IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA CHARLOTTE DIVISION

Transcription

1 IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA CHARLOTTE DIVISION SECURITIES AND EXCHANGE COMMISSION, vs. Plaintiff, REX VENTURE GROUP, LLC d/b/a ZEEKREWARDS.COM, and PAUL BURKS, Civil Action No. 3:12 cv 519 APPLICATION FOR FEES AND EXPENSES BY THE RECEIVER AND HIS ADVISORS FOR THE SECOND QUARTER OF 2013 Defendants. Kenneth D. Bell, Esq., the Court-appointed Temporary Receiver (the Receiver ) for and over the estate of Rex Venture Group, LLC d/b/a ZeekRewards.com, any of its subsidiaries, whether incorporated or unincorporated, and any businesses or business names under which it does business (the Receivership Defendant ), and McGuireWoods LLP ( MW ), as counsel for the Receiver, hereby submit this application (the Application ) for allowance of compensation and reimbursement of expenses incurred by the Receiver, MW, and FTI Consulting, Inc. ( FTI ), consultants for the Receiver (collectively, the Receiver Team ), during the period from April 1, 2013 to June 30, 2013 (the Compensation Period ). I. SUMMARY OF PROFESSIONAL FEES AND REIMBURSEMENT OF EXPENSES REQUESTED This Application has been prepared in accordance with the Billing Instructions for Receivers in Civil Actions Commenced by the U.S. Securities and Exchange Commission (the SEC Guidelines ). 1 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 1 of 36

2 Pursuant to an Order dated August 17, 2012 (the Initial Receiver Order ), upon motion of the Securities and Exchange Commission ( SEC ), the Court appointed Kenneth D. Bell, Esq., the Temporary Receiver over the estate of the Receivership Defendant. An Amended Order Appointing Temporary Receiver was entered on August 30, 2012 ( Amended Receiver Order ), expanding the definition of the Receivership Estate. The Temporary Receiver was reappointed by Order dated December 4, The Receiver and MW attorneys and paraprofessionals have expended a total of 3, hours working on this matter during the Compensation Period. The Receiver and MW seek allowance of compensation for services rendered during the Compensation Period with respect to the Receivership Estate in the amount of $1,075, (which reflects a 15% discount of the regular billing rates of the Receiver and all MW personnel), and reimbursement of actual and necessary expenses in the amount of $16, The Receiver retained FTI as the forensic accountants and litigation and database consultants for the Receivership Estate. FTI professionals expended a total of 2,714.1 hours working on this matter during the Compensation Period, and seek allowance of compensation for services rendered in the amount of $925, (which reflects a 15% discount from FTI s regular billing rates 1 ). 2 Pursuant to the SEC Guidelines, the following exhibits are attached: a. Certification regarding compliance by the Receiver and MW with the SEC Guidelines (attached as Exhibit A); 1 In keeping with the rate discounts applied by MW, FTI reduced the hourly rates for its Senior Managing Directors to $495, Managing Directors to $410, Senior Directors to $395, Directors to $350, Senior Consultants to the range of $270-$320, and Consultants to the range of $210-$225. The average reduction in bill rates is 20.8% per hour. 2 FTI has agreed to not charge for travel time. Additionally, FTI has waived its customary administrative expense that is usually 6% of fees charged. 2 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 2 of 36

3 b. Certification regarding compliance by FTI with the SEC Guidelines (attached as Exhibit B); c. Fee Schedule setting forth all MW professionals and paraprofessionals who have performed services in this case during the Compensation Period, the capacity in which each individual is employed by MW, each individual s customary hourly billing rate, the hourly billing rate charged by MW for services performed by each individual, the aggregate number of hours expended in this matter, and the fees billed (attached as Exhibit C); d. Fee Schedule setting forth all FTI professionals who have performed services in this case during the Compensation Period, the capacity in which each individual is employed by FTI, each individual s customary hourly billing rate, the hourly billing rate charged by FTI for services performed by each individual, the aggregate number of hours expended in this matter, and the fees billed (attached as Exhibit D); e. Schedule specifying the categories of expenses for which the Receiver and MW seek reimbursement, and the total amount for each such expense category (attached as Exhibit E); f. All MW time records billed during the Compensation Period by activity categories and a description of the services rendered, arranged in chronological order (attached as Exhibit F); g. All FTI time records billed during the Compensation Period by activity categories and a description of the services rendered, arranged in chronological order (attached as Exhibit G); and h. All activity categories and subcategories created in conjunction with SEC and pursuant to SEC Guidelines (attached as Exhibit H). This is the Receiver s third application for fees and expenses. The Receiver previously requested and the Court previously granted interim applications for fees and expenses and payments have been made on those applications in the cumulative amount of $2,486, The Receiver and MW have not been previously compensated for the fees and expenses in this Application. The Receiver and MW do not object to a permissive holdback of up to 20%, and FTI does not object to a permissive holdback of up to 20% of fees, but request that any holdback be done on a rolling basis, and be reconsidered at each application. The fees and 3 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 3 of 36

