone, and is not unique to ZeekRewards, Penny Auctions or MLM. If you got paid
$50,000 into your ZR account and had the cash withdrawal set at 10%, thus using $45,000 of it
to buy more bids and increase your point total, your 1099 is going to reflect the entire $50,000
as earned income, even though you only pulled out $5,000 in cash. ZR has went to great effort
to educate their affiliates on this matter, and it is the responsibility of the affiliate to understand it.
And no, this $50,000 would not be “illusionary” income, as some ZR critics have suggested. It
was absolutely income, and the affiliate had the option to receive it as cash. Just because they
chose not to does not negate it’s monetary value.
But then, whether or not it was legally commissionable income in a multilevel pay plan, or an
investment into a Ponzi or pyramid scheme, or an unregistered security... well, that’s another
matter entirely.
Pyramid Scheme vs. Ponzi Scheme
Before we continue, it’s important to understand the distinction between these two types of
schemes. A Ponzi scheme is fundamentally, mathematically, and legally separate and distinct
from a Pyramid scheme, although the terms are often, and incorrectly, used interchangeably.
A Ponzi scheme, named after the 1920’s era con-artist Charles Ponzi, is one where more than
100% of each dollar invested is paid out, thus requiring additional investors to pay off previous
ones. For example, Charles Ponzi promised a 50% return on investment within 45 days. So if
Paul gave him $1,000, he needed to come up with another $500 to cover his promised $1,500
return. How he did that was by finding Peter, another $1,000 investor, and using half of his
investment to pay off the first investor (as in "Robbing Peter to pay Paul"). But now the second
investor will be expecting a $1,500 payment, so Ponzi had 45 days to find another $1,000
investor. His investment, added to the remaining $500 from the previous one, allowed him to
pay off the second investor. Although now, with no money left in hand, and needing two more
$1,000 investors to pay off the $1,500 promised to the third investor, he had to find two more
$1,000 investors. This was not a problem since the first two happy investors were giddily telling
everyone they knew about the success they just had with Ponzi's amazing investment
opportunity67.
In a pyramid scheme the total amount promised in payments is never more than the total
amount paid in. For example, in the "Airplane Game", a classic pyramid scheme from the 70s
and 80s, you had to fill a 2x3 matrix with people who agreed to pay $1,500 for nothing more
than the opportunity to participate (there was no product). Once this was accomplished you
cashed out with $10,000, or what amounted to 47.6% of the promoter’s total $21,000 take.
When each of your two first level players cashed out and received their $10,000 it required eight
more participants each, or $12,000. So again, the promoter was always able to pay off those
who cashed out with cash-in-hand, and keep a little for himself.68
Let's put this in network marketing pay plan terms, if only for a moment. If a plan actually paid
20% down seven levels, a 140% total pay out, that would likely be a Ponzi scheme regardless of
the value of the products sold. The plan pays out more than it takes in. If a plan paid 10% down
five levels, a typical 50% pay out, it cannot be a Ponzi scheme since it does not pay out more
than what it takes in. No more than 50 cents is paid out of every dollar paid in. However, such a
plan could still very well be considered an illegal pyramid. More on that in a moment.
For a more detailed delineation, check out these articles:
Ponzi vs. Pyramid
http://www.MarketWaveInc.com/viewarticle.asp?id=72
Pyramid, Ponzi, and Investment Schemes
http://www.MarketWaveInc.com/viewarticle.asp?id=45
Is ZeekRewards a Ponzi Scheme?
No.
When ZR first hit the scene so many knees jerked in unison that it practically altered the rotation
of the Earth. They were offering a 125% return, or 1-2% per day, and they were paying it! Of
course it had to be a Ponzi scheme, right?
Wrong. In fact, this part of the ZR business model is ingenious. Start an MLM company called
ZeekRewards, collect an army of people who will place literally millions of small advertisements
all over the net, and buy literally millions of bids to give away, all designed to attract customers
67
Which Ponzi claimed was based on profits earned from international postal reply coupons.
And it usually is a guy. Check out my article "Silent Sirens" at
http://www.marketwaveinc.com/viewarticle.asp?id=46
68
to a penny auction site called Zeekler.com. While the penny auction site is selling items to
hundreds of winning bidders and raking in 10 to 40 times their cost for each one, all day long,
seven days a week, they can easily afford to plow “up to 50%” of Zeekler’s daily profits into
ZeekRewards. Imagine if Apple Computers were to start an MLM division selling a mineral
supplement made from silicon, and then applied 50% of all Apple profits into the MLM comp
plan. It would probably pay out more than 100%, and it wouldn’t be a Ponzi scheme.
Is ZeekRewards a Pyramid Scheme?
