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Securities and Exchange Commission v. Traffic Monsoon, LLC

United States District Court, D. Utah

March 28, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
TRAFFIC MONSOON, LLC and CHARLES D. SCOVILLE, Defendants.

          MEMORANDUM DECISION AND ORDER GRANTING A PRELIMINARY INJUNCTION AND DENYING THE DEFENDANTS' MOTION TO SET ASIDE THE RECEIVERSHIP

          Jill N. Parrish United States District Court Judge

         Two related motions are before the court. First, the SEC has moved for a preliminary injunction that continues the receivership and asset freeze put into place by the TRO entered by the court. Second, defendants Traffic Monsoon, LLC and Charles Scoville (collectively, Traffic Monsoon) have moved to set aside the receivership. [Docket 33]. The court GRANTS the SEC's request for a preliminary injunction and DENIES the defendants' motion to set aside the receivership.

         PROCEDURAL BACKGROUND

         On July 26, 2016, the SEC moved for a TRO freezing the assets of Mr. Scoville and Traffic Monsoon and appointing a receiver for these assets. The court granted the TRO, appointed Peggy Hunt as the receiver for Mr. Scoville's and Traffic Monsoon's assets, and set a preliminary injunction hearing. Traffic Monsoon subsequently moved to set aside the receivership.

         The court held evidentiary hearings on the SEC's request for a preliminary injunction and Traffic Monsoon's motion to set aside the receivership on November 1, 2016 and November 3, 2016. The parties presented legal argument on November 30, 2016.

