EDITOR’S NOTE: This story, which easily could be titled “What NOT To Do In MLM,” summarizes a few of the witnesses and exhibits the U.S. government may use against TelexFree’s James Merrill when his trial gets under way Oct. 24 in Massachusetts. The background provided below is based on research by the PP Blog. Prosecutors filed their witness/exhibit lists on Sept. 26 in U.S. District Court. For our Brazilian readers, we’ll note here that the United States is expected to call at least one member of the Brazilian Federal Police to testify. U.S. District Judge Timothy S. Hillman is presiding. In total, dozens of witnesses may testify, including some who have been sued by the SEC, TelexFree Trustee Stephen B. Darr or private attorneys. There are hundreds of government exhibits, some collected by the Massachusetts Securities Division and the U.S. Department of Homeland Security.
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EXHIBIT: The government may introduce a document filed by TelexFree with the Alabama Public Service Commission in March 2014.
BACKGROUND: This document potentially could be used to demonstrate Merrill lied to regulators and business consultants. It was filed on March 20, 2014, and asserts TelexFree was “financially qualified” to operate in the state as a telecom company and that its “current financials Show considerable net worth.”
Less than a month later, however, TelexFree filed for bankruptcy, raising questions about the truthfulness of its telecom applications in various states. The document, which the PP Blog published before TelexFree’s bankruptcy filing, also ties Merrill to Indiana MLM accountant Joe Craft, a former interim TelexFree executive listed Sept. 26 by the government as a witness. Craft was sued alongside Merrill and others by the SEC in April 2014. He later filed a pleading in which he said he had concluded TelexFree was a Ponzi scheme selling unregistered securities and that he had been misled by TelexFree insiders.
Joseph Isaacs, a Florida-based consultant for TelexFree, helped prepare TelexFree’s telecom filing in Alabama and other states. Isaacs also now is listed as a government witness. Filings in Missouri say Isaacs told regulators there that Merrill had not been truthful when submitting an affidavit.
EXHIBIT: The government may introduce a photo of Merrill posing with a Hummer vehicle in TelexFree promos.
BACKGROUND: Ponzi/pyramid schemes and flashy rides are virtually inseparable.
In 2014, a federal judge ordered TelexFree pitchman Santiago De La Rosa — an SEC defendant — to sell two BMWs and a Land Rover Range Rover. De La Rosa now is listed as a government witness.
EXHIBIT: The government may introduce a September 2013 email that shows Merrill was aware of a criminal indictment and prison term imposed against AdSurfDaily President Andy Bowdoin in a Ponzi case with remarkable similarities to TelexFree.
BACKGROUND: The email described above allegedly was sent to Merrill by MLM attorney Jeffrey Babener. Babener now is listed as a government witness. Darr, the bankruptcy trustee, has said Babener informed TelexFree in August 2013 that it was operating a pyramid scheme, but TelexFree nevertheless continued to gather money.
EXHIBIT: A video by Thomas More of Newport Beach, Calif.
BACKGROUND: The SEC has warned for years that scams spread on social media. More, now listed as a government witness, was a TelexFree pitchman who was listed as a “winner” in the Zeek Rewards Ponzi- and pyramid scheme. Nehra once was a speaker at a TelexFree event in Newport Beach.
EXHIBIT: Records from various banks and financial vendors for Merrill or TelexFree.
Screen shot: Part of a letter from the Minnesota Department of Commerce to the state Public Utilities Commission.
BULLETIN: The Minnesota Department of Commerce has asked the state Public Utilities Commission to deny TelexFree’s authorization to provide long-distance service in the state.
Minnesota regulators now are questioning whether TelexFree financial and background information submitted to the state to gain telecom authority was accurate. The PUC granted the authority on April 18, after the Department of Commerce recommended approval of the application.
But a Department of Commerce letter and attachment to the PUC dated yesterday asks the agency to mothball TelexFree “until it demonstrates that the information provided in its application is accurate.”
