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 SECOND INTERIM APPLICATION FOR FEES AND EXPENSES BY THE RECEIVER AND HIS ADVISORS 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 October 1, 2012 to December 31, 2012 (the Compensation Period ). I. SUMMARY OF PROFESSIONAL FEES AND REIMBURSEMENT OF EXPENSES REQUESTED 1. 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 ). Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 1 of 31

2 2. Pursuant to an Order dated August 17, 2102 (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. 3. An Amended Order Appointing Temporary Receiver was entered on August 30, 2012 ( Amended Receiver Order ), expanding the definition of the Receivership Estate. 4. The Temporary Receiver was reappointed by Order dated December 4, The Receiver and MW attorneys and paraprofessionals have expended a total of 2,494 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 $907, (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 $76, The Receiver retained FTI as the forensic accountants and litigation and database consultants for the Receivership Estate. FTI professionals expended a total of 1,809.4 hours working on this matter during the Compensation Period, and seek allowance of compensation for services rendered in the amount of $617, (which reflects an overall average discount of 18.9% from FTI s regular billing rates 2 ) and reimbursement of actual and necessary expenses in the amount of $1, 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 At the time of the Receiver s appointment, the Receiver and MW agreed to a 15% reduction in the hourly rates for the Receiver and all of MW s attorneys and paraprofessionals. 2 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 20.6% per hour. 3 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 132 Filed 02/28/13 Page 2 of 31

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. Schedule specifying the categories of expenses for which FTI seeks reimbursement, and the total amount for each such expense category (attached as Exhibit F); g. 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 G); h. 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 H); and i. All activity categories and subcategories created in conjunction with SEC and pursuant to SEC Guidelines (attached as Exhibit I). 8. This is the Receiver s second application for fees and expenses. The Receiver previously requested and the Court previously granted the First Interim Application for Fees and Expenses by the Receiver and his Advisors on December 18, 2012, in the cumulative amount of $853,491.29, and payments were made in that amount. The Receiver and MW have not been 3 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 3 of 31

4 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 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 9. 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. RVG and Burks operated a penny auction website, ( Zeekler ), and a self-described 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 on Zeekler.com, but ZeekRewards and its affiliates purchased the vast majority of the bids that they sold or gave away for free. 10. On August 17, 2012, the 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 4 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 4 of 31

5 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 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 with 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. 11. 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, Initial Receiver Order). 4 An Amended Order Appointing Temporary Receiver was entered on August 30, 2012, expanding the definition of the Receivership Estate. See (Doc. No. 21, Amended Receiver Order), (collectively with the Initial Receiver Order the Receiver Orders ). 12. 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 ). 4 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 132 Filed 02/28/13 Page 5 of 31

6 III. SUMMARY OF STEPS TAKEN BY THE RECEIVER 13. 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 following activities: (1) operating the Receivership Estate for the benefit of the creditors of the Receivership Estate; (2) investigating the Receivership Defendant s financial condition; (3) identifying, evaluating, and preserving Receivership Estate assets; and (4) investigating and analyzing claims of the Receivership Defendant against third parties. 14. Operating the Receivership Estate a. The Receivership Defendant owns two buildings in Davidson County, North Carolina: the main office building in Lexington, from which the Scheme was operated, 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. b. In order to recover data associated with the Scheme, it was necessary to maintain each of the owned and leased facilities in modified working order, including security, internet access, and certain utility services for certain facilities while continuing to pay for the third party server facilities in Florida, operated by InternetDynamo. The Receiver terminated the lease on the Davidson County office building in the fourth quarter. Before the Receiver s appointment, the corporate apartments in Davidson County were prepaid by the Receivership Defendant through April 2013 but those leases will be terminated upon expiration of the lease term. The Receiver is also leasing three climate-controlled storage units containing personal property that is currently being appraised. 6 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 6 of 31

