Securities and Exchange Commission v. Rex Venture Group, LLC et al

Filing 146

ORDER denying #80 Motion for an Order Requiring Release of Frozen Third-Party Assets. Signed by Senior Judge Graham Mullen on 5/30/2013. (Pro se litigant served by US Mail.)(eef)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
3:12CV519
SECURITIES AND EXCHANGE
COMMISSION,

)
)
)
Plaintiff,
)
)
vs.
)
)
REX VENTURE GROUP, LLC d/b/a
)
ZEEKREWARDS.COM, and PAUL BURKS,
)
)
Defendants.
)
)
__________________________________________)

ORDER

This matter is before the Court upon an “Emergency Motion for an Order Requiring
Release of Third-Party Assets Frozen in Response to this Court’s August 17, 2012 Order and
Request for Evidentiary Hearing” filed by non-party movants David Sorrells, David Kettner and
Mary Kettner (“Movants”). Both the Receiver and the SEC have filed a response in opposition
to this motion. No Reply has been filed.
On August 17, 2012, the Court entered an Agreed Order Appointing Temporary Receiver
and Freezing Assets, which Order was amended on August 30, 2012. (“Agreed Order” [Doc. 4].)
Among other things, the Agreed Order required that “all Receivership Assets and Recoverable Assets
are frozen until further order of this Court.” Agreed Order, ¶3. The Agreed Order expressly applied
to any person or entity with “direct or indirect control over any Receivership Assets and/or any
Recoverable Assets,” and it further specified that the freeze extends to all such assets on deposit with
“online or internet-based payment processors.” Id. The term “Receivership Assets” is defined in the
Agreed Order as “all assets of the Receivership Defendant.” The Agreed Order empowered the
Receiver to take “custody, control and possession of all Receivership Property.” Id. at ¶7(B). The

1

Receiver’s powers include taking any action that, prior to entry of the Agreed Order, could have been
taken by the Rex Venture Group’s agents. Id. at ¶7(E).

Sometime between August 17, 2012 and August 20, 2012, the Receiver and/or the SEC
delivered copies of the Agreed Order to several e-wallet companies, including NxSystems, Inc.
(“NxPay®”), SolidTrustPay, and Payza/Alert Pay (the “E-wallet Companies”) for the purpose of
recovering Recoverable Assets, including assets belonging to Paul Burks and Rex Venture
Group (“RVG”). These E-wallet companies were used by Defendants to handle collection from
and distribution of funds to ZeekRewards’ affiliate-investors. Movants are each former affiliates
of ZeekRewards.com and each an owner of an e-wallet account at NxPay® which has been
frozen.

Movants contend that similar to funds in a normal bank account, any funds in their

NxPay® accounts are owned by them and that the Receivership Defendant does not have an

interest in the accounts and has no right to access the funds by charge-back or otherwise.
Each individual who signed up with NxPay® entered into a user agreement (“User
Agreement”) governing his or her relationship with NxPay®. The User Agreement describes the
nature of the services provided by NxPay® as follows: “The Services are issued by and all funds are
held by the Company for processing only. These are not bank held accounts. You acknowledge
and agree your balance is not a deposit, does not bear interest and is not insured by any government
agency.” Moreover, when funds are being processed through NxPay®, the party paying the money
can still control those funds. The User Agreement states at Paragraph 5, “If your Card or Account is
funded by a third party, you authorize us to reverse such payment upon request of the third party.”

Kenneth Mitchell-Phillips, Sr., corporate counsel for NxSystems, Inc., filed an affidavit
in which he explained funds processing at NxPay®:
NxPay® is best understood as a platform for transferring funds. Until the
receiving party takes action to withdraw the funds that are made available to
him, the funds are within the control of the party transferring the funds and

2

the transfer of ownership is not complete. . . . In other words, it is as if the
money is sitting on the counter of the company making the payment in a
folder with a person’s name on it waiting to be picked up. And, until the
person picks up the money and takes it out of the building, the company can
take the money out of the folder if it decides to do so.

(Aff. Of Mitchell-Phillips, ¶¶ 7-8). Mr. Mitchell-Phillips stated that after NxPay® received the
Court’s Agreed Order, it complied with what it believed to be its obligation under the Agreed Order
and froze every account associated with ZeekRewards until it could “determine for each personal
account whether the money in the account was loaded by RVG (in which case the money should be
returned to RVG) or by the account holder (in which case it was the account holders’ money that
could be transferred to their designated bank account).” Id. at ¶ 9. NxPay® began a lengthy process
of reconciling each frozen account to determine what funds belonged to account holders and what
funds belonged to RVG. In a December 4, 2012 letter to Affiliate-Investors whose accounts had
been frozen, NxPay® wrote: “Please keep in mind the following important points when your funds
do become available. First, only the funds that you placed onto your NxPay® Account that were not
subsequently used to purchase bids through ZeekRewards will be available.”
NxPay® ultimately spent months addressing each of approximately 150,000 AffiliateInvestor accounts to determine which funds “were money under Zeek control, and which funds were
the account holders’ money deposited by the account holders into the accounts.” Id. at ¶ 11. Mr.
Mitchell-Phillips states NxPay® has completed its review, and its payment processor currently holds
between $4 million and $6 million that NxPay® believes are Receivership Assets. Id. at ¶ 12.
Movants’ argument that funds in their NxPay® accounts were like funds in normal bank
accounts is belied by the plain language of the User Agreement. The User Agreement establishes
that RVG retained control over funds that it had placed in the Movants’ accounts which were not
withdrawn by Movants. Accordingly, NxPay® properly froze the accounts and the funds determined
to be RVG funds must be returned to the Receiver pursuant to the Agreed Order.

3

IT IS THEREFORE ORDERED that the “Emergency Motion for an Order Requiring

Release of Third-Party Assets Frozen in Response to this Court’s August 17, 2012 Order and
Request for Evidentiary Hearing” filed by non-party movants is hereby DENIED, and the Court
Orders the RVG funds being held by NxPay® to be turned over to the Receiver.
Signed: May 30, 2013

4