4 expenses herein were incurred through the discharge of the Receiver s duties specified in the Court s Initial Receiver Order, Amended Receiver Order, and Order Reappointing Temporary Receiver. We believe the charges are necessary and proper, and that our efforts have brought significant benefit to the Receivership Estate. In accordance with SEC Guidelines, the Receiver and MW have not billed for their work on this Application. II. BACKGROUND The Receivership Defendant is a group of interrelated entities and websites, all of which were either controlled or owned directly or indirectly by Defendants Rex Venture Group, LLC ( RVG ) and Paul Burks ( Burks and with the Receivership Defendant, the Defendants ). RVG and Burks operated a penny auction website, ( Zeekler ), and a selfdescribed private, invitation-only, affiliate advertising division for Zeekler at ( ZeekRewards or the ZeekRewards Program ). The ZeekRewards Program had its physical operations in Lexington, North Carolina and had internet-based affiliates and contacts throughout the United States and internationally. The Zeekler participants were required to pay a non-refundable fee to purchase and place each incremental bid (typically one cent) on merchandise sold via auction. Bidders could acquire those bids by purchasing them directly on Zeekler.com, but ZeekRewards and its affiliates purchased the vast majority of the bids that they sold or gave away for free to be used in the penny auctions. On August 17, 2012, the Securities and Exchange Commission ( SEC ) commenced a civil enforcement action (the Enforcement Action ) against Burks and the Receivership Defendant. See (Doc. No. 2, Complaint filed Aug. 17, 2012 (the SEC Complaint )). The SEC Complaint alleges that the Defendants engaged in (1) the unregistered offer and sale of securities in violation of Sections 5(a) and 5(c) of the Securities Act; (2) fraud in the offer or sale of securities in violation of Section 17(a) of the Securities Act; and (3) fraud in connection with the 4 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 4 of 36

5 purchase or sale of securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. According to the SEC Complaint, Burks and RVG engaged in the fraudulent unregistered offer and sale of securities in unregistered investment contracts constituting securities in a combined Ponzi and pyramid scheme (the Scheme ) involving hundreds of millions of dollars of money supplied by domestic and foreign investors. Id at 1 and 3. The SEC sought equitable relief, including injunctions against future violations of the securities laws, disgorgement, prejudgment interest, and civil monetary penalties. Simultaneous with the filing of the SEC Complaint, the SEC, the Receivership Defendant, and Burks agreed to an order granting emergency relief, including a preliminary injunction, in the form of an order freezing the assets of the Receivership Defendant and appointing a Temporary Receiver over the estate of the Receivership Defendant. See (Doc. No. 4, Agreed Order Appointing Temporary Receiver and Freezing Assets of Defendant Rex Venture Group, LLC, filed Aug. 17, 2012) ( Initial Receiver Order ). 3 An Amended Order Appointing Temporary Receiver was entered on August 30, 2012, expanding the definition of the Receivership Estate. See (Doc. No. 21, Order Granting in Part and Denying in part Motion to Amend/Correct Order) ( Amended Receiver Order ) (collectively with the Initial Receiver Order the Receiver Orders ). There are approximately 2.2 million unique users ( Affiliates or usernames ) in ZeekRewards. The number of Affiliates does not reflect the number of unique individuals who participated in ZeekRewards, as it is likely that some individuals had more than one username. Approximately 1 million Affiliates paid money into the ZeekRewards Program ( Affiliate- Investors ). 3 Capitalized terms used but not defined herein shall have the meanings ascribed them in the Initial Receiver Order. 5 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 5 of 36

6 III. SUMMARY OF STEPS TAKEN BY THE RECEIVER The Receiver Orders direct the Receiver to identify, locate, recover, and preserve all assets of the Receivership Estate for liquidation and distribution to the appropriate parties in accordance with a Final Liquidation Plan. The Receiver Team continues to engage in the activities outlined below. A. Operations of the Receiver 1. Investigating the Receivership Defendant s Financial Information The Receiver continues to investigate the financial information of the Receivership Defendant and to marshal, identify, and secure potential assets of the Receivership Estate. The Receiver has made significant progress, particularly with respect to securing the outstanding assets of the Receivership Defendant held at various financial institutions, including payment processors and e-wallet vendors. The Receiver continues to work with various financial institutions to obtain the necessary information for the analysis and reconstruction of the Receivership Defendant s records and a determination of the funds of the Receivership Estate. In addition, the Receiver continues to investigate and analyze accounts of, and payments and transfers to and from, key insiders, thirdparty advisors, and companies affiliated with RVG and/or its principals and key insiders. Part of this process involves the investigation of transfers made to RVG accounts through various payment processors and e-wallets. Additional or supplemental document requests, subpoenas for documents and/or testimony, witness interviews, and other means of discovery are being and will continue to be used to determine whether there are any additional outstanding assets that can be seized for the Receivership Estate. Finally, the Receiver continues to work with the United States Secret Service ( USSS ) to locate and secure additional Receivership Assets. 2. Marshaling and Preserving Receivership Assets 6 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 6 of 36

