Sec. & Exch. Comm'n v. Traffic Monsoon, LLC

• Decision Date: 28 March 2017
• Docket Number: Case No. 2:16–cv–00832–JNP
• Citation: 245 F.Supp.3d 1275
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. TRAFFIC MONSOON, LLC and Charles D. Scoville, Defendants.
• Court: U.S. District Court — District of Utah

245 F.Supp.3d 1275

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.TRAFFIC MONSOON, LLC and Charles D. Scoville, Defendants.

Case No. 2:16–cv–00832–JNP

United States District Court, D. Utah.

Signed March 28, 2017

Daniel J. Wadley, Alison J. Okinaka, Amy J. Oliver, Cheryl M. Mori, Securities and Exchange Commission, Salt Lake City, UT, for Plaintiff.

D. Loren Washburn, Washburn Law Group, John E. Durkin, Smith Correll LLP, Edwin S. Wall, Wall Law Offices, Salt Lake City, UT, for 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. "TrafficMonsoon² 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.

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