Received an email from Leenon site saying they had done their interim reportt so i downloaded it a posted the entire thing here for easy reading. enjoy.
page 1 of 25
Quote:
Thomas F. Lennon ("Receiver"), Court-appointed permanent receiver for
LifeClicks, LLC, 12daily Pro ("12DP"), and their subsidiaries and affiliates
(collectively, the "Receivership Entities"), hereby submits his First Interim Report
of Permanent Receiver and Petition for Further Instructions pursuant to Local
Rule 66-6. This reports details the Receiver’s activity since his appointment on
March 1, 2006. The volume of material and information acquired, including the
large number of investors and transactions to be analyzed, the need for
additional information, and the need for verification and analysis of the
information received to date, requires that this initial report be considered
preliminary. The Receiver may need to materially modify its contents after
further consideration.
I. OVERVIEW
In mid-2005, Charis Johnson began operating the 12DP website. The
information on the website described an autosurf program whereby investors could
earn 12% of their invested funds every day for twelve days by running a program on
their computer that would automatically access certain websites and thereby
purportedly generate advertising revenue. Ms. Johnson was extremely successful in
attracting investors and raised approximately $500 million in less than nine months.
12DP did not handle any of the investors’ money. Money was handled by
third party online payment processors such as StormPay, EMO, and e-gold.
Ms. Johnson utilized these third-party payment processors to facilitate her business.
When investors decided they wanted to "upgrade," or purchase investment units,
they opened accounts with the payment processor linked to the 12DP website.
Initially, investors used e-gold, then later StormPay, and finally EMO. Investors
could transfer money into their e-gold, StormPay, or EMO account by using their
credit cards, electronic transfers or money orders. The payment processor would
take a commission of the total transfer of monies.
Under the rules posted on the website, 12DP investors were limited to
purchasing $6,000 in "upgrades" or investment units. An investor that met the
autosurfrequirements, and invested $6,000, would accrue $720 (12% of their
investment) per day for 12 days. They could then choose to withdraw $8,640 at the
end of the cycle, a profit of $2,640. The investors could also earn fees by referring
new investors to 12DP. If an investor chose to withdraw its funds, 12DP would
direct the online payment processor to transfer money out of the 12DP account into
the investor’s account. Based on the information obtained by the Receiver to date, it
appears that all of these earnings were paid with funds received from other or later
investors. The Receiver has not identified any significant revenue generating
activity other than investments made by new and existing investors.
In February 2006, 12DP had approximately 175,0001 investors with aggregate
account balances of between $50 and $60 million. The majority of 12DP investors
were using StormPay to process payments at that time. In the beginning of
February, StormPay froze 12DP investor accounts and aggregated all account
balances into the 12DP account. This $50 million figure, however, was an account
balance reflected on StormPay’s records, it was not matched dollar-for-dollar by
liquid assets within the control of StormPay. It appears that StormPay did not, as a
practice, maintain liquid assets at all times in an amount equal to the account
balance of its customers. Because 12DP investors could not access their accounts at
StormPay, they quickly turned to exercising self-help in the form of initiating
chargebacks with the credit card companies and returns of electronic transfers. The
Receiver took control of the Receivership Entities on March 2, 2006. As described
The Receiver is still in the process of refining the information on the number of investors and
each investors’ transaction history. In the process, over 400,000 unique email addresses have
been identified, suggesting that there may have beenthat many 12DP investors. It now
appears that there were a significant number of 12DP participants who never "upgraded" (i.e.
actually invested money). In addition, some investors used multiple email addresses. The
Receiver’s best estimate of active investors at the time the case was commenced is
approximately 175,000.
in detail below, the Receiver secured the premises of 12DP, made arrangements to
enforce the injunction and asset freeze, and began his investigation.
II. PROCEDURAL BACKGROUND
On February 21, 2006, the Securities and Exchange Commission
("Commission") filed its Complaint against Chaffs Johnson, LifeClicks, and 12DP
(the "Defendants") along with an Ex Parte Application for Temporary Restraining
Order, and Orders: (1) Freezing Assets; (2) Requiring Accountings; (3) Prohibiting
the Destruction of Documents; (4) Expediting Discovery; (5) Appointing a
Temporary Receiver, and Order to Show Cause regarding Permanent Injunction and
Appointment of a Permanent Receiver. The Commission’s Ex Parte Application
was denied without prejudice. On February 24, 2006, the Commission and the
Defendants entered into a stipulation for an Order of Permanent Injunction and
Orders (1) Freezing Assets; (2) Requiring Accountings; (3) Prohibiting the
Destruction of Documents; and (4) Appointing Thomas F. Lennon, Inc. as a
Permanent Receiver. The Court entered the Order (the "Permanent Injunction
Order") on March 1, 2006.
