UPDATE: A federal judge has ordered the receiver in the WCM777 case to list for sale three properties linked to the alleged MLM pyramid scheme.
U.S. District Judge Christina A. Snyder is presiding over the SEC’s civil case filed in March. Receiver Krista L. Freitag asked for the authority to sell the properties last month. Snyder granted the authority June 9. The properties are single-family residential homes in Lake Elsinore, Monrovia and Walnut, Calif.
Snyder also authorized Freitag to “close frozen bank accounts of the Receivership Entities and have the balances wired to receivership bank accounts.”
Since the filing of the original SEC pyramid action, the agency has upped the dollar volume of the alleged scam from about $65 million to about $80 million. In April, Freitag said she’d put an end to a nascent MLM scheme with ties to WCM777.
WCM777 purportedly was part of an entity known as World Capital Market.
In an amended complaint last month, the agency accused Vincent Messina, an attorney linked to alleged WCM operator Phil Ming Xu, of self-dealing and distributing millions of dollars in funds linked to WCM777 to other entities.
Certain money disbursed by Messina ended up with “persons in Canada, Abu Dhabi, and to an entity in Hong Kong,” the SEC alleged.
Snyder imposed an asset freeze on Messina last month.
Some promoters of TelexFree, an MLM “program” and alleged Ponzi- and pyramid fraud that gathered more than $1.2 billion, also promoted WCM777.
Like TelexFree, WCM777 was the subject of a state-level securities investigation in Massachusetts. Regulators said both programs targeted individuals who speak Spanish or Portuguese. WCM777 also targeted the Asian community.
Like other HYIP scams, WCM777 traded on the names of famous companies.
The WCM777 and TelexFree “programs” have led to questions about whether MLMers were getting sucked into companies that have cult-like qualities.
2ND UPDATE 9:44 P.M. EDT U.S.A. Just last week, accused promoter Faith Sloan was blasting TelexFree figures James Merrill and Carlos Wanzeler, as well as MLM attorney Gerald Nehra. In defense filings in the SEC’s civil case against her, Sloan threw all three men under the bus.
Merrill asserted that Nehra was among multiple attorneys with whom he consulted while operating TelexFree. Parts of the brief read like a damning of the MLM legal trade with faint praise.
Nehra, Merrill contended, “holds himself out as the expert in the field of multi-level marketing.”
And, Merrill argued through defense attorney Robert M. Goldstein, Nehra “offered his support for the multi-level marketing plan being used by TelexFree, and told promoters he was ‘honored to be the MLM specialist on retainer attorney for TelexFree.’”
Class-action lawyers have contended Nehra engaged in racketeering with Merrill and others while counseling TelexFree and divined a construction by which TelexFree was not engaging in fraud and the sale of unregistered securities.
Merrill nevertheless contends that he has “substantial ‘advice of counsel’ and state of mind defenses to any prosecution—a point the government to date has not contested in the slightest respect.”
Regulators have called TelexFree a billion-dollar Ponzi- and pyramid fraud that used a VOIP product as a front to mask an investment scheme that promised returns of more than 200 percent a year — with sales commissions on top of the investment plan.
In the early stages, Merrill’s defense has concentrated on getting him freed on bail. He’s been detained since his May 9 arrest on a criminal charge of wire-fraud conspiracy. Merrill has signaled that a “reliance of counsel” defense, specifically the counsel of Nehra, may be part of his strategy as the case-in-chief winds through federal court in Massachusetts.
Another part of Merrill’s strategy appears to be to highlight Merrill’s family bonds to Massachusetts while at once trashing legwork by law enforcement. Merrill today contended that an affidavit prepared by a federal agent after an undercover probe that began at least by October 2013 was “grossly misleading” and “remarkably misleading.”
At the same time, Merrill contends that favorable testimony delivered in the TelexFree bankruptcy case by interim TelexFree CEO Stuart MacMillan should be considered by the judge in the criminal case to free Merrill on bail.
Merrill and co-defendant Carlos Wanzeler hired MacMillan on April 13, according to court filings. Like Merrill, Wanzeler has been charged criminally with wire-fraud conspiracy. Federal prosecutors have described Wanzeler as an international fugitive.
Testimony by William Runge, a turnaround specialist working with MacMillan, also is favorable to Merrill’s position he should be released on bail, according to the defense filing today.