The move comes on the heels of TelexFree’s April 13 bankruptcy filing in Nevada and fraud charges filed against the firm on April 15 by the Massachusetts Securities Division and the U.S. Securities and Exchange Commission.
In the letter and attachment from the Department of Commerce, the agency asked the PUC to question whether TelexFree was in any financial position to provide service in Minnesota and whether “any other factors” exisited that could be relevant in determining its suitability to operate in the state.
Among the considerations in granting a telecom license is “the extent to which the applicant has had any civil, criminal, or administrative action taken against it in connection with the applicant’s provision of telecommunications services,” the Department advised the PUC.
“A certificate to provide local facilities-based service must not be granted unless the applicant establishes that it has the financial, technical, and managerial capability to provide the services described in its petition consistent with the public interest,” the Department said.
In asking the PUC to deny TelexFree’s authority, the Department pointed to an April 18 email from “TELEX FREE’s former [telecom-registration] representative, Joseph Isaacs.”
The Isaacs’ email, the Department said, “indicates that TELEXFREE provided false and misleading information to the Department in its application for certification to provide long distance service.”
From the Department’s assertions to the PUC (italics added):
The allegedly misleading information provided in TELEX FREE’s application relate to the basic filing requirements of Minn. Rules pts. 7812.0300, subpt. 2 (E, F, and N): civil and administrative action pending, financial statements, and information relating to the technical, managerial and financial capabilities of TELEX FREE in support of its application for certification. The allegedly misleading information in the TELEX FREE’s application relate to the decision criteria in Minn. Rules pt. 7812.0300, subpt. 2 (C, D, and H).
If the Department had known this information, it would not have recommended approval of the application for certification to provide long distance service, without further investigation.
TelexFree operates as an MLM. Some of its members now are asking a federal bankruptcy judge to “bail out” the “program.”
Beyond that, the U.S. Trustee for the region in which TelexFree filed its bankruptcy petition (Nevada) said in court filings that “[t]here is compelling evidence of fraud, dishonesty and gross mismanagement of the affairs of the TelexFree debtor entities, TelexFree, LLC, TelexFree, Inc. and TelexFree Financial, Inc.”
TelexFree LLC was the entity granted authority to operate in Minnesota on April 18.
Tracy Hope Davis, the trustee, also alleged there are “reasonable grounds” to believe that “criminal conduct” occurred at TelexFree.
Challenges to its authority to provide telecom services could affect TelexFree’s ability to persuade a bankruptcy judge that it could continue as a going concern. Litigation against TelexFree is occurring at both the state and federal levels, and the firm also might face the prospect of class-action lawsuits from its distributors.
The Massachusetts Securities Division alleged on April 15 that information provided investigators in that state did not agree with information provided the Washington State Utilities and Transportation Commission.
Records in Nevada show that TelexFree’s pending telecom application in the state potentially could be denied for failure to advertise its application in newspapers as required by the state.
Although ads did appear in two newspapers, they did not appear as required in three others, records show.
Virtually no one was safe from the TelexFree MLM financial menace, documents suggest. Not even the government.
How far and deep did the alleged TelexFree fraud pollution flow? The answer remains unclear a week after Ponzi- and pyramid allegations were filed against the enterprise, but documents suggest pollution at hundreds of thousands of points of contact across a spectrum of vendors, participants and government agencies.
It may be the largest MLM HYIP fraud in world history.
Records in Nevada show that the state Public Utilities Commission ordered TelexFree to pay for newspaper ads publicizing its application to become a telecom provider on April 9, just four days before the firm filed for bankruptcy protection in the state.
Though regulatory requirements vary from state to state, a firm may be asked to pay an application fee and generally must show it can meet the financial demands of being in the telecom business. Hearings may be scheduled to discuss applications and consider objections to them, thus creating the need to pay for public notices on websites and in newspapers.
