I read on CNN today that a company called “Zeek Rewards” was just shut down by the SEC for being a ponzi scheme. After some research into how ZeekRewards worked, all the same telltale signs were there from the original Ponzi scheme and also another scheme that became popular in 2006.
Here’s a synopsis of the original Ponzi scheme, based on my reading of the book Ponzi: The Incredible True Story of the King of Financial Cons:
Let’s start with Charles Ponzi, an Italian immigrant in the 1920s who promised a 50% return in only 45 days, compared to the 3-4% [annual returns] that banks were giving out at the time. He stated that the crazy returns he got were from some sort of international transactions involving postal stamps and currency exchanges. The first people involved were skeptical, but when he delivered on the promise in 45 days, people started rushing in with their money. At his peak, he had about $10 million (in 1920s money!!) of other people’s cash. Of course, there was a spectacular collapse when the government finally stepped in and shut it down. Even at the end, Ponzi still had many devoted followers who refused to believe it was a scam.
The 12DailyPro story from the same previous post (2006 SEC press release):
12DailyPro.com debuts, and promises a 44% return on your money in only 12 days, as compared to the ~4% [annualized returns] banks are giving out now. The investment program states that the money comes from users surfing websites with advertisements for about 5 minutes a day, amongst other vague things. The first people involved were skeptical, but as the site consistently delivered the said returns, people started rushing in with their money. Millions of dollars are reported to have went through the company. Due to recent investigations by various state and federal authorities, the site has shut down, with many people losing tens of thousands of dollars. Even during this collapse, 12DailyPro still has many devoted followers who refuse to believe it was a scam.
The Zeek Rewards Story
Zeek Rewards debuts in 2011, and promised a 1.5% daily return on investment, as compared to the ~1% APY banks are giving out now. The program proudly states that it’s not an “investment”, but they are simply “profit-sharing” with you in exchange for marketing their penny auction website with the simple task of posting ads on public classified sites like Craigslist. The first people involved were skeptical, but as the site consistently delivered the said returns, over a million people started rushing in with their money. As of August 2012, the SEC has frozen $225 million in investor funds that remain in the company’s bank accounts, while millions have been siphoned off for the operators of this scam. Even after being shut down, Zeek Rewards still has many devoted followers who still support the site and believe it was legit.
From what I could gather from a Google cache, a purchase of “VIP Sample Bids” (1 VIP ProfitPoint = $1) would earn a ~1.5% return daily for 90 days (ex. $1,000 would return $15 after one day) and then expire. You could then reinvest your money again into more bids to compound your returns, meaning a $500 initial investment could turn into over $15,000 in a year. This time, the victims thought this impossibly easy return for work that took minutes a day was legit because they were told it was profit-sharing from promoting the penny auction site. (By the way, penny auction sites are ripoffs as well, but most are legal ripoffs for now.)
There will always be scams. What I can’t believe is that the ringleader Paul Burks was allowed to settle the case without admitting any wrongdoing by agreeing to pay a $4 million penalty with no jail time! From reading the press release, it’s hard to decipher how much the SEC will recoup of the “several” million that Burks already stole. Such lax enforcement and soft penalties all but guarantees this will happen again.
By Jonathan Ping | Investing | 8/20/12, 3:00am