Prosecutors have contended Merrill should remain jailed, saying he may have access to cash and admirers to help him make an escape bid and asserting that TelexFree had a “cult-like quality” and thousands of promoters who “remain fanatically loyal to the company.”
Merrill also claimed today that TelexFree’s Alexa ranking was “astounding” in a good way and demonstrated that the government overreached in efforts to keep Merrill in jail.
MLMers often suggest that a high ranking in Alexa is “proof” of the legitimacy of a “program.”
How soon a judge will decide the bail issue was unclear tonight. Merrill lost his initial bid last month to be freed on bail.
“But like Heaven above me/The spy who loved me/Is keeping all my secrets safe tonight” — Lyrics from “Nobody Does It Better,” composed by Marvin Hamlisch, written by Carole Bayer Sager, performed by Carly Simon as the theme song of the James Bond film, “The Spy Who Loved Me.” Elektra Records, 1977.
British spy James Bond, the world’s most public keeper of secrets, de-stressed through drollness. “Mmm, maybe I misjudged Stromberg,” he said in The Spy Who Loved Me. “Any man who drinks Dom Perignon ’52 can’t be all bad.”
Bond, remarkably, has saved humanity approximately two dozen times over the years. Even more remarkable is that we know this. At least one of the saves, according to a film that never should have been made public, occurred in space.
People in general didn’t know what had gone down in the cosmos and never should have been told. Given that the plot failed and they were still alive, they simply didn’t need to know. This is why it is so surprising MI6 made Moonraker public and actually sold tickets.
Tacky.
We’ll perhaps never know how many times the CIA and its various spies have saved humanity. Mum’s the word at Langley. Regardless, we appear to have found out today that agency that never talks and never sleeps also has a Bond-like odd and amusing quality.
We can neither confirm nor deny that this is our first tweet.
Faith Sloan in a TelexFree promo. Source: YouTube.
UPDATED 8:55 P.M. EDT U.S.A. Veteran HYIP huckster Faith Sloan told a federal judge presiding over the SEC’s TelexFree case that she is a victim of the company and was duped by TelexFree executives James Merrill, Carlos Wanzeler and Steve Labriola.
And, the former Noobing, Zeek Rewards and Profitable Sunrise pitchwoman asserted, she also was duped by MLM attorney Gerald Nehra, a lawyer for TelexFree.
Sloan was among four TelexFree promoters charged with fraud by the SEC. Four executives also were charged.
“Sloan believed what Defendants Carlos Wanzeler, James Merrill, Steve Labriola and their attorney, Gerald Nehra, had told her, until TelexFree continued to miss the deadlines for the launch of its new products, which were to be the foundation of TelexFree’s growing business going forward into 2014,” Sloan said in court filings through her attorney.
Those new products, Sloan said, included “MyFinancialAdvantagePlan,” “Mobile App,” “TelexCommerce” and “TelexMobile.”
Taking a swipe at Nehra, Sloan contended that she and fellow promoters were “excited” about TelexFree after Nehra “had stood on the stage and publicly announced that TelexFree was ‘on a solid legal ground’, because they were selling a real product.”
Nehra made the remark at a TelexFree rah-rah fest in Newport Beach, Calif., in July 2013, according to YouTube videos. The remarks followed a June 2013 action in Brazil in which certain TelexFree assets were frozen and new registrations were suspended, amid pyramid-scheme allegations.
Sloan did not say why she continued to promote TelexFree with serious pyramid allegations on the table, except to suggest that Nehra’s remarks paved the way for her to continue with TelexFree. Nor did Sloan say whether her experience promoting Noobing, Zeek and Profitable Sunrise provided her any clues that something could be amiss at TelexFree.
MLM attorney Gerald Nehra offering remarks about TelexFree; Source: YouTube.
Sloan was not charged in the Noobing, Zeek and Profitable Sunrise cases. Regulators say Noobing, an HYIP that targeted people with hearing impairments, was attached to a government-grants swindle. It effectively was shut down by the FTC.
Zeek, meanwhile, was an $850 million pyramid- and Ponzi scheme, and Profitable Sunrise was a cross-border securities swindle effectively run by a ghost that potentially raked in tens of millions of dollars. Both “programs” collapsed after SEC actions.
