UPDATED 10:48 P.M. EDT U.S.A. A plaintiff bringing a prospective class-action lawsuit in Massachusetts federal court has accused 10 TelexFree figures of committing crimes and — as a group — committing racketeering violations through an “association-in-fact enterprise.”
Unlike other prospective TelexFree-related class-actions, this one names neither attorneys nor banks nor TelexFree itself defendants. Rather, it pins the onus of the conduct exclusively on James Merrill, Carlos Wanzeler, Steve Labriola, Joe Craft, Fabio Wanzeler, Sann Rodrigues, Santiago De La Rosa, Randy Crosby, Faith Sloan and Carlos Costa.
Costa, a Brazil-based TelexFree figure, is described in the complaint as the “mastermind of the TelexFree pyramid scheme of fraud.” The complaint further asserts Costa conducted business in Massachusetts, where TelexFree operated an entity known as TelexFree Inc.
Olavo F. Magalhaes of Milford, Mass., is the plaintiff. The complaint says Magalhaes invested more than $209,000 in TelexFree LLC, the Las Vegas-based TelexFree business that operated in a Massachusetts office suite.
The crimes alleged against the defendants include fraud, securities fraud, wire fraud and conspiracy. Violations of civil law also are alleged.
On the racketeering front, the complaint alleged, the members of the “association-in-fact enterprise” associated together between January 2012 and April 15, 2014, “for the purpose of conducting an illegal pyramid scheme and wrongfully enriched themselves” at the expense of Magalhaes and others.
“Each member of the enterprise played a role in the targeting of victims, advertising and working together to make the TelexFree enterprise work,” the complaint alleged.
Fabio Wanzeler is the brother of Carlos Wanzeler, an alleged international fugitive accused criminally by federal prosecutors of wire-fraud conspiracy in the United States. Carlos Wanzeler is believed to be in Brazil.
Fabio Wanzeler, formerly of Worcester, Mass., is believed also to be in Brazil, according to the Magalhaes complaint.
In other TelexFree news, a federal judge has denied a motion by Faith Sloan to make more than $15,000 available to her.
MLM attorney Gerald Nehra, his law partner Richard Waak and their law firm are now lawyered up in the TelexFree bankruptcy case.
Groups of TelexFree members have sued them in bankruptcy court, alleging violations of the federal racketeering (RICO) statute and violations of federal securities laws. TelexFree filed for Chapter 11 bankruptcy protection on a Sunday evening in April, just prior to fraud actions filed by securities regulators.
Attorneys Christopher F. Robertson and William J. Hanlon, partners in the Boston office of Seyfarth Shaw LLP, entered appearance notices for Nehra, Waak and the firm yesterday.
Also named defendants in some or all of the actions are TelexFree, alleged officers or executives James Merrill, Carlos Wanzeler, Carlos Costa, Steve Labriola and Joe Craft, alleged promoters Sann Rodrigues, Randy Crosby, Santiago De La Rosa and Faith Sloan, and several alleged financial vendors or service-providers.
In a complaint filed May 3, 2014, plaintiffs accused Nehra of counseling TelexFree “on methods to evade United States securities laws that were intended to offer, in part, protection from pyramid Ponzi schemes; all to enrich himself financially and serve his own selfish interests.”
He further was accused of encouraging unknowing TelexFree members to “participate in the evasion of federal and state securities laws.”
Sloan, in response to fraud allegations against her filed by the U.S. Securities and Exchange Commission, said she “believed what [SEC Co-] 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.”
Nehra, Waak and the law firm are not defendants in the SEC action. Nor are they defendants in a TelexFree-related securities action by the Massachusetts Securities Division. Sloan, who later was accused by the SEC of violating the asset freeze against her in the SEC case by sending thousands of dollars to another “program” and transferring her interest in a real-estate trust to her mother, is a longtime HYIP huckster.
In a separate criminal case that alleges wire-fraud conspiracy against Merrill and Wanzeler, Merrill has signaled that he intends to use a defense of reliance on Nehra’s lawyering. The Massachusetts Securities Division has described TelexFree as a “financial pariah” and a combined pyramid- and Ponzi scheme that had gathered more than $1.2 billion. The SEC likewise has accused TelexFree of hatching a billion-dollar pyramid-and Ponzi scheme, saying it was aimed largely at Brazilians and Dominicans.
Nehra, according to plaintiffs suing him in in at least one of the TelexFree-related actions in bankruptcy court, advised at least two other “programs” regulators accused of operating massive pyramid or Ponzi schemes: Zeek Rewards (2012/$850 million) and AdSurfDaily (2008/$119 million).
