URGENT >> BULLETIN >> MOVING: (5th update 7:33 P.M. EDT U.S.A.) In a defense filing in the SEC’s securities fraud case against him, former TelexFree interim CFO Joseph Craft says he concluded TelexFree was a Ponzi scheme selling unregistered securities.
The acknowledgement, which appears to be the first concession from the TelexFree inner circle that the enterprise engaged in fraud, potentially pits Craft against other TelexFree defendants and others who may have inside knowledge of the scheme. Craft paints himself in the filing as an outsider who was misled by insiders.
Craft, 50, came to the Ponzi/securities conclusion in “approximately March” 2014, according to the filing. TelexFree filed for bankruptcy protection the following month. The SEC immediately sued, the Massachusetts Securities Division (MSD) filed a civil-fraud action and federal agents raided TelexFree headquarters in Marlborough, Mass. It later became known that the U.S. Department of Homeland Security had conducted an undercover investigation into TelexFree’s operations beginning at least by October 2013.
Alleged TelexFree managers or executives James Merrill and Carlos Wanzeler later were indicted on criminal charges of wire fraud and wire-fraud conspiracy.
Filings in the TelexFree bankruptcy case say Craft was appointed TelexFree CFO on April 13. Why he’d accept the appointment from Merrill and Wanzeler at an emergency board meeting on a Sunday night in April after concluding TelexFree was a Ponzi scheme in March was not immediately clear in defense filings.
Craft, a certified public accountant in Boonville, Ind., was charged civilly by the SEC in April, two days after the bankruptcy filing. So were seven others, including Merrill and Wanzeler, former executive Steve Labriola and four alleged promoters. The scheme gathered more than $1.2 billion, MSD alleged.
TelexFree also was charged civilly. Craft became TelexFree’s accountant in July 2012, according to the defense filing.
Craft “denies that he was a principal or insider in the enterprise at any time, and says that he performed honest and legitimate accounting services for the corporations named in the Complaint,” the defense filing reads in part. “He denies that he assisted any wrongful activity. He was kept in the dark about the true nature of the enterprise’s activities and was a victim of misrepresentations for most of the time that he served as TelexFree’s accountant. He was not an insider, employee, owner, principal or promoter.”
And, according to the filing, “[i]n 2013 and 2014” while performing accounting services for TelexFree, Craft “relied on the advice of the defendant enterprises’ counsel in all material respects.”
The former CFO did not identify the counsel. One TelexFree lawyer, MLM attorney Gerald Nehra, has been accused of racketeering by some TelexFree members.
Other Highlights Of Defense Filing
Craft admitted he was aware a Brazilian state court in Acre had suspended TelexFree’s Brazilian affiliate (Ympactus) in June 2013, but says he “was told that the suspension was improper and was going to be overturned.” He did not say who advised him the Acre action would be overturned.
He “denies that he was involved in any way in ‘running a huge Ponzi and pyramid scheme.’ He was not involved in company operations. He was not a company principal or someone who was correctly informed about many of the [details] of the company’s true operations.”
Craft admits that he “compiled an unaudited, informal financial statement” that was filed with MSD in 2013. But the statement, he says, was “based entirely on information provided by corporate officers.”
“At the time of preparing the compilation Mr. Craft had been misinformed about the company’s activities and material information was withheld by company officers,” according to the defense filing.
The SEC has said TelexFree’s VOIP service was a front to mask a billion-dollar fraud scheme.
BULLETIN: (2nd update 9:54 p.m. EDT U.S.A.) MLM attorney Kevin Grimes and a companion entity known as MLM Compliance VT LLC received $843,000 from the Zeek Rewards pyramid- and Ponzi scheme through the sale of a “bogus compliance course,” receiver Kenneth D. Bell has alleged in an amended complaint.
The amended complaint, filed yesterday, includes MLM Compliance as a defendant. The original complaint filed last month did not. Also new in the amended complaint is the figure of $843,000. The original complaint did not specify a specific sum.
Co-defendants also include Grimes and the Grimes & Reese law firm.
“In total, Grimes and MLM Compliance received approximately $843,000 from RVG for the bogus course,” Bell alleged. “The final payment from [Zeek operator Rex Venture Group] to Grimes and MLM Compliance was, upon information and belief, a check rushed to and indorsed by Kevin D. Grimes for $342,510, which posted on August 13, 2012, less than a week prior to ZeekRewards’ shutdown.”
The course, Bell alleged, served as “window dressing” for the Zeek fraud. The SEC shut down Zeek on Aug. 17, 2012.
Some MLMers immediately raced to other fraud schemes — after participating not only in Zeek, but in the AdSurfDaily MLM Ponzi scheme and other “programs.”
Zeek gathered on the order of $850 million in a combined pyramid- and Ponzi scheme that operated for about two years. It was “an internet based so-called ‘MLM’ (multi-level marketing) program,” Bell said.