The Commission’s Complaint alleges that the Defendants sold unregistered
securities in the form of investment contracts. By way of these contracts, investors
would purchase or "upgrade" their membership units in 12DP.2 The membership
units were sold at $6.00 per unit with a maximum purchase at any given time of
1,000 units. The Defendants promised their investors 12% for 12 days, meaning
that each investor would receive 144% of their investment within 12 days.
At the time the case was filed, there were approximately 175,000 12DP
investors. Approximately 87,000 of those investors reside in the United States. The
remainder are located outside the United States, with the largest group in Malaysia.
Anyone could acquire membership units in 12DP simply by registering at the 12DP website.
Investors could "upgrade" their membership units through an investment contract. Only those
that "upgraded" their membership units received distributions.
The Receivership Entities were based in Charlotte, North Carolina, where Charis
Johnson resides.
A. Glossary of Key Names
12dailyPro (" 12DP")
LifeClicks, LLC
Chaffs Johnson
StormPay, Inc. ("StormPay")
Global Payments Direct, Inc.
("Global")
Nova Information Systems, Inc.
("Nova")
Legends Bank ("Legends")
ITI Internet Services, Inc. ("ITI")
EMO Corp. ("EMO")
e-gold Ltd ("e-gold")
Domain name registered to C_hafts.
Johnson located an Charlotte, North
Carolina.
A North Carolina Limited Liability.
C_ompany located in Charlotte, North
Carolina. LifeClicks purports to own and
operate 12DP.
A resident of Charlotte, North Carolina,
owner of LifeClicks and .administrator of
the 12DP website.
Internet payment processor located in
Clarksville, Ten!)essee throug_h which
12DP received the majority or-its
invesmaents and paid out tlae majority
its distributions.
Credit card payment processor_that
processed payments for Storm_Pay,
including payments by 12DP investors.
Credit card payment processor that
processed payments for StormPay,
including payments by 12DP investors.
State-chartered bank in Tennessee that
holds ope.ra.ting accounts of StormPay and
processed tlae.majori~ of electronic
payments made to and by StormPay.
A corporation based in Tacoma,
Washington, which acts as a third pa.l~
ACH originator, and processed a portion
of StorrnPay electromc payments.
Texas corporation that sold electronic
money orders to 12DP investors as a
means of making investments in 12DP.
EMO is thee suNect of a receivership at the
request or-the Texas Attorney General and
_Texas Department of Financial
Institutions.
Internet payment processor based in
_Nevis, West Indies. Before moving to
StormPay, 1.2DP had accounts at e-gold_
which it used to receive investments and
make distributions.
III. RECEIVER’S ACTIVITIES
The Receiver’s Employment of Professionals
Pursuant to authority granted under Section VII of the Permanent Injunction
Order, the Receiver has retained the law firm of Allen Matkins Leck Gamble
Mallory & Natsis LLP ("Allen Matkins") to represent him in this matter, including
in connection with discovery and investigation efforts, as well as potential recovery
and avoidance actions to recover assets and funds for the benefit of the receivership
estate and its creditors. The Receiver also hired the law firm of Poyner Spruill Ltd.
to represent him as local counsel in Charlotte, North Carolina.
The Receiver retained the services of William H. Ling, Certified Public
Accountant, to conduct a forensic accounting analysis of the books and records of
12DP (including data provided by StormPay, EMO and e-gold) and to perform
whatever other accounting services are necessary and appropriate. Finally, the
Receiver has retained the services of Investigative Technologies as information and
technology consultants to assist in the preservation, organization, and analysis of
electronic data, including electronic data from StormPay, EMO, and e-gold, and the
creation and maintenance of the Receiver’s 12DP web portal (discussed further
below).
B. Securin~ of Premises and Interviews with Charis Johnson
In late February and early March 2006, the Receiver traveled to Charlotte,
North Carolina. After the Permanent Injunction Order was entered, the Receiver
visited the I’2DP offices, seized all records and equipment that were there, and
interviewed the office manager. The Receiver also delivered a copy of the
Permanent Injunction Order to the local post office with instructions to forward all
mail for the Receivership Entities to the Receiver.