7 c. The Receiver Team collected, secured, and preserved all of RVG s electronic data, including approximately 10.4 terabytes of data from dozens of computers and servers, the ZeekRewards.com website, and the Affiliates back office internet portals. More than 115 boxes of hard copy documents were also collected from the RVG offices. Additionally, the Receiver Team sent numerous subpoenas and voluntary document requests to the Receivership Defendant s former employees, service providers, and other professional advisors. We have received responses from many of the recipients and are negotiating with others regarding their necessary productions. d. The Receiver Team has begun a preliminary analysis of the RVG data. However, certain third parties have asserted various claims of attorney-client privilege and work production protection for communications and electronic documents in the Receiver s possession. The Receiver Team has expended considerable resources to establish an internal taint team of MW lawyers to fulfill its Court-ordered and ethical obligations to assess and evaluate third parties assertion of privilege, notwithstanding the Receiver s waiver of RVG s attorney-client privilege and work product protection for RVG s pre-receivership records. In an effort to conserve costs by avoiding duplicative document review where possible, the Receiver Team hopes to be able to delay a significant portion of its document review until after the privilege disputes have been resolved. The delay caused by the privilege disputes may cause delays in the litigation of the Receivership Estate s claims. e. Approximately 80,000 net-winner Affiliate-Investor usernames participated in ZeekRewards. The Receiver issued subpoenas to some of those usernames who withdrew more than they invested. Many subpoena recipients have already responded by producing documents, and the Receiver Team is analyzing these responses. The Receiver will aggressively enforce subpoenas and pursue sanctions for non-compliance. The Receiver continues to gather 7 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 7 of 31

8 information from third-parties to help marshal Receivership assets and pursue claims of the Receivership Estate. f. While the Receiver terminated all employees of the Receivership Defendant in the third quarter of 2012, during the fourth quarter the Receiver continued to respond to claims for unpaid wages by individuals classified as independent contractors by RVG. The Receiver also continues to respond to claims for unemployment filed by former employees of the Receivership Defendant. The Receiver has also engaged tax experts to ensure the Receivership is in compliance with state and federal employment and income tax laws. g. The Receiver Team worked to review and comply with IRS filing requirements for Fiscal Year To that end, the Receiver Team interviewed the Receivership Defendant s prior outside tax and accounting advisors to ascertain what had been filed for 2011 and earlier. This work was necessary in order to prepare Form-1099s for Affiliates and tax returns on behalf of RVG for tax year Additionally, the Receiver continued to index employees and service providers to assess which parties will receive W-2s and Form-1099s. 15. Investigating the Receivership Defendant s Financial Condition a. The Receiver identified numerous financial accounts in which the Receivership Defendant held an interest and has successfully marshaled and secured many of those assets. The Receiver Team also continues to reconstruct and analyze financial records of the Receivership Defendant, requiring the creation of books and records that were unavailable. This time-consuming process is necessary as the Receiver continues to identify additional assets, analyze millions of transactions, trace the proceeds of any fraudulent conduct, evaluate claims of creditors and investors, and identify potential claims against former employees, third parties (including Affiliate-Investors), and others that may have received assets of the Receivership Estate. 8 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 8 of 31

9 b. FTI s data analysis team has collected and staged electronic data from the Receivership Defendant and third-parties. Specifically, FTI has staged three of the RVG databases which include approximately 1.6 billion records across 406 material tables. The cataloguing, review, and understanding of the tables and their elements were critical in understanding how the ZeekRewards program worked, specifically as it related to Affiliate information, reward program transaction information, and bid history information. c. After collecting and staging this data, FTI began analyzing it to identify and validate the transactions that involve the transfer of cash into or out of the accounts of the Receivership Defendant. This analysis has taken longer than initially anticipated due to several issues: problematic transactions with questionable accuracy, the validity of database records, and the lack of available documentation (including look-up tables, database dictionaries, and source code documentation which are commonly used to understand the organization and function of a database s components). In the absence of these tools, FTI has been required to perform extensive testing of the data to validate the proposed calculations and to rely on disparate third-party sources, including Paul Burks, e-wallet vendors, financial institutions, and subpoena responses, for understanding of the organization and function of the database components. d. The Receiver Team has begun a forensic investigation into the operations of the Receivership Defendant which, to date, includes a review of RVG bank and payment processor records, public records, documents produced by third parties, and the ZeekRewards.com website. Working with the Receivership Defendant s website hosting vendor, InternetDynamo, FTI gained access to the ZeekRewards.com website. FTI and MW are reviewing the contents of the ZeekRewards.com guest site and certain of the ZeekRewards.com back offices to gain an understanding of the business operations and activities. As there were over two million Affiliates 9 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 9 of 31