Although it’s perfectly legal for me to say “no”, it could actually be deemed libelous if I were to
definitively say “yes” (Just ask MLM über-critic Robert Fitzpatrick69). However, my own legal
council has advised that I say, “In my opinion this company may be legally vulnerable, based on
how they appear to me”.
So... in my opinion this company may be legally vulnerable, based on how they appear to me.
First of all, ZR has picked an historically unfriendly state to base their home office in. North
Carolina has not been an MLM fan ever since the infamous David Crowe based American Gold
Eagle in that state (1989-1991).70 Besides being one of the six states to pile on in the Equinox
case, they are one of the original states to create MLM legal precedence back in the 1970s and
early 80s when they prosecuted such companies as Dare to be Great71 and Challenge72. North
Carolina’s AG also closed down The Tax People (aka Renaissance) in August of 2000. When it
comes to identifying pyramid schemes they know what to look for, and how to find it, even when
it’s well hidden. Let alone when the company is sky writing it right over the state capital building.
Before I explain why ZR is, in my option, based on how they appear, legally vulnerable, it’s
important here that you understand how state and federal authorities define an illegal pyramid
scheme. It is not simply the absence of a product, nor even the absence of a product of genuine
value. Equinox73 and Jewelway74 had perfectly fine products, yet both were declared illegal
pyramid schemes by the FTC.75 Nor is it a matter of how much a participant is encouraged to
purchase, or what percentage of product is sold to non-participant customers. In fact, based on
myriad legal precedence and specific guidance offered by the FTC, the primary factor is the
motive for buying the product.
In a letter to the DSA76, in response to their request for guidance, the FTC states:
“Much has been made of the personal, or internal, consumption issue in recent years. In
fact, the amount of internal consumption in any multi-level compensation business does
not determine whether or not the FTC will consider the plan a pyramid scheme. The
69
http://www.marketwaveinc.com/viewalert.asp?id=147
American Gold Eagle was under investigation in NC when it failed due to Cease & Desist orders filed in
other states.
71
http://www.mlmlaw.com/library/cases/mlm/state/ncdare.htm
72
http://www.mlmlaw.com/library/cases/mlm/state/ncchallenge.htm
73
http://www.ftc.gov/opa/2000/04/equinox.shtm
74
http://www.ftc.gov/opa/1997/11/jewel-2.shtm
75
Equinox was also charge as an illegal pyramid scheme by six states, including North Carolina.
76
http://www.marketwaveinc.com/FTC_Letter.pdf
70
critical question for the FTC is whether the revenues that primarily support the
commissions paid to all participants are generated from purchases of goods and
services that are not simply incidental to the purchase of the right to participate in a
money-making venture.”
They go on to specifically declare:
“...a multi-level compensation system funded primarily by payments made for the right
to participate in the venture is an illegal pyramid scheme.”
To paraphrase the FTC, are the participants buying the products because they actually want
them, and would purchase them even if there were no income opportunity, or are they buying
the products primarily to meet certain quotas and qualifications in the compensation plan?
North Carolina’s “Pyramid and Chain Schemes Prohibited” statute77 defines such a scheme as:
“...any program utilizing a pyramid or chain process by which a participant gives a
valuable consideration for the opportunity to receive compensation or things of value in
return for inducing other persons to become participants in the program...” (emphasis
mine)
How “compensation” is defined here, and in most state’s pyramid statutes, is key. In the North
Carolina code, compensation in an illegal scheme excludes:
"...payment based on sales of goods or services to persons who are not participants in
the scheme, and who are not purchasing in order to participate in the scheme.”
In other words, if compensation is based on sales to those who are not participating in the
income opportunity (i.e. retail customers), or those who are participants but are not purchasing
primarily, or solely, to meet prerequisites to earn income, then this would not define an illegal
pyramid scheme. So again, we must consider the motive for buying the products.
In most MLM programs this is subjective. That is, subject to being a mind reader. Are all those
distributors buying that $35 bottle of fruit juice because they actually want the juice, and they
would still be buying it even if there were no commission to qualify for? That’s good. Or, are they
buying four bottles every month because the comp plan has a $140.00 personal volume
requirement to get paid? That’s bad. Did the women who purchased $5,000 of personal care and
cosmetic products do so to have enough inventory to sell at all the home parties she plans to
have? That’s good. Or, did she buy that much to achieve the higher paying “Executive” rank in
the pay plan? That’s bad.