         FINDINGS OF FACT

1. On September 29, 2014, Mr. Scoville registered Traffic Monsoon with the State of Utah as a limited liability company. Hearing Transcript (“Tr.”) 29-32; Ex. 1, tab 1. Organizational documents filed with the State of Utah identify Mr. Scoville as Traffic Monsoon's sole member, manager and registered agent. The documents list his Murray, Utah, apartment as Traffic Monsoon's corporate address. Ex. 1, tab 1.
2. Traffic Monsoon was operated by Mr. Scoville through a website with the address www.trafficmonsoon.com. Tr. 12; Ex. 1 ¶ 8. The website prominently identified Traffic Monsoon as a “revenue sharing advertising company.” Docket 64-2, p. 2.
3. Traffic Monsoon operated as a web traffic exchange that sold several different products designed to deliver “clicks” or “visits” to the websites of its customers. Tr. 12-17. The exclusive method of purchasing these services was through the website. Tr. 12, 127.
4. These purchased visits are of value to website owners because they make the website appear more popular than it actually is. Because search engines such as Google employ algorithms that prioritize more frequently visited websites over less frequently visited websites, these paid visits tended to result in a higher ranking on a search engine query.
5. Individuals who wished to purchase services from Traffic Monsoon would create an account and became “members” of the Traffic Monsoon website.
6. A large majority of the financial transactions the members completed with Traffic Monsoon-both payments made to Traffic Monsoon and withdrawals from the member's account-were conducted through PayPal. Tr. 19, 54.
7. Traffic Monsoon sold 1, 000 website visits for $5.95 and 20 clicks on a member's banner ad for $5.00. Tr. 17-18, 246-47.
8. Traffic Monsoon's most popular product by a large margin, however, was the Banner AdPack (AdPack). AdPacks, which could be purchased for $50, bundled 1, 000 website visits and 20 clicks to the member's banner ad. What set this product apart (and justified the additional cost for identical services that could be purchase à la carte for just $10.95) is that the AdPack permitted the purchaser to share in the revenues of Traffic Monsoon by receiving credits in the member's account up to a maximum amount of $55 per AdPack.
9. To qualify for this AdPack revenue sharing, the member had to click on a number of websites each day. The number of required clicks increased over time, but the member was ultimately obligated to click on 50 ads and remain on each website for five seconds. This took the member a little over four minutes per day. The member's obligation to click on 50 ads for five seconds each did not scale with the number of AdPacks purchased. Whether the member owned 1 or 1, 000 AdPacks, he or she was obligated to click on only 50 ads per day and remain on the website to which the member was directed for five seconds each in order to participate in revenue sharing.
10. 99% of AdPack buyers qualified for some portion of revenue sharing after their purchase of an AdPack. Tr. 260-61; Ex. 5.
11. Traffic Monsoon members also were entitled to a 10% commission on all products- including AdPacks-that were purchased by individuals whom the member referred to Traffic Monsoon. Tr. 301-02. This 10% commission was paid on all future purchases made by the referred member, including when the referred member rolled over revenues from existing AdPacks to purchase new AdPacks. Tr. 20-21.
12. Mr. Scoville stated in emails to the SEC that he allocated the $50 purchase price of an AdPack as follows: 10% was deposited in the referring member's account, 4.5% was retained by Traffic Monsoon, 1.5% went to Traffic Monsoon's programmer in Russia, and the remaining 84% either was distributed to other AdPack holders who had qualified in the past 24 hours or was placed in a reserve fund. Ex. 110. The amount placed in the reserve fund for future sharing was used to even out fluctuations in the amount of money flowing into the member accounts. Ex. 110. In other words, out of the $50 purchase price, the referring member received $5, Traffic Monsoon and its programmer received $6, and the remaining $39 was either shared with other qualified AdPack holders or placed in a reserve fund for future distribution.
13. Mr. Scoville kept no accounting records for Traffic Monsoon. Ex. 1, tab 6. So there are no readily available documents that describe precisely how the money was distributed. After the receiver in this case conducted a preliminary investigation of how Traffic Monsoon distributed the money it received, she expressed some doubt as to whether the funds were distributed in the exact manner that Mr. Scoville described. Tr. 25-26. Rather, it appeared that the money coming into Traffic Monsoon was simply pooled together and then paid out as needed. Id.
14. At any rate, neither the website nor any other publicly available source of information informed the members how Traffic Monsoon split revenue between itself and qualified AdPack holders. So long as Traffic Monsoon shared some undefined portion of the revenue coming into the company with qualified AdPack holders and paid out a 10% commission, Mr. Scoville was free to distribute the money however he wished.
15. AdPack purchasers typically received about $1 per day in revenue sharing per AdPack purchased. Tr. 296. These revenue sharing payments would appear as credits in the member's Traffic Monsoon account. The member could then use these credits to purchase additional AdPacks or to purchase Traffic Monsoon's other services. The member could also convert these credits into real currency by performing an electronic transfer to a bank account.