10 associated with the ZeekRewards Program at any given time, the review of the back office information is a time consuming process. e. As part of the effort to marshal, identify and secure potential assets of the Receivership Estate, the Receiver Team continues to communicate through counsel when appropriate with individuals and entities believed to have information about Receivership Assets. The Receiver Team interviewed certain Receivership Defendant employees and officers who were willing to be interviewed, as well as various third parties. These interviews have identified numerous individuals and entities with relevant information. 16. Evaluating and Preserving the Receivership Estate Assets a. The Receiver continues to maintain three 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 United States Secret Service ( USSS ) on behalf of the Receivership Estate (the Seized Asset Account ). A third account is used as an operating accountant with funds primarily held or controlled by the Receivership Defendant pre-initial Receiver Order (the Pre- Filing Account ). Creating segregated accounts controlled by the Receiver helps ensure accuracy in the ongoing forensic accounting. As of December 31, 2012, the Receivership Estate held approximately $85.3 million in the Affiliate Account, $0 5 in the Seized Asset Account, and approximately $4.0 million in the Pre-Filing Account. b. The Receiver continued to work with the USSS to seize and collect Receivership Assets from various entities and financial institutions. As of December 31, 2012, the USSS had seized approximately $221.0 million and continues to pursue at least one additional 5 As of January 15, 2013, approximately $221.0 million seized by the USSS on behalf of the Receivership Estate was transferred from the U.S. Treasury Department to the Receiver s Seized Asset Account. 10 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 10 of 31

11 source of Receivership Assets. In December 2012, with the assistance of the USSS, the Receiver requested that the Treasury Department transfer the seized amounts to the Receiver s Seized Asset Account. This transfer was completed January 15, c. The Receiver personally approves all payments made by the Receivership Estate and maintains procedures to ensure that all payments and transactions are authorized by the Receiver Orders and are necessary to preserve the Receivership Estate. The Receiver Team ensures that all such transactions are accurately recorded and monitored. d. The Receiver Team located and identified many domestic and foreign bank accounts controlled by the Receivership Defendant, as well as any banks, brokerage houses and other financial institutions conducting business with the Receivership Defendant. After freezing all identified accounts, the Receiver requested historical account information and account opening documents which have assisted the Receiver s investigation. e. On December 4, 2012, the Court entered an order reappointing Kenneth D. Bell as Temporary Receiver. Within ten days thereafter, in order to obtain jurisdiction and control over Receivership Assets pursuant to 28 U.S.C. 754, 959, 1962, the Receiver filed a Notice of Filing Complaint and Order Appointing Receiver, the SEC Complaint, and the Receiver Orders in each of the 93 other federal judicial districts where the Receiver believes Receivership Assets may be located (in the 50 United States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, and the Northern Mariana Islands). f. There are approximately 80,000 net-winner usernames, and a similarly large number of net-winner Affiliate-Investors (many Affiliate-Investors used more than one username). Based on this large number of net-winners, the Receiver determined that it was necessary to file notices in all federal districts so that he would have every opportunity to seize all 11 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 11 of 31

12 Receivership Assets and maximize the return of funds to all creditors of the Receivership Defendant. g. As indicated in the Preliminary Liquidation Plan, the Receiver Team located and collected all known unpresented checks and other financial instruments from the Affiliate- Investors that were made payable to the Receivership Defendant. The instruments mostly consisted of cashier s checks, but also included certified checks, personal checks, bank money orders, and personal money orders. These instruments were collected primarily from three sources: (1) the Receivership Defendant s facilities in Lexington, North Carolina; (2) continuing mail and carrier deliveries directed to the Receivership Defendant; and (3) third party payment processing vendors. h. As of December 31, 2012, the Receiver presented over 140,000 financial instruments for deposit. Many of these items were returned and not paid for various reasons. The Receiver Team is working with financial institutions to re-present instruments that were returned in error, and it is working to identify all instruments that were improperly returned. Many financial instruments were accepted and paid, and approximately $85 million has been deposited into the Affiliate Account from the proceeds of these instruments. 6 i. The Receiver Team encountered several substantial difficulties in the process of locating and presenting outstanding checks and financial instruments. One such difficulty arose when the Receiver Team retrieved approximately 85,000 cashier s checks and other financial instruments from Preferred Merchant Services ( PM ), a processor used by the Receivership Defendant for processing payments from Affiliate-Investors. PM informed the Receiver Team that although most of these instruments had been processed, a significant number of these instruments had not been processed or presented for payment. After reviewing these instruments, reviewing the 6 At the request of the Receiver, an in-depth analysis of the categories of returned checks and the reason for their return is currently being performed by the Receiver s bank. 12 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 12 of 31

