Following closely on the heels of Massachusetts banning WCM777 for selling unregistered securities, on January the 15th California issued a cease and desist against Xu and WCM777.

Issued on January 8th by Jann Lynn Owen, the Commissioner of Business Oversight for the state of California, the “desist and refrain order” lists World Capital Market Inc., WCM777 Inc., WCM777 Limited, (Phil) Ming Xu, (Tiger) Zhi Liu and Harold Zapata as respondents.

Xu and Liu are/were WCM777’s CEO and President respectively, with Zapata credited in the order as a WCM777 “Director” and affiliate (investor).

The order begins with some factual background on WCM777, which I’ll reproduce here so that it’s on file for future reference (fact-loving readers, you’re welcome):

At all relevant times, World Capital Market, Inc. (“WCM”), is a company with its principal place of business at 150 S. Robles Avenue, Suite 900, Pasadena, California, 91101-2486. WCM registered with the State of Delaware on March 27, 2012. WCM also claims to be registered in the British Virgin Islands. WCM maintains a website at worldcapitalmarket.com, which states that WCM is a “merchant banking firm” that acts as a “strategic investor” and “incubates” companies in a variety of industries. At all relevant times, WCM777, Inc. and WCM777 Limited are two companies that operate collectively as “WCM777,” a “social marketing” business with a headquarters in the United States at 1218 John Reed Court, City of Industry, California, 91745. WCM777, Inc. was incorporated under the laws of Nevada on March 7, 2013 and was dissolved on September 24, 2013. On one of its websites, wcm777.com, WCM777 states that it has also registered in Hong Kong under the name WCM777 Limited. Despite changes in corporate form, WCM777 has operated continually from at least March 7, 2013 to the present. WCM777, Inc. and WCM777 Limited are wholly owned subsidiaries of WCM. At all relevant times, Ming Xu is the Chief Executive Officer and Chairman of WCM and the Chairman of WCM777. Ming Xu is also an owner of WCM. At all relevant times, Zhi Liu is the Chief Executive Officer of WCM777 and one of the executive managers at WCM. At all relevant times, Harold Zapata is a Director and affiliate of WCM777. Zapata is one of WCM777’s primary salespersons on YouTube. On his LinkedIn resume, Zapata also identifies himself as “CEO at WCM777 Global Stars,” where he says that “I Help People Make Money!”

Interesting that they note Xu as “one of the owners of WCM777”. I wonder who the other owners are?

What follows is the Department of Business Oversight’s analysis of WCM777’s business model:

Since at least March 7, 2013, Respondents have been soliciting the general public—through websites, webinars and live presentations—to purchase WCM777 membership units that allow the purchaser access to WCM777’s alleged online cloud services. More importantly, purchasers of WCM777 membership units are allegedly paid daily returns over a 100-day period. WCM777’s claimed daily returns are allegedly paid out in the form of profit-sharing payments, bonuses and commissions. WCM777 offers five levels of membership units, which cost $399, $799, $1,199, $1,599 and $1,999 respectively. The amount of daily returns that a purchaser is allegedly paid depends upon the unit level that the purchaser acquires; the more expensive the membership unit, the higher the alleged daily returns. For example, a person who purchases the $399 membership unit receives an account on WCM777’s website that provides the purchaser one year of access to WCM777’s alleged online cloud services. In addition, WCM777 claims that the purchaser will receive up to $4 per day in daily returns over a 100-day period. The most expensive and, by far, the most popular WCM777 membership unit costs $1,999. The $1,999 membership unit provides the purchaser five years of access to WCM777’s alleged online cloud services. In addition, WCM777 claims that a purchaser of the $1,999 membership unit will receive up to $32 per day over a 100-day period in the form of profit-sharing payments, bonuses and commissions. Thus, over a 100-day period, a purchaser of the $1,999 membership unit would allegedly earn $1,200 more than the original cost of the unit—an alleged 60% return in only 100 days.

I’ve bolded the parts that I raised as red flags and strong indications that WCM777 is a Ponzi scheme in my BehindMLM WCM777 review (June 2013).

The cease and desist order goes one step further though, providing statistical fact that verify my previous analysis.