7 a. Accounts for Holding Receivership Assets The Receiver maintains four interest-bearing bank accounts on behalf of the Receivership Estate. One account has been used to deposit Affiliate-Investor payments (the Affiliate Account ). Another account is reserved for the funds seized from financial institutions and payment processors by the USSS or the Receiver on behalf of the Receivership Estate (the Seized Asset Account ). A third account is used as an operating account with funds primarily held or controlled by the Receivership Defendant pre-initial Receiver Order (the Pre-Filing Account ). A fourth account is used for depositing the proceeds of settlements with net winners (the Settlement Account ). On June 28, 2013, the Receiver deposited approximately $2.5 million seized by the USSS from one of the e-wallet providers, SolidTrust Pay, into the Seized Asset Account. 4 As of June 30, 2013, the Receivership Estate held approximately $85 million in the Affiliate Account, approximately $222 million in the Seized Asset Account, approximately $1.7 million in the Pre-Filing Account, and approximately $593,000 in the Settlement Account. 5 b. Cashier s Checks While most financial institutions complied with the Receiver Orders and the Uniform Commercial Code by honoring cashier s checks and bank money orders that affiliates sent to the Receivership Defendant prior to the commencement of the Enforcement Action, some financial institutions stopped payment on these items when they were presented by the Receiver. The 4 In addition, the USSS received from e-wallet provider NxPay approximately $3.6 million in previously frozen RVG funds, which will be deposited into the Seized Asset Account during the third quarter of These are approximate numbers. The sum of all four accounts, or total cash on hand of the Receivership, was $309,480, as of June 30, 2013, as set forth in Section IIC and Exhibit B of the Receiver s Quarterly Status Report. In addition, the US Treasury account holds an additional $10,055, seized by the USSS, which will be transferred to the Receivership during the third quarter. The Receiver has marshaled approximately $325.1 million in total assets to date, which includes the cash on hand plus the funds seized by the USSS held in the US Treasury account, minus disbursements. 7 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 7 of 36

8 Receiver Team has worked to create a list of the relevant returned cashier s checks and bank money orders, and it has begun the process of seeking recovery from approximately 700 financial institutions that improperly stopped payment on these instruments. FTI worked with the Receiver Team s depository institution, Wells Fargo, to gather transactional records associated with all deposits, returns, and re-deposits related to checks that were returned due to stop payment. Overall, FTI identified over 7,500 checks totaling approximately $17 million for which the Receivership Team will seek reimbursement from these financial institutions. In addition, the Receivership Estate incurred approximately $70,000 in returned item fees because of these stop-payment orders. The Receiver is seeking recovery of the face value of the cashier s checks and bank money orders along with the associated returned item fees. During the second quarter, the Receiver deposited approximately $214,000 6 into the Affiliate Account from financial institutions that contacted the Receiver Team about cashier s checks for which they had erroneously stopped payment upon initial presentment. c. Funds Held by E-Wallets The Receiver continues to investigate the extent to which there are any recoverable funds from the Receivership Defendant s former e-wallet vendors. The Court recently ordered that NxPay transfer to the Receiver the approximately $3.6 million it held in Receivership Assets. Further, the Receiver is working with the USSS to investigate and secure additional Receivership Assets that NxPay identified and are being held by its payment processor, LST Financial, Inc. In addition, working with the USSS, the Receiver recovered approximately $2.5 million from SolidTrustPay during the second quarter. The Receiver Team is working to confirm whether SolidTrustPay holds any additional Receivership Assets. 6 The adjusted value of deposits from cashier s checks for which payment had previously been stopped is $199,969, as reflected in Section IIC and Exhibit B of the Receiver s Quarterly Status Report. The difference of approximately $14,000 is due to charges for returned checks. 8 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 8 of 36

9 Finally, the Receiver is currently working to recover Receivership Assets from Payza. d. Additional Asset Recovery Working together with the USSS, the Receiver recently obtained additional funds from two of the Receivership Defendant s payment processors. Specifically, it obtained approximately $800,000 from PlasticCash and $5 million from epayment America. The Receiver continues to investigate whether there are additional outstanding recoverable assets subject to seizure for the Receivership Estate. e. Foreign Accounts The Receiver is still working to recover the funds associated with the previously reported foreign account. The Receiver Team is investigating this foreign account and finalizing the reconciliation of the holder s account records. At this time, the Receiver Team estimates that this account holds approximately $9.5 million in Receivership Assets. 7 During the second quarter, the Receiver Team identified two additional foreign accounts that might contain Receivership Assets. The Receiver Team is working with the USSS to investigate these accounts and determine whether there are additional funds to pursue. The Receiver Team has not completed the reconciliation of all of the Receivership Defendant s account records with the amount of funds recovered from foreign accounts. As such, the Receiver continues to reserve all of his rights in that regard. 3. Analyzing the Operations of the Receivership Entity a. Investigating and Validating the Receivership Defendant s Electronic and Financial Data 7 As a result of our continuing investigation, the Receiver Team s estimate of the Receivership Assets held in this account has fluctuated. Our investigation is ongoing, and the Receiver Team continues to work to determine the final amount held in this account. 9 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 9 of 36