13 records of the Receivership Defendant, communicating with PM, and working with a forensic accounting vendor, the Receiver Team was unable to definitively ascertain which instruments had already been processed and presented for payment by PM. In order to maximize recovery to the Receivership Estate, the Receiver Team elected to present all of these instruments for payment. Approximately 50,000 of these PM instruments were returned, which resulted in returned check fees of approximately $450,000. The Receiver Team negotiated a 25% reduction in these returned check fees, which saved approximately $150,000. In the end, the deposit of the PM checks resulted in a net gain of approximately $14.5 million to the Receivership Estate. j. The Receiver has been receiving numerous communications from financial institutions and Affiliate-Investors regarding cashier s checks that have never been presented for payment. The Receiver has presented and attempted to deposit all cashier s checks in his possession, and does not expect to receive additional cashier s checks in the mail. Additionally, the Receiver is unaware of any additional locations where cashier s checks payable to the Receivership Defendant might be stored. The Receiver determined that he does not have rights under the Uniform Commercial Code or the Receiver Orders to claim an interest in cashier s checks that were never received by the Receiver or the Receivership Defendant. Therefore, the Receiver has taken the position that although any cashier s check that is subsequently received by the Receiver is a Receivership Asset and will be deposited, financial institutions should consider any cashier s check that has not been presented by the Receiver or the Receivership Defendant as having been lost, and may refund the remitters of such cashier s checks without fear of liability to the Receiver. The Receiver believes that its communication of this position will resolve substantial lingering questions among financial institutions and allow the immediate return of funds to many Affiliate-Investors. 13 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 13 of 31

14 k. NxPay has informed the Receiver that is has approximately $4.0 million to $6.0 million in funds which it believes are Receivership Assets, and it is prepared to send those funds to the Receiver once a pending motion related to e-wallet funds is resolved. See (Doc. No. 80, Mot. For Order Requiring Release of Frozen Third-Party Assets, filed Dec. 11, 2012). In addition, NxPay s payment processor is holding approximately $1.3 million which have been requested but have not been sent to NxPay, and NxPay believes that the majority of those funds are Receivership Assets. l. 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. 17. Analyzing Claims Against Third Parties a. In the fourth quarter, the Receiver Team worked to investigate claims against officers, employees, participants, professionals and others who may have benefited from the Scheme. These claims may include common law claims and claims under fraudulent transfer statutes against those who ran or facilitated the operations of the Scheme and those who received more (of other Affiliate-Investor s money) than they paid into the Scheme. b. While the Receiver cannot yet predict the likelihood, amount or costeffectiveness of particular claims or the claims as a whole, the Receiver continues to diligently evaluate and prepare claims against third parties. The Receiver has offered those who are required under the law to return money the opportunity to do so cooperatively, but will enforce claims in court against those who fail to cooperate. 18. Notwithstanding the foregoing, the Receiver and his team recognize that the resources of the Receivership Estate are limited, and have sought to minimize time spent without 14 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 14 of 31

15 compromising the proper discharge of duties. Time charges and requested expense reimbursements have been significantly discounted. 19. The Receiver respectfully refers the Court to the Quarterly Status Report for the Fourth Quarter of 2012 for more information regarding the operation of the Receivership Estate. IV. CASE STATUS 20. Assets Marshaled as of December 31, 2012 a. Between August 17, 2012 and December 31, 2012, in accordance with Paragraphs 15 and 16 of the Initial Receiver Order, the Receiver Team recovered approximately $312.1 million in Receivership Assets, 7 primarily from the funds seized by the USSS and the deposit of cashier s checks, minus any necessary disbursements as outlined below. b. The Receiver anticipates the potential for additional receipts from various online e-wallets which may still maintain Receivership Assets. c. The Receiver Team and the USSS have been largely successful in obtaining the majority of the known Receivership Assets. However, as discussed in the Receiver s Preliminary Liquidation Plan, DE No. 51, and the Quarterly Status Report for the Fourth Quarter of 2012, DE No. 120, certain Receivership Assets held in foreign bank account(s) have not yet been recovered. The Receiver Team continues to seek to recover these additional assets and to locate other assets. 21. Disbursements as of December 31, 2012 a. From August 17, 2012 through December 31, 2012, the Receiver disbursed funds from the Receiver s accounts of $1,703,379.38, which includes the fees previously approved for payment of FTI and MW. These funds were disbursed for: bank fees for the deposit of financial 7 This number includes the funds seized by the USSS on behalf of the Receivership Defendant. 15 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 15 of 31

