It’s no secret that I am not a fan of government regulation in general and the SEC in particular. Indeed, I think what the SEC did to PokerStars amounted to nothing more than extortion.
But I would be dishonest if I said they didn’t get it right sometimes, which is what happened yesterday when they shut down Zeekler, the penny auction site that apparently used its own affiliate’s investment to pay, well to pay its affiliates. Ladies and gentlemen, that is a Ponzi scheme.
Zeekler or ZeekRewards is one of those penny auction sites like QuiBids, where people pay a certain amount for a bid and then use each bid on whatever item that is being auctioned. Each bid is worth only a penny, so each item sells for way less than normal. However, since people had to buy the bids in the first place, the total amount put into these items far exceeds the item’s market value. In other words, it’s nothing more than a form of gambling.
Zeekler was different than the others though, because it marketed itself by bringing in affiliates that would invest however much money in Zeekler. This money bought free bids for potential customers who could use those bids to place a penny bid on whatever item. In addition, affiliates had to place one ad a day on one of an assortment of different craigslist-ripoff sites advertising the free bids to potential customers that the affiliates were providing with their own money (yes, it does sound a bit suspicious doesn’t it).
For putting up their money and this ad, the affiliates were promised something like a 1.5% return per day! Which amounts to approximately one butt load% per year. (My dad calculated Zeekler would have to make as much money as Apple to pay out the obligations they had incurred, but I don’t feel like verifying this.)
I was actually given a sales pitch on ZeekRewards to come in under someone who had signed up an acquaintance of mine (like any multi-level marketing company, you get a piece of the people’s profits whom you bring on board). The pitch immediately sounded questionable (indeed, questions about whether ZeekRewards was a Ponzi scheme are nothing new). There was quite a few specific questions he couldn’t answer, namely:
– How much cash does Zeekler have on hand?
– Why won’t Zeekler allow you to take all of your money off the site at once (you have to do it in steps)?
– How can Zeekler manage the immense amount of accounting that would be required?
– Why would anyone buy bids for Zeekler when they can get free one’s from an affiliate who are putting up the money?
– And thus the big question; what percent of the bids are bought vs acquired for free?
Actually the only thing that gave me any confidence that Zeekler was legitimate was the fact it hadn’t been shutdown by the SEC at that point. On a side note, I should mention that regulation often just provides a false sense of security. This was even part of the guy’s sales pitch for Zeekler. And after all, how much has the SEC really saved investors here given that according to their own report, Zeekler was about to collapse anyways. They certainly didn’t save the investors in Bernie Madoff’s scheme a dime.
But I digress. Simply put, the problem was that despite that spam ad that each affiliate had to post, the affiliates didn’t add any value other than their cash investment. Honestly, this “work” affiliates had to do was a joke. The guy giving me the pitch even mentioned there were companies that you could hire to post your ad for you. (Because 2 minutes a day is just too much of a time commitment. By the way, why didn’t these companies just sign up for ZeekRewards?).
Furthermore, it’s not surprising that Craigslist wouldn’t let Zeekler affiliates post ads there since it would just be a barrage of spam. So which sites did let Zeekler affiliates post to? Well, they are sites that, from what I can tell, were set up just to be spam receptacles. Take a look at AdPost.com’s business products section and see if you notice anything:
It appears that every one of the sites Zeekler affiliates posted ads to was pretty much like that. Who is possibly going to use these ads? And if they do, who cares? All the bids they would get were for free and if they wanted more, it wouldn’t be too hard to find a place that offers more free bids. Indeed, why would anyone, under any circumstances imaginable, actually buy Zeekler bids?
So at least I got my question answered. It turns out that 98% of ZeekRewards revenue came from investors (cough, Ponzi scheme, cough). Which is not surprising given the only thing of value the affiliates brought to the table was their own money. As the SEC complaint states, “ZeekRewards brought in approximately $162 million while total investor cash payouts were approximately $160 million.” (You can read the entire SEC filing here).
I wonder what goes through the heads of people like Zeekler CEO Paul Burks, Bernie Madoff, the financial ministers of virtually every Western entitlement system or Charles Ponzi himself. Was it just meant to be a temporary solution until things got out of control? How on Earth did they think they would get away with it? It simply baffles me.
In the end, my friend has probably lost his entire investment, for all intents and purposes. My parents lost a small amount one time in a similar sort of thing and eventually received a pittance payment some 15 years later (I kid you not), so Zeekler investors shouldn’t expect to get anything back. In the end, it’s the same old lesson folks: if it sounds too good to be true, it probably is. And if it looks like a Ponzi scheme, swims like a Ponzi scheme and quacks like a Ponzi scheme, then it probably is a Ponzi scheme.
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