210 F. Supp. 3d 421
E.D.N.Y2016Background
- CKB (aka WIN168/CKB168) operated as a multi-level marketing/pyramid operation selling "business packs" ($1,380) that included one software license and purported "Prpts" (points) said to be worth $750 and convertible to pre‑IPO stock.
- The compensation (Dynamic Rewards Plan) rewarded recruitment and sales to OMAs (Online Marketing Angels); there was virtually no retail sales and most licenses were unused.
- Promoters (Shern, Leung, Guo, Lee, Ma, Yao Lin, and others) advertised CKB as a lucrative, low‑risk investment, promised imminent IPO and stock conversions, and emphasized passive/active returns based on Prpts and recruitment.
- Prpts could not be meaningfully converted to cash; stock was not actually provided (only one promoter received a nontransferable certificate); top promoters captured the vast majority of commissions while most OMAs lost money.
- The SEC moved for summary judgment; the court found the record undisputed on key facts and granted summary judgment for the SEC against Shern, Leung, Guo, Lee, Ma, and Yao Lin.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants violated Exchange Act §10(b)/Rule 10b‑5 and Securities Act §17(a) by making material misrepresentations in connection with securities | Defendants knowingly or recklessly made material false statements (CKB legitimate, Prpts had cash value, convertible to stock, imminent IPO, risk‑free returns) in connection with sale of securities; scienter established | Defendants claimed reliance on CKB materials, lack of intent, and disputed some factual assertions | Court held defendants made material misrepresentations, acted with scienter (knowledge/recklessness), and are liable under §10(b)/Rule 10b‑5 and §17(a) as a matter of law |
| Whether defendants are liable for an overall fraudulent scheme ("scheme liability") beyond discrete misstatements | SEC: defendants’ promotional and structural conduct (recruitment plan, back‑office, seminars, enrollment transactions) were inherently deceptive and furthered a scheme to defraud | Defendants disputed characterization and claimed they relied on company representations | Court held scheme liability: defendants performed inherently deceptive acts furthering a fraudulent pyramid enterprise |
| Whether offering/selling Prpts/business packs or promising pre‑IPO stock violated Securities Act §5 (unregistered securities) | SEC: business‑pack investments/Prpts/pre‑IPO stock are securities and were offered/sold without registration; defendants substantially participated in sales | Defendants disputed that the instruments were securities and contended they merely promoted an MLM product | Court held investments were securities (Howey and label/attributes), offers/sales occurred, and defendants violated §5; Leung also liable as substantial participant |
| Whether Shern and promoters violated Exchange Act §15(a) by acting as unregistered brokers | SEC: promoters solicited, advised, induced purchases, received commissions and thus acted as brokers without registration | Defendants argued lack of formal employment/registration and reliance on company materials | Court held promoters were brokers as a matter of law under the multi‑factor test and violated §15(a) |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
- Anderson v. Liberty Lobby, 477 U.S. 242 (summary judgment and genuine issue standard)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (requiring specific facts to defeat summary judgment)
- SEC v. W. J. Howey Co., 328 U.S. 293 (investment‑contract test for securities)
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (who is the maker of a statement for Rule 10b‑5)
- Omnitrition Int’l, Inc. v. Webster, 79 F.3d 776 (pyramid scheme characteristics in MLM context)
- BurnLounge, Inc. v. F.T.C., 753 F.3d 878 (MLM/pyramid analysis and functional focus on recruitment vs retail sales)
- F.T.C. v. Five‑Star Auto Club, Inc., 97 F. Supp. 2d 502 (pyramid scheme criteria and collapse risk)
- Universal Express, Inc. v. SEC, 475 F. Supp. 2d 412 (liability where promoters failed to investigate and continued misrepresentations)