10 During the second quarter, the Receiver Team continued to reconstruct and analyze financial records of the Receivership Defendant, including the creation of certain books and records that were unavailable. FTI s data analysis team continued to analyze three of the RVG databases, which include approximately 1.6 billion records across 406 material tables. During the second quarter, FTI provided analyses to support settlement discussions with net winner Affiliate-Investors. This included the review of e-wallet clawback payment transactions that Affiliate-Investors alleged were never received, NxPay funds that were potentially frozen, and the review of other net winner statements made in refuting their alleged winnings. FTI prepared detailed analyses that the Receiver Team used in negotiating settlements. FTI worked to reconcile commission payments included in the ZeekRewards database to those reflected in the RVG bank statements. This effort included combining separately identified commission and available cash payments in the database to match up with the check amounts listed on the bank statements. In addition, discrepancies were identified between the check numbering in the database and those listed on the bank statements (e.g., the database listed check numbers that were one digit higher than the corresponding checks listed on the bank statements). FTI is now in the final stages of reconciling the financial transactions represented in the RVG databases with the financial transactions represented in records produced by third party financial institutions. FTI also continued investigating and reconstructing over eighteen months of financial information. To this end, FTI has consolidated and analyzed the financial information received from the inception of the Receivership through the second quarter. Recreation of the books and records related to the RVG financial accounts for which FTI has received transaction records covering the period January 1, 2011 through August 17, 2012 is substantially complete. 10 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 10 of 36

11 However, a limited number of transactions require further investigation. Additionally, in the second quarter, documents located during the ongoing investigation of the Receivership Defendant s operations indicate the possibility of additional financial accounts. Further investigation regarding these accounts has begun. As information regarding these additional accounts is received, FTI continues to update the books and records related to the RVG financial accounts. b. Investigating the Receivership Defendant s Operations During the second quarter, the Receiver Team continued its investigation into the operations of the Receivership Defendant. This investigation is ongoing and includes a review of RVG bank and payment processor records, public records, documents produced by third parties, and the ZeekRewards.com website. In addition, the Receiver Team communicated throughout the second quarter through counsel when appropriate with numerous individuals and entities believed to have information about Receivership Assets and the operations of RVG. The Receiver Team continues to interview the Receivership Defendant s former employees, officers, advisors, and promoters who are willing to be interviewed, as well as various third parties. These interviews have identified numerous other individuals and entities with relevant information, and the Receiver Team continues to pursue this information using voluntary and compulsory means as necessary. The Receiver Team has collected several terabytes of data in response to subpoenas and voluntary document requests sent to the Receivership Defendant s former employees, service providers, and other professional advisors, as well as certain Affiliate-Investors. In the second quarter, the Receiver Team established a protocol for culling, reviewing, and cataloging the large number of documents collected to date. The protocol was designed to pinpoint for review those 11 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 11 of 36

12 documents that are most relevant and necessary in aiding the Receiver in the execution of his duties and to avoid incurring costs associated with reviewing less relevant documents. The Receiver Team implemented this protocol and began the review process, utilizing a team of contract attorneys, Receiver Team members, and document review specialists, during the second quarter of The Receiver Team continues to negotiate with others regarding their necessary productions and pursues compulsory means as necessary to obtain responsive documents. All records obtained by the Receiver are being preserved in their original format and will be analyzed on an ongoing basis to the extent the Receiver believes they will aid him in completing his court-appointed assignment. c. Privilege Review Team As previously reported, Paul Burks has asserted attorney-client privilege and work product protection over communications and electronic documents in the Receiver s possession and/or control on the grounds of a joint representation by counsel of Mr. Burks and the Receivership Defendant. These claims stem from the time frame when Burks asserts that he and RVG were represented jointly by the same outside counsel. The Receiver has waived RVG s attorney-client privilege and work product protection for RVG s pre-receivership records, and the Receiver intends to waive such privilege as to any corporate communications over which the Court determines Burks has no right to object. As part of the document review protocol described above, the Receiver Team has established a procedure for identifying documents that could potentially be implicated by Burks privilege assertion and sequestering them for later review by the Receiver s internal taint team of McGuireWoods LLP ( MW ) lawyers. In the second quarter, the Receiver s taint team has 12 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 12 of 36