Grimes and MLM Compliance engaged in “Unfair and Deceptive Trade Practices” by creating the course, which “served to bolster what they knew to be an unlawful scheme,” Bell alleged.
Bell is suing Grimes and the Grimes and Reese firm for a sum in excess of $100 million, alleging they were unjustly enriched and engaged in Legal Malpractice, Negligence, Breach of Fiduciary Duty and Aiding and Abetting Breach of Fiduciary Duty.
Longtime HYIP huckster and TelexFree figure Faith Sloan has been banned by Illinois from selling securities. The prohibition order is dated June 9. It was issued by the Securities Department of Illinois Secretary of State Jesse White.
The state found that Sloan, an Illinois resident, operated a TelexFree-related website and acted as an unregistered securities dealer, salesperson and investment adviser.
Violating the order could result in a felony charge, the state said.
Sloan, who faces TelexFree-related civil charges of securities fraud from the U.S. Securities and Exchange Commission, is associated with the website TelexFreePower.com. The website now appears not to be loading properly.
When Illinois observed the site, the state said in the prohibition order, the site loaded an image of an “exotic sports car” with a statement that read, “I made $200 in 7 days working 3 minutes a day.”
The image implied that “one would be able to afford the exotic sports car by becoming a member of TelexFree,” the state said.
The SEC also has referenced the TelexFreePower website. In addition to promoting the massive TelexFree pyramid- and Ponzi scheme, the SEC said, Sloan violated the asset freeze in the case and lied to a federal judge.
Faith Sloan. Source: YouTube.
The order also bans TelexFree managers or executives James Merrill, Carlos Wanzeler, Joe Craft and Steve Labriola from selling securities in the state.
Attorneys handling the TelexFree bankruptcy case appear to have became aware of the order at least by June 16, according to billing records in the bankruptcy case. The effect the order had on decision-making in the bankruptcy case is unclear.
On July 16, bankruptcy trustee Stephen B. Darr said in court filings that he has “no intention of reorganizing or reactivating” the TelexFree businesses. TelexFree, its former manager or executives and some of its promoters, including Sloan, are facing a mountain of litigation.
Merrill and Wanzeler have been indicted on U.S. charges of wire fraud and wire-fraud conspiracy. Brazilian federal police conducted TelexFree-related raids last week.
Sloan has blamed TelexFree, Merrill, Wanzeler and MLM attorney Gerald Nehra for her TelexFree-related troubles.
Florida “Expat” and Zeek Rewards Ponzi-scheme figure T. LeMont Silver yuks it up earlier this year in the Dominican Republic. Source: YouTube.
MLM, witness your latest PR train wreck — as voiced by alleged Zeek “winner” and purported “revenue sharing” consultant/trainer and Florida “Expat” T. LeMont Silver. (Video below.)
In a consolidated motion in response to motions by various alleged Zeek “winners” to dismiss the clawback lawsuits against them, the court-appointed receiver in the Zeek Rewards Ponzi- and pyramid case has asked the court to take “judicial notice” of two YouTube videos featuring Silver, a veteran HYIP huckster.
In typical HYIP fashion that marries the merely imponderable to the truly bizarre, one of them painfully is titled, “(T. Le Mont Silver, Sr.), (7 Figure Producer) shares about Plan B part #2.” (Bold emphasis added by PP Blog.)
The HYIP sphere, the staging waters for boat sharks who throw purported rescue jackets to victims bloodied in the water from earlier scams and desperately struggling to stay afloat, is infamous for Plans B.
Although the “program” isn’t identified in the video, Silver’s Plan B appears to be the ill-fated JubiRev/JubiMax. (See June 18, 2013, BehindMLM.com story.)
MLM may have a problem with “serial participants” in Zeek-like schemes to defraud, Zeek receiver Kenneth D. Bell suggests in the motion asking the court to take judicial notice of the Silver videos.
The language chosen by the receiver is similar to language the SEC used in 2013 to describe MLM HYIP huckster Matthew John Gagnon. Gagnon, the SEC said at the time, was a “serial fraudster.”
The context of the SEC’s Gagnon prosecution may be important. Indeed, one of the “programs” he was accused of promoting was the infamous Legisi scheme, a semi-offshore debacle the SEC took down in 2008. Like Zeek, the Legisi case started with asset freezes and the appointment of a receiver.
Time slowly marched on. But in 2009, the receiver sued Gagnon. In 2010, the SEC filed civil charges against him. He was charged criminally in 2011.
Legisi, the SEC said, operated a “classic pooled investment vehicle.” In one of the Silver videos cited by the receiver, Silver describes his “Plan B” program as the operator of a “pot.”
Women between the ages of 30 and 55 were the financial targets of the “opportunity,” according to one of the videos referenced by Bell.