In the case of ZeekRewards, the motive for purchasing bids is glaringly obvious. ZR leadership
has clearly stated numerous times that affiliates are buying bids not to actually bid with, but to
give away! They encourage affiliates to give bids away, add incentives to their pay plan to
motivate it, and openly describe how the vast majority of bids are, in fact, not being used for
bidding. Dawn Wright-Olivares routinely trains affiliates to use their bids as samples to “attract
customers”. During a February 21st training call Dawn recited her “hamburger analogy” where
77
http://www.mlmlegal.com/ncarolina.html
she states, “If you bought that burger from ZeekRewards, you’re buying that burger as a sample,
not to consume”78 (emphasis mine). On the same call their tax expert, Howard Kaplan, instructed
affiliates to write off their bids as a business expense, “since we are using the bids to give to
customers to help build our business income.”79 During an interview with Troy Dooly80 at an
ANMP81 event in Las Vegas, Dawn unabashedly declared that Affiliates were not even allowed
to use the sample bids they purchased to bid with!82 Paul Burks posted on the ZR news site that
is was “VERY IMPORTANT” (caps are original) that affiliates understood that “using your bids as
samples to attract customers creates a potential tax deductible advertising expense. I’m not a
tax lawyer, so consult with your own advisor about that issue, but that could be HUGE!”83 There’s absolutely no question what the affiliate’s motive is for buying bids from ZR. It is
overwhelmingly obvious they’re buying bids primarily, of not solely, to participate in the income
opportunity, and would never have purchased these bids if no income opportunity existed.
It is common knowledge throughout the MLM industry that paying commissions or bonuses on
sales aids, training, back office access, marketing websites, or any other type of business
building tools is legally taboo. All such distributor-centric items clearly have no value to nonparticipants in the income opportunity, and require the recruitment of distributors for this sales
volume, thus commissions, to occur. ZR might counter that they also require the enrollment of
two non-participant customers to qualify for income, but that doesn’t get them off the hook. For
example, in FTC vs. FutureNet84 the FTC stated:
“The compensation received by FutureNet Consultants... from purchases of goods or
services by members of their downlines is not primarily based upon the sale of products
or services to users who are not participants in FutureNet’s marketing plan. Although
defendants purport to require the acquisition of two new customers each month as a
condition for the payment of compensation, they do not ensure that products or services
purchased by distributors are primarily resold to ultimate users who are not part of the
marketing plan... The compensation received by Internet Consultants from their own
and their downline’s recruitment of new Internet consultants is unrelated to the sale of
products or services to ultimate users.”
As part of the Final Judgment and Order against FutureNet, the founder of FutureNet was
banned for life from participating “in any multi-level marketing program or prohibited marketing
scheme within the United States”.
In MLM attorney Kevin Grimes’ article “BigSmart Not So Smart”85 he discusses the legal
challenges with this web mall scheme where the FTC ultimately found the commissionable sale
of the internet site itself, rather than the products purchased via the site, to be a sales tool only of
interest to participants in the scheme.
78
79
80
81
82
83
84
85
Stated at the 5:01 mark.
This is discussed at both the 24:24 and 28:20 mark.
http://www.MLMHelpDesk.com
Associates of Network Marketing Professionals
http://www.youtube.com/watch?v=ySL_i81uF7o http://zeekrewardsnews.com/2011/08/letter-from-zeek-ceo-paul-burks/
http://www.mlmlaw.com/library/cases/mlm/ftc/futureco.htm
http://www.mlmlaw.com/saleswatch/saleswatch10327.html
“[BigSmart] offers its distributors the opportunity to sell the company’s products...
through internet malls set up by the company... commissions are based on the sale of
the malls rather than the sale of goods and services that are offered through the malls.
Legitimate MLMs never pay a commission on the sale of catalogs, marketing
literature, starter kits, and other sales aids. Only retailable products and services are
properly commissionable. Bigsmart however, generated most of its commissions from
the sale of malls, which are... not retailable products since the only persons who would
have any interest in purchasing a mall are those who wished to participate in the
Bigsmart compensation plan. Other than the value the online mall presented by virtue
of the attached income opportunity, the malls were otherwise devoid of intrinsic
consumer value.” (emphasis mine)
Now take a look at the contents of ZR’s three Premium subscription packages, which cost $10,
$50 and $99 respectively, and which generate a monthly 20% “Retail Profit” to the affiliate who
enrolls anyone who signs up for one.86
Note that each subscription includes your “own unique personal e-commerce enabled retail store
with even higher profit margins and deeper discounts in your wholesale store!”, and your online
store, “is fully stocked with high-value merchandise and whenever someone makes a purchase
YOU earn the profit!”.87 This is essentially a web mall similar to BigSmart, and the online sales
site itself is a significant part of the package that is sold by ZR – and commissioned! BigSmart
charged $99.95 per month for their online store ($1,199.40 per year), and ZR’s Diamond
package costs $99.00 monthly ($1,188.00 per year).
The proverbial nail-in-the-coffin for ZR might very well be this section of the FTC’s Pyramid
Scheme guidance document:88
“The focus of the program is recruiting new representatives and selling the products to
new members as they join, not selling to customers. You’re told that the more you buy,
the more you’ll earn.”