The vast majority of purchasers buy the five year unit, rather than the less expensive units that generate lesser returns. In fact, over 95% of purchasers in the United States bought the $1,999 membership unit. There is no limit to how many WCM777 membership units an individual may purchase at one time. In fact, a significant number of purchasers buy multiple WCM777 membership units at the same time. After the purchaser’s 100-day daily returns cycle expires, the purchaser may “re-up” by purchasing another membership unit at a 50% discount, which then restarts the 100-day cycle. A purchaser can “re-up” indefinitely. Therefore, over a 300-day span, a purchaser of a single $1,999 WCM777 membership unit who “re-ups” at the end of each 100-day cycle would allegedly earn up to $5,600 more than the cost of buying the membership units—an alleged 140% return in about 10 months. In its marketing materials, WCM777 does not explain why an individual would need or want multiple online cloud service accounts. In its marketing materials, WCM777 also does not explain why a purchaser who buys five years of online cloud services would need or want to purchase another five years of access only 100 days later.

Why indeed. I have to say the whole “re-up” thing was news to me. As far as I knew affiliate investors were re-investing the same amounts they initially did.

Giving them a 50% discount every 100 days would shorten the life of the scheme considerably.

WCM777 claims that there are seven sources for the alleged daily returns, including payments for profit sharing based on WCM777’s revenues, options to purchase stock in WCM777 following an initial public offering that is purportedly scheduled for 2014, and bonuses for referrals of new purchasers of WCM777 units. In particular, WCM777’s claimed profit sharing payments are referred to by Respondents as WCM777’s “Global Business Bonus.” Under the “Global Business Bonus,” purchasers of WCM777 units allegedly receive a fixed percentage of WCM777’s profits from its global sales on a daily basis. Each purchaser of a WCM777 membership unit receives an electronic account to which WCM777 will allegedly pay out the purchaser’s daily returns. Balances in a purchaser’s account would be nominally denominated in “Kingdom Card Points.” However, WCM777 states that a purchaser’s “Kingdom Card Points” balance can be freely converted into United States dollars at any time. Following conversion, a purchaser’s balance can be withdrawn. In fact, when Respondents advertise WCM777’s alleged daily returns, the returns are usually denominated in United States dollars, not in “Kingdom Card Points.”

I really don’t know how many times we have to go through this dance (next will likely be TelexFree and their “VOIP”), but time and time again we see US regulators slicing through these psuedo-compliance measures like butter.

“We’re not a Ponzi scheme, we pay out in Kingdom Points!” Yeah… and when those points are readily converted to cash, nobody cares.

At this point I think it’s important to note that the following are based on direct correspondence between “the respondents” and the Department of Business Oversight.

At no time has Phil Ming Xu given any indication that he has been contacted with, issued a cease and desist order against or been working with US authorities.

To this day Xu accepts payments from affiliate investors globally through Kingdom777 (formerly WCM777).

With that in mind,

Respondents claim that some of the daily returns that are allegedly paid to purchasers require no effort or work by the purchasers themselves, such as the efforts involved in actively referring new purchasers. Respondents also claim that WCM777’s alleged daily returns are backed by the global banking business of its parent company, WCM. WCM777 and WCM had no significant income outside of sales of WCM777 membership units. From March 2013 to the end of September 2013, WCM777 and WCM generated over $20 million in sales of WCM777 membership units. During the same period, over 99% of the income of WCM777 and WCM came from sales of WCM777 membership units, while less than 1% of their income came from WCM’s alleged global “merchant banking” or any other business.

And there you have it ladies and gentlemen. As per my analysis, over 99% of the revenue raised by WCM777 was sourced from affiliate investors, and subsequently paid out to existing affiliate investors.

Proof yet again that if it smells like a Ponzi, acts like a Ponzi then… well, you get the idea.

The WCM777 membership units offered and sold by Respondents constitute securities. These securities were offered for sale in the State of California in an issuer transaction. Respondents have neither applied for nor secured from the California Commissioner of Business Oversight a qualification to offer or sell securities in the State of California.

As we’ve seen in the comments left by WCM777 affiliates here at BehindMLM, there’s often a barrage of psuedo-compliance reasons cited as to why WCM777 isn’t a Ponzi scheme.

In light of a business model that quite obviously involved the sale of unregistered securities, here’s what the US regulators ultimately think of psuedo-compliance “we are not a Ponzi scheme” reasoning:

Respondents offered and sold securities by means of written and oral communications which included untrue statements of material fact and which omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. The material misstatements and omissions include, without limitation, the following: i. the misstatement that Respondents’ activities were not subject to the jurisdiction of the United States Securities & Exchange Commission or the United States Federal Trade Commission; ii. the failure to disclose that WCM777 had no other significant sources of income but for its sale of membership units; and iii. the failure to disclose that WCM777 did not have an enforceable contract with Siemens under which Siemens would provide the alleged online cloud services that WCM777 advertised.