In April 2014, the SEC described TelexFree as an epic, billion-dollar cross-border pyramid and Ponzi-swindle that engaged in securities fraud and the sale of unregistered securities. All four of the “programs” offered returns that bested Bernard Madoff on orders of between 20 and 70 to one on an annualized basis.
Regulators have been warning about HYIP schemes for years, saying they offer returns that are too good to be true and make cosmetic tweaks to dupe the masses.
Many such schemes proliferate because serial promoters turn blind eyes to obvious markers of fraud such as preposterous interest rates, a presence of a “program” on Ponzi-scheme forums, the presence of other serial fraud promoters and fractured relationships with payment vendors during the course of the fraud. The schemes pay commissions to unlicensed promoters to sell securities to recruits and typically have an illegal investment arm attached.
When a scheme collapses, serial promoters disingenuously point fingers of blame back at management. Though the blame is deserved, it ignores the promoters’ roles in driving dollars to scams.
Sloan also today accused Merrill and Labriola of threatening to boot her from the “program” after she made unflattering remarks about it — after she’d been in the “program” for a year or so and suddenly realized something was wrong at TelexFree.
“In response to her public complaints, Labriola, with the approval of the Defendant, Merrill, threatened to terminate Sloan’s relationship with TelexFree shortly before they filed for bankruptcy protection on April 13, 2014,” Sloan contended in a “verified” memorandum of law filed by her attorney. The document seeks to have the charges against Sloan dismissed.
From Sloan’s motion (italics added):
Sloan became a “promoter” of TelexFree early in 2013. Sloan attended public webinars (web-based seminars) along with thousands of other TelexFree “promoters”. During those webinars, Sloan was told by TelexFree leaders that they were growing a company based on remarkable new products such as the “MyFinancialAdvantagePlan” (MFA), “Mobile App” “TelexCommerce” and “TelexMobile”, which was built on the backbone of Sprint, Verizon, and T-Mobile. All these products were due to be launched during the last quarter of 2013. The Mobile App was touted as being on a par with “WhatsApp”, which had been purchased by Facebook for 19 billion dollars. Based on what she was told by her fellow Defendants, Sloan and her fellow “promoters” were excited about the future of TelexFree, especially after the companies’ lawyer, Gerald Nehra, had stood on the stage and publicly announced that TelexFree was “on a solid legal ground”, because they were selling a real product.
Sloan’s troubles aren’t limited to the SEC case. She’s also a defendant in at least three prospective class-action lawsuits that allege fraud and racketeering.
Nehra is accused in the class-action complaints of turning a blind eye to TelexFree’s fraud to line his own pockets and dupe the masses.
In the Legisi HYIP Ponzi case, HYIP figure Matthew John Gagnon tried a defense similar to Sloan’s defense in the SEC civil case. It didn’t work.
Gagnon was held civilly liable and eventually was charged criminally for making a secret deal with Legisi to promote its scam, which had payouts similar to TelexFree, Noobing, Zeek and Profitable Sunrise. He was sentenced to five years in federal prison.
Like the criminal side of the TelexFree case, the Legisi case was brought after an undercover investigation.
The Nevada Public Utilities Commission has rejected TelexFree’s telecom application. Image source: PUC document. Red highlight by PP Blog.
Nevada, the state in which TelexFree operated an alleged $1.2 billion pyramid- and Ponzi scheme through a mailbox and filed its initial Chapter 11 bankruptcy petition, has rejected the company’s application to become a telecom provider.
The Nevada Public Utilities Commission denied the application in an order dated June 2. The staff of the PUC pressed for the denial last month, noting that TelexFree filed for the license on April 1 but then declared bankruptcy only 12 days later. The staff also said it was aware TelexFree had been charged civilly with fraud by the U.S. Securities and Exchange Commission and that its assets had been frozen. At the same time, the staff said it was aware TelexFree also is the subject of state-level civil action by the Massachusetts Securities Division.
Former TelexFree President James Merrill currently is jailed on a criminal charge of wire-fraud conspiracy. That charge was filed May 9. Merrill continues to seek his release on bail. Carlos Wanzeler, Merrill’s TelexFree business partner, also was charged criminally with wire-fraud conspiracy last month. U.S. federal prosecutors have described him as an international fugitive.
TelexFree faces challenges to its license in other states. The firm says on its website that it “has suspended all business activity.”