Unquestionably Premium Subscriptions are only sold to “new members” of ZeekRewards, bids
are only purchased to use as a marketing tool, and the more bids you buy, the more you earn.
86
$1.00 from every new Gold and Diamond subscription and renewal is also applied to a pool each
month and paid out to qualified Diamond/Executive Affiliates.
87
http://www.zeekrewards.com/getpaid.asp
88
http://www.ncdoj.gov/Consumer/Investment-Work-and-Money-Making-Schemes/PyramidSchemes.aspx
ZR removes all doubt about what the motive is for ZR affiliates to by bids with the statement:
“**Please Note: Affiliates in your 2 x 5 forced matrix who upgrade before you do will
not create commissions for you. The sooner you upgrade or qualify the less the
chance of missing out on potential earnings! The purchase of a Premium
subscription generates automatic rank qualifying PV.”89 (emphasis original)
Affiliates in an MLM opportunity should be buying the company’s product because they actually
want the product, not to qualify for more income in the pay plan.
It is true that ZR affiliates can buy bids to bid with themselves, but as ZR says:
“ONLY Zeek sample bids purchased in the ZeekRewards back office are eligible for
the Cash Rewards program payments. Retail bids purchased on the Zeekler Penny
Auction site do not qualify for Cash Rewards.”90
ZRʼs compensation plan actually creates a powerful disincentive for affiliates to buy bids from
ZeekRewards to actually bid with.
I have heard some ZR defenders claims ZeekRewards cannot be an illegal pyramid scheme
because the purchase of bids is “optional” and they offer an option to participate for free.
However, in North Carolina Court of Appeals v. Challenge, Inc.91 (section 4)92 the court states:
“The defendants argue that Challenge is not an illegal pyramid scheme because
participants are not ‘required’ to sell courses to themselves to advance in the
organization, and an Independent Sales Agent does not pay valuable consideration for
the chance to receive compensation upon the introduction of other participants. This
argument is not convincing since the statute is violated if an individual ‘pays’
consideration, regardless of whether he is required to pay it. The Challenge modus
operandi is such that it would be grossly impractical not to pay the consideration for the
opportunity to participate. The evidence is uncontroverted that all participants in North
Carolina who advanced in the program did so by purchasing the seminars for
themselves in order to meet the $5,000.00 requirement to become an Independent
Sales Agent.” (emphasis mine)
In the FTC’s letter to the DSA, they succinctly describe their thinking as to fees paid by downline
reps that would only be purchased by downline reps – such as fees paid for Premium
Subscriptions, and for bids that are used strictly for business building purposes:
“In a pyramid scheme, participants hope to reap financial rewards well in excess of
their investment based primarily on the fees paid by members of their ‘downlines.’
Downline members pay these fees to join the scheme and meet certain prerequisites
for obtaining the monetary and other rewards offered by the program.”93
89
90
91
92
93
http://www.zeekrewards.com/getpaid.asp
http://vifne.zeekrewards.com/faq.asp
North Carolina Court of Appeals, Edmisten v. Challenge, Inc. (1981), 54 N.C.App. 513, 284 S.E.2d 333
http://www.mlmlaw.com/library/cases/mlm/state/ncchallenge.htm
http://www.marketwaveinc.com/FTC_Letter.pdf
But, Zeek has customers. Lots and lots of them!
Do they? Zeekler claims that their penny auction site “has become the #2 largest trafficked
Penny Auction site in the World”. Allegedly they have over 600,000 registered “customers” in 22
countries. Unique “customer traffic” has gone from 22,000 visitors in May of 2011 to 317,000 in
May 2012. Their ratio of customers to affiliates, they claimed in May, was 25 to 1.94 This appears
to be yet another way in which MLM companies have this masterful way of saying things that are
technically true, but not entirely true. First of all, if you sign up as a customer first Zeekler will
give you at least 25 free bids. Then your sponsor can give you even more free bids (up to 1,000)
when you enroll as a ZR affiliate. So it’s a common practice (and openly encouraged) for those
who want to enroll as affiliates to take the token step of enrolling as a customer first just to get
extra free bids. Secondly, ZR counts all those who simply receive free bids as customers
whether they use them or not. Therefore, the number of “customers” is being grossly inflated.
In an August, 2011 post on the ZR news site95, Paul Burks states:
“In the MLM industry there have been numerous court decisions addressing what is
called ‘garage qualifying’ or ‘front-loading’. That means permitting affiliates to
purchase large amounts of inventory that they never use or sell simply to qualify for
the pay plan. It is generally understood, industry wide, that affiliates must use or sell
at least 70% of their purchases before they can purchase more. Our automatic daily
repurchase system, with no requirement that the bids be used or sold, was a
potential problem. Some affiliates were accumulating thousands of unused bids.”
