Clawback Defendants File Counterclaims Against Receiver, Seek Treble Damages and Fees

 In a novel strategy, several "net winners" facing claims that they received millions of dollars in false profits from the $600 million ZeekRewards Ponzi scheme have responded to the court-appointed Receiver's complaint by asserting various counterclaims against the Receiver - a strategy that may have actually exposed some of those individuals to further liability.  Defendants Durant Brockett, Rhonda Gates, Trudy Gilmond, Jerry Napier, Darren Miller, Aaron Andrews, and Sharon Andrews (the "Defendants") were sued by Receiver Kenneth Bell on claims that they had each received over $1 million in "false profits" exceeding their investment in ZeekRewards.  Each has filed an Answer and Counterclaim against the Receiver, with Brockett also seeking to dismiss the claims.

Clawback Actions

 The Defendants were sued after being identified by the Receiver as the largest recipients of purported profits from their affiliation with ZeekRewards, which the Securities and Exchange Commission shut down in August 2012 on claims that it was operating a massive Pyramid and Ponzi scheme.  Following Bell's appointment, his investigation showed that nearly $300 million had been distributed to so-called "net winners."  Bell sought and received court approval to file two lawsuits - one against the largest net winners, and another in the form of a class action lawsuit against approximately 9,000 investors that received at least $1,000 in net profits.  The Defendants comprised a portion of the individuals and entities named in the first lawsuit.

In their pleadings, the Defendants largely denied or claimed lack of knowledge surrounding the Receiver's allegations concerning Zeek's operation as a massive Ponzi scheme.  In addition, each of the Defendants also chose to assert counterclaims against the Receiver - the first time in recent memory such a tactic has been attempted.  The claims asserted by each Defendant are:

  • Durant Brockett - Breach of Contract, Tortious Interference, Money Had and Received, 42 U.S.C. 1983 (Deprivation of Constitutional Rights) or in the alternative common law 4th amendment claims, and North Carolina's Unfair and Deceptive Trade Practices Act.
  • Sharon and Aaron Andrews - Breach of Contract, Tortious Interference, Money Had and Received, 42 U.S.C. 1983 (Deprivation of Constitutional Rights) or in the alternative common law 4th amendment claims, and North Carolina's Unfair and Deceptive Trade Practices Act.
  • Trudy Gilmond - Breach of Contract
  • Jerry Napier - Breach of Contract
  • Darren Miller - Breach of Contract
  • Rhonda Gates - Breach of Contract 

Breach of Contract Claims

The crux of the breach of contract claims is that each of the Defendants was owed compensation for their "work" for ZeekRewards parent entity Rex Venture Group ("RVG"), and that the Commission's actions shutting down ZeekRewards prevented each Defendant from receiving the compensation owed to them.  Each Defendant also alleges that the Commission "unnecessarily delayed its prosecution of claims" against RVG to their detriment.  While the existence of a contract is alleged, there is little detail provided as to the substance of that contract or the terms of compensation.

The breach of contract claims likely face an uphill battle.  As an initial matter, Receivers enjoy broad and nearly unlimited immunity from suit for performance of their duties.  Additionally, the Order Appointing Receiver typically prohibits the filing of actions against Receivership Entities by any person without judicial leave.  Finally, the court-ordered claims process was designed to be the exclusive forum for those who held potential claims against RVG or ZeekRewards.

Additional Claims Could Result In Additional Liability To Defendants

In addition to the breach of contract claims, Defendants Durant Brockett and Sharon and Aaron Andrews also asserted additional claims that included a claim for violations of North Carolina's Unfair and Deceptive Trade Practices Act (the "Act"), alleging that the Receiver and RVG's conduct was illegal and immoral, offends public policy, and constituted unfair methods of competition, unfair trade practices, and deceptive trade practices.  As a result, Brockett and the Andrews allege that they are entitled to an award of treble damages and their attorney's fees and costs, as provided in the Act.  

However, a review of the relevant provision of the Act governing an award of attorney's fees provides that:

In any suit instituted by a person who alleges that the defendant violated G.S. 75-1.1, the presiding judge may, in his discretion, allow a reasonable attorney fee to the duly licensed attorney representing the prevailing party, such attorney fee to be taxed as a part of the court costs and payable by the losing party, upon a finding by the presiding judge that:

......

(2)        The party instituting the action knew, or should have known, the action was frivolous and malicious. 

Thus, a party prevailing in defending claims under the Act can collect his/her reasonable attorney's fees where the party instituting the action knew or should have known that the action was frivolous and malicious.  Perhaps ironically, the recovery of the Receiver's attorney's fees is not available pursuant to the claims asserted in the original complaint; rather, Defendants Brockett and the Andrews may have exposed themselves to the potential for an adverse attorney's fees award by bringing claims under the Act that are likely to be challenged as frivolous by the Receiver.  Such an award is in the judge's discretion, but the fact that funds that could potentially be returned to victims will instead be paid to the Receiver to defend these claims could certainly be a consideration.

A special thanks to ASDUpdates for providing the pleadings:

Brockett

Gil Mond 

 For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.

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