A U.S. Bankruptcy Judge in Nevada transferred the TelexFree petition to Massachusetts last month, after the SEC argued the state was TelexFree’s nerve center. Litigation against the firm is centered in Massachusetts, although a prospective class-action lawsuit against TelexFree and alleged managers, promoters and vendors also has been filed in federal court in the Eastern District of North Carolina.
At least two civil actions against TelexFree, including the one in North Carolina, allege violations of the federal racketeering (RICO) statute. There also is active TelexFree-related litigation in Brazil. An alleged promoter of TelexFree was arrested in Uganda last month and paraded in front of TV cameras.
In the United States, the SEC has referred to a number of TelexFree-related promos on YouTube. HYIP schemes are notorious for using social media to gain a head of steam. The actions by various governments and private litigants show that promoters are not insulated from prosecution and can become defendants in cases that allege fraud.
With its assets frozen, whether TelexFree has the resources to address lawsuits and licensing challenges in multiple jurisdictions remains an open question. Individual promoters named in complaints could rack up high legal bills, with the company unable or unwilling to provide assistance.
Because some of the actions name “Doe” defendants, it is possible that other TelexFree promoters will find themselves with the need to hire attorneys at their own expense. Named promoters so far include Faith Sloan, Sann Rodrigues, Randy Crosby and Santiago De La Rosa.
It is known that the U.S. Department of Homeland Security opened an undercover probe into TelexFree by at least October 2013.
One TelexFree huckster, according to court records, told an undercover agent that “he [the huckster] had earned $1,600,000 as a TelexFree promoter, without selling a TelexFree product.”
Precisely how many TelexFree promoters interacted with undercover agents is unclear.
The 2008 AdSurfDaily Ponzi probe began as an undercover operation. Such techniques also have been used in penny-stock cases and cases involving “carding.”
Stephen B. Darr, senior managing director of Mesirow Financial Consulting LLC of Boston, has been appointed trustee in the TelexFree bankruptcy case.
The appointment was made by William K. Harrington, the United States’ Trustee, based on the order of U.S. Bankruptcy Judge Melvin S. Hoffman. The office of the U.S. Trustee is the bankruptcy watchdog arm of the U.S. Department of Justice.
News of Darr’s appointment first was Tweeted by Timothy J. Durken, an attorney writing about the TelexFree case.
BULLETIN: (12th Update 9:50 p.m. EDT U.S.A.) In resisting former TelexFree President James Merrill’s latest bid to make bail in the criminal case against him, federal prosecutors said today that TelexFree “has a disturbingly cult-like quality.”
Meanwhile, in separate action in the SEC’s civil case against TelexFree, the agency has accused alleged TelexFree pitchwoman Faith Sloan of lying to a federal judge in a declaration that asserted she did not hear about the TelexFree action until weeks after it had been filed.
Although Merrill attorney Robert Goldstein argued yesterday that TelexFree may have much higher retail-sales numbers than the government believes from its VOIP product — somewhere on the order of $200 million — the office of U.S. Attorney Carmen Ortiz countered today that TelexFree owed $5 billion to its promoters when the scheme collapsed.
Prosecutors also argued that U.S. Magistrate Judge David Hennessy made the right call last month when he ruled Merrill should continue to be jailed.
The “massive amount of revenue the company received between February 2012 and April 2014 did not come from its VOIP product selling like hotcakes, but from an ongoing influx of investor dollars, which it then paid out in commissions.
“Becoming a TelexFree ‘promoter’ cost $340 or $1425, depending on the level of buy-in,” prosecutors continued. “But once someone signed up they were able, for example, to make a guaranteed 200% to 300% annual return on their investment for doing basically nothing and without selling a single VOIP product.”
Merrill knew it was a sham while TelexFree members accorded him “rock star status,” prosecutors contended.
Thousands of promoters “remain fanatically loyal to the company which, despite the bankruptcy and three government enforcement actions, they see as helping hard working people make a little money on the side,” prosecutors argued.
From prosecutors’ argument that Merrill should remain jailed (italics/carriage returns added/light editing performed):
As the government emphasized at Merrill’s detention hearing, understanding the risk of releasing him requires understanding the unique aspects of the TelexFree phenomenon. It is these aspects that ultimately convinced the Magistrate Court that this case is unlike the general run of white collar cases.
