Sec. & Exch. Comm'n v. CKB168 Holdings, Ltd.

• Decision Date: 28 September 2016
• Docket Number: 13–CV–5584 (RRM) (RLM)
• Citation: 210 F.Supp.3d 421
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CKB168 HOLDINGS, LTD., et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

210 F.Supp.3d 421

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.CKB168 HOLDINGS, LTD., et al., Defendants.

13–CV–5584 (RRM) (RLM)

United States District Court, E.D. New York.

Signed September 28, 2016

Daniel Joseph Maher, Stacey Bogert, Devon Staren, U.S. Securities and Exchange Commission, Washington, DC, for Plaintiff.

Jacob Frenkel, Shulman Rogers Gandal Pordy & Ecker, P.A., Potomac, MD, Allan Schiller, Schiller Law Group, P.C., John Vincent Golaszewski, Orans, Elsen, Lupert & Brown LLP, Francis Robert Denig, Michael Joseph Frevola, Holland & Knight LLP, New York, NY, Zhijun Liu, American Law Groups, PLLC, Allan Schiller, Flushing, NY, Peiwen Chang, Cogswell Nakazawa & Chang LLP, Long Beach, CA, for Defendant.

CKB168 Holdings Ltd., pro se.

WIN168 Biz Solutions Ltd., pro se.

CKB168 Ltd., pro se.

CKB168 Biz Solution, Inc., pro se.

Cyber Kids Best Education Ltd., pro se.

Hyng Wai Howard Shern, pro se.

Rui Ling (Florence) Leung, pro se.

MEMORANDUM AND ORDER

ROSLYNN R. MAUSKOPF, United States District Judge.

Plaintiff Securities and Exchange Commission ("SEC") commenced this action on October 9, 2013, alleging violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b–5 thereunder;¹ Section 17(a)(1) and (3) of the Securities Act, 15 U.S.C. § 77q(a)(1), (3) ; and Section 5 of the Securities Act, 15 U.S.C. § 77e. (Compl. (Doc. No. 1).) The SEC also alleges violations of Section 15(a)(1) of the Exchange Act, 15 U.S.C. § 78o (a)(1), and Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2), against CKB founder Hyng Wai (Howard) Shern and CKB's United States promoters—Daliang (David) Guo, Yao Lin, Wen Chen Hwang (aka Wendy Lee), and Joan Congyi (JC) Ma, (collectively "promoters"). (Compl.) The SEC now moves for summary judgment against all defendants pursuant to Federal Rule of Civil Procedure 56.² (Mot. Summ. J. (Doc. No. 311).) Defendants oppose the motion.³ (Shern Opp'n (Doc. No. 327); Leung Opp'n (Doc. No. 328); Guo, Lee, Ma, Yao Lin Opp'n (Doc. No. 353).) For the reasons below, the SEC's motion is granted.

BACKGROUND⁴

Defendants are the architects and top U.S. promoters of "CKB," a multi-national pyramid scheme made of several collective entities, purported to be a legitimate multi-level marketing company ("MLM") selling educational software. Defendants Shern, Leung, and Santos were CKB founders. Defendants Guo, Lee, Ma, Yao Lin, Kiki Lin, Chang, Chen, and Mao were among CKB's top promoters. In just two years, defendants collectively earned approximately millions in commissions by recruiting investors with false promises of investment returns and profitable stock.

I. The Purported Business

Defendants described CKB as a profitable provider of web-based educational software for children. The products functioned like a video game, with animation and interactive features. Through 2012, CKB had three software products; however, by the time this suit was filed, CKB had seven unique software products. (SEC's 56.1 at ¶¶ 20–22.) To use a product, a purchaser had to obtain a license from CKB before accessing the product via the internet. (SEC's 56.1 (Doc. No. 311–2) at ¶¶ 18–19.) The SEC maintains that the majority of software licenses issued were never used. (SEC's 56.1 at ¶ 23.)

CKB and its promoters earned money by recruiting investors, known as Online Marketing Angels ("OMAs"). OMAs joined CKB by purchasing $1,380 "business packs," which contained one software license; "profit reward points" ("Prpts"), which defendants claimed had a cash value of $750 and could be converted to stock in the future; and access to a password-protected account (a "back office account") on the CKB website, which contained each OMA's personal CKB financial information, Prpt pricing, and CKB promotional materials. (SEC's 56.1 at ¶ 30.) CKB's compensation plan, called the "Dynamic Rewards Plan," offered no incentive for OMAs to sell CKB's products to retail purchasers. Instead, it set forth a system of direct and indirect commissions earned solely by recruiting other OMAs. (SEC's 56.1 at ¶ 54.)

Defendants promoted CKB through seminars, conferences, email, a corporate webpage, individually maintained webpages, internet postings on sites such as YouTube, and in-person solicitations. These promotional efforts did not focus on CKB's software, rather they promoted CKB as a no-risk business opportunity to make enormous investment returns.⁵ (SEC's 56.1 at ¶ 24.) For example, in a presentation recorded and posted on YouTube, Chang compared CKB to prominent companies with successful initial public offerings ("IPOs") and talked at length about how an investment in CKB could quickly multiply. In the video, Chang did not attempt to sell CKB's actual software, offering only platitudes about CKB's educational mission. (SEC's 56.1 at ¶ 25.) In another video recording, Guo promotes CKB to potential investors, one of whom can be heard saying to Guo: "We're attracted by the stocks, and not many people are using the products really." (SEC's 56.1 at ¶ 28.)