16. If the owner of an AdPack consistently performed his or her daily obligation to click on 50 ads, the owner would typically recoup the original $50 payment, plus an additional $5 in profit in about 55 days. If the member continually purchased a new AdPack after the previous AdPack matured, he or she could reap an impressive 66% annual return on the $50 investment.[1] The member could earn even more money by convincing others to buy AdPacks.
17. Thus, for all $50 AdPacks that were purchased by a referred member, Traffic Monsoon typically deposited $60 worth of credits in member accounts: $55 into the purchasing member's account over a 55-day period (so long as the member qualified) and $5 into the referring member's account.
18. When a customer purchased an AdPack, he or she agreed to be bound by several terms and conditions. Some of these terms and conditions are as follows:
a. “TrafficMonsoon[2] registered as a limited liability company and not a bank nor a security firm. A purchase of advertising service with us is not considered a deposit, nor investment.” Docket 64-2, p. 44.
b. “You agree to recognize TrafficMonsoon as a true advertising company which shares its revenues, and not as any form of investment of any kind.” Docket 64-2, p. 44.
c. “The information, communications and / or any materials TrafficMonsoon contains are for educational purposes, and is [sic] not to be regarded as solicitation for investments in any jurisdiction which deems a non-public offers or solicitations [sic] unlawful, nor to any person whom it will be unlawful to make such an offer and / or solicitation.” Docket 64-2, p. 45.
d. “You agree that our past performance does not guarantee you the same result in the future.” Docket 64-2, p. 44.
19. The Traffic Monsoon website also makes a number of representations regarding its services. Some of those representations are as follows:
a. “Only 1 of the services we offer includes a revenue sharing position. We do not sell ‘shares.' We only sell advertising services. It's from the sales of all our services that we share revenues. When our members purchase a service from TrafficMonsoon, the revenues from that purchase are held by the company. Then, you can qualify to receive share [sic] of the profits! Naturally there is cost associated with providing services. Each service provided generates a profit margin. We share those profits with you! . . . As long as you are qualified, each sharing position you receive with your AdPack Combo purchase will continue to share in revenue up to $55.00. Reaching this maximum is not guaranteed, or affixed to any time frame. It's completely reliant upon sales of services, and you being qualified.” Docket 64-2, p. 19.
b. “Is TrafficMonsoon a hyip, Ponzi, pyramid scheme, or illegal? What is a Ponzi? ponzis [sic] are investment schemes which offer interest payments. they [sic] pay interest from new investor principle deposits. If you add together the interest earned total and principle total, there would be a debit balance created. Sufficient funds would not be available to pay people their principles and interest. . . . Why is Traffic Monsoon not a Ponzi? Traffic Monsoon only offers ad services. Nothing else is for sale than ad service. There is no investment plan offered. Yes, you can qualify to share in the sales revenue generated when services are sold by actively viewing other people's websites, but this is not interest. . . . New sales of advertising service generate new earnings. That's not a ponzi. . . . In conclusion, when looking at pure definitions, Traffic Monsoon is not a ponzi . . . .” Docket 64-2, p. 31.
c. “[W]e cannot guarantee the amount you'll receive per day, but as long as you are qualified to receive share [sic] in site revenues, you'll continue to receive of revenues [sic] on each sharing position up to $55. This also means we do not guarantee reaching $55, because earnings from revenue sharing is completely dependent upon the sale of ad services, and also dependent upon you meeting the qualification to receive of revenues [sic] . . . .” Docket 64-2, p. 36.
20. Despite these disclaimers, the Traffic Monsoon website also promoted the AdPacks as a way to make money: “There are really 4 opportunities to earn with traffic monsoon [including revenue sharing through AdPacks]. . . . Each one can be your main focus, or all of them. Naturally, the more you utilize all 4 of these ways to earn money, the more you'll earn.” Docket 64-2, p. 33.
21. By a large margin, AdPacks were Traffic Monsoon's most popular product. The sale of AdPacks constituted over 98% of all Traffic Monsoon revenue. Tr. 17, 274. Thus, over 98% of the revenue sharing distributed to qualified AdPack owners came from the sale of other AdPacks. The Traffic Monsoon website did not inform members that almost all of the revenue that was shared with qualified AdPack owners was generated by the sale of new AdPacks.
22. Approximately 90% of the Traffic Monsoon members who purchased AdPacks reside outside of the United States and presumably purchased the AdPacks while located in their home countries. Complaint at ¶ 66.
23. Some individuals initially purchased AdPacks principally as a way to promote their online businesses. But for many members, the profits that could be reaped from the AdPacks themselves quickly eclipsed this motive. Tr. 180-86.
24. Traffic Monsoon member correspondence with the receiver evidences that Traffic Monsoon customers' primary motivation in purchasing AdPacks was to earn the $5 return on each AdPack, not to receive the advertising services that were available for only $10.95 if purchased separately from the AdPack. Tr. 74-76, 84-85. Indeed, many members have not received or used the web visits and banner clicks purchased in the AdPack. Tr. 181-186. A number of members indicated that they had invested their “life savings” or “savings” by purchasing AdPacks. Ex. 3, p. 7 & tab 8.