The video tends to suggest that Silver understood how Zeek got caught by using highly questionable “bids” as its “product” and that the MLM’s trade’s serial fraud wing immediately sought more clever disguises — hiding an HYIP scam behind the purported sale of ostensibly legitimate products such as cosmetics and diet shakes, for instance.
Silver has appeared in “many” online videos and has promoted “several ‘revenue sharing’ schemes in addition to Zeek,” receiver Kenneth D. Bell advised Senior U.S. District Judge Graham C. Mullen.
Bell supplied the court links to the videos.
In the HYIP sphere, the term “revenue sharing” is used to make schemes appear to be innocuous.
As noted above, the HYIP sphere is infamous for purported Plans B, which typically are cosmetically tweaked reload schemes designed to fleece an initial group of marks for a second time.
Here, it’s appropriate to revisit HYIP history for a second time. If you believe AdSurfDaily Ponzi schemer Andy Bowdoin caused an almost inconceivable amount of PR damage to the MLM trade by comparing the U.S. Secret Service to “Satan” and the 9/11 terrorists, wait until you get a load of what T. LeMont Silver does in one of his videos cited by the receiver. (Video appears at bottom of this column.)
By way of background, the HYIP sphere is infamous for dropping the names of famous entities and people, even if they have no ties whatsoever to the “opportunity” being presented.
Although Silver apparently isn’t selling Avon or Amway or Mary Kay or Herbalife or ViSalus in the video, he drops the names of all of them (and more). Along the way he drops in a veiled reference to Zeek, describing it as a penny auction “program” in which affiliates would “make large purchases of . . . let’s say ‘bids’,” with Zeek’s product creating a “big issue” with regulators.
Silver notes that he’ll provide “training” for the upstart “program,” positioning it as a way for average MLMers to make money without having to recruit or to orchestrate “dog and pony” presentations. Regardless, Silver assures the audience that he’s a master of the MLM dog and pony. He further suggests that, because Zeek’s “bids” had caught the attention of regulators, the trade’s braintrust now is turning toward “more traditional MLM-type products and services.”
Putting lipstick on brand-new HYIP pigs or evolving ones is part and parcel to the HYIP sphere. Silver’s video suggests that the HYIP trade has learned that sketchy products such as Zeek’s bids might not fly and now was concentrating on attracting women between the ages of 30 and 55 by wrapping cosmetics, weight-loss shakes, home products and travel into a purported “revenue sharing” model in which participants who bought in would receive “pro rata” shares from a giant revenue pot.
After suggesting he has inside information about the new HYIP regime, Silver curiously observes that he is “very, very key on genealogical integrity.” We interpret this to mean that he’d be exceptionally pleased if people with existing MLM organizations within traditional companies would port them into his next scam.
Even though he’s apparently not selling Amway in the video, he bizarrely also prompts viewers not to dare “call Amway Scamway.” Equally bizarrely, Silver congratulates the company for “legitimizing this industry” back in the 1970s by purportedly “kick[ing] the backside” of the U.S. government and the government’s “[p]atootie.”
“My goodness,” he says. “Thank you, Amway.”
Yes. T. LeMont Silver has now publicly thanked Amway for kicking the government’s ass 35 years ago and, under his interpretation of In the Matter of Amway Corporation, Inc., et al., paving the way for people to send tremendous sums of money to companies with presumptively better disguises than Zeek.
Amway is a lot of things — good and bad — to a lot of people. Unlike Zeek, however, it is not an HYIP that offered “passive” investors who sent in $10,000 or smaller sums a laugh-out-loud, average daily return of 1.5 percent, basically in perpetuity.
Gawd!
Our take on Silver’s take of the 1979 non-HYIP Amway decision is that it somehow made preposterous “revenue sharing programs” as seen in the HYIP sphere lawful or that all HYIP schemes are lawful if they have product such as those offered by Avon, Amway, Herbalife and the others. But the pyramid analysis, of course, does not exclusively hinge on whether a company has a “product.” If it did, Zeek (“bids”) and BurnLounge (“music”) would still be in business. Moreover, there would be no Bill Ackman/Herbalife dichotomy, no question about whether Herbalife was Jurassic Park or Disneyland. In short, MLM heaven on earth would not be a rumor, it would be a reality.
“Plan B,” meanwhile, is a virtual calling card of HYIP swindles, with prospects typically given instructions to join at least two “programs” in case one of them fails or to quickly join another “program” when a favored one collapses or encounters regulatory scrutiny.
Silver is a longtime pusher of “Plan B” MLM HYIPs, which, as noted above, typically call themselves “revenue sharing programs.” He’s hardly alone. Zeek figure and purported MLM expert Keith Laggos pushed the Lyoness “program” to Zeekers as a “Plan B” just prior to the Aug. 17, 2012, collapse of Zeek. (See Aug. 12, 2012, PP Blog editorial: “Karl Wallenda Wouldn’t Do Zeek.”)
Lyoness, among other things, dropped the name of Nelson Mandela in sales promos.