But, there is still no requirement that the bids be “used or sold”! The above prohibitions against
front loading and stockpiling of products requires that the distributor use the products
themselves, or sell them. If literally 100% of ZeekRewards affiliates never used a single bid they
purchased to actually bid with, nor did a single Preferred Customer they gave free bids to ever
place a single bid, this would not effect the affiliates income by one iota! ZR affiliates might as
well be purchasing those red, white and blue plastic poker chips. What’s more, ZR allows you to
buy as many as ten-thousand bids, for $10,000, even if you have no intention of using a single
one for its intended purpose – to bid with. When you buy thousands of dollars worth of products
just so you will make more money in the comp plan, that is most certainly a front load.
They are so clearly not purchasing bids to be used on a penny auction website, they are
essentially purchasing points to be used in an MLM compensation plan.
If there’s still any doubt left that ZeekRewards is a recruitment based income scheme, where
recruiting is, in fact, required to earn income, here’s one of the most ironic statements ever
written considered it’s part of a post titled “Compliance, Compliance and More Compliance…”:
“Do NOT advertise that there is no Sponsoring or recruiting necessary to earn
income. It is a fraudulent statement and is grounds for removal from this program.”96
That’s not a typo, folks. If you tell a prospect that they can actually make money in ZR
without recruiting – it’s a terminatable offence!
94
95
96
The Network Marketing Business Journal, Vol. 27 - Issue 4 (April 2012).
http://zeekrewardsnews.com/2011/08/letter-from-zeek-ceo-paul-burks/
http://zeekrewardsnews.com/2012/01/compliance-compliance-and-more-compliance/#comment-3351
Is ZeekRewards a Security?
This one is not as definitive as the pyramid question (in my opinion, based on how they appear
to me). However, in spite of a number of adjustments ZR has made at the advice of their
legal/consulting team, I do believe this is a risk that is still in play.
The primary reason I believe ZR is still legally vulnerable here, in my opinion, based on (yada,
yada, yada), is the fact that no matter how much they demand that affiliates stop presenting ZR
as a security, no matter how many times they tell them, in so many ways, to stop using terms
like “investment”, “compound”, and “return”, no matter how much “compliance training” they now
offer, no matter how strict there zero tolerance policy is towards such policy violations, no matter
how many affiliates they actually terminate for violating them – they won’t stop doing it!
I’ve gotten the full-on Zeek pitch three times, all since these security-lingo sanctions were
enacted, and all three basically presented an opportunity for me to buy bids, do about “five
minutes of no-brainer work a day”, and then kick back and watch the cash roll in. At one time
(around late January) one even said there were services available where you could hire out the
ad placement function, and ZR offered a deal where they would give you the customers to give
the free bids to, so you had to do nothing but “buy bids and masturbate” (his words).
In Zeek’s defense, they quickly put the kibosh on the “we’ll place your ad for you” schemes, and
the customer acquisition deal he was referring to was the 5cc program, which is also gone. This
might provide a much more valid explanation for why the 5cc program was discontinued. That is,
per the Howey Test (the test you want to fail, mentioned way back on page one), you have to
apply some “effort” in the creation of the income to not be a security in the eyes of the SEC.
In the beginning ZR required only the effort of placing a free, online ad. Otherwise, you did just
buy bids and... celebrate. Soon after they hired their compliance team they changed the plan
from just having to buy bids to get pool points to giving away bids for them to convert to points.
So here’s the million dollar question: Does the placement of advertisements and the giving away
of your product count as “effort” as it relates to the SEC’s definition of a security?
I already know Montana’s Commissioner of Securities & Insurance97 opinion. Although their
Communications Director was limited in his ability to discuss any specific company, or to give
legal advice, I was allowed to ask him questions based on “hypothetical” scenarios. When I
presented one to him with only hamburgers being substituted for bids, and asked if the placing
of a free online ad each day or the giving away of most or all of my hamburgers would constitute
effort as it pertains to the Howey Test, he said he would check with their legal department and
get back to me. He did. The answer was “no” and “no”.
I am not a legal expert on this subject, but have researched it thoroughly and interviewed two
attorneys on the matter. Here is my understanding as to why these functions will likely not be
considered effort in any state, or on a federal level: The effort you apply must be effort towards
the specific activities that generate the return, not effort to participate in the return.
