Federal regulators announced fraud charges Friday against a company they said was operating a $600 million Internet Ponzi scheme “on the verge of collapse.”

The Securities and Exchange Commission accused ZeekRewards.com, its parent company, Rex Venture Group, and Rex Venture head Paul Burks of luring more than 1 million investors worldwide into the scheme, which began in early 2011.

ZeekRewards is a companion to the penny auction site Zeekler.com. Visitors to the the ZeekRewards site were told that by paying subscription fees and becoming “affiliates,” they could share in the company’s profits.

In fact, the SEC said, the payouts the firm made came from the funds of new investors, “in classic Ponzi scheme fashion.”

“The obligations to investors drastically exceed the company’s cash on hand, which is why we need to step in quickly, salvage whatever funds remain and ensure an orderly and fair payout to investors,” the SEC’s Stephen Cohen said in a written statement.

The SEC said it has frozen the roughly $225 million in investor funds that remain in the company’s bank accounts. So far, the agency said, ZeekRewards has paid out some $375 million to investors, while Burks allegedly siphoned off millions for himself in the process.

Burks has agreed to settle the SEC case without admitting or denying wrongdoing, paying a $4 million penalty and forfeiting his stake in the firm.

The SEC can only pursue civil charges. Burks could still face further charges from subsequent criminal investigations.

Lawyers for Burks and Rex Venture did not immediately return requests for comment.

“Penny auctions” are a controversial kind of online sale in which prospective buyers compete over a set period of time with bids that increase by increments of one cent.

Participants pay a separate, non-refundable fee for each bid they make. An expensive item like an iPad might therefore sell for a seemingly unbelievable list price of $30, even though participants in the auction paid many times more than that in total to place their bids.

Read more