25. By Traffic Monsoon's own description, it has delivered only 1.6 billion website visits out of the 17.5 billion that have been purchased by Traffic Monsoon members. Tr. 82-84. In other words, it has delivered only 10% of the web traffic purchased by members through the sale of AdPacks. It would cost Traffic Monsoon tens of millions of dollars to acquire and deliver the billions of web visits it owes to its members.
26. Many individuals began to purchase or accumulate hundreds or even thousands of AdPacks. Tr. 23; Exs. 11, 12.
27. Members typically did not cash out an AdPack when it matured. Instead, they rolled over the money deposited in their accounts by purchasing another AdPack. Tr. 20. In order to maximize their returns, members purchased dozens or hundreds of AdPacks. They would then use the revenue from the existing AdPacks to purchase new AdPacks as soon as they had enough money in their account to do so. Thus, members that owned hundreds of AdPacks, which could return thousands of dollars in shared revenues, typically had relatively little money in their account because the members would continually reinvest it by purchasing new AdPacks. Ex. 10.
28. If the members rolling over money in their accounts had been referred by another member for the 10% commission, these rollover transactions also generated commission payments to the referring members. Tr. 20-21. Therefore, if the referred member purchased a single AdPack for $50 and then rolled the proceeds over into a new AdPack every 55 days, the referring member would reap $30 in commissions in less than one year.
29. Enticed by these commission payments, Traffic Monsoon members promoted the AdPacks to others. Several members actively promoted the AdPacks online or through presentations as a money making opportunity with slogans such as “If You Can Click a Mouse. [sic] You Can Get Paid!!” Tr. 88-89, 210-11. Ex. 3, tab 19.
30. After making an initial investment to purchase multiple AdPacks, a member could accumulate an ever-growing number of AdPacks by purchasing additional AdPacks with the 10% profit the member acquired over a 55-day period. For example, if a member initially invested $5, 000 by purchasing 100 AdPacks and only rolled over the principal amount in new AdPacks, the member could purchase about 166 AdPacks at the end of one year by reinvesting the principal and profit into new AdPacks. If the same member continued this pattern of rolling over the principal amount and investing the profit at the end of the year, the member could purchase around 275 AdPacks at the end of the second year and 456 AdPacks at the end of the third. If the member then allowed these 456 AdPacks to mature, he or she could accumulate $25, 080-over five times the initial investment.[3] If the member were able to convince family or friends to make similar bulk purchases of AdPacks, the member could reinvest the resulting 10% commission and acquire even more AdPacks.
31. Between October 2014 and July 2016, Traffic Monsoon members worldwide paid Traffic Monsoon $173 million in new money to purchase 3.4 million AdPacks. Tr. 270-77; Ex. 6. Traffic Monsoon members purchased approximately 14 million additional AdPacks for $700 million during that same period by rolling over their revenue-sharing payments into the purchase of these new AdPacks. Id. During that same period, Traffic Monsoon members paid approximately $2.9 million for all other Traffic Monsoon products combined. Id.
32. Out of the $175.9 million total paid into Traffic Monsoon by its members, approximately $88.4 million has been paid back out to its members, leaving a difference of $87.4 million between what has been paid in by members and what they have taken out. Tr. 278-81; Ex. 7.
33. In January, 2016, PayPal became concerned about the enormous growth in the volume of transactions between Traffic Monsoon and its members, and it froze Traffic Monsoon's account. Tr. 26, 137.
34. The PayPal freeze significantly reduced the amount of money that was flowing into Traffic Monsoon. Tr. 26. Traffic Monsoon then began to transition to other electronic payment processors such as Payza, Allied Wallet, and SolidTrustPay. Tr. 27. With the introduction of these new payment processors, AdPack transactions began to rise again. Tr. 27.
35. Traffic Monsoon's resurgence was halted on July 26, 2016, when this court froze its assets and appointed a receiver.
36. The current combined account balance of Traffic Monsoon members is $34.2 million. Tr. 284-86; Ex. 7. If the outstanding AdPacks currently owned by Traffic Monsoon members had matured, the account balance would swell by an additional $243.9 million, for a combined balance of $278.1 million. Id.
37. The receiver currently has between $50-$60 million in frozen Traffic Monsoon assets. Tr. 110.

         ANALYSIS

         The SEC alleges in its complaint that Traffic Monsoon's sale of AdPacks constituted an illegal Ponzi scheme that violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5(a) and (c) promulgated thereunder. The SEC also alleges that Traffic Monsoon violated Section 17(a)(1) and (3) of the Securities Act of 1933 (Securities Act).[4][Docket 2, ¶¶ 84-92].

         Section 10(b) of the Exchange Act makes it unlawful for a person to “use or employ . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). Pursuant to this statutory grant of ...


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