For example, let’s say I’m getting a 20% annual return on my own investment portfolio, which I
manage myself. Several of my neighbors ask of they can give me some of their money and have
me invest it for them. Since I’m aware of the three pronged Howey Test, and know this is
97
http://sao.mt.gov/
already “an investment of consideration” and it’s into a “common enterprise” (me), I need them
to apply some effort so as not to meet the definition of a security. So, I tell them all sure, I’ll
invest your funds for you, as long as you all paint my garage. That would not be effort towards
the creation of the return, that would essentially just be their barter fee for my services. Now, if
they all got together and assisted me in my research of various public companies, and had a say
in which ones we bought stock in, then that would be a legal investment club and, in most
cases, need not be registered as a security.98
The managerial processes and mathematical algorithms that ZR performs to generate Point
Pool share payments to affiliates does not change in relation to the ads posted or the bids given
away. Let’s call these internal steps “A, B and C”. As the SEC states (see footnote 95), a
security is one where the participants, “expect to make a profit from the entrepreneurial and
managerial efforts of others”. In Zeek’s case the ad is utterly irrelevant in the production of Point
Pool earnings. Whether your ad gets no response, or 1,000 responses, you still earn the same
share of the pool. ZR is still performing steps A, B and C. Same with giving away bids. Yes, you
have more points in your account for them to perform steps A, B and C on, but they are still
performing steps A, B and C.
ZR CEO Paul Burks stated:
“Paying Daily Profit Shares based on the amount of an affiliate’s purchases creates
the potential for an SEC challenge for offering a ‘passive investment’. This was
especially true when a specific earning percentage (125%) was being mentioned.
Even with the complete Legal Disclaimers that we were using they still felt we could
have problems later.”
Changing all the processes that affiliates perform does not change the processes that
ZR performs. Requiring affiliates to now give away the bids they purchased, or
removing the cap on the return, or eliminating terms like “investment”, “return” and
“compounding” from ZR lexicon, is only changing the packaging, but not the content. ZR
was generating this fixed 125% return then by performing steps A, B and C, and today
they are still performing steps A, B and C.
Mr. Burks goes on to say:
“Eliminating the 125% cap on profit sharing also accomplishes a couple of important
results. First, it prevents anyone from accusing the company of paying a fixed ‘return
on investment’. That is NOT what we do, but it is important that we remove any
appearance that we are doing that! Second it gives you a raise! Based on the
current rate of daily rewards you should earn substantially more in daily rewards
over the 90 days, based on 100% repurchase, than you have earned using the
125% cap.”
Yes, it prevents anyone from accusing them of paying a “fixed” return on investment,
but not from paying a return on investment. All they’ve done here is make the return a
floating amount. It has not been eliminated.
Next Mr. Burks borrows Ms. Wright-Olivares’ hamburger analogy:
98
http://www.sec.gov/investor/pubs/invclub.htm
“If you purchase a burger at McDonalds you give the guy at the counter some
money and he gives you a burger. Then, you own the burger and the store owns the
money. You didn’t ‘invest’ in a burger expecting to get a return. You just bought a
burger. You get to eat it or give it to someone else to eat.”
Right. And that’s exactly why this is not even remotely analogous to what ZeekRewards is
doing!
You are not going to McDonalds to buy hundreds, thousands, or tens-of-thousands of Big Macs
solely to give away, in an effort to earn more Big Macs, and a share of McDonald’s profits.
To their credit, ZR did make several adjustments in an attempt to widen the berth between
themselves and a security, but they never completely severed the umbilical cord. They did a
decent job of improving the wrapping paper, but not the content. At least, not nearly enough. In
my opinion, based on how they appear.
Conclusion
I did not begin this investigation in earnest until late May. I figured it didn’t make a lot of sense
trying to evaluate the structure and condition of something who’s structure and condition was
constantly evolving. It seemed the noise and dust from all the renovations began to subside
around then, so I pulled out the magnifying glass and went to work. By mid-June I had gained
enough knowledge to at least be conversant in Zeekeze, and to know what questions to ask,
and what concerns to address. I had compiled enough questions and concerns that would only
be appropriate to ask ZR management that I felt an interview was warranted. I always attempt to
give the subject of my reviews an opportunity to address all such concerns before going public
with them. So that’s when I began my quest for an interview, which I described back on page 3.
Over about a six week period we tentatively set up four different interviews with two different ZR
corporate members, with the caveat that attorney Kevin Grimes be present during the interview
with Paul Burks (which I gladly agreed to). Then the Civil Investigative Demand (CID) was made
public on August 6th, and used as an excuse – and in this case a good one – for why the
interview had to be delayed again.
But, hereʼs where I have a problem (well, another one). I have since discovered that this CID
was initially issued on July 6th, exactly a month before it was made public! ZR has known they
were under investigation by their stateʼs AG that whole time, including the period when I was led
on about a pending “exclusive” interview with Mr. Burkes.
