CUNA, CUNA Mutual: Ponzi Scheme Hitting Members

The Credit Union National Association (CUNA) was instrumental in providing advance notice to credit unions of a Ponzi scheme that has victimized credit union members and involves losses of about $19.8 million so far to credit unions.

For the past two months, CUNA has participated in BITS Fraud Steering Committee ad hoc calls related to the scheme, which centers on North Carolina-based Rex Venture Group, doing business as Zeek Rewards and as penny auction site Zeekler.com. The Securities and Exchange Commission (SEC) shut down the group and its site on Aug. 17, saying that its securities offerings are not registered with the SEC as required under federal securities law.
 
In its complaint filed Aug. 17 with the U.S. District Court for the Western District of North Carolina Charlotte Division, SEC said the $600 million Ponzi scheme, on the verge of collapse, attracted more than one million online customers, including many credit union members, who were promised up to 50% of the company's daily net profits through a profit sharing system in which they would accumulate rewards points redeemable for cash payouts.
 
"Unbeknownst to its investors, ZeekRewards is, in reality a massive Ponzi and pyramid scheme," said SEC in its court filing.  "Approximately 98% of Zeek Rewards' total revenues, and correspondingly the purported share of 'net profits' paid to current investors, are comprised of funds from new investors," it said.
 
Other activity was discovered in money orders, cashier's checks, debit and credit cards and automated clearinghouse (ACH), with check amounts ranging from $10 to $10,000.  CUNA is receiving lists that identify credit unions impacted from Wells Fargo, the bank assisting the receiver in the case, and has been notifying the credit unions.
 
So far, more than 8,200 checks totaling $19.8 million have been issued by about 1,150 credit unions affected by the scheme. CUNA has sent more than 1,400 e-mails to about 700 identifiable credit unions with valid e-mail addresses whose members are affected by the Ponzi scheme.
 
CUNA also notified CUNA Mutual Group, which issued three Risk Alerts to its policyholders on Sept. 3, Sept. 14 and Oct. 7 and allowed CUNA to distribute the alerts to affected credit unions.
 
Many members who invested with Zeek Rewards heard about the SEC's action and have asked their credit unions to stop payment on cashier's checks they had submitted to ZeekRewards as investments.
 
CUNA Mutual's Risk Alerts warn that credit unions are at risk for wrong dishonor claims if they place a stop payment on cashier's, teller's and official checks without following the established procedures in the Uniform Commercial Code (UCC) regarding lost, destroyed or stolen cashier's checks, teller's checks or certified checks.
 
"Under UCC laws, financial institutions should not place stop payments on cashier's checks," said the Risk Alert for Sept. 13. "Doing so can result in potential liability to the financial institution for any losses suffered by holders in due course."  Checks that were sent to ZeekRewards are still being processed for payment as part of its receivership process. Credit unions should not place stop payments on these cashier's checks or certified checks.
 
In an Oct. 4 Risk Alert, CUNA Mutual said, "many credit unions improperly stopped payment on cashier's checks based on requests from members who invested in ZeekRewards." This "violates the court's order." The receiver is resubmitting the checks for payment. If payment is refused, the credit union may be required to pay the receiver's expenses and loss of interest from nonpayment of the items. It also may be liable for consequential damages and risk being held in contempt of the court's orders.
 
CUNA Mutual's advice: Pay the check. If a credit union has already dishonored the submitted cashier's check should consult with its legal counsel to determine an appropriate action.
 
Julie Esser, director of new alliances at CUNA Strategic Services and one of CUNA's staff liaisons with BITS, is receiving information from Wells Fargo that identifies credit unions that need notification, and is notifying credit unions as more information becomes available. Credit unions should tell members involved to monitor the receiver's website for updates. Use the link.