The Receiver conducted several telephone and in-person interviews with
Chaffs Johnson regarding the operations of 12DP, the computer databases of
cont.investor information, and the location of computers, servers, and other equipment.
The computers were secured and sent to the Receiver’s offices for investigation and
analysis.
C. Recovery, of 12DP Electronic Data
12DP maintained a website hosted by Hosted Solutions, Inc., a limited
liability company headquartered in Raleigh, North Carolina. The servers supporting
the 12DP website contained important electronic data regarding the identity and
transaction history of 12DP investors. The Receiver demanded that Hosted
Solutions turn over this data pursuant to the Permanent Injunction Order. Hosted
Solutions initially refused, stating that it would not turn over the data unless the
Receiver paid amounts that were due under its contract with 12DP. On March 15,
2006, Hosted Solutions and the Receiver reached an agreement in which the
Receiver agreed to pay $2,585 to Hosted Solutions for the limited services it
provided in March 2006, and for Hosted Solution.s’ incidental costs associated with
turning over the 12DP electronic data. At the request of the Receiver, Investigative
Technologies imaged the 12DP servers maintained by Hosted Solutions, thereby ¯
preserving this data for the Receiver’s use.
As discussed further below, 12DP used several internet payment processors to
receive investments and make distributions. The majority of 12DP’s transactions
were handled by StormPay. The Receiver has obtained account data for the
12DP/Charis Johnson account at StormPay, including the email addresses of all
12DP investors that used the StormPay system. Investigative Technologies has
spent considerable time analyzing this data, beginning the process of reconciling
StormPay data against that maintained by 12DP and generating relevant reports for
the Receiver’s use in administering the estate and reporting to the Court.
D. The Receiver’s Website
The Receiver has established a website dedicated to the 12DP receivership
case. The Internet address is www.tlennonforl2dailypro.com. Given the extremely
large number of investors, and the fact that all investors necessarily had access to
the Internet in order to invest with 12DP, communicating with investors through the
Internet is the most practical medium.3 From the website, investors and other
interested parties can download the Commission’s Complaint, the Permanent
Injunction Order, and the Court’s March 27, 2006 Minute Order (discussed below).
The Receiver has also posted three letters to investors, a Frequently Asked
Questions page, and instructions on how to contact the Receiver. The Frequently
Asked Questions are regularly updated with information about the case for
investors. The Receiver will continue to update the website regularly with pertinent
orders from the Court, reports from the Receiver, and other pleadings in the case.
The website has been an effective means of informing investors about the case; on
average, approximately 29,000 investors have visited the website per month.4
E. The Receiver’s Interactive Web Portal
The Receiver is in the process of constructing an interactive web portal for
12DP investors. 12DP investors will be able to register at the website by providing
their name, contact information, and setting up a user name and password. Investors
will then be given the opportunity to provide information about their investments in
12DP, including the dates, Internet payment method used (i.e. StormPay, EMO or
e-gold), and amounts invested.
The investor data received through the web portal will supplement the data
obtained from 12DP and StormPay, and help ensure that as many investors as
possible are contacted. The Receiver also contemplates using the web portal to
assist in the receipt and administration of investor claims.
3
4
By separate motion, the Receiver will request that email notice to investors be deemed
sufficient notice under Civil Local Rule 66-7.
This data is based on the number of distinct "hosts," or separately identifiable computers, that
have visited the website per month between March 3, 2006, and July 31, 2006. If an investor
hits the website on multiple occasions in the same month from the same "host," this is counted
as only one visit.
F. Comliaunications with Investors
In order to contact as many investors as possible in a short time and because
of the delay in obtaining 12DP data from Hosted Solutions, the Receiver initially
used investor email addresses provided by StormPay to send letters to 150,436
investors via email on April 21, 2006. After an initial search of 12DP records and
the addition of information received directly from 12DP investors, the Receiver sent
an updated letter via email to 207,704 investors on May 21, 2006. While some of
these were duplicative of those addressees in the first email group, most were new
addresses. Subsequently, after additional information was retrieved from the 12DP
servers and further investor input was received, a comparative elimination was
carried out by the Receiver, and an updated letter was sent to 452,199 email
addressees on July 18, 2006.