So, on August 8th I decided I had been patient long enough and began writing this review. I still
sincerely wish I could have interviewed someone from ZR before I wrote it. Maybe rhetorical
questions wouldn’t have outnumbered answers. But I did try.
To their credit, ZR has at least attempted to make the necessary renovations, but ZeekRewards
is a fixer-upper that just can’t be fixed. To make all the necessary changes to really bring this
juggernaut into compliance would require essentially ripping the guts out of the income
opportunity. For example, ZR should never have allowed commissionable points to be created
by merely purchasing bids, as they did in the beginning, nor should they have stopped at
requiring them to be given away to create these points. Bids should not be commissionable until
somebody actually uses them to bid with!
But then, this would only exacerbate the already troublesome practice of affiliates dumping
several hundred dollars worth of bids into Zeekler on auction items worth a fraction of the
winning bid price. And yes, that absolutely is happening. Why wouldn’t it? If you had, say,
$10,000 worth of VIP bids and you needed to give them away or use them to bid with to convert
them to points in the Retail Point Pool, why not just bid up a $250 Macy’s gift card to $1,000? If
you give $1,000 in bids away you get nothing. At least this way you get a $250 Macy’s gift card.
Or course, you would give these bids to a family member who would do your bidding. This
practice is already corrupting the bidding at Zeekler, and creating “bid inflation”. Can you imagine
what would happen if they made it mandatory to use your bids to bid with to convert them to
points, rather than give them away?
And by the way, did I mention that you can bid for cash? What are they thinking?
In conclusion (finally), I want to make two things very clear. First of all, having listened to them
speak for cumulatively over 10 hours, having met them personally, and trusting others opinions
who have directly worked with them, I have no doubt in my mind that Paul Burks, Dawn WrightOlivares, and the rest of their corporate team, have no intentions of operating an illegal scheme,
or to scam anyone. I believe they honestly believed, early on, that they were doing nothing
improper. And when they were informed that perhaps they were, they have gone to great lengths
to renovate and restore their unsturdy house. But when it’s a house of cards with a foundation
made of quicksand, even the greatest legal, consulting and public relations minds on the planet
are going to have a huge challenge saving it.
Which leads me to my second final point. I have great respect for Kevin Grimes, Gerry Nehra,
and Richard Waak. I have no doubt that they’ve done the best they can do with what they have
to work with. Their working on behalf of ZR by no means should be considered their
endorsement of it. They were hired by ZR to do a job, and they are doing their job. Even Bernard
Madoff had a defense attorney. And regardless of his unceremonious firing, as an MLM
consultant Keith Laggos does knows his stuff. Although I didn’t get the chance to really know him
personally, Greg Caldwell seems to be a stand up guy with a good reputation, and has produced
some great compliance training, especially on income disclosures.
So what’s the future hold for ZeekRewards? In my opinion, based on how they appear, it won’t
be a long one. The North Carolina investigation is absolutely not “routine” as some ZR
supporters have suggested (a very small fraction of NC businesses get issues CIDs), and NC is
very good at teasing out all the same stuff I’ve found. This may even result in a Temporary
Restraining Order (TRO) which will be lifted only after ZR makes several demanded changes.
Changes that, as I described above, may then cause ZR to die a natural death of attrition. Best
case they’ll have to make some unpopular changes without the TRO. However, I actually think
the FTC or SEC is a bigger threat considering the size and scope of ZR. But if I were a betting
man (which I’m not, which is why I can live in Las Vegas), I’d put my money on ZR being taken
down by ABC, CBS or NBC. ZeekRewards is a 20/20 segment just begging to happen. And then
the feds will go grab their magnifying glasses. This is, after all, an election year. This is all
assuming, of course, the FTC doesn’t take down the entire penny auction niche first. Which I
also believe, as does Dr, Laggos, will eventually happen (but I don’t have any secret sources).
In the mean time, I maintain the same recommendation I have been issuing for the past year...
Don’t join ZeekRewards.
Epilogue
Yesterday morning I sat down at my desk to finish this review. I had about two or three pages of
the “Is ZeekRewards a Pyramid Scheme?” section to complete, and a small section within
“Taxing Tax Issue”. They were not completed only because I was waiting for the answers to
three key questions. For example, I had asked three different experienced ZR reps what was the
current maximum number of free bids you could give away to one person, and received three
different answers (50, 500 and 1,000). So I asked a few more folks who were knowledgeable of
Zeek stuff. When I checked my email to see if any had responded yet, there was one. He began
by asking, “Have you seen this yet?”
I have to admit to feeling a bit of ambivalence upon hearing the news that Zeeks’ home office
was closed. Three months and 31 pages of typing for nothing. Couldn’t the SEC have waited just
a couple more days?