Among the tips Laggos provided to listeners of a Lyoness conference call was this: “Don’t put no more than 70 percent back in [Zeek]. Take out 20 or 30 percent [on] a daily basis. [Unintelligible.] This would be a good place. But, by the same token, if you put $10,000 in Zeekler, if nothing happens over the next year, you’ll probably make $30,000 or $40,000, if that’s all you do without building the front end, the matrix . . . The same amount of money in Lyoness, you’re looking . . . and not doing anything else, without single sponsoring . . . you can probably make a quarter-million dollars.”
One of the problems with HYIP schemes is that they cause polluted money to flow between and among scams, in part because the scams have serial promoters in common. The inevitable result is that payment vendors become warehouses for fraud proceeds, prompting the government to apply for asset freezes and account seizures to stop the flow of tainted cash.
Receiver Cites Second Silver Video
The second video featuring Silver — an alleged winner of more than $1.71 million in Zeek — is titled “Internet Entreprenuer Family Chooses Cabrera [Dominican Republic] For Their New Expat Lifestyle.” It shows Silver and his wife — another alleged Zeek winner — lounging in the Dominican Republic after the collapse of the Zeek scheme.
Prior to relocating to the Dominican Republic, Silver told his downline in a failed MLM “program” known as GoFunPlaces to take advantage of “low-hanging fruit” (other disaffected GoFunPlaces members) and become recruiters for a “program” known as Jubimax. The “programs” ultimately accused each other of fraud.
Silver also promoted “OneX,” which federal prosecutors in the District of Columbia described as an AdSurfDaily-like, money-circulating scheme. ASD operator Andy Bowdoin, now jailed after the collapse of the ASD fraud in 2008, also promoted OneX, explaining to prospects that they’d earn $99,000 very quickly and that he’d use the money he’d earned to pay for his criminal defense in the ASD case.
Bowdoin asserted OneX was great for college students. Silver asserted that positions being given away were worth $5,000.
Prosecutors also linked Bowdoin to AdViewGlobal, an ASD reload scam that operated as a “Plan B.” AdViewGlobal, which purported to operate offshore but actually was operating from Florida and Arizona, mysteriously vanished in the summer of 2009.
Zeek receiver Bell, who connected alleged Zeek winner Todd Disner to the ASD Ponzi scheme in court filings this week, now says in court filings that certain Zeek clawback defendants “may well be serial participants in these types of schemes.”
One of the things that makes Zeek-related litigation unique in the history of actions flowing from HYIP schemes is that Bell is not limiting his lawsuits to a relatively small universe of alleged major winners such as Silver. In a proposed class action, he’s also pursuing more than 9,000 alleged winners of smaller sums (more than $1,000 but less than $900,000), something that could have a long-needed chilling effect on serial promoters who may enter an HYIP Ponzi knowingly but less publicly.
Some early HYIP Ponzi entrants may recruit heavily at first and be satisfied with smaller sums, because the larger plan is to get out quickly on the theory smaller winners won’t be pursued.
Regulators have warned for years about the online phenomenon of “riding the Ponzi.”
Some money could be in the hands of Zeek victims on Sept. 30. Senior U.S. District Judge Graham C. Mullen has approved a motion by the court-appointed receiver to make an interim, partial distribution of allowed claims.
EDITOR’S NOTE: Zeek receiver Kenneth D. Bell has issued the following statement (below). The original is here and is dated July 30, 2014. “RVG” stands for Rex Venture Group, the operator of Zeek. Zeek is alleged to be a Ponzi- and pyramid scheme that gathered on the order of $850 million. The receiver’s statement addresses U.S. domestic class-action claims against more than 9,000 alleged “winners.” Still engaging in willful blindness, pushing HYIP schemes and hoping to harvest “commissions” from them — and perhaps deluding yourself into believing there will be no consequences?
Zeek-related matters have been inside the courts for nearly two years, meaning the litigation is at an advanced stage compared to, say, TelexFree. Zeek’s history therefore may provide a roadmap of sorts on what’s in store downstream for the TelexFree “program” and certain insiders and promoters. On a side note, the trustee in the TelexFree bankruptcy case is seeking court approval to issue subpoenas to many businesses and people who came in contact with that “program.” TelexFree, which operated in the United States, Brazil and other countries and appears to have gathered more than $1 billion, is known to have had promoters in common with Zeek. By one account, Zeek had 100,000 promoters in Brazil alone.
Bell is expected to file litigation against alleged international Zeek “winners.” How deeply that will touch Brazilian affiliates is unclear.
** Editor’s Note update at 2:08 p.m. Please see Comments thread below for possible Zeek promoter tie-ins to the Profitable Sunrise and Text Cash Network schemes. **
** _____________________________ **
Zeek receiver Kenneth D. Bell. December 2013 screen shot.