First, like many “multi-level marketing” companies, TelexFree has a disturbingly cult-like quality. Egged on by the company itself, promoters spoke of “reaching their dreams” and being “100% TelexFree.” TelexFree’s promoter extravaganzas – in the United States, Brazil and Spain, among other places – were recorded and posted on YouTube. These events had a “boisterous . . . rock concert atmosphere,” at which crowds of promoters cheered James Merrill when he took the stage . . .
Merrill would have the crowd “do the wave.” As the “American face” of TelexFree, crowds of foreign promoters lined up to have their pictures taken with Merrill; his wife conceded that he was “treated like a minor celebrity.” . . . In or about November 2013, TelexFree rented a cruise ship and invited thousands of promoters to join a cruise off the coast of Brazil. Merrill addressed the crowd of (at least) hundreds from the promenade deck, helicopter hovering in the background.
Second, thousands of these promoters do not live in the United States, but in Canada, the Caribbean, and Central and South America . . . Thousands remain fanatically loyal to the company which, despite the bankruptcy and three government enforcement actions, they see as helping hard working people make a little money on the side.
Many TelexFree promoters, at least the earlier ones, made substantial sums from their involvement.
Third, TelexFree itself exists in several foreign countries, including Canada, Brazil, the United Kingdom and the Dominican Republic. According to Canadian corporate filings, Merrill and Wanzeler are the directors of TelexFree Canada . . . the Facebook page for which lists 7,691 “likes” and shows dozens of supportive messages, all written after the bankruptcy and enforcement actions were filed. Merrill and Wanzeler are also the directors of TelexFree’s Dominican entity. This is nothing, however, compared to TelexFree’s presence in Brazil, where thousands of Brazilian promoters took to the streets in June 2013 when the Brazilian government sued TelexFree’s Brazilian entity for running a pyramid scheme.
Even though Goldstein argued yesterday that Merrill — unlike his TelexFree co-defendant Carlos Wanzeler — remained in the United States to face justice after the April 15 raid at TelexFree headquarters, prosecutors asserted that evidence exists that Merrill and Wanzeler were “like brothers.”
Wanzeler, they argued, “has access to substantial funds and has been Merrill’s close friend for 20 years.”
“According to bank records, in February 2013, Wanzeler gave Merrill a check for $865,000, using funds drawn from TelexFree’s Brazilian operations,” prosecutors said. “In December 2013 – around the time he withdrew $3,000,000 for himself – Merrill authorized the transfer of about $7,000,000 to Wanzeler from TelexFree accounts. The real risk here is not Merrill fleeing to Brazil, but Wanzeler helping him from that location.”
And, they continued, “TelexFree has substantial assets overseas. The government has managed to freeze millions of dollars in United Kingdom and Singapore accounts, but various accounts remain unfrozen. There is a TelexFree account in Cayman with the Royal Bank of Canada. It remains unfrozen and the account balance is unknown. Similarly, the government has seized a $10,000,000 cashiers’ check made out to TelexFree Dominicana SRL – TelexFree’s Dominican entity – but no Dominican accounts are frozen. Finally, in or about 2013 Merrill and Wanzeler traveled to Singapore, where we know there are three accounts in the names of TelexFree and Carlos Wanzeler. One of these accounts is frozen, but not the other two.”
Merrill, prosecutors said, had traveled to Brazil four times since 2008, and also has ventured to Spain and Japan.
But TelexFree’s “network of supporters is not just overseas,” prosecutors argued. “[Merrill] knows several TelexFree promoters in the United States who made substantial sums with the company, and would be in a position to assist him.”
These things and more make Merrill a flight risk, prosecutors asserted, noting he potentially faces an effective sentence of life in prison in the United States.
Hennessy, who ordered Merrill jailed last month, already has spoken to these issues, prosecutors contended. From prosecutors, quoting the judge at an earlier hearing (italics added):
There’s evidence, and I certainly think it’s persuasive, that the defendant had a key role in a massive Ponzi scheme. He faces 20 years in jail [on the single charge in the complaint], and there’s something unique to this case that I haven’t really seen in other cases where as a result of his participation in TelexFree, and in the alleged Ponzi scheme, the crime itself has created for the defendant a type of world outside the United States to which the defendant belongs. There are associates outside the United States, including the defendant’s close friend and former business partner, Carlos Wanzeler. There are bank accounts outside the United States, and it’s unclear how much money is in those accounts and whether the defendant has either direct signatory authority over those accounts or has the ability to instruct others to withdraw money from those accounts for the defendant.