16 instruments 8 ; RVG website and database hosting 9 ; federal, state, and local taxes; security services; rent; utilities; internet and phone service; IT support; hosting and monitoring of the Receivership website; storage and moving services; and other professional services. b. At this time, the Receiver has identified over 800,000 net-loser usernames in the Receiver Defendant s records. The Receivership Team is still determining how many net-loser individuals these usernames represent. Each of these net-losers is a creditor of the Receivership Estate, and the Receiver estimates that the Affiliate-Investors net losses could potentially amount to approximately $800 million in claims. In addition, various trade creditors and taxing authorities are creditors of the Receivership Estate. The Receiver has received invoices or other demands for payment in the amount of approximately $940,000 from various trade creditors, including certain invoices for professional services that were due or coming due when the Receiver was appointed. We anticipate these creditors will submit claims once the claims process begins. c. In order to recover data associated with the Scheme, it was necessary to maintain each of the owned and leased facilities in modified working order, including security, internet access, and certain utility services for certain facilities while continuing to pay for the third party server facilities in Florida. The Receiver terminated the lease on the Davidson County office building in the fourth quarter. Before the Receiver s appointment, the corporate apartments in Davidson County were prepaid by the Receivership Defendant through April 2013 but those leases 8 As of December 31, 2012, approximately $620,000 had been disbursed by the Receiver for bank fees incurred in the recovery of approximately $85 million in Receivership Assets. The Receiver Team negotiated a reduced rate for these bank fees and will receive an additional credit against the fees of approximately $35,000 in January Additionally, the Receiver Team intends to seek recovery of certain returned check fees incurred as a result of improper stop payment orders honored by certain financial institutions. 9 The Receivership Defendant maintained the majority of its electronic data at a third party data host in Miami, Florida, InternetDynamo. The USAO and the USSS required the Receiver to maintain these data sites to ensure complete imaging and extraction of all files stored by this data host, and the Receiver has made disbursement to the necessary vendors in order to continue storing that data. Additionally, the Receiver has contracted with InternetDynamo to host the RVG websites for a limited term because it was cost-prohibitive for the Receiver to rebuild the website. 16 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 16 of 31

17 will be terminated upon expiration of the lease term. The Receiver is also leasing three climatecontrolled storage units containing personal property that is currently being appraised. d. The Receiver has retained real and personal property auctioneers who have visited the Receivership Defendants owned properties to begin their work on appraisals. 22. The Receiver respectfully refers the Court to the Quarterly Status Report for the Fourth Quarter of 2012 for more information regarding the assets located to date, the Receiver s continuing efforts to locate and monetize additional assets, the claims of creditors and investors. V. FEES AND EXPENSES REQUESTED 23. In connection with the Compensation Period, the Receiver and MW request compensation for services in the amount of $907, and reimbursement of expenses in the amount of $76, In connection with the Compensation Period, FTI requests compensation for services in the amount of $617, and reimbursement of expenses in the amount of $1, 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. 26. 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 17 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 17 of 31

18 have been reduced from $1,227, to $907,617.21, a reduction of $319, As required by the SEC Guidelines, the Receiver and MW provided a 50% reduction in fees associated with nonworking, non-local travel time, for a discount of $3, The work described in this Application was performed primarily by a group of approximately 10 attorneys, who were assisted primarily by one legal assistant. 10 The Receiver and MW submitted this Application to the SEC on January 17, We have been informed by the SEC that it has no objection to this Application. 28. The Receiver and MW have submitted one previous fee application in this case, which was approved by this Court. MW has not received a retainer in this case. 29. 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. 30. 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 31. 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 I. Narrative summaries of these activity categories and subcategories are provided below. 10 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 total number of timekeepers will decrease going forward. 18 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 18 of 31