Given assertions by regulators that TelexFree was a massive Ponzi and pyramid whose purported telecommunications product masked an epic securities-fraud scheme and contributed very little to its overall operation, it is possible that various TelexFree telecom applications in various states were paid for with Ponzi proceeds and that TelexFree vendors and consultants also were being paid with fraud proceeds.
TelexFree caused Nevada, for example, to be paid a $200 application fee. It caused Minnesota to be paid almost three times that sum, according to records. Given the nature of the TelexFree fraud allegations, an untold number of vendors, government agencies or downstream recipients of TelexFree money could have been paid with Ponzi proceeds.
By some accounts, TelexFree had hundreds of thousands of member accounts — people from all over the world who were being paid by the enterprise to recruit even more people.
Polluted money flowing to multiple points is one of the key dangers of HYIP Ponzi schemes. On April 17, TelexFree was the top story in the Department of Homeland Security’s daily infrastructure report.
Earlier, on April 5, a TelexFree promo appeared online in which TelexFree marketing executive Steve Labriola claimed the enterprise had picked up “550,000 new customers in [the] U.S.A. alone” since March 9. Logos of major American media firms rolled on the screen during the Labriola-narrated promo, including the logo of the Las Vegas Review Journal, Nevada’s largest newspaper. The promo implied TelexFree had the backing of the media. Regardless of the suggestion, however, the reality was that a PR news service had caused TelexFree-authored puff pieces to appear on the websites of the prominent media outlets.
Four days later, the Nevada PUC advised TelexFree that the Review-Journal was one of the newspapers in which TelexFree was required to advertise its telecom application. If ever there was a moment of pregnant irony in the MLM sphere, this was it.
The ads, according to the commission, needed to appear in a “minimum one column by three inch ad with black borders on all sides” no later than April 20.
Because TelexFree had asked that its financial reports to Nevada be filed under seal, Nevada Attorney General Catherine Cortez Masto filed a “Notice of Intent to Intervene” in the application process to represent “the public interest,” according to records.
Then-TelexFree President Jim Merrill and TelexFree telecom consultant Joseph Isaacs were copied on the PUC’s April 9 letter that advised TelexFree it was the firm’s responsibility to “contact the newspapers and make timely payment arrangements” for the required telecom-licensing ads, according to Nevada records.
Whether that occurred is unclear.
The PUC warned TelexFree that “your filing may be dismissed for failure to make payments timely.”
TelexFree’s bankruptcy filing occurred four days later, on April 13. Earlier, on April 4, TelexFree — through Florida-based Isaacs — advised the state of Alabama that it needed a hearing scheduled for April 10 to consider its telecom application postponed “for a month” owing to unspecified “scheduling conflicts.”
In Alabama filings, TelexFree contended that it had “total income” of nearly $700 million in 2013 and “net income” of more than $36 million.
Separately, in Minnesota filings in March, TelexFree made the same financial assertions and requested confidential treatment. Minnesota nevertheless published on its website the financial documents TelexFree submitted. Records show that Isaacs’ company sent Minnesota a check for $570 on March 24 to cover filing fees.
The Florida telecom consulting company of Joseph Isaacs made a payment of $570 to the state of Minnesota to cover TelexFree’s filing fees, according to records. Isaacs later would contend he’d been duped by TelexFree, an alleged Ponzi- and pyramid scheme that gathered more than $1.2 billion.
By April 15, the SEC was in federal court accusing Labriola and other TelexFree executives of fraud. In its complaint, the SEC made a specific reference to the Labriola video with the rolling logos of media companies and claims TelexFree had picked up more than 500,000 customers in less than a month. (The SEC notes a separate publication of the Labriola video on April 6, but the video appears to have been published on a different site a day earlier.)
In addition to the rolling media logos and claims TelexFree had scored more than half a million new customers, the video featured Labriola complaining about negative TelexFree coverage on Blogs and compared the firm’s experience with bad press to that of MLM companies such as Amway and Herbalife. Herbalife, an MLM company that promotes nutrition supplements, also is the subject of a government probe. It has denied wrongdoing.
