Several people locally have reportedly been victimized as part of a Ponzi scheme that has now been targeted by the Securities and Exchange Commission, which announced fraud charges and an emergency asset freeze to halt the $600 million scam last week.

According to the SEC, the emergency action assures that victims can recoup more of their money and potentially avoid devastating losses. That means that a group of local people who invested their money as part of the online website ZeekRewards.com may not lose all of their invested funds.

“It was a scheme,” said David Jenkins, financial advisor at Edward Jones in Clinton. He, like some others in finance occupations locally, are knowledgeable about ZeekRewards and victims in the area. “I know there’s a few folks locally that were affected. It is very sad. Hopefully they can get some of their money back.”

The SEC alleges that online marketer Paul Burks of Lexington and his company Rex Venture Group have raised money from more than one million Internet customers nationwide and overseas through the website ZeekRewards.com, which they began in January 2011.

According to the SEC’s complaint filed in federal court in Charlotte, customers were offered several ways to earn money through the ZeekRewards program, two of which involved purchasing securities in the form of investment contracts. These securities offerings were not registered with the SEC as required under the federal securities laws.

The SEC alleges that investors were collectively promised up to 50 percent of the company’s daily net profits through a profit sharing system in which they accumulate rewards points they can use for cash payouts. However, the website fraudulently conveyed the false impression that the company was extremely profitable when, in fact, the payouts to investors bore no relation to the company’s net profits. Most of ZeekRewards’ total revenues and the “net profits” paid to investors have been comprised of funds received from new investors in classic Ponzi scheme fashion.

Jenkins, who visited the ZeekRewards website months back upon hearing about it, said there were immediate red flags. Those who attempt to visit the site now are greeted with a message: “Zeek Rewards is currently unavailable. More information will be available shortly on this website.”

However, Jenkins said the site, when up and running, outlined a typical pyramid scheme.

“It involved a lot of recruiting,” he said. “It’s not a legitimate thing because their whole emphasis is getting people to recruit other people. Anytime the whole emphasis is recruiting other folks, you know it’s a pyramid sceme.”

Stephen Cohen, an associate director in the SEC’s Division of Enforcement, said the obligations to investors drastically exceeded the company’s cash on hand, which is why the SEC needed to step in quickly, salvage whatever funds remain and ensure an orderly and fair payout to investors.

“ZeekRewards misused the power of the Internet and lured investors by making them believe they were getting an opportunity to cash in on the next big thing, Cohen said. “In reality, their cash was just going to the earlier investor.”

There have been some reports of individuals who have taken out cashier’s checks from local banking institutions believed to be for ZeekRewards, only to return to the bank to try and stop payment on those checks. Sources say there have been close to a dozen individuals locally, possibly more, who invested in the Zeek Ponzi scheme, with their investment amounts ranging from $5,000 to $23,000, which may also be higher.

“That’s not nickels and dimes right there,” Jenkins noted.

The SEC’s complaint alleges that the scheme is teetering on collapse with investor funds at risk of dissipation without its emergency enforcement action. Last month, ZeekRewards brought in approximately $162 million while total investor cash payouts were approximately $160 million. If customers continue to increasingly elect to receive cash payouts rather than reinvesting their money to reach higher levels of rewards points, ZeekRewards’ cash outflows would eventually exceed its total revenue.

Burks has agreed to settle the SEC’s charges against him without admitting or denying the allegations, and agreed to cooperate with a court-appointed receiver.

According to the SEC’s complaint, ZeekRewards has paid out nearly $375 million to investors to date and holds approximately $225 million in investor funds in 15 foreign and domestic financial institutions. Those funds will be frozen under the emergency asset freeze granted by the court at the SEC’s request.

Meanwhile, Burks has personally siphoned several million dollars of investors’ funds while operating Rex Venture and ZeekRewards, and he distributed at least $1 million to family members. Burks has agreed to relinquish his interest in the company and its assets plus pay a $4 million penalty. Additionally, the court has appointed a receiver to collect, marshal, manage and distribute remaining assets for return to harmed investors.

When in doubt, potential investors should not hesitate to consult with a financial advisor before throwing their money into something, Jenkins said.

“If it sounds too good to be true, it probably is,” he said. “Part of what I do is help people understand the fraud. Every day in North Carolina, there are scams. We have a lot of checks and balances. That right there (ZeekRewards), proves that it is worth it.”

Chris Berendt can be reached at 910-592-8137 ext. 121 or via email at sicrime@heartlandpublications.com.