19 A. Asset Analysis and Recovery (AAR), Asset Disposition (AD), Business Analysis (BA), Litigation Consulting (LC), and Data Analysis (DA) AMOUNT: $643, 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 recover and consolidate the Receivership Defendant s assets by collecting funds and outstanding amounts from certain banks and payment processors used by the Receivership Defendant before the appointment of the Receiver. These ongoing tasks require coordination with various financial institutions, vendors and government agencies to efficiently and effectively maximize recoveries for the Receivership Estate. The Receiver Team has been required to address many issues raised by these financial institutions in order to obtain Receivership assets. Various online e-wallet services have been in contact with the Receiver regarding funds transferred to those services by the Receivership Defendant. As discussed above, the activities in this category also include the issuance of subpoenas, analysis of the subpoena responses, witness interviews, and review of third-party documents related to Receivership Assets. 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: $194, 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 matters. These 19 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 19 of 31

20 efforts also include legal research into the most effective recovery methods and techniques in advance of suit, preparation for the service and enforcement of out-ofstate pleadings and subpoenas, and the filing of certain non-dispositive motions. In addition, the Receiver has been required to defend against motions to quash and file motions to compel net winners to produce subpoenaed documents (Docket #73, 76 (motion to quash and response); Docket #92 (motion to compel)). This obstruction by certain large net winners has magnified the Receiver s expenses. b. Other Litigation (OLG, OLLR, OLSUB, OLNDM, OLDM, OLDEP, OLSET) AMOUNT: $52, The above subcategories of the AAR activity category relate to Other 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, such as a motion to appoint an Examiner (Docket # 77), a motion to release frozen assets (Docket #80), and motion to intervene and dissolve the appointment of the Receiver (Docket #84). Much of the Receiver s efforts in responding to these motions occurred during January and February 2013, and are not included in this application for fees. The Receiver Team also made efforts to recover records and materials related to the Receivership Estate through the issuance of subpoenas. c. Other AAR Subcategories (FI, FNA, LR, SAP) AMOUNT: $339, 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 primarily consist of 20 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 20 of 31

21 factual investigation and efforts related to negotiations with financial institutions for the release and recovery of funds belonging to the Receivership Estate. d. Remaining Activities (AD, BA, LC, DA) AMOUNT: $56, 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 the disposition of certain receivership assets, business analysis, litigation consulting, 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: $61, 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 to manage the wind-up of the Receivership Defendant s business operations, including review of receivables, review and payment of payables, payment of final employee payroll and administration of benefits, review and processing of payables for more than 50 individuals categorized as independent contractors by RVG, and assuring federal and state tax compliance. Because these matters relate to the winding-up of the Receivership Defendant, a portion of these fees are likely to be non-recurring. However, work on tax issues and the liquidation of assets will continue into at least the first quarter of a. Tax Issues (TI) and Employee Benefits/Pensions (EBP) AMOUNT: $33, The fees associated with the activity categories listed above are included in the amount listed in Subsection B, above, and are unlikely to reoccur since they relate to 21 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 21 of 31

22 the Receiver s initial resolution of certain tax and employee benefit matters arising from the Receiver s appointment. Accordingly, the Receiver anticipates that these activities will be limited in the future. b. Business Operations (BO) AMOUNT: $28, The fees associated with the activity category listed above are included in the amount listed in Subsection B, above, and primarily represent efforts directed at winding up the business operations of the Receivership Defendant discussed above. C. Case Administration (CA), Status Reports (SR), Claims Administration and Objections (CAO) AMOUNT: $196, 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 regular meetings and status conferences among members of the Receiver Team, the Receiver Team s efforts to comply with the directives of the Court including Court filings, analysis and review of potential litigation by and against the Receivership Estate, interviews of key employees and third parties, collection of the Receivership Defendant s electronic and hard copy records for processing, review, and analysis, and site visits to and from the Receivership Defendant s headquarters in Lexington, North Carolina. The category also includes efforts to establish procedures for administering the claims of Affiliate- Investors, including the Receivership website and updates to same and reviewing s and correspondence from Affiliates. Other activities include the Receiver s management and oversight of the Receiver Team and MW s participation in calls and conferences with FTI, the SEC, the USAO, and the USSS. The Receiver has also conducted an online teleconference, open to all 22 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 22 of 31