Similarly, in a testimonial posted on the CKB website, Ma talks about how she profited from the CKB business opportunity. (SEC's 56.1 at ¶ 26.) CKB promotional literature also emphasizes the business opportunity, not the products. As one hand-out states:

Is It Possible to Turn $1,380 Investment To $500,000?

...

Return on Investment: With a courseware purchase, investing $1,380 in education, you receive a Pre–IPO privilege of PrPt for FREE, an equivalent of $750 in value, salable, redeemable, and convertible to company stock. Your investment will be doubled, quadrupled and continue to grow in size to 8 times, 16 times ... till IPO.

(SEC's 56.1 at ¶ 27.)

In fact, CKB never sold its software products directly to any retail customers. The majority of licenses were purchased as part of the business pack sold to OMAs. In only a few instances did any promoter ever make a sale of a CKB license directly to a retail customer. This was such a rarity that CKB's proceeds show no revenue attributable to retail sales of its software. (SEC's 56.1 at ¶¶ 29–32.)

II. Defendants' False Claims that OMAs Would Own CKB Stock and that CKB Would Have an IPO

Defendants typically referred to OMAs as "investors" and described the purchase of a business pack as an "investment" in CKB. Among other promotional tactics, defendants stated that OMAs would see significant returns on their investment, referred to as "pre–IPO shares," when CKB went public. (SEC's 56.1 at ¶¶ 33, 39.) Promoters initially told potential investors and OMAs that OMAs would directly acquire stock. Though CKB did issue stock certificates to early OMAs, it attempted to rescind such certificates in 2011 upon learning they were unlawfully issued. Yet, even after, Shern and the promoters continued to claim that OMAs could convert Prpts to stock. (SEC's 56.1 at ¶¶ 35–36.)

In a 2012 presentation, Shern told potential investors, "when the company goes public [in 2014], it could be up to eight times the rate of return. Your investment of $56,000 will become $420,000." Similarly, in a July 2012 email, Lee sent a document to an OMA that stated, "CKB168 will be publicly listed in 2014 and is estimated to undergo splitting for four times before listing." In a November 2012 email, Ma made the same representation that CKB would have an IPO in 2014. (SEC's 56.1 at ¶ 40.)

Despite these claims, CKB never provided stock to OMAs in exchange for Prpts. (SEC's 56.1 at ¶¶ 36–38.) While defendants frequently claimed they owned "shares" in CKB, only Yao Lin ever received a purported stock certificate, which could not be sold or transferred. (SEC's 56.1 at ¶¶ 33, 37.)

Along the same lines, despite defendants' claims of an imminent IPO, CKB, Shern, and Leung made no preparations to go public. (SEC's 56.1 at ¶¶ 41, 160.)

III. Defendants' False Claims that Investors Would Make Active and Passive Profits

Defendants claimed that OMAs could make large, rapid returns on their investments. Defendants divided these returns into two categories: (a) "active" or "dynamic" returns and (b) "passive" or "static" returns. (SEC's 56.1 at ¶ 42.) However, OMAs could only realize a profit through recruitment commissions, the majority of which were realized by defendants themselves.

a. Active Returns

As set forth in CKB's Dynamic Rewards Plan (the "Plan"), OMAs could only make actual money by recruiting new OMAs to buy business packs. The Plan provided no incentive for OMAs to make retail sales. Rather, the Plan rewarded OMAs that successfully recruited new OMAs with commissions, which appeared in the OMA's back office account.⁶ (SEC's 56.1 at ¶¶ 52–54.)

Under the Plan, CKB rewarded OMAs in two instances: (1) when they established "downlines," new OMAs who they or their existing downlines recruited, and (2) when an existing downline purchased additional business packs. Generally, OMAs could profit from investments up to ten levels below them. Defendants, as top-ranked OMAs, could earn commissions from deeper levels. This pyramid structure incentivized OMAs to grow their business by finding new investors. As discussed above, defendants' marketing efforts, as well as the training they provided to downlines, focused almost exclusively on the investment opportunity.⁷ (SEC's 56.1 at ¶¶ 55–59.)

b. Passive Returns

Defendants' claims of passive returns referred to the accumulation and allegedly increasing value of Prpts. (SEC's 56.1 at ¶ 45.) Defendants told investors that Prpts would rapidly increase in value and never decrease. OMAs were given Prpts with a purported value of $750 in their business packs, and CKB claimed that their value would increase as a function of CKB's business pack sales. Defendants stated that so long as CKB continued to attract new OMAs, CKB would increase the value assigned to the Prpts. (SEC's 56.1 at ¶ 46.)

Every few months, CKB would "split" its Prpts, thus doubling each OMA's Prpt holdings. (SEC's 56.1 at ¶ 47.) Though defendants represented the value of Prpts in terms of "dollars" and...