TelexFree A No-Show At Alabama Hearing; Litigation Involving Firm Piles Up

UPDATED 12:25 P.M. EDT U.S.A. Immersed in litigation on at least 10 fronts in the United States while also confronting licensing challenges and asset freezes, TelexFree did not appear last month at a hearing it requested to consider its telecom application before the Alabama Public Service Commission.

As things stand, the company is not authorized to operate in the state. The May 13 hearing began, according to a transcript published June 4, with an administrative law judge polling the room for appearances on behalf of the state and TelexFree. Two officials from the Commission entered appearances.

“Let the record reflect that no one has appeared on behalf of the applicant,” noted Administrative Law Judge Scott Morris.

The Commission then noted a TelexFree matter before the Minnesota Public Utilities Commission. In April, the staff of the Minnesota PUC asked the state to deny the firm the authority to operate, amid allegations it had provided “false and misleading information” during the application process.

Morris, according to the Alabama transcript, then noted that “unless [TelexFree] requests rescheduling and pays the court reporter fees for not appearing, this application will not go forward. It will be dismissed.”

TelexFree initially was scheduled to appear at an Alabama hearing on April 10, but asked for the session to be postponed “for a month” owing to unspecified “scheduling conflicts.”  One of those scheduling conflicts now appears to have been the logistics associated with filing for bankruptcy in Nevada less than a month after TelexFree assured Alabama regulators it had the financial wherewithal to operate in the state.

The Commission accommodated TelexFree by rescheduling the April 10 hearing for May 13, but TelexFree did not show.

TelexFree’s Alabama application asserted that TelexFree LLC had a “parent company” known as “TelexFree Group Inc.” Where it is based is unclear. A provision of the TelexFree LLC “Operating Agreement” included in the Alabama application purported to permit TelexFree LLC “[t]o lend money upon terms acceptable to the Managers to any person or entity, and to enter into contracts and agreements which are not arms-length if they are consistent with the best interests of the Company.”

On April 13, TelexFree declared bankruptcy. The Massachusetts Securities Division (MSD) and the U.S. Securities and Exchange Commission (SEC) filed fraud allegations shortly thereafter. MSD described TelexFree as a combined pyramid- and Ponzi fraud that had gathered more than $1.2 billion.

Less than a month earlier, on March 20, TelexFree filed for its license in Alabama, saying it had 2013 net income of more than $36.4 million and that its “current financials Show considerable net worth.” The document described “Joe Craft” as holding the “Official Title” of “CFO” of TelexFree LLC.

As the PP Blog reported on April 21 (italics added):

Page 15 [of the Alabama application] includes an oath recorded March 5, 2014, before a Massachusetts notary public. The oath bears the name and signature of Jim Merrill, who is listed as “President” of TelexFree LLC. The oath attests that the information in the Alabama document — an “Application for a Certificate of Public Convenience and Necessity to provide interexchange telecommunications services in Alabama” — is true to the best of Merrill’s knowledge and belief.

The document appears accidentally to have identified Merrill as a woman, given that the certification line actually reads “the statements made herein are true to the best of her [emphasis added by PP Blog] knowledge and belief. Merrill appears not to have noticed when signing the document.

Despite the sworn oath of Merrill that Craft was the “Official” TelexFree “CFO” on March 5, 2014, however, TelexFree’s board appears not to have named Craft CFO until sometime after 8:11 p.m. on April 13, 2014, the same day TelexFree and related entities filed for bankruptcy in Nevada.

According to TelexFree’s bankruptcy filing, “Joe H. Craft” of “Joe H. Craft, CPA” was present at the meeting, which was called to order by Carlos Wanzeler.

During the meeting, the board and other attendees, including CPA Craft, “considered the Company’s liabilities, the strategic alternatives available to it, and the impact of each of the foregoing on the Company’s businesses,” according to the bankruptcy filing.

During the meeting, the board decided to file for bankruptcy. It then was resolved that “Joe H. Craft” would become one of TelexFree’s “authorized persons.” After this resolution, it then was resolved that “the Authorized Persons be, and they hereby are, authorized and directed to employ the accounting firm of Joe H. Craft, CPA to provide Joe H. Craft to serve as Chief Financial Officer of the Company while the Chapter 11 case is pending and to assist the Company in carrying out its duties under the Bankruptcy Code.”

Another resolution resolved that “Joe H. Craft be, and he hereby is, elected to serve as Chief Financial Officer of the Company.”

On April 15, the SEC accused TelexFree, Merrill, Wanzeler and Craft civilly of fraud. Merrill and Wanzeler later were charged criminally with wire-fraud conspiracy. Interim TelexFree CEO Stuart MacMillan said he fired Wanzeler on April 17 and asked Merrill and Craft to resign.

Page 19 of the 99-page Alabama filing showed an image of a March 8, 2014, document from the office of Alabama Secretary of State Jim Bennett. The document noted that the name TelexFree LLC was “reserved as available” in the state.

“This name reservation is for the exclusive use of BWFC Processing Center, LLC, 825 East Main St, Boonville, IN 47601 for a period of one year beginning March 08, 2014 and expiring March 08, 2015,” the document reads in part.

The East Main Street address is the address of both Craft’s accounting firm and the address of BWFC Processing Center LLC, a company listed in New Hampshire as a payment processor. A company with the same name operates in Nevada and provides registered-agent services.

The SEC said in a complaint that Craft was hired as TelexFree’s accountant in April 2012 and “was sometimes held out as the company’s CFO.”

Craft is accused of preparing “materially false and misleading” TelexFree financial statements.

His work for TelexFree “was fraudulent and deceptive, because TelexFree was a Ponzi and pyramid scheme that was destined to collapse, thereby preventing it from making the payments promised to investors,” the SEC alleged.

The PUCs of Nevada and Hawaii have booted TelexFree, with licensing issues unsettled in Minnesota, Alabama and other states.

TelexFree is facing civil actions by the SEC and MSD, litigation in bankruptcy court, criminal prosecutions against Merrill and Wanzeler, a criminal grand-jury investigation in Massachusetts, forfeiture actions and at least four prospective class-action lawsuits.

The firm says on its website that it “has suspended all business activity.”