13 continued to review and log documents that were subpoenaed and provided voluntarily. Through this work, the taint team continues to fulfill its Court-ordered and ethical obligations to assess and evaluate third parties assertions of privilege, independently classifying those documents as privileged, work product, or not protected. 4. Communicating with Affiliates and Creditors As previously reported, to facilitate communications with Affiliate-Investors, the Receiver Team established a website through which Affiliate-Investors and other claimants may access information relating to the Receivership ( During the second quarter, the Receiver posted updated Letters from the Receiver two times on that website. The Receiver s most recent message to Affiliate-Investors, dated May 9, 2013, was a letter to Affiliate-Investors and other creditors of RVG informing them that the Court had approved the claims process and that the online Claim Portal would open on or before May 15, The Receiver Team also set up a claims inbox. A Claims FAQs section was added to the website and subsequently updated multiple times in response to affiliate s sent to the claims inbox, including updates on May 16, May 22, and June 1, The Receiver Team has made extensive efforts to reach out to and respond to affiliates throughout the second quarter. 5. Issues Concerning Federal Taxes During the second quarter, the Receiver Team worked to determine which federal and state tax filings were necessary as a result of the January 2013 reclassification of independent contractors to employees. After analyzing the issues, the Receiver Team filed supplemental employment tax forms with the IRS, the North Carolina Department of Revenue, and the Arkansas Department of Workforce Services. The Receiver Team also remitted the necessary federal and state taxes to these agencies as a result of the January 2013 reclassification. The 13 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 13 of 36

14 Receiver Team continues working with the IRS to determine whether there are any additional, outstanding employment-related taxes that need to be paid. Additionally, as previously reported for the first quarter, FTI and MW worked with National Law Forms to issue amended 1099s to Affiliate-Investors affected by failed electronic transactions and two Affiliate-Investors whose payment amounts increased as a result of a financial record research. These amended 1099s were e-filed with the IRS on April 30, MW continues to work with FTI and National Law Forms to respond to Affiliate-Investor inquiries regarding s. The Receiver Team is in the process of causing federal and state income tax forms to be prepared and filed for RVG. Given that RVG is a flow-through entity for federal and state income purposes, the Receiver Team does not anticipate the Receivership to owe federal or state income taxes. 6. Issues Concerning Former Employees As previously reported, the Receiver Team worked with RVG s former payroll company to issue W-2s to all former employees who had been misclassified by RVG as independent contractors and had been issued 1099s. Throughout the second quarter, the Receiver Team identified all individuals whom RVG had misclassified as independent contractors and issued them their back wages. The Receiver Team is working with RVG s former payroll company to remit payroll withholding taxes on these back wages. The Receiver Team also has continued to respond to former employees requests for information on the status of unpaid wage claims. 7. Litigation in the SEC Enforcement Action 8 8 This section discusses litigation in the SEC Enforcement Action. The Receiver s efforts related to the recovery of fraudulently transferred funds are discussed later in this Report. 14 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 14 of 36

15 During the second quarter, the Receiver filed a brief opposing the efforts by class-action plaintiffs counsel to obstruct the claims process by asking the Court to require the Receiver not contact certain net loser Affiliate-Investors in providing notice of the claims process. As the Court is aware, the Court approved the claims process on May 8, 2013, and the order approved the notice procedures as originally proposed by the Receiver. In addition, the Receiver has continued to serve subpoenas for documents upon key insiders, vendors, and net winner Affiliate-Investors. The Receiver Team has engaged in extensive discussions with counsel for these individuals and entities and has been engaged in discovery disputes with some subpoena recipients. These disputes and often-prolonged discussions continue to delay the Receiver and increase the costs to the Receivership Estate. B. Disposition of Receivership Defendant s Real and Personal Property As previously reported, the Receiver has retained appraisers and auctioneers to value the real and personal property of the Receivership Estate in order to assist with the liquidation of those assets. The Receivership Defendant owns two buildings in Davidson County, North Carolina: the main office building from which the ZeekRewards Scheme was operated (to which a functioning, leased laundromat is attached), and a warehouse. The Receivership Defendant was also a tenant under leases for an office building and two apartments in Davidson County, North Carolina and a lease for a virtual corporate office in Las Vegas, Nevada. The Receiver terminated the lease on the Davidson County office building in the fourth quarter of Prior to the Receiver s appointment, the lease for the virtual corporate office in Las Vegas, Nevada was prepaid by the Receivership Defendant through April 2015, and the corporate apartments in Davidson County were prepaid by the Receivership Defendant through April Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 15 of 36

16 During the second quarter of 2013, the Receiver Team terminated the leases of the corporate apartments and transferred all personal property located therein to the warehouse in anticipation of auction. The Receiver Team also terminated the leases for three climatecontrolled storage units and transferred the personal property located in those units to the warehouse in anticipation of auction. The Receiver will continue to work with the retained appraisers and auctioneers to liquidate the real and personal property at auction. The Receiver plans to conduct these auctions before the end of the year. The proposed details regarding the auction will be set forth in a motion for sale, which the Receiver will submit to the Court in advance of the auction. C. Claims Held by the Receivership Estate The Receiver Team has continued to evaluate options and strategies for pursuing funds fraudulently transferred by the Receivership Defendant. 1. Identifying and Pursuing Fraudulently Transferred Funds Held by Net Winner Affiliate-Investors As of June 30, 2013, the Receiver estimates that net winner Affiliate-Investors received approximately $290 million in fraudulent transfers from the Receivership Defendant. The Receiver Team intends to recoup as much of this money as possible for the Receivership Estate, but it is unable to estimate the portion of this amount that may be reduced to judgment and eventually collected. The Receiver s litigation team continues to evaluate the most efficient and cost-effective method for pursuing fraudulent transfer claims. As reported previously, the Receiver s clawback litigation is likely to be a combination of individual actions, group actions, defendant class actions, and other alternative dispute resolutions as approved by the Court. Such proceedings will establish the key findings applicable to most, if not all, recipients of fraudulently transferred 16 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 16 of 36