23 Affiliates, in order to update Affiliates on case status and progress. The Receiver has also engaged in motions practice and has filed an opposition to a Texas-based lawyer seeking court appointment as counsel for Affiliates and attempting to charge the Receivership Estate for his representation of those Affiliates. a. Claims Administration and Objections Subcategories (CAO) (RES, RA, DR, CAF, CIN, OTH) AMOUNT: $29, The Claims Administration and Objections activity category and the above subcategories of the CAO category, including Research (RES), Review/Analyze (RA), Draft/Revise (DR), Communicate Affiliates (CAF), Communicate Internal (CIN), and Other (OTH), are part of the $197, listed in Subsection C above. During the fourth quarter, the Receiver Team worked to create a claims process and the necessary claim form. The Receiver anticipates filing a motion seeking approval of the Claims Submission Process by the conclusion of the first quarter of The Claims Motion will seek (i) approval of the claims submission process, (ii) to establish the date by which claims must be filed against the Receivership Defendant (the Bar Date ), and (iii) approval of the noticing procedures to be used in providing notice of the Bar Date and the claims submission process. More detailed information about the proposed claims process is set out in the Final Liquidation Plan, DE No b. Case Administration (CA - $107,454.69) and Status Reports (SR - $59,310.59) AMOUNT: $166, The Case Administration (CA) and Status Report (SR) activity categories listed above are included in the $197, listed in Subsection C above and comprise the 23 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 23 of 31

24 majority of efforts described in Subsection C above, including the preparation of the Receiver s Liquidation Plan and Quarterly Status Report. D. Accounting/Auditing (AA) and Forensic Accounting (FA), AMOUNT: $5, The activities in this category consist of working with FTI to review and analyze the business and financial activity of the Receivership Defendant, as discussed below. E. Travel, AMOUNT: 11 $2, The activities in this category cover all non-working travel time of the Receiver and MW professionals outside a 20-mile radius of the relevant offices during the Compensation Period. The starred entries on Exhibit C reflect the actual travel time of the professionals. The SEC Guidelines permit non-working travel time to be billed at 50% of the professional s billing rate. Accordingly, the Receiver and MW reduced the fees that fell within this category by charging at 50% of the discounted rates, resulting in a discount from $5,409, or a total travel time reduction of $3,110.16, resulting in an effective discount of approximately 58%. Because the Receivership Defendant s operations have been concluded, and the relevant data and records have been largely collected, fees and expenses in this category are likely to be reduced in future fee applications. However, additional travel expenses will be incurred in conjunction with the liquidation of the Receivership Assets in Lexington. VII. SUMMARY OF SERVICES RENDERED BY FTI DURING THE COMPENSATION PERIOD A. Data Analysis (FTI Code 7), AMOUNT: $534, The activities in this category include the collection, staging and analysis of electronic data and databases of the Receivership Defendant and data produced by third parties. FTI has worked to analyze the data in the databases to reconstruct the Receivership Defendant s 11 Travel time has been coded with the activity code associated with the purpose of the travel. 24 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 24 of 31

25 business and financial activities. FTI has used the databases to identify potential net winners of the Receivership Defendant s business scheme. Additionally, FTI has used these databases and data produced by third party financial institutions to reconcile initial subpoena responses. FTI worked with Internet Dynamo to restore the Receivership Defendant s websites to allow for review of the website and testing of the Receivership Defendant s databases. All of the activities in this category are necessary in order to construct and reconstruct the financial records of the Receivership Defendant and to analyze claims brought by and against the Receivership Estate. In light of the complexity of the RVG databases and the poor condition of the records of the Receivership Defendant, the data analysis will continue into future periods. B. Accounting/Auditing and Forensic Accounting (FTI Codes 5 and 6), AMOUNT: $53, The activities in this category consist of steps taken by FTI to understand the business and financial activity conducted by the Receivership Defendant. Specifically, FTI reviewed RVG bank and payment processor records as well as public records and documents produced by third parties in response to voluntary document requests, including documents provided by financial institutions and former RVG advisors and accountants. The primary focus of FTI s work to date in this category has been to reconstruct the Receivership Defendant s books and records. This analysis was conducted in part to facilitate the recovery of assets as well as to trace the funds of the Receivership Defendant. FTI has also worked to review the website of the Receivership Defendant to gain an understanding of the business model and compensation structure of the Receivership Defendant. Due, in part, to the poor state of the records and the complexities of the RVG databases the efforts pertaining to the forensic accounting and auditing are only in their preliminary stages. This work will continue into and possibly beyond the next fee period. 25 Case 3:12-cv GCM Document 132 Filed 02/28/13 Page 25 of 31