The precise reason why Herbalife is under investigation is not publicly known. What is known is that part of the investigation reportedly reaches into the state of Massachusetts. (See April 11 Reuters report with a dateline of “New York/Boston.”)
TelexFree had an operation in Massachusetts. The SEC accused the firm of targeting Brazilian and Dominican communities. Hedge-fund manager Bill Ackman has contended that Herbalife is a pyramid scheme that targets vulnerable population groups.
“I know,” Labriola said in the April 5 video. “You’ve heard the Blogs. I’ve heard the Blogs. I hear every day, ‘The Blogs say this, the Blogs say that.’ You know what’s good about the Blogs talking about us? It means we’re growing. Have you heard about Amway? Herbalife? The big companies out there that have achieved their levels — Bloggers hit them all the time. So, the positive thing is [that] Bloggers are talking about us ’cause we’re growing, ’cause you’re growing the business. They will continue to hit companies that are growing.”
TelexFree was in bankruptcy court eight days later, on April 13. Promoters have claimed $289 sent to the firm returned $1,040 in a year and that $15,125 returned $57,200. TelexFree says it is a telecom firm, but also allegedly sold something called “AdCentral” packages that provided a return promoters described as “guaranteed.”
By April 18, according to filings elsewhere, Isaacs had contacted the Washington State Utilities and Transportation Commission and told regulators there that he believed he’d been duped on matters pertaining to TelexFree’s financial affairs, operations and ability to meet the demands of a competitive telecom company.
“It has come to my attention this week that my client TelexFree, LLC, whom has applied for or has recently been approved to provide telecommunications services in your state, has misrepresented their intentions, their business model, their customer base and the source of all of their revenue, income and profits declared on their 2013 financial statements that were provided to this commission for the approval of their petitions (applications in some jurisdictions),” Isaacs wrote.
Included with Isaacs letter to Washington state were copies of fraud complaints that had been filed against TelexFree April 15 by the Massachusetts Securities Division and the U.S. Securities and Exchange Commission.
“Please disassociate my firm with these alleged [TelexFree] crooks,” Isaacs asked Washington state regulators.
As the PP Blog reported on April 15, one of the contentions against TelexFree by the Massachusetts Securities Division was that information TelexFree had provided Massachusetts investigators was at odds with information TelexFree had provided the Washington State Utilities and Transportation Commission.
Massachusetts also alleged that TelexFree was a massive Ponzi- and pyramid scheme that had gathered more than $1.2 billion.
When the SEC sued TelexFree on the same day, the agency contended that TelexFree co-owners James Merrill and Carlos Wanzeler and TelexFree CFO Joseph M. Craft had engaged in securities fraud and that the firm’s telecommunications product served as a front to mask an investment-fraud scheme.
On March 4, 2014, the PP Blog noted that Zeek Rewards, an MLM firm the SEC sued in 2012 amid allegations it had gathered hundreds of millions of dollars through a combined Ponzi- and pyramid scheme, appeared to have a high number of immigrants in its membership ranks.
A court-appointed receiver’s listing of alleged Zeek Ponzi winners living in the United States showed about 45 people with the last name of “Johnson” and about 52 with the name of “Smith.” By contrast, the document listed about 67 people with the name of “Wang,” about about 61 with the name “Tran,” and about 146 with the name of “Nguyen.” (See story and Comments thread.)
The document raises questions about whether American MLM firms are targeting immigrants and selling an improbable tale of riches to them. The TelexFree probe has led to similar questions.
There also may be concern across U.S. government agencies that some MLMers simply move from one fraud scheme to another. Multiple TelexFree members, for instance, appear to have been members and winners in the Zeek scheme. And some alleged Zeek winners also were participants in the AdSurfDaily MLM Ponzi scheme that collapsed in 2008.
EXHIBIT: The government may introduce a photo of Merrill posing with a Hummer vehicle in TelexFree promos.