17 funds (findings such as the existence of a Ponzi and/or pyramid scheme). They will also separately provide a forum for the efficient determination of the proper amount of each net winner s repayment obligation. The group of net winners identified to date includes numerous individuals residing outside of the United States, with the largest foreign winners living mainly in countries with established legal systems which are signatories to the Hague Convention for international service of process. While the pursuit of clawback claims against these foreign net winners raises various challenges, the Receiver intends to include these winners as parties to domestic litigation based on their contacts with the ZeekRewards Program in the United States so long as doing so will not delay the litigation against domestic winners. The Receiver will also pursue costeffective foreign litigation to establish the repayment obligation and/or to collect judgments where necessary and appropriate. Now that the Court has denied the recent attempt by certain net winners to dissolve the Receivership, the Receiver anticipates that the first clawback claims will be filed in the third or fourth quarter of Settlements with Net Winner Affiliate-Investors In an attempt to resolve as many of the claims against net winners as possible prior to litigation, the Receiver has encouraged net winner Affiliate-Investors to voluntarily enter into settlement discussions with the Receiver. Most recently, after consultation with SEC counsel, the Receiver sent an on April 2, 2013 to all those who won over $1,000 notifying them of the upcoming litigation and offering to discuss settlement of the claims against them on or before May 31, In response to those s or pursuant to earlier settlement discussions, the Receiver has now reached settlement agreements with more than 135 net winners, expressly subject to this 17 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 17 of 36

18 Court s approval. These promised settlement payments total approximately $1,800,000 on net winnings of $3,220,000, an approximate 55.9% return. The individual settlements range from approximately 45% to 100% of a given individual s net winnings, reflecting the different circumstances of the various winners and the Receiver s judgment as to the appropriate amount taking into consideration the amount won, the winner s financial resources, the extent and nature of the winner s recruitment of others to join the Scheme, and other individual situations. On June 28, 2013, the Receiver filed a motion asking the Court to approve these settlement agreements. See (Doc. No. 150, Receiver s Motion to Approve Settlement Agreements and for Leave to Settle Certain Claims against Net Winners). 3. Investigating Claims against Receivership Defendant Insiders The Receiver continues to evaluate and prepare for the prospect of filing claims against Receivership Defendant insiders including employees, contractors, or other RVG agents who played an active role in furthering the Scheme. The approximate value of these potential claims remains unknown at this time. 4. Investigating Claims against the Receivership Defendant s Third-Party Advisors and Others The Receiver continues to evaluate the prospect of filing claims against the Receivership Defendant s prior third-party advisors, vendors, and other service providers that knew or should have known of the inappropriate nature of RVG s activities and yet facilitated those activities for their own gain. The approximate value of these potential claims remains unknown at this time. D. Status of Creditor Claims Proceedings, After Such Proceedings Have Been Commenced On May 8, 2013, the Court entered the Order Approving (I) Claims Process, (II) Setting of Bar Date, and (III) Approving Notice Procedures (the Claims Order ). 18 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 18 of 36

19 In accordance with the Claims Order, the Receiver caused notice of the claims process to be ed to approximately 1.7 million addresses of potential claimants. According to the Receiver s advisors, approximately 1.3 million of these s were received by the addressees. The terms of the Claims Order required that the Receiver attempt to mail notice to the more than 420,000 individuals whose addresses were invalid and did not receive the e- mail notice. In order to reduce costs, the Receiver s consultants confirmed the deliverability of as many of the physical addresses as possible before mailing. The Receiver was still required to mail in excess of 330,000 post-card notices to potential claimants. The Receiver also caused post-card notices to be mailed to more than 7,000 financial institutions that could conceivably hold claims. In accordance with the Claims Order, and in addition to the notice and the physical notices of the claims process, the Receiver published notice of the claims process in both physical newspapers and on certain multilevel marketing websites. As such, the Receiver has now provided all the notice required by the Claims Order. FTI worked with MW and Garden City Group ( GCG ) to determine the requirements and design for the online Claims Portal where ZeekRewards claimants may file claims for money lost in the Scheme. On May 15, 2013 the Claims Portal was opened to permit the submission of claims by claimants. The Claims Portal will be open for the submission of claims until September 5, As of June 30, 2013, there were 87,318 unique Registration IDs registered on the Claims Portal. Of these registrants, 50,307 submitted a claim as final. In total, 53,378 individual claims have been completed and finally submitted to the Receiver. The overwhelming majority of these finally submitted claims, approximately 99%, have been asserted by Affiliate-Investors and 19 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 19 of 36