“In short,” prosecutors argued, “Judge Hennessy concluded that this was not the usual white collar case essentially because, unlike the usual white collar defendant, Merrill (a) potentially faces life in prison, and (b) should he decide to flee, a preponderance of the evidence shows that he has somewhere to go, and the means to go there . . . As the Magistrate Court found, in several countries there are ‘promoters who may be willing to assist the defendant.’”
And, prosecutors argued, the judge expressed concern not only that Wanzeler could help Merrill flee, but that “Wanzeler might have a more personal stake in Merrill not being available to the government.”
As for Sloan, the SEC said she was playing fast and loose with the truth.
The PP Blog reported on April 25, eight days after news of the lawsuit broke on an international basis, that the SEC asserted it had spoken to Sloan on April 17 and advised her she was being sued. Sloan, the SEC contended, wanted to know back then why the agency was “picking on” her.
Faith Sloan. Source: YouTube.
But Sloan now maintains she first learned of the case in “late May,” according to the SEC.
“The bottom line is simple: Sloan has known about this case since April 17,” the SEC alleged today. “She was told how to get a copy of the Complaint but refused to provide an address where the Commission could serve her pursuant to Rule 4. On May 6, she was served with the Summons, the Complaint, and the April 16 Order. Her assertion —made under penalties of perjury —that she did not hear about the case until late May is a flagrant falsehood.”
BULLETIN: (5th Update 10:06 p.m. EDT U.S.A.) A defense filing by alleged TelexFree co-owner James Merrill may signal a serious divide between Merrill and Carlos Wanzeler, now described by the United States as an international fugitive.
At the same time, new defense filings by Merrill say arguments made in bankruptcy court that suggest TelexFree could restore its business in a new form should be considered at a hearing to free Merrill on bail.
Merrill, 53, of Ashland, Mass., has been detained since his May 9 arrest on charges of wire-fraud conspiracy.
“Indeed, unlike his co-defendant in this case, Mr. Merrill did not attempt to flee or avoid this prosecution, despite clear notice and knowledge of the government’s ongoing criminal investigation,” a lawyer for Merrill said in court filings today.
Government filings have said Wanzeler, 45, of Northborough, Mass., ducked into Canada under cover of darkness on April 15, and flew to Brazil two days later. Like Merrill, Wanzeler was charged criminally with wire-fraud conspiracy on May 9.
Wanzeler allegedly fled into Canada on the same day TelexFree’s headquarters in Marlborough, Mass., were raided. Two days later — on April 17 — he allegedly boarded a plane in Toronto bound for Brazil.
From the defense filing (italics/bolding/carriage returns added):
On May 9, 2014, more than three weeks after execution of the search warrants, the government filed a criminal complaint and arrested Mr. Merrill. He was still here, in Massachusetts, driving his car on Route 9 at the time of his arrest. At no time during the intervening three weeks did Jim Merrill ever attempt or consider fleeing the jurisdiction. Instead, he was in the process of preparing to lawfully defend himself, fully confident in the legal process.
The fact that his co-defendant chose to leave the United States on April 15, 2014, or that Mr. Merrill allegedly spoke to Mr. Wanzeler on that date, facts relied upon extensively by the government at the original bail hearing . . . do not remotely support detention in this case. To the contrary, given the inference the government apparently seeks to draw from the telephone records (i.e., that Mr. Merrill spoke to Mr. Wanzeler on April 15, 2014, and was therefore aware he was leaving the country), the logical conclusion to draw from the government’s suggested inference is that Mr. Merrill deliberately chose to remain in the United States.
In any event, whether they spoke that date or not, and whatever they discussed, the fact of the matter is that Mr. Merrill had the same opportunity as Mr. Wanzeler to leave the country, but he did not do so, with full knowledge he was the subject of a criminal investigation, and fully cognizant that the government believed (rightfully or wrongly) that the company was a massive pyramid scheme . . .
Through his attorney Robert M. Goldstein, Merrill also is arguing that certain claims made in U.S. Bankruptcy Court by interim TelexFree CEO Stuart MacMillan and turnaround specialist William Runge should be considered in a bail application by Merrill.
