SEC Sees $105 Million Pyramid Scam

ATLANTA (CN) - A Georgia man raised $105 million in a massive pyramid scheme through his Atlanta-based company Zhunrize, which purports to sell online stores through which "members" can sell merchandise, the SEC claims in court.

The SEC sued Zhunrize and its CEO Jeff Pan, 52, of Suwanee, Ga.

It claims the company, founded in 2012, makes virtually all of its money - more than 98 percent of it - from selling "memberships," not from selling any actual products.

"From 2012 to the present, the company has taken in approximately $105 million from investors who have purchased approximately 77,000 stores," the lawsuit states.

"Zhunrize purports to be a legitimate multi-level marketing business by which members purchase online stores and then sell merchandise through them, while earning commissions on products purchased by their customers and through store sales to other members and hosting fees paid by those members," according to the complaint.

"In fact, the company is operating as a pyramid scheme because it depends on the continual recruitment of new members to generate the returns it pays its members. The company offers compensation plans to investors that are based on recruitment, with the most lucrative returns based on recruitment by subsequent members in a member's downline. The company earns virtually no profit from product sales. A majority of the 'stores' (online websites which are what members purchase) sold by the company cannot sell product." (Parentheses in complaint.)

The lawsuit continues: "Zhunrize does not disclose, however, that to date substantially all of its revenue (more than 98 percent) has comes from the sale of memberships (referred to as stores) and the corresponding monthly internet hosting fees associated with operating those stores, rather than the sale of products.

"Further, the product sales that do take place are, overall, not profitable. The lucrative returns paid to investors come from fees paid by other investors.

"Promotional literature used by Zhunrize also tout[s] the lucrative profits that can be earned from the recruitment of additional members, even suggesting that members can make a return of over 800 percent.

Thus, contrary to the representations to potential investors, Zhunrize is actually a fraudulent pyramid scheme."

The SEC seeks a restraining order and injunction, freezing of assets, an accounting, disgorgement, preservation of records, and penalties for fraud, securities fraud, and unregistered offering of securities.

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