SEC Sues Pyramid Scheme Perps

The Cost of Supervisory Failures
May 22, 2019
Can well-regarded, top-rated funds still fail compliance tests?
June 6, 2019

SEC sues pyramid scheme perps promising cryptocurrency riches


The Securities and Exchange Commission (SEC) filed a civil injunctive action against Daniel Pacheco, a resident of San Clemente, CA, the alleged perpetrator of a multimillion-dollar pyramid scheme. Short story: From January 2017 through March 2018, Pacheco conducted a fraudulent, unregistered offering of securities through two California-based companies he controls, IPro Solutions LLC and IPro Network LLC (IPros).


IPros raised more than $26 million from investors who bought instructional packages providing lessons on e-commerce. Investor/purchasers also received “points” that could be converted into a digital asset known as PRO Currency. For a contribution of additional funds, investors could earn a mixture of cash commissions and additional convertible points by recruiting new investors into the IPro network.


Sound familiar? It is.


A pyramid scheme, the IPros ultimately collapsed thanks to Pacheco’s fraudulent use of investor funds to, among other things, make an all-cash purchase of a $2.5 million home and a Rolls Royce. His misappropriations accelerated the rate at which the IPros failed to pay the commissions and bonuses due its investors.


Moreover, the SEC alleges that Pacheco’s offer and sale of IPro instructional packages constituted an unregistered sale of securities because the packages involved an investment in:

  • a pyramid scheme; and/or
  • the PRO Currency digital assets

This meant that the offer/packages should have been registered with the SEC unless an exemption applied, which it did not.


According to Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office, the Commission alleges “that Pacheco hid an old fraud under the guise of cutting-edge technology. He enticed investors by offering them the opportunity to speculate in cryptocurrency, when, in fact, he was simply operating a pyramid scheme.”

Pyramid schemes… Ponzi schemes…

Why not just burn your cash?

IPro began operations in early 2017 when it started an investment program that offered on-line instructional materials – the IPro packages – for sale. These materials purported to educate purchasers on how to establish and operate a successful e-commerce business. For an additional $50 annual activation fee, IPro package purchasers could also become “active members” of IPro, with the potential to become “independent sales associates” or “premium independent sales associates.”

From its inception in 2017 through March 2018, IPro’s membership grew rapidly, reaching approximately 20,000 members and raising at least $26.5 million through package sales. The IPros claim to be legitimate multilevel marketing enterprises (MLMs) and that its customers are motivated only by a desire to purchase IPro’s e-commerce instructional materials.

The e-commerce instructional materials, however, were not the sole or even most salient component of the IPro packages. First, there was the matter of the $50 activation fee, which gave purchases the added right to participate in IPro’s “iPN Compensation Plan” and earn money by recruiting other members to IPro. IPro package purchasers also received rebate rewards and recruitment bonuses in the form of a cryptocurrency – PRO Currency – which, according to Pacheco and IPro, also had the potential to increase in value.

The system reportedly offered “members” three ways to make money. They could:

  1. Put into effect the e-commerce lessons taught in the IPro packages’ instructional materials and starting an online retail business;
  2. Pay the $50 activation fee, become an IPro member, and then recruit new members to IPro who would buy packages, and in turn, recruit others new members to IPro, and so on;
  3. Convert rewards points – earned when purchasing IPro packages and when recruiting others to IPro – into PRO Currency, in the hope that that the cryptocurrency would appreciate.

IPro’s Recruitment Compensation Plan
Under IPro’s “IPN Compensation Plan, package purchasers could pay a $50 and their purchase would then be eligible to earn a:

  •  Direct Sales Bonus,
  •  10% Binary Bonus,
  •  Matching Bonus, and
  •  Leadership Bonus as an “Independent Sales Associate” of IPro, or IPro member.