“Indeed,” Goldstein argued, “Stuart MacMillan, a person with over 25 years of management experience who was hired to serve as Interim Chief Executive of TelexFree in February 2014 . . . has averred under oath his belief ‘that through a revamped model [TelexFree] will be able to leverage their uniquely situated product to provide valuable and dependable services to their customers while ensuring that their operations are profitable.’”
And, Goldstein noted, Runge has contended that TelexFree participants used approximately 11 million minutes of VoIP service in February 2014.
MacMillan was hired by Merrill and Wanzeler on April 13, and also caused Merrill’s resignation and the firing of Wanzeler on April 17, according to bankruptcy court records.
With respect to bail, Goldstein argued, friends and family of Merrill would agree to post real estate as security for his appearance at trial and Merrill himself would agree to house arrest and electronic monitoring.
Today’s defense motion also signals that Merrill may introduce a “reliance of counsel” defense, specifically the counsel of MLM attorney Gerald Nehra.
Some TelexFree members have painted Nehra as a racketeer who helped fraud schemes such as TelexFree and Zeek Rewards thrive. Zeek, the SEC said in 2012, was a Ponzi- and pyramid scheme that had gathered hundreds of millions of dollars.
Nehra also was an expert witness for AdSurfDaily in 2008, asserting that ASD was not a Ponzi scheme. In 2012, ASD President Andy Bowdoin pleaded guilty to wire fraud and admitted ASD was a Ponzi scheme that had never operated lawfully from its inception in 2006.
Merrill’s latest motion to be freed on bail coincidentally occurred on the same day the U.S. Court of Appeals for the 9th Circuit agreed with both a lower court and the FTC that the BurnLounge MLM “program” was a pyramid scheme — despite the fact that a certain percentage of retail sales could have occurred.
In a lawsuit against TelexFree by the SEC, the agency contended that members could make money through TelexFree without selling anything at all because of an attached passive investment scheme in which members were told they were getting paid for posting ads online about TelexFree. The investment program was known as “AdCentral” and was a sham to mask the pyramid scheme, the SEC alleges.
Among other things, the SEC contends that credit-card and banking transactions “indicate that, from August 2012 to March 2014, TelexFree received slightly more than $1.3 million from the retail sale of approximately 26,300 monthly VoIP contracts. During the same period, TelexFree received more than $340 million from hundreds of thousands of investors who purchased AdCentral or AdCentral Family contracts. Through the sale of those one-year contracts, TelexFree effectively promised to pay more than $1.1 billion to the investors who posted the required ads.”
Goldstein argued today that retail sales of TelexFree’s VOIP product may be much higher than the government believes.
“Most critically,” Goldstein argued, “significant doubt exists regarding the accuracy of the government’s main contention—i.e., that TelexFree sales of its VoIP product amounted to approximately 1% of total revenue, and the company therefore constitutes an unlawful pyramid scheme. In fact, the company’s revenue from the sales of its VoIP product may have amounted to more than two hundred million dollars ($200,000,000.00), a sales-to-revenue ratio in line with accepted industry practice and certainly well beyond the 1% figure the government has stressed to the Court.”
UPDATED 10:12 A.M. EDT (JUNE 3) U.S.A. The U.S. Court of Appeals for the 9th Circuit today agreed with both a lower court and the Federal Trade Commission: BurnLounge was a pyramid scheme.
Much to the dismay of some MLMers, the case demonstrates that a company that makes some retail sales still can be a pyramid scheme if rewards derived by participants largely came from recruitment, not from product sales.
“We agree with the district court that BurnLounge was an illegal pyramid scheme in violation of the [Federal Trade Commission Act] because BurnLounge’s focus was recruitment, and because the rewards it paid in the form of cash bonuses were tied to recruitment rather than the sale of merchandise,” a three-judge panel ruled.
The panel further ruled that the lower court did not err when it admitted testimony by Peter Vander Nat, an FTC expert who holds a doctorate in economics and an advanced degree in mathematics. BurnLounge had sought to strike the testimony.
Circuit Judge Morgan Christen wrote the opinion for the panel, which unanimously found BurnLounge was a pyramid scheme.
U.S. District Judge George H. Wu of the Central District of California made the pyramid ruling in 2012, ordering the company, CEO Juan Alexander Arnold and other pitchmen to pay about $17 million.