ANNOUNCEMENT FROM THE RECEIVER – JULY 30, 2014
On March 3, 2014, I announced the filing of a lawsuit to obtain the return of the money paid out to net winners in the ZeekRewards scheme in excess of the amount they paid into RVG. In that lawsuit, Kenneth D. Bell v. Todd Disner, et al., Civil Action No. 3:14-cv-91, I made claims against more than 10 of ZeekRewards’ largest “net winners” in the United States asking that the Court order them to repay the net winnings they received from the scheme. I also made class action claims against approximately 9,400 ZeekRewards net winners in the United States who each won more than $1,000.
Today, I have filed with the Court a motion asking the Court to certify this Net Winner Class and asked that the Court appoint one or more of the largest net winners sued by name as class representatives because they will, by virtue of their own defense to the same claims, be adequate and appropriate representatives for the rest of the Net Winner Class. Proposed Net Winner Class members are not required to file any response to the motion, but may, of course, discuss this matter with legal counsel if they choose to do so. The deadline for the named defendants to respond to the motion has been set for August 18, 2014.
A copy of the Motion to Certify the Net Winner Class and the Memorandum of Law in Support of the Receiver’s Motion to Certify the Class can be found here: Motion and Memorandum. Also, a list of those individuals whom the Receiver believes won more than $1,000 and therefore would be included in the Net Winner Class can be found here.
BULLETIN: (UPDATED 4:29 P.M. EDT U.S.A.) Zeek Rewards receiver Kenneth D. Bell — for the first time — has referenced the AdSurfDaily Ponzi case in a federal court filing. Zeek, believed to have gathered on the order of $850 million, is known to have had participants in common with ASD, a $119 million fraud.
Some MLM HYIP promoters proceed from fraud scheme to fraud scheme, racking up windfalls along the way.
Bell’s specific reference to ASD is in the context of alleged Zeek “winner” Todd Disner, already the subject of a clerk’s entry of default in a Zeek receivership lawsuit against Disner and other alleged winners.
Disner was defaulted for not entering a defense.
After not defending against the receiver’s claims, Disner then sought to file pro se to set aside the default. Bell is seeking more than $2 million from Disner, including more than $1.8 million in alleged Zeek winnings, plus interest.
Bell said today in court filings that the default entry should stand. Meanwhile, the receiver strongly suggested that Disner, after earlier having played games in ASD-related litigation, now was trying to do the same thing with Zeek.
“Mr. Disner is no stranger to litigation,” Bell said. “For instance, as a promoter of the Ad Surf Daily Ponzi Scheme, Disner earned significant funds and filed a twenty-nine page pro se Complaint for Declaratory Relief against the federal government in late 2011 claiming wrongful seizure of his Ad Surf Daily Ponzi scheme winnings . . . ”
Disner eventually lost the case he filed against the government in the Southern District of Florida — this after he earlier lost a pro se bid to intervene in the ASD case in the District of Columbia.
Disner’s co-plaintiff in the Southern Florida case was former AdSurfDaily pitchman Dwight Owen Schweitzer, potentially a Bell Zeek target along with Disner. Schweitzer, a former attorney whose license to practice law was suspended in Connecticut, is listed as a “winner” of more than $1,000 on the Zeek receivership website.
“Mr. Disner also has a history of dilatory action in litigation,” Bell said. “In the [ASD-related] case he filed against the United States, the government filed a motion to dismiss on May 18, 2012. However, Disner failed to provide any response to the motion to dismiss. As a result, the court was forced to order Disner to file a response . . .
“In light of his history, Mr. Disner was aware of the severe consequences of a failure to plead or defend [in the action against Zeek winners],” Bell said. “Despite this clear knowledge, he nonetheless failed to raise a hand until after default had been entered in this matter. For this reason as well, the motion should be denied.”
Bell also moved today to certify a class of more than 9,000 net-winner defendants from Zeek, all of whom allegedly won more than $1,000. Schweitzer potentially could be a member of this class, given the appearance of his name in a document on the receivership website maintained by Bell.
BULLETIN: (2nd Update 8:29 p.m. EDT U.S.A.) Three individuals alleged to be key insiders of the Zeek Rewards Ponzi- and pyramid scheme have agreed to a $600 million consent judgment with the court-appointed receiver.
Receiver Kenneth D. Bell sued several alleged insiders, including Zeek operator Paul R. Burks, former COO Dawn Wright-Olivares and programmer Daniel Olivares, in late February.
Now, Burks, Wright-Olivares and Olivares have agreed to a consent judgment of $600 million “to be satisfied with substantially all of their assets,” Bell said in court filings today.
The settlement must be approved by the court. Senior U.S. District Judge Graham C. Mullen of the Western District of North Carolina is presiding over the cases of the alleged insiders.
Other alleged insiders continue to challenge Bell’s complaint. If judgments are entered against Burks, Wright-Olivares and Olivares, continued litigation by other alleged insiders increasingly could become an uphill climb.