20 Retail Auction Users. The remaining claims are largely spread across the other claim types enumerated on the Claims Portal. The median claim amount that has been submitted as final is $4, As of June 30, 2013, the aggregate sum of the claims that have been asserted as final was $237,019,771. The Receiver Team anticipates that numerous additional claims will be submitted by the close of the Claims Portal on September 5, FTI has coordinated with Garden City Group to receive several extracts of claimant-filed data to prepare for the initial stages of claims reconciliation. Concurrently, FTI is performing initial claims variance analyses and is working on customizing a claims management tool that will allow for cost effective, online review of claims. The Receiver anticipates that the claims reconciliation process will begin within the next month. In accordance with the Claims Order, upon the completion of the claims reconciliation process, a claims determination letter will be issued to the claimant. The Receiver anticipates filing a motion that will seek to distribute the Receivership Assets to the claimants on a pro-rata basis. This motion will seek to, among other things: (1) establish the procedures for the resolution of objections to claim determination amounts; (2) establish the priority of payments among all claimants (if any); (3) establish the method for determining the amounts of the distributions to be made (rising tide, net investment, etc.); (4) establish the method of distributions to be made (check, electronic payment, etc.); (5) address the application and allocation of expenses in making distributions; and (6) address how to treat de minimus distributions. It is anticipated that this motion will be filed subsequent to the close of the Claims Portal. IV. RECEIPTS AND DISBURSEMENTS The Receiver s Schedule of Receipts and Disbursements ( Schedule ) from April 1, 2013 through June 30, 2013 are detailed in the Receiver s Quarterly Status Report. The Report sets 20 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 20 of 36

21 forth the following receipts and disbursements: 1. The Receivership received funds in the amount of $2,508, from the USSS in seized assets; 2. Received funds in the amount of $199, from the deposit of Affiliate- Investor financial instruments; 3. Received funds in the amount of $558, in income from third-party litigation settlements 10 ; 4. Received income from other sources, such as interest income, totaling $76,877.79; and, 5. Disbursed funds from the Receiver s accounts, on a cash basis, of $2,606,329.01, which includes the fees previously approved for payment of FTI and MW. These funds were disbursed for bank adjustments to deposit amounts; bank fees for the deposit of financial instruments; claims process expenses; state and federal taxes; back pay; RVG website and database hosting with InternetDynamo in Miami, Florida; security services; utilities; document services; property insurance; IT support; hosting and monitoring of the Receivership website; appraisal services; storage and moving services; and other professional services. Between April 1, 2013 and June 30, 2013, the Receivership Estate deposited $3,343, and disbursed $2,606, The Schedule does not include additional funds that were collected by the USSS on behalf of the Receivership Estate, totaling approximately 9 These funds are the result of financial institutions paying the Receiver on account of affiliates cashier s checks which those financial institutions erroneously stopped payment upon previously. 10 As of the filing date of this Fee Application, the Receiver has agreed to approximately $1.8 million in settlements with third parties. These settlements were subject to court approval, and this Court approved the Receiver s Motion to Approve Settlement Agreements and for Leave to Settle Certain Claims Against Net Winners on July 26, Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 21 of 36

22 $10.1 million. Therefore the Receiver marshaled total assets of approximately $325.1 million during the period between August 17, 2012 and June 30, V. FEES AND EXPENSES REQUESTED In connection with the Compensation Period, the Receiver and MW request compensation for services in the amount of $1,075, and reimbursement of expenses in the amount of $16, In connection with the Compensation Period, FTI requests compensation for services in the amount of $925, These amounts reflect the hours worked by the Receiver and MW attorneys and legal assistants, and the hourly rates in effect at the time that the services were rendered, as modified by the discount provided by the Receiver and MW and additional write-offs of attorney time. These amounts also take into account all relevant circumstances and factors as set forth in the N.C. Code of Professional Responsibility and the SEC Guidelines, including the nature of the services performed, the amount of time spent, the experience and ability of the lawyers and legal assistants working on this engagement, the novelty and complexity of the specific issues involved, the time limitations imposed by the circumstances, and the responsibilities undertaken by the Receiver and MW under the Receiver Order and the Amended Receiver Order. Pursuant to the Receiver Order and Amended Receiver Order and the public service discount and additional fees and write-offs as described above, the fees of the Receiver and MW have been reduced from $1,335,256 to $1,075,936.68, a reduction of $259, Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 22 of 36

23 The work described in this Application was performed primarily by a group of approximately 10 attorneys, who were assisted primarily by one paralegal. 11 The Receiver and MW submitted this Application to the SEC on July 18, The Receiver and MW have addressed all of the SEC s comments and the SEC has informed the Receiver that it has no objection to this Application. The Receiver and MW have submitted previous fee applications in this case, which were approved by this Court. MW has not received a retainer in this case. As required by the SEC Guidelines, the Receiver and MW professionals recorded all services performed in time increments of one-tenth of an hour. All services by MW legal assistants and other paraprofessionals were professional in nature. In accordance with the SEC Guidelines, this Application does not seek payment for time spent preparing the Application or any documentation in support. VI. SUMMARY OF SERVICES RENDERED BY THE RECEIVER AND MW DURING THE COMPENSATION PERIOD Pursuant to the SEC Guidelines and discussions with the SEC, MW has segregated its time during the Compensation Period into twelve activity categories and additional subcategories. A description of the activity categories and subcategories is attached hereto as Exhibit H. Narrative summaries of these activity categories and subcategories are provided below. 11 The remainder of the timekeepers consist of MW professionals and paraprofessionals working in specialized capacities, such as bankruptcy, tax, employee benefits and information technology, who were consulted for a limited purpose and who charged limited time to the Estate. The timekeepers this quarter also include outsourced attorneys retained to assist with the document review discussed above. The total number of timekeepers will decrease going forward. 23 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 23 of 36

