More Broken Windows: The SEC and Ponzi Schemes

Investment fund fraud actions – those in which investors are convinced to part with their hard earned cash on the promise of good, often guaranteed but illusory returns — have become a staple of SEC enforcement. Sometimes the scheme is an offering fraud. In other instances the scheme is more complex. Regardless of the structure, the end is always the same. Investors who thought they were maximizing their returns end up with little or nothing. Those running the scheme make off with the cash.

Last week the Commission brought two investment fund fraud actions. One was filed on Monday and announced on Tuesday. SEC v. Zhunrize, Civil Action No. 1:14-cv-0303 (N.D. Ga. Filed September 22, 2014). See Lit. Re. No. 32091 (Sept. 23, 2014). A second was brought on Wednesday. SEC v. eAGear, Inc. Civil Action No. 14-cv-04294 (N.D. Cal. Filed September 24, 2014). Both cases were packaged together into a press release issued on Friday, apparently as another example of “broken windows.”

Zhunrize is discussed here. In eAdGear the defendants are eAdGear, an internet company; eAdGgear Holdins Ltd.; Charles S. Wang; Francis Yuen; and Qian Cathy Zhang. Mr. Wang is the founder and CEO of eAdGear Holdings, Mr. Yuen is the founder and CFO and COO of eAdGear Holdings and eAdGear; Ms. Zhang is a defacto officer of both companies.

eAdGear is represented to be a successful internet marketing and advertising company. The firm supposedly increases page rankings for customer websites on search engines.

Investors have the opportunity to profit in two ways. First, each investor account is credited daily with a share of the revenues generated from the collective efforts of the members. Second, investors are credited with a portion of the money generated from the referral of new investors who purchase a package for a fee. Investors are told that they have the potential for very significant returns.

The defendants have sold investors about $129 million in so-called memberships or business packages in eAdGear.com over the last four years. About 66,000 accounts for largely Chinese investors in the U.S. and abroad have been established.

Although eAdGear claims to generate millions of dollars in revenues from its internet marketing business, in fact it has no such business, according to the complaint. Rather, the records of the firm demonstrate that there is no search engine optimization business. Revenue was generated from the sale of memberships and then misappropriated by the defendants.

eAdGear is tottering on the brink of collapse. While the firm has about $370,000 in bank accounts, it owes investors at least $5 million. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and liability under Exchange Act Section 20(a). The case is pending.