Bell’s filing today also reveals that the receivership has recovered $107,697 from an FXDirectDealer (FXDD) account linked to Wright-Olivares through an entity known as “Wandering Rex.”
FXDD was sued by the U.S. Commodity Trading Futures Commission (CFTC) last year, amid allegations it failed in its supervisory obligations by “employing a trading system that gave FXDD pricing advantages over [customers] and harmed thousands of its retail customers.”
Whether Wandering Rex was a harmed customer was not immediately clear.
“Wandering Rex was an entity established by Dawn Wright-Olivares and/or her affiliates through which Rex Venture Group funds were fraudulently transferred,” Bell advised Mullen today in a quarterly report to the court.
Only in MLM: In a head-scratching promo earlier this year, TelexFree cheerleaders used an image of the Pyramids of Giza during an active pyramid-scheme probe in Brazil. Red highlight by PP Blog.
If you’ve been following TelexFree developments, you’ve probably heard about “Operation Orion,” the code name for the investigation that led to raids against TelexFree’s Ympactus arm last week by the Brazilian federal police. The Orion name was chosen, police said, because it fit splendidly within the context of a pyramid-scheme case.
How so? The Pyramids of Giza in Egypt were aligned with the Orion constellation, police explained.
Our analysis of the “Operation Orion” name is that it shows heady messaging by Brazilian police. It is direct in the sense that TelexFree, after all, may be the world’s largest MLM HYIP pyramid scheme. And it’s subtle in the sense that so many pyramid-scheme participants have bright stars in their eyes that blind them to the realities of mathematics.
Here we’ll point out that, for whatever reason, someone within the TelexFree sphere got the head-scratching idea earlier this year to use an image of the Pyramids of Giza in a promo for TelexFree during an active pyramid-scheme probe in Brazil.
We believe it notable that Brazilian police also referenced the Pyramids of Giza, given their presence in a TelexFree promo.
For newer readers, we’ll also point out that the HYIP sphere is infamous for taunting the law-enforcement community. Like TelexFree, a “program” known as WCM777 also came under investigation in multiple countries earlier this year. Naturally someone within the WCM777 sphere shoved an image of a pyramid down the throat of law enforcement after word of the investigations became public.
Second Tour (At Least) For ‘Operation Orion’
Did you know that the code name “Operation Orion” chosen by Brazilian police previously had been used by the United States in a major law-enforcement action, albeit in a completely different context? (More on the 2012 U.S. action below.)
What’s your thinking? Are two Operation Orions in two years coincidence?
And did you know that the U.S. Department of Homeland Security (DHS), which has its own TelexFree probe, has an office in Brasilia and a history of cooperating with Brazil’s federal police — and that some criminal investigators from outside the United States receive training at the DHS Federal Law Enforcement Training Center in Glynco, Ga? (The U.S.-sponsored training also sometimes occurs in countries that host the United States. Some Brazilian investigators, for example, have received U.S. training in Peru. See photo below.)
U.S. prosecutors did not respond to a request for comment on whether there was any coordination between the United States and Brazil last week on TelexFree-related events: the indictment of TelexFree figures James Merrill and Carlos Wanzeler in the United States, and the public announcement of “Operation Orion” in Brazil.
What’s In A Code Name?
U.S.-based police, prosecutorial and regulatory agencies regularly conjure up operational names to distill the essence of the law-enforcement goal and to send a message that fraudsters never should be confident. Agencies also sometimes engage in something we’ll describe as reverse black comedy whose purpose is to accent the absurdities of scams and scammers. In New Jersey last year, for example, a law-enforcement action targeted at alleged booze diluters was memorably named “Operation Swill.”
It was an instant classic.
A long-running FBI operation targeted at dozens of penny-stock fraudsters a few years ago was dubbed “Operation Shore Shells,” in part because the probe occurred near the sea and in part because the fraud involved the use of shell companies, often a nemesis of legitimate commerce. The SEC, which regulates the U.S. securities markets, once dubbed an action directed at hundreds of companies ripe for pump-and-dump swindles “Operation Shell Expel.”
To out illegal gambling conduits reaching into the United States, DHS once set up a sting operation and “obtained a business address near Atlantic City, New Jersey” to bolster undercover operatives’ street cred. As part of the operation, the Feds created a bogus “payment processor” known as Linwood Payment Solutions to “negotiate contracts and terms of the processing, and to handle the intricate movement and processing of collection and payment data from the gambling organizations to the banks.”
These well-dressed greeters actually were part of a federal undercover operation dubbed “No Such Thing as a Free Lunch.” Source: U.S. Marshals Service. Red blocks by PP Blog.
The U.S. Marshals Service, in charge of rounding up fugitives, once famously conjured up a sting dubbed “No Such Thing as a Free Lunch” that operated as part of a larger sting dubbed FIST — for Fugitive Investigative Strike Teams.