To earn these bonuses, IPro members recruited new members to IPro. In a marketing presentation entitled “What is IPro Network?” Pacheco described the iPN Compensation Plan as follows. Much emphasis was placed on the income IPro package purchasers could earn by recruiting new IPro members, who would in turn, through multiple “levels” of recruitment, bring additional members to IPro:

So this is a very, very simple compensation plan, but it’s extremely generous. So let me break it down this way. Now I’ve been, like I said, just shy of 11 years in the [multi-level marketing] industry, and one of the things that I like the most is always having fast cash, being able to make money today. And with this program, there’s five different levels of membership. There [are] $100, $500, $1,500, $2,500, and $5,500. In the video posted on the internet, Pacheco described the iPN Compensation Plan’s “direct sales bonus” as follows: Now there’s a 10% direct sale bonus on any package sold directly by you. Pacheco also described the iPN Compensation Plan’s “binary bonus” in the video: Now the binary bonus. Now, folks, I love the binary. I’ve been in the binary since day one, and I absolutely love the binary and here’s the reason why…You can earn from you down to infinity with no levels to qualify. You get to override every single person’s volume in your organization, including spillover, including the volume that I get just for being in a good, strong team where people are placing people below me even though I didn’t put them there. And so that is huge because you get to override everything and 10 percent of your weaker team volume is what you’re going to get…Now I’ve been – I made seven figures – multiple companies, multiple times in this industry because of the binary.29.As for the iPN Compensation Plan’s “matching bonus. So we have the matching bonus, and the matching bonus works this way…You could literally max out our compensation plan going as wide as you want to go four levels deep on the matching bonuses. And then on the binary, you could go to unlimited depth. So you have the best of both worlds. But this isn’t one of those weak compensation plans where they give you like 10% first level, then next level you go to five [percent], then the third level you go to like 1 percent, and then…the deeper you go, the less and less and less you get paid. This is 10 [percent], 10 [percent], 20 [percent], 20 [percent], very, very easy, very profitable, very generous compensation plan on the matching bonuses.”

And then in describing the “leadership bonus,” Pacheco continued in the video as follows:

“[I ]t doesn’t stop there. We have our leadership rank bonus. Now, this is huge, guys because if you understand leadership advancement, you’re going to find out that this is where the big, big money is made…This is life-changing income, folks. When you go through the leadership ranks and actually get to override your entire team’s volume, this is huge. As reflected in IPro’s marketing materials, the recruitment bonuses available through the iPN Compensation Plan were, in fact, an important part of a purchaser’s decision to buy an IPro package, and they were marketed as such. A majority of the individuals who purchased IPro’s packages paid the $50 activation fee, which allowed them to earn recruitment bonuses through IPro’s iPN Compensation Plan. In addition, many IPro members bought multiple packages, packages that would be superfluous if not for the additional points awarded in the form of rebate rewards. Accordingly, IPro members did not purchase IPro packages solely for the e-commerce instructional materials. Rather, purchasers of IPro packages were paying money to IPro in exchange for the right to sell IPro packages on their own, as well as the right to receive compensation for recruiting other participants to the investment program, recruitment compensation that was not related to the sale of the e-commerce educational component of the packages to someone actually interested in using those materials.”

IPro’s cryptocurrency rewards program

On or about early-2017, a third-party doing business as PRO Commerce created and began issuing a digital asset called PRO Currency, which Pacheco asserted was a cryptocurrency. PRO Commerce claimed PRO Currency was based on an open-source blockchain, or distributed ledger of transactions, that was developed through the “proof-of-stake” method of transaction validation. These validations occurred whenever a transacting party’s computer connected to a decentralized computer network, with validation occurring in the transacting party’s online “wallet.”

In 2017, PRO Commerce arranged for PRO Currency to trade on several public digital asset exchanges. The company transferred more than 200 million PRO Currency coins to IPro in 2017-2018. In exchange for creating PRO Currency and providing IPro with more than 200 million PRO Currency coins, IPro transferred about $415,000 to PROCase Commerce. IPro disseminated the PRO Currency coins to package purchasers in the form of rewards rebates and recruitment bonuses. IPro also paid recruitment bonuses to its members in the form of points, with each point being worth $1. IPro members could later redeem up to 70% of their recruitment bonus points for a cash payout from IPro. As for the remaining 30% of their recruitment bonus points, those points were convertible into a “coin back reward,” which they received in the form of more PRO Currency.