Each of the letters directed investors to the Receiver’s website and
encouraged them to review the Frequently Asked Questions page in order to stay
informed on the status of the case. The website provides investors with a dedicated
phone number for telephone calls (619-464-6691), the Receiver’s email address and
the fax number. While the Receiver believes he has contacted the vast majority of
12DP investors, he continues to review other possible sources of investor data and
integrate the changes, additions, and updates received on a daily basis.
As of July 31, 2006, the Receiver had received and made more than 700
telephone calls on the dedicated investor line. Additionally, the Receiver had
received and reviewed more than 9,000 emails and faxes. More than 7,000 of those
emails and faxes were either responded to or required updates to investor contact
information. As of July 31, 2006, the Receiver had made 1,842 changes to the
investor email address database.
Notice of this report and a link to a copy of the report on the Receiver’s
website, will be sent to all email addresses in the Receiver’s updated investor email
address database. Given the large number of investors and the fact that the Receiver
does not have physical addresses for all investors, by separate motion, the Receiver
will request a modification of Local Rule 66-7 to permit email notice to satisfy the
requirement of notice to all creditors. The Receiver will mail the report to the
parties, to all who have requested notice by mail, and to the few trade creditors that
may have claims.
G. Recordin~ and Filin~ the Permanent Iniunction Order in Foreign
Jurisdictions
Pursuant to 28 U.S.C. § 754, the Receiver caused certified copies of the
Complaint and Permanent Injunction Order to be filed in the U.S. District Courts in
the following locations: Nashville, Tennessee; Charlotte, North Carolina; Atlanta,
Georgia; and Baltimore, Maryland, thereby obtaining jurisdiction and control of
property of the Receivership Entities located in those districts. The Permanent
Injunction Order was also recorded on the Register of Deeds for Mecklenburg
County, North Carolina, in which Charlotte is located. The Receiver will continue
to record and file the Complaint and Permanent Injunction Order in foreign
jurisdictions as appropriate based on additional information obtained.
H. Pendin~ Litigation
The Receiver is aware that the North Carolina Securities Department issued a
Cease and Desist Order against the Defendants for violations of North Carolina’s
securities laws. In addition, the Receiver has received notice of several small claims
actions. In each instance, the plaintiffs have been advised of the injunction. The
Receiver is not aware of any other significant pending litigation involving the
Defendants, their affiliates or principals.
IV. ENFORCEMENT OF THE PERMANENT INJUNCTION ORDER
Due to the large number of 12DP investors and 12DP’s use of Internet
payment processors to handle the receipt of investments and payment of
distributions, enforcement of the Permanent Injunction Order posed significant
problems from the outset of the case. At the time the Receiver was appointed
cont..
StormPay had already voluntarily frozen 12DP’s investor accounts with StormPay in
response to the SEC’s investigation. The freezing of 12DP investor accounts by
StormPay effectively prevented investors from directly withdrawing funds from
their account and prevented them from using that account to make additional
investments with 12DP. It did not mean, however, that actual liquid assets were
frozen to secure the account balances. Nor did it prevent investors from quickly
turning to self-help and initiating chargebacks on their credit cards or reversals of
electronic payments to the extent possible. In response, the Receiver requested the
Court’s assistance in enforcing the Permanent Injunction Order, which specifically
enjoined the investors from exercising self-help.
A. The Electronic Flow of Funds
In connection with their purchase of membership units, 12DP investors were
required to set up an account at an Internet payment processor. The majority of the
investments received by 12DP were processed by StormPay.5 Although the
Receiver has not yet obtained definitive data on this point, it appears that by
February 2006, 12DP transactions constituted the vast majority of StormPay’s
business. StormPay allowed its customers, including 12DP investors, to fund their
accounts with credit card payments and electronic fund transfers ("EFT"). Investors
would fi~d their accounts with credit card payments and/or EFTs and direct
StormPay to transfer those funds to the 12DP account at StormPay. At the time the
Permanent Injunction Order was entered, the 12DP account at StormPay had a
balance of approximately $30 million.
StormPay had contractual relationships with two credit card payment
.processors, Global Payments Direct, Inc. ("Global") and Nova Information Systems,
Inc. ("Nova"), which process payments to StormPay through the VISA and
5.Prior to StormPay, a relatively low volume of 12DP transactions was handled by an Internet
payment processor called e-gold. 12DP then used StormPay almost exclusively for the
majority of its operations. Shortly before the case was commenced, 12DP had begun to move
its operations from StormPay to another I_nternet payment processor called EMO Corpora
09-03-2006, 04:19 AM
Lennon 12dailypro interim report
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