As part of a six-year FIST operation in the 1980s, marshals created a fake business known as “Flagship International Sports Television Inc.,” obtained the last-known addresses of more than 3,000 wanted persons and sent brunch “invitations” that promised free food and free National Football League game tickets to those addresses. The marshals also offered a shot at free Super Bowl tickets.
The free-food sting netted 100 arrests. FIST overall netted more than 14,700.
Undercover TelexFree Probe
It is known that DHS conducted a TelexFree-related undercover operation that lasted for months. Whether the operation extended to foreign soil and had a formal name is unclear. Based on its research, the PP Blog believes that undercover stings (named and unnamed) operated by U.S. government agencies and aimed at HYIPs have been operating continuously in the United States since at least 2006.
One of the reasons is that the schemes put banks in the line of fire and often target disadvantaged populations. Beyond that, HYIP schemes have a history of trading on the names of the White House and U.S. government agencies, thus confusing people across the world. TelexFree promoters, for instance, traded on the names of President Obama, the cabinet-level office of the U.S. Attorney General, the SEC and Massachusetts Commonwealth Secretary William Galvin. Why? To cloak themselves in a veneer of legitimacy and to drive money to a scheme that purportedly returned $1,040 in a year to people who paid in $289, $5,200 to people who paid in $1,375 and $57,200 to people who paid in $15,125.
Even Bernard Madoff would gag at the thought.
Female police officials from multiple countries, including Brazil, received U.S. training in Peru in 2012. Photo source: DHS.
With the Internet emerging as the favored delivery vessel of both clever and unclever fictions aimed at transferring great sums of wealth and putting unwarranted financial power in the hands of criminals and criminal enterprises, the need has arisen to pursue cross-border frauds aggressively. The only way to minimize the mushroom effect of fraud schemes operating on the Internet is through international cooperation at the highest levels of government and law enforcement.
Put another way, your latest recruit could be a Fed. The person you instructed not to “call it an investment” (as part of a ham-handed cover-up bid) could be a Fed. The person sitting next to you at a hotel “extravaganza” of some sort could be a Fed. So could the person in the cabin next to you on the scammers’ cruise ship. So could the recruit who, at your direction, paid you personally while joining, instead of paying the company. That upline guy — the one who sponsored you and asked you to pay him personally — could have one or more Feds in his downline. Those Feds could be “placing ads” for the program and keeping notes on whether anybody signed up under them.
Channeling?
Could Brazilian authorities who selected the name “Operation Orion” and referenced the Pyramids of Giza perhaps been channeling their U.S. counterparts and engaging in some reverse black comedy to point out the absurdity of scams? Man, we hope so.
As noted above, someone within the TelexFree sphere showcased the Pyramids of Giza during a pyramid-scheme probe in Brazil. Apparently no one in TelexFree thought it prudent, say, to stop the scheme during the Brazilian probe.
Because the HYIP sphere is populated by the most disingenuous “businesses” and people you’ll ever encounter, it’s easy enough to read such an act as telling law enforcement to shove it. Fractured thinking and taunts at law enforcement are core signatures of HYIP frauds, perhaps characteristics every bit as defining as preposterous daily payout rates of between .50 and 2.75 percent.
Good fortune certainly did not shine down on TelexFree from Orion on July 23, the date of the U.S. indictments. Nor did it shine down on July 24, the date the “Operation Orion” pyramid probe was announced in Brazil.
In our view, the name “Operation Orion” selected by Brazilian police was practically perfect.
In addition to being a star constellation, Orion is the great hunter from Greek mythology. With Brazil’s “Operation Orion,” alleged pyramid schemers became the hunted.
Alleged child predators were the hunted in the U.S. version of “Operation Orion,” a 2012 sting engineered by DHS. Arrests were made in the United States, Spain, the Philippines, Argentina and the United Kingdom. The DHS agency that launched the 2012 version of “Operation Orion” is known as Immigration and Customs Enforcement — or ICE for short. Homeland Security Investigations (HSI) is an ICE directorate.
From ICE (italics/bolding added):
HSI investigates immigration crime, human rights violations and human smuggling, smuggling of narcotics, weapons and other types of contraband, financial crimes, cybercrime and export enforcement issues. ICE special agents conduct investigations aimed at protecting critical infrastructure industries that are vulnerable to sabotage, attack or exploitation.
In addition to ICE criminal investigations, HSI oversees the agency’s international affairs operations and intelligence functions. HSI consists of more than 10,000 employees, consisting of 6,700 special agents, who are assigned to more than 200 cities throughout the U.S. and 47 countries around the world.
U.S. court records show that HSI started the undercover investigation into TelexFree at least by October 2013. Other records show HSI has an attaché office in Brasilia, the capital of Brazil.
In May 2014, ICE and HSI announced they had cooperated with federal police in Brazil in a sting known as “Operation Proteja Brasil,” described as aimed at protecting against child porn.