You want to change the terminology used in your business and claim you’re not a Ponzi scheme? US regulators don’t care.

You want to lie about your business associations and ride the coattails of legitimate businesses? US regulators don’t care.

You want to hide behind the facade that your revenue is derived from legitimate business activity when it infact isn’t? US regulators don’t care.

Despite being issued a cease and desist however, it seems Ming Xu still hasn’t caught on that psuedo-complaince is just that.

On January 17th Xu tweeted:

You think defining your Ponzi scheme as a PEVC company instead of an illegal investment scheme will mean regulators won’t come after you? US regulators don’t care.

As evidenced above, what they do care about is where your revenue comes from and how your pay out your commissions. Or in other words, your business model.

Based upon the foregoing findings, the California Commissioner of Business Oversight is of the opinion that World Capital Market, Inc., WCM777, Inc., WCM777 Limited, Ming Xu, Zhi Liu and Harold Zapata engaged in the offer and sale of securities in the form of WCM777 membership units. These securities have not been qualified under the California Corporate Securities Law of 1968, in violation of section 25110 of the Corporations Code. Pursuant to section 25532 of the California Corporate Securities Law of 1968, World Capital Market, Inc., WCM777, Inc., WCM777 Limited, Ming Xu, Zhi Liu and Harold Zapata are hereby ordered to desist and refrain from the further offer or sale of securities in the State of California, including but not limited to WCM777 membership units, unless and until qualification has been made under the law or unless exempt. The California Commissioner of Business Oversight is further of the opinion that World Capital Market, Inc., WCM777, Inc., WCM777 Limited, Ming Xu, Zhi Liu and Harold Zapata offered and sold securities in the form of WCM777 membership units, by means of written and oral communications including untrue statements of material fact and omission of material facts necessary to make the statements not misleading, in violation of section 25401 of the Corporations Code. Pursuant to section 25532 of the California Corporate Securities Law of 1968, World Capital Market, Inc., WCM777, Inc., WCM777 Limited, Ming Xu, Zhi Liu and Harold Zapata are hereby ordered to desist and refrain from offering or selling any security in the State of California, by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. This Order is necessary, in the public interest, for the protection of investors and consistent with the purposes, policies, and provisions of the Corporate Securities Law of 1968. Dated: January 8, 2014 Sacramento, California

Reading between the lines and despite Xu making no effort to inform WCM777 investors he was under investigation in California and in communication with US regulators, Xu’s unofficial response was to change the name of WCM777 to Kingdom777 and put James Tenorio in charge.

Note that neither Kingdom777 nor James Tenorio appear in the order as respondents.

Sneaky sneaky… but will US regulators care? I doubt it.

Whether or not Californian authorities (or any other US regulators) have instigated further communication with Xu, specifically regarding Kingdom777 and James Tenorio continuing to operate the WCM777 Ponzi scheme, is currently unclear.

Accompanying the cease and desist is a publicly issued investor alert, within which the Office of Financial Institutions warns

The California Department of Business Oversight recently issued a Desist and Refrain Order against World Capital Market and related companies WCM777, Inc. and WCM777 Limited, all headquartered in California. It is believed that the companies are selling unregistered securities and making untrue and misleading statements in their sales offerings. The California order follows a similar order issued by the Massachusetts Securities Division. The amount of money invested with these companies is not known, but could be in the millions. Nor is the number of investors and their geographic location known. As the investment is being offered globally over the Internet, there could be investors throughout the United States and the world. If you are considering investing with one of these companies, please use extreme caution and conduct thorough research. If you have already invested or have questions and concerns, contact the OFI Securities Division at (225) 925-4518 or (225) 925-6550.

Questions remain over whether or not Xu’s “but we changed our name and put a new guy in charge” efforts will be enough to satisfy US regulators. Looking at California’s cease and desist, I think the writing is clearly on the wall.

I think the big question now is firstly how much of the $20 million Ponzi funds that were raised through WCM777 are left, and secondly what will Xu do with them?

Oh and if I was TelexFree, I’d be reading that cease and desist very carefully. Anyone want to take a punt at how much revenue TelexFree generated through retail VOIP sales versus affiliate AdCentral investment?

Stay tuned…