24 A. Asset Analysis and Recovery (AAR), Asset Disposition (AD), Business Analysis (BA), Litigation Consulting (LC), and Data Analysis (DA) AMOUNT: $811, Listed above are certain activity categories which are required under the SEC s Guidelines to track the Receiver s efforts and, while the Receiver will not necessarily conduct all of the above-referenced activities in a given quarter, we have grouped the above categories together for convenience. As outlined above, the activities in this category consist of the Receiver Team s efforts to identify, recover, and consolidate the Receivership Defendant s assets by collecting funds and outstanding amounts from certain financial institutions which have not released all Receivership Assets. The Receiver continues to investigate transfers involving key insiders, third-party advisors and companies affiliated with RVG and/or its key insiders. Various online e-wallet services have been in contact with the USSS and the Receiver regarding Receivership Assets and the USSS and the Receiver have made efforts to secure the release of those funds. Additionally, the Receiver s factual investigation and litigation activities fall into this category also including the issuance and enforcement of subpoenas, analysis of the subpoena responses, witness interviews, and review of RVG and third-party documents related to Receivership Assets and the operation of RVG. Additional subcategories, which were created in conjunction with the SEC, further break out and clarify many of the activities listed above: a. Clawback Litigation (CLG, CLLR, CLSUB, CLNDM, CLDM, CLDEP, CLSET) AMOUNT: $268, The above subcategories of the AAR activity category relate specifically to Clawback Litigation. These Clawback Litigation subcategories consist of efforts to aid in the recovery of funds fraudulently transferred by the Receivership Defendant, including a review and analysis of legal recovery theories and other 24 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 24 of 36

25 matters. These efforts also include legal research into the most effective recovery methods and techniques in advance of suit, the service and enforcement of out-ofstate pleadings and subpoenas, and the filing of certain non-dispositive motions. In addition, the Receiver has contacted approximately 16,000 net winners for the purpose of settling potential claims, and has negotiated settlements promising approximately $1.8 million. The Receiver has worked to secure the production of documents and engaged in extensive communications and negotiations with attorneys for key insiders and third-party vendors related thereto. b. Other Litigation (OLG, OLLR, OLSUB, OLNDM, OLDM, OLDEP, OLSET) AMOUNT: $59, The above subcategories of the AAR activity category relate to litigation other than Clawback Litigation. The Other Litigation subcategories include responding to various related cases filed by victims of the Scheme, and responding to motions filed in the SEC Enforcement Action by non-party net winners and others. c. Other AAR Subcategories (FI, FNA, LR, SAP) AMOUNT: $443, The above subcategories of the ARR activity category relate to Fact Investigation (FI), Financial Institution Negotiations/Analysis (FNA), Legal Research (LR), and Strategic Analysis and/or Planning (SAP). These activities consist of factual investigation and efforts related to negotiations with financial institutions for the release and recovery of funds belonging to the Receivership Estate and certain legal research. The document review project outlined above is also included in this category, including fees for outsourced attorneys and document review specialists, as is the work related to privilege review. Additionally, attorney work 25 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 25 of 36

26 associated with the disposition of the Receivership Defendant s real and personal property is included in this subcategory. d. Remaining Activities (BA, LC, DA, AD) AMOUNT: $39, The above activity categories are included in the amount listed in Subsection A, above, and comprise the remainder of work performed under that subsection, including efforts involving business analysis, litigation consulting, asset distribution, and analysis of assorted data relevant to the administration of the Receivership Estate. B. Business Operations (BO), Employee Benefits/Pensions (EBP), Tax Issues (TI) AMOUNT: $35, Listed above are certain activity categories which are required under the SEC s Guidelines to track the Receiver s efforts and, while the Receiver will not necessarily conduct all of the above-referenced activities in a given quarter, we have grouped the above categories together for convenience. The activities in this category consist of the Receiver Team s efforts related to the Receivership Defendant s business operations, including review of receivables, review and payment of payables, payment of final employee payroll and administration of benefits, and assuring federal and state tax compliance for independent contractors and employees. Because these matters relate to the winding-up of the Receivership Defendant, a portion of these fees are likely to be non-recurring. a. Tax Issues (TI) and Employee Benefits/Pensions (EBP) AMOUNT: $29, The fees associated with the activity categories listed above are included in the amount listed in Subsection B, above, and include the work related to federal and state tax filings outlined above, including tax work related to the January 2013 reclassification of contractors to employees, work related to the federal tax lien, 26 Case 3:12-cv GCM Document 155 Filed 08/14/13 Page 26 of 36