In his “What is IPro Network?” online presentation, Pacheco explicitly analogized PRO Currency to Bitcoin, another cryptocurrency that was the object of significant investor interest in 2017. Explaining that PRO Currency’s current market value was 2.5 cents per coin, Pacheco asked package buyers to recall that “Seven years ago, Bitcoins were worth nothing. But today they’re worth $900. Now let’s say these [PRO Currency] coins in seven years are not worth $900. Let’s say they were only worth a dollar. Would you be upset? Let me see that by a show of hands? Would anybody be upset?… Now, what if they went to $2. Would you be happy? Okay, I see a lot of hands going up, yes, yes, yes, yes. Now, who would be unhappy? Well, I don’t think anybody would be unhappy.”

Celebrity-endorsed pyramid scheme

Pacheco and IPro also organized IPro-sponsored member events and arranged for a celebrity endorser to market the investment aspects of PRO Currency at several of these events taking place across the country in 2017.

Further, IPro and Pacheco also arranged for PRO Currency to be listed on several cryptocurrency exchanges. This enabled secondary trading in PRO Currency, which also enhanced the usability, accessibility, and value of the coin. Pacheco and IPro consequently took steps to encourage speculation in PRO Currency by:

  •  Placing time and volume restrictions on IPro members’ ability to convert points into PRO Currency to support its market price; and
  •  Endorsing the market’s valuation of PRO Currency by using its market price as the basis for calculating the PRO Currency coins awarded to IPro members redeeming their rebate rewards and/or recruitment bonuses.

In sum, as demonstrated by IPro’s marketing materials, the purchasing decisions made by its members, and the structure of IPro’s recruitment-based iPN Compensation Plan, investors purchased IPro’s package so that they could generate passive income by:

  1. Recruiting new members, who recruit additional new members, who recruit yet more new members, therefore entitling that IPro member to progressively larger recruitment bonuses; and
  2. Converting rebate rewards and recruitment bonuses in order to amass PRO Currency coins, a cryptocurrency whose value might rise on cryptocurrency exchanges as a result of IPro’s marketing efforts.

Where’s the money?

The IPro investment program was heavily subscribed, quickly raising at least $26.5 million through the sale of IPro packages from January 2017 through March 2018. From January 2017 through August 2018, Pacheco incurred expenses of nearly 68% of investor proceeds – more than $18 million – for reasons other than the payment of commissions and bonuses to members.

Among other things, Pacheco

  •  Spent roughly $2.5 million in IPro funds to purchase a luxury home in Redlands, California in an all-cash transaction;
  •  Had approximately $1.925 million in IPro funds to be transferred to Accept Success Corporation, an entity held in his daughter’s name but controlled by Pacheco, and had nearly $2 million transferred to E Profit Systems LLC and another$600,000 to a limited liability company under Pacheco’s control; and
  •  Used about $150,000 in IPro funds to buy a Rolls Royce for his use.

Pacheco’s misallocation of resources left insufficient IPro funds available for the payment of commissions and bonuses owed to IPro investors. By March 2018, IPro was on the brink of collapse and ceased operations shortly thereafter.

What happens to pyramid schemes when the money runs out?

Bad things.

Could a compliance system have made a difference? In the case of IPro and Pacheco, the answer is, “probably not.” Barring a whistleblower – only total failure and implosion can stop a pyramid scheme in its tracks. While one cannot stop bad actors from acting badly, or investors from investing in opportunities that are much too good to be true, there is help for firms interested in compliance. That’s where Patrina can help. We’ve built our business based on helping organizations keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.

Request A Demo
We will contact you shortly to arrange your demonstration.
We respect your privacy. Your information is safe and will never be shared.
Don't miss out. Subscribe today.
×
×
WordPress Popup Plugin