From ICE (italics/bolding added):
Some of the warrants executed during this operation were the direct result of leads provided by HSI Brasilia and the National Center for Missing & Exploited Children (NCMEC).
UPDATED AT 11:10 P.M. EDT U.S.A. JULY 28, 2014: Globo.com (Brazil) is reporting that police raided the headquarters of Ympactus this morning in a law-enforcement action dubbed “Operation Orion.” The story suggests raids also were carried out elsewhere and that Brazilian tax authorities are involved in the actions.
Costa is not named in the U.S. indictment, which appears to refer to him as “a third man” who formed TelexFree in the United States with Merrill and Wanzeler in 2012. Wanzeler, believed to be in Brazil, is considered a fugitive by the United States, which has issued a warrant for his arrest.
Whether Brazilian and U.S. authorities were coordinating events was not immediately clear.
A snippet from the Google translation of the Globo story (italics added):
Altogether, participated in the action 50 federal police officers and 18 auditors from the IRS Brazil. The operation name alludes to the Great Pyramids of Giza in Egypt Plain considering that the Egyptian pyramids are perfectly aligned with the constellation Orion.
UPDATE 11:10 P.M. EDT U.S.A. JULY 28, 2014: Please see this from Mikaella Campos, an economics reporter at A Gazeta Newspaper in Brazil. We are grateful to Mikaella for posting it here.
URGENT >> BULLETIN >> MOVING: 10th Update 9:18 p.m. EDT U.S.A.) TelexFree figures James Merrill and Carlos Wanzeler have been indicted by a federal grand jury.
The indictment, dated today, includes eight criminal counts of wire fraud and one criminal count of wire-fraud conspiracy.
Among other things, the indictment alleged that Merrill and Wanzeler conspired with each other and with “others known and unknown to the Grand Jury” to fleece TelexFree members.
The indictment describes wire transfers involving Merrill and Wanzeler that began on the day after Christmas in 2013 and continued on Dec. 27.
Here are the alleged wire transfers:
Merrill: Dec. 26. $136,200 from TelexFree Inc. account at Fidelity Co-operative Bank to Merrill.
Wanzeler: Dec. 26. $500,000 from TelexFree Inc. account at Fidelity Co-operative Bank to Wanzeler.
Wanzeler: Dec. 26. $136,200 from TelexFree Inc. account at Fidelity Co-operative Bank to Wanzeler.
Wanzeler: Dec. 26. $158,900 from TelexFree Inc. account at Fidelity Co-operative Bank to Wanzeler.
Wanzeler: Dec. 26. $22,700 from TelexFree Inc. account at Fidelity Co-operative Bank to Wanzeler.
Merrill: Dec. 27. $3 million from TelexFree Inc. account at Fidelity Co-operative Bank to Waddell & Reed Inc., to Merrill.
Wanzeler: Dec. 27. $3 million from TelexFree Inc. account at Fidelity Co-operative Bank to Wanzeler.
Wanzeler: Dec. 27. $3.5 million from TelexFree Inc. account at Fidelity Co-operative Bank to Wanzeler.
Prosecutors from the office of U.S. Attorney Carmen Ortiz of the District of Massachusetts said in a statement early this evening that assets seized in the case so far total about $140 million.
From a statement by prosecutors (italics added):
The indictment also specifies approximately 70 assets to be forfeited as proceeds of the alleged fraud scheme, or assets traceable to such proceeds, including approximately $140,000,000 seized from TelexFree’s accounts and various real assets, such as homes, condominiums, cars and two boats.
Also from prosecutors (italics/bolding/carriage returns added):
According to the indictment, TelexFree, Inc., and TelexFree LLC (collectively, “TelexFree”) provided “voice-over-internet-protocol” (“VOIP”) telephone services that allowed customers to use the Internet to make phone calls. The indictment alleges, however, that TelexFree actually operated as a pyramid scheme, in which its ongoing operations were supported, not by actually selling TelexFree’s VOIP product, but by bringing in a constant stream of new investor dollars.
Between early 2012 and March 2014, TelexFree purported to aggressively market its VOIP service by recruiting thousands of “promoters” to post ads for the product on the Internet. Each promoter was required to “buy in” to TelexFree at a certain price, after which they were compensated by TelexFree, under a complex compensation structure, on a weekly basis so long as they posted ads for TelexFree’s VOIP service.
It is further alleged that over the course of the fraud TelexFree derived only a fraction of its revenue from sales of VOIP service and the vast majority of it from new people buying into the scheme, and so TelexFree was able to pay the returns it had promised to its existing promoters only by bringing in money from newly-recruited promoters. The indictment includes eight charges of wire fraud, based on Merrill, in December 2013, wiring about $10,000,000 in TelexFree funds to personal accounts belonging to him and Wanzeler.
Also see May 27 PP Blog story on SEC allegations about how some of the TelexFree money was dissipated.
