U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23164 / December 19, 2014
Securities and Exchange Commission v. Zhunrize, Inc., Civil Action No. 1:14-cv-3030-RWS, United States District Court, Northern District of Georgia
SEC Obtains Permanent Injunctions Against Zhunrize, Inc. and Jeff Pan
The Securities and Exchange Commission ("Commission") announced today that the Honorable Richard W. Story, United States Judge for the Northern District of Georgia entered permanent injunctions against Zhunrize, Inc. ("Zhunrize") and its CEO, Jeff Pan ("Pan") (collectively "Defendants"). These judgments enjoin Defendants from future violations of Sections 5(a), (c) and 17(a) of the Securities Act of 1933 and Section 10b of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The judgments further provide that upon motion of the Commission, the Court will set disgorgement, prejudgment interest, and civil penalties. Defendants consented to the entry of these judgments without admitting or denying the allegations of the Commission's complaint.
The Commission's complaint, filed on August 22, 2014, alleges that Zhunrize is operating as a pyramid scheme because its commission structure is based on the continual recruitment of new members, with the most lucrative returns dependent on the downline recruitment of other members through store sales irrespective of any product sales. According to the complaint, Zhunrize has taken in approximately $105 million from approximately 77,000 investors since 2012.
The Commission's complaint further alleges that in its promotional materials, Zhunrize touts the ability to earn commissions from the sale of products, both through the owner's store and through downstream owners' stores. For example, a Zhunrize promotional video differentiates Zhunrize from other on-line multi-level marketing plans, claiming that Zhunrize has "sustainability." According to the video, the Zhunrize "model will sustain itself because we will have millions more customers than distributors." Later, the narrator in the video claims "we have the Vendor Relationships, the Logistics, the Payment Gateways to reach millions of new customers each month." The Commission's complaint also alleges that Zhunrize does not disclose, however, that to date substantially all of its revenue 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. Indeed, Pan testified that the company currently derives 80-90% of its revenue from selling online stores and the monthly internet hosting fees for them, as opposed to actual products from these stores. Thus, contrary to the representations to potential investors, Zhunrize is actually a fraudulent pyramid scheme.
See also L.R.-23091