Read the 2014 Appeals Court ruling which, among other things, discusses the applications of the Omnitrition International Inc. and Koscot Interplanetary Inc. pyramid cases on the BurnLounge case.
Precisely what percentage of retail sales defeats charges of pyramid-selling remains an open question, with courts choosing to look at how the MLM business operates in practice, rather than how an MLM firm may spin things.
In BurnLounge, Wu found that the the program’s bonus system was “a labyrinth of obfuscation” that resulted in a “93.84% failure rate for all Moguls,” all of whom were required to pay a fee to become Moguls and earn cash rewards, according to the appeals panel.
The Wall Street Journal and the New York Times are reporting tonight that golfer Phil Mickelson’s name has surfaced in an insider-trading probe that also involves billionaire investor Carl Icahn and Las Vegas sports bettor William “Billy” Walters.
Reports say Mickelson was approached today by the FBI at the Memorial golf tournament hosted by Jack Nicklaus in Dublin, Ohio. The SEC also is investigating.
BULLETIN: U.S. Bankruptcy Judge Melvin S. Hoffman of the Massachusetts Central Division in Worcester has ordered the appointment of a trustee in the TelexFree Chapter 11 bankruptcy case.
The U.S. Trustee, the U.S. Department of Justice’s watchdog arm in bankruptcy cases, pressed for the appointment last month.
“There are reasonable grounds to suspect that the members of the governing board who selected the Debtors’ new executives participated in actual fraud, dishonesty and criminal conduct in the management of TelexFree,” the U.S. Trustee argued last month.
Based on the order, Jordan Maglich of PonziTracker.com is reporting that “TelexFree’s vision of emerging from bankruptcy with new products and revenue streams appears dismal at best.”
For days, some TelexFree affiliates have been planting the false seed in various web reports that the appointment of a trustee means that TelexFree had been cleared of pyramid- and Ponzi charges. That simply is not the case.
From PonziTracker (italics added):
Now that an independent trustee will be appointed, he/she will follow Section 1106, which includes the filing of a statement of investigation, as soon as practicable, that includes “any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor…” Additionally, the trustee may recommend the conversion of the case to another Chapter under the Bankruptcy Code, including a liquidation under Chapter 7.
James Merrill, one of TelexFree’s co-owners, was jailed in the United States May 9 on criminal charges of wire-fraud conspiracy. Carlos Wanzeler, another co-owner, allegedly fled to Brazil through Canada after U.S. federal agents raided TelexFree’s headquarters and seized computer equipment elsewhere on April 15.
Like Merrill, Wanzeler was charged with wire-fraud conspiracy. The U.S. Justice Department has deemed him a fugitive.
Joe Craft, TelexFree’s CFO, was appointed by Merrill and Wanzeler to that post on April 13, the same day TelexFree declared bankruptcy. On April 15, the SEC accused Craft of securities fraud. Court records show Merrill and Wanzeler are under criminal investigation for securities fraud and money laundering.
The SEC has alleged that Craft was in possession of nearly $38 million in cashier’s checks on April 15, the date of the federal raid. One of the checks alegedly was for more than $2 million and was made out to Katia Wanzeler, the wife of Carlos Wanzeler.
“[Carlos Wanzeler] made most of the acquisitions using companies under his control including: (i) JC Real Estate Management Company LLC, a Nevada limited liability company that was formed in July 2012 with Wanzeler and [James] Merrill as managers; (ii) Above & Beyond the Limit, LLC (“Above & Beyond”), a New Mexico limited liability company that [Joe] Craft formed for Wanzeler in September 2012, (iii) CNW Realty State, LLC, a Nevis corporation that was formed in October 2012 with Above & Beyond as manager; (iv) KC Realty State LLC, a Florida limited liability company that Craft formed in October 2012 with Katia Wanzeler as manager; (v) Acceris Realty Estate, LLC, a Massachusetts limited liability company that Craft formed in February 2013 with Katia Wanzeler as manager; and (vi) Makeover Investments LLC, a Florida limited liability company that was formed in July 2013 with Marilza Wanzeler, Wanzeler’s 65-year-old mother, as a manager.”
In April, the SEC linked Craft to other TelexFree-related entities.
UPDATE: A federal judge has ordered the receiver in the WCM777 case to list for sale three properties linked to the alleged MLM pyramid scheme.