But this really isn’t a joking matter. This is going to create hardships for so many people, so
much greater than some wasted time expended by a two-finger typer. Lives are going to be
wrecked by this. I know people personally, good people, innocent people, who walked away from
other well paying opportunities to pursue ZR. One was making over $50,000 a month. How do
you replace that? I’ve heard so many stories of good people who resigned from other MLM
programs that were paying them a living income, that they were supporting their families with. I
have two friends that I personally warned not to join Zeek, that did anyway. Truthfully, I feel
absolutely no gratification at all in this. I feel nothing but sadness, and anger.
I’d spend yet another page describing my anger, but turns out it’s practically identical to MLM
attorney Kevin Thompson’s. So here’s his:
http://themlmattorney.com
There’s been some online chatter over the last 24 hours about bashing Zeek affiliates for their
ignorance and greed, and the inevitable vultures who are already trying to recruit them. Normally
I’d have little sympathy for the victims/perpetrators of such schemes (and, by the way, exactly
how many levels down from the company do you stop becoming a perpetrator and become a
victim?). But in this case even if they did do a due-diligence of ZR, which we tend to chastise
such victims for not doing, they likely would not have been dissuaded from participating – they
would have been encouraged to! The educated, experienced and trusted sources many of them
would seek such guidance from were reassuring them it was safe! The ANMP, a trade
association whose focus is distributor education and protection, showcased ZeekRewards at
their last event as a model of corporate compliance, and their Executive Vice President, Peter
Mingles, was a staunch supporter, promoter, and participant. They were featured twice as
“Company of the Month” in Network Marketing Business Journal, where they were touted as a
safe, “long term” opportunity. Well respected industry authorities such as Troy Dooly was at
times somewhat critical, but generally defended and supported them (and much to his credit has
publicly apologized). Ted Nuyten’s popular BusinessForHome.org site lists ZeekRewards as the
#3 “Top Direct Selling Company” in 2012, and Dawn Wright-Olivares as the #1 “Field Leader”
(with 45% of 47,760 votes cast), along with a favorable review of ZR, and an interview with Ms.
Wright-Olivares that includes not a single challenging question.99
99
http://www.businessforhome.org/2012/06/the-top-mlm-distributors-in-the-world-in-2012/
With this stable of enablers, and ZR’s promotion of their all-star legal & consulting team, Zeek
affiliates and prospects didn’t stand a chance.
Rather than go on for another 20 pages reciting and analyzing the SEC’s charges, I’ll just give
you a link to them...
http://www.sec.gov/news/press/2012/2012-160.htm
... and summarize them like this: The only thing I got wrong (maybe) was the point that ZR was
not a Ponzi Scheme. According to the SEC they were. And they are a pyramid scheme – for
exactly the reasons I described. And they are an unregistered security – for exactly the reasons I
described. And the only reason I was off on the Ponzi issue was because I assumed
Zeekler.com, like so many penny auctions, was making huge profits. As it turns out, according to
the SEC, not so much. In fact, according to the SEC’s findings, 98% of ZeekRewards’ total
revenue was coming from ZR affiliates, not Zeekler customers (actual bidders). The SEC claims,
“of approximately 10 billion VIP bids purchased by or awarded to investors, less than onequarter of one percent have been actually used in auctions on the Zeekler.com penny auction
website”. Furthermore, ZR has three billion profit points outstanding, and in July of 2012 ZR had
total revenue of $162 million and total cash payouts of $160 million. The SEC also reports that
Paul Burks has withdrawn about $11 million, and still has about $4 million. This might explain
why he was fined $4 million.
For the record, I solemnly swear that did not go back and change one word of any part of this
review that I had already written before ZR was closed. If I were to do that I’d probably lighten up
a little on Paul Burks for not following through on the interview. What has also been revealed
since the closure was that his wife has recently suffered some serious medical issues, and he
wasn’t spending a lot of time in the office the past few weeks. Otherwise, right or wrong, what I
saw is what you get.
And I assure you, it sometimes takes me about an afternoon to write one coherent paragraph.
There’s no way I wrote 34 pages in the last 34 hours.
And frankly I’m still not convinced Zeek Rewards was a Ponzi scheme, and the SEC wasn’t
entirely accurate on their complaint.100 For example, they reference the 5cc program and the ad
placement services as still being in play. They haven’t been for months. They also suggest that
since ZR had revenues in July of $162 million and paid commissions of $160 million, if Zeeksters
were to increase their average withdrawal percentage by just a tick ZR would, in fact, be paying
out more than they are taking in. But, ZR would have just lowered the share percentage.
At this point the feds are working from a lot more intel than I am, so who knows.
Still... two out of three ain’t bad.
Len Clements
Founder & CEO
MarketWave, Inc.
100
http://www.sec.gov/litigation/complaints/2012/comp-pr2012-160.pdf