Sloan is known to have promoted Zeek Rewards. Some HYIP promoters move from scheme to scheme to scheme, piling up purported “earnings” alleged to be fraudulent along the way.
“Attorney Nehra’s extensive experience in multi-level marketing, and particularly his involvement with the Ponzi schemes involving Ad SurfDaily and Zeek Rewards, armed him with the knowledge of what constitutes violations of United States securities law,” plaintiffs alleged. “Indeed, Attorney Nehra was well aware that the use of semantics and obscured phraseology to obfuscate securities laws fails to legitimize TelexFree’s illegal Pyramid Ponzi Scheme.”
Zeek-related actions still are winding their way through the courts. The Zeek “program” was back in the news yesterday, with the court-appointed receiver alleging that an affiliate who appears to have invested $10 filed a claim for $30 million and that a vendor alleged to have aided Zeek wanted nearly $15 million.
BULLETIN: (3rd Update 5:56 p.m. EDT U.S.A.) A federal judge in Massachusetts has permitted TelexFree figure James Merrill to be freed on bail, but has imposed tight restrictions.
In granting Merrill bail, U.S. District Judge Timothy S. Hillman overruled U.S. Magistrate Judge David Hennessy, who agreed with federal prosecutors and ruled last month that Merrill should continue to be detained pending trial because he posed a flight risk.
Hillman today yanked Merrill’s passport, placed him in the custody of his wife Kristen, ordered his wife to supervise him and “to notify the court immediately in the event the Defendant violates any conditions of release or disappears,” ordered three pieces of real estate to be used as collateral for a $900,000 bond, ordered Merrill to remain in Massachusetts and to seek permission to travel outside the state and ordered him not to seek international travel documents.
In addition, Hillman imposed an 8 p.m. to 8 a.m. curfew on Merrill, ordered him to wear an electronic monitoring bracelet and to “avoid all contact directly or indirectly, with any persons who are or who may become a victim or potential witness in the subject investigation or prosecution and any co-conspirators.”
At this stage, the judge said in his bail ruling, the government “has presented a strong case against Merrill,” but “has failed to meet its burden of proof that no condition or combination of conditions would assure the Defendant’s presence” at trial on a charge of wire-fraud conspiracy.
Merrill’s family bonds and community ties in Massachusetts appeared to have weighed heavily in the judge’s decision to free Merrill on bail. Regardless, Hillman placed travel restrictions on Merrill’s wife and children.
“The Defendant’s wife and children must agree to surrender their passports and agree not to seek new passports or international travel documents without prior written approval of the Court,” Hillman ruled.
The bail ruling does not mean that TelexFree has been found not to be a pyramid- or Ponzi scheme. Rather, it means that Merrill can go free pending trial. Some TelexFree affiliates falsely have claimed repeatedly that the “program” has been cleared of fraud charges.
From the judge’s ruling (italics/carriage returns added):
This Court recognizes that Merrill, if convicted, could face a substantial sentence and that the case against Merrill appears, at this juncture, to be a strong one. Additionally, the government argues that Merrill, unlike many white collar criminals, has both a place to flee to and the means to go there. It is this factor that Magistrate Judge Hennessey’s decision to detain Merrill relied most heavily upon. However, this Court finds the government has not been able to offer enough concrete evidence supporting this argument to overcome the factors discussed above which weigh against Merrill’s risk of flight.
While the government has identified overseas accounts belonging to TelexFree, it cannot show how much money is in these accounts nor that Merrill is able to access them; in fact the affidavit of TelexFree’s interim CEO states that Merrill no longer has signatory authority over any accounts. Moreover, while the government points to Merrill’s international network of supporters, it has not offered proof that there are any individuals, with the possible exception of [co-defendant Carlos] Wanzeler, who would actually help Merrill flee.
Prosecutors have contended that TelexFree had “a disturbingly cult-like quality” and that U.S. promoters would be in position to assist Merrill in going on the lam. Wanzeler allegedly fled to Brazil after TelexFree’s headquarters in Marlborough, Mass., was raided on April 15.
Prosecutors said they had no comment on the bail decision.
A former pitchman for the Zeek Rewards MLM Ponzi- and pyramid scheme also acknowledged he participated in TelexFree, the state of Montana said in a consent agreement and final order.
James D. Helgeson was fined $5,000 by the office of Monica Lindeen, Montana’s Commissioner of Securities and Insurance (CSI) and state auditor.
The case demonstrates that accountability for a “program” can apply to both the operators and individual promoters. It also demonstrates that promoters who may move from one dubious MLM scheme to another may encounter state-imposed restrictions.
As part of the agreement, Helgeson must notify Montana for the next five years “prior to his participation in any multilevel distribution company.”
From Helgeson’s agreement with Montana, which was finalized this month (italics/carriage returns added):
This condition applies regardless of whether the MLM is registered with the State of Montana as required under §30-10-216.
“Participation” includes selling any MLM product or service; directly or indirectly promoting, recommending, or referring a person to any MLM product, service, or compensation plan; participating in any MLM compensation structure wherein Respondent sponsors or is sponsored by another person in the structure, or receives a pecuniary or other benefit based upon the efforts of other persons within the structure; or paying a MLM or its representative, whether directly or through the purchase of a product or service, for the opportunity to participate in a compensation plan or structure.
“Participation” does not include the purchase of a MLM product or service for personal consumption or use, so long as the MLM does not market or offer that product or service as a means for the purchaser to earn income.
In April 2014, Montana issued a cease-and-desist order to TelexFree, saying it unsuccessfully had sought complete information from the MLM “program” for months and alleging that TelexFree continued to do business in the state after claiming it had pulled out.
Alleged TelexFree co-owners James Merrill and Carlos Wanzeler were charged criminally by federal prosecutors in May 2014 with wire-fraud conspiracy. They also face serious allegations of fraud filed by the U.S. Securities and Exchange Commission, as well as at least four prospective class-action lawsuits.
The SEC has sued four alleged individual promoters, saying they engaged in securities fraud. Helgeson, who neither admitted nor denied wrongdoing in Montana, is not among the federal defendants.
During the Zeek-related action brought against him in Montana, Helgeson acknowledged to authorities that he also had been involved in TelexFree and an MLM “program” known as Apex Revenue, the state said in its order.
The filing asserts that Helgeson, who was a registered securities salesperson and investment adviser while pushing Zeek, pushed Zeek’s unregistered securities.
Helgeson supplied the state with a list of the names of his Zeek recruits and “has offered certain Montana resident-participants payment for monies lost through participation in the Program,” according to the order.
“Respondent has further informed the CSI that he has terminated his Participation in the TelexFree and Apex Revenue MLM programs prior to the date of this Agreement,” the state said in the order, which was dated June 2.
Zeek gathered $850 million in its scam, federal officials have said. TelexFree gathered more than $1.2 billion, according to the Massachusetts Securities Division.
There is a report on social media this morning of a bogus TelexFree site that mirrors an old TelexFree site that existed when the company was actively soliciting business. The site creates the impression TelexFree has reopened.
TelexFree has not reopened.
It is Sunday. Federal prosecutors handing the TelexFree criminal case involving alleged fraudsters James Merrill and Carlos Wanzeler did not immediately respond to a request for comment.
The actual TelexFree site says the firm has suspended all business activity. The trustee in the TelexFree bankruptcy case has begun his investigation and announced in court filings that he is seeking court authority to issue subpoenas. (See documents 261-265 here. Link current as of today’s date.)
Because the report about the bogus site was made on social media and the intent of the poster is not known, extreme caution is warranted. Clicking on the link to the asserted hacking site through the social-media site potentially could have bad consequences. So could entering any information on forms at the site.
The social-media poster positioned the report as a warning hackers seeking to profit from the troubles at TelexFree could be at work. The site used the word “telexfree” as part of its URL.
Even if the social-media poster was being sincere in his warning and it proves true the site is bogus and designed for hacking, clicking on the link potentially could expose you to harm.
And if the site is not a hacking or phishing site, it leads to questions about why such a site that mirrors TelexFree’s “old” site exists to begin with. Could it be an old TelexFree affiliate’s site created with swiped code and designed to dupe prospects into believing they were dealing directly with the TelexFree corporate entity? Could it be an orphaned site of TelexFree itself?
The asserted hacking site uses the name of a male individual with an address in Chicago, according to a database search. The Registant Organization is listed as “telexfree.”
Some TelexFree affiliates are alleged to have accepted TelexFree payments directly, a circumstance the Massachusetts Securities Division said in April resulted in a condition in which “participants received uncontrolled cash deposits outside of the TelexFree system.”
The social-media poster who issued the warning appears to be pushing a “program” known as ViziNova that may be linked to the alleged $80 million WCM777 scam allegedly operated by Phil Ming Xu.
It is common for HYIP hucksters to be in multiple “programs” simultaneously. After “working” a “program” for months and cleaning up with it, the most disingenuous promoters then may turn on the “opportunity,” perhaps particularly if a regulatory action occurs or there is a sense one is imminent.
Such promoters then may try to port entire “teams” to a new scam.
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.
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.”
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.
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.”
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.”
