BULLETIN: The state of Montana has issued a Cease and Desist order to TelexFree, revealing it had been unsuccessfully seeking 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.
The April 23 order was issued by the office of Monica Lindeen, Montana’s Commissioner of Securities and Insurance and state auditor. The state says it suspects TelexFree “may be a pyramid scheme that has already cost Montanans $70,000” and that the firm “appears to have engaged in practices that violate the Securities Act of Montana.”
TelexFree sought to register as a multilevel distribution company in July 2013, but the form submitted to the state was “obsolete and no longer accepted by the [Office of the Commissioner of Securities and Insurance,]” the C&D alleged.
In August 2013, according to the C&D, the state sought a list of “all” TelexFree participants in Montana, specifically requesting their names, addresses, phone numbers, sums paid to TelexFree, sums received from TelexFree, participant starting dates and the names and addresses of individuals sponsoring TelexFree participants in the state.
Montana also requested “copies of all agreements, solicitation documentation, sales materials, marketing materials, brochures, any policy and procedure manual, any customer receipt, and any other information made available to prospective participants,” according to the C&D.
At the same time, the state asked TelexFree for information on start-up kits and a list that would include dates, times and locations of recruitment or demonstration sessions or TelexFree meetings in the state since Jan. 1, 2012, according to the C&D.
In October 2013, according to the C&D, an attorney for TelexFree provided the state an “incomplete spreadsheet of Montana” TelexFree participants and a “link” to the TelexFree website, which purportedly contained the marketing/sales material Montana requested two months earlier.
The attorney, who was not identified in the C&D, also advised the state that TelexFree did not use start-up kits and further advised authorities that a TelexFree participant in Billings was holding meetings twice a week, according to the order.
TelexFree ignored some spreadsheet fields and provided incomplete or inaccurate information on “all consideration paid to date by at least one participant,” according to the C&D.
The state then notified TelexFree that it needed to file the correct form to operate in Montana, according to the C&D.
In late October, TelexFree notified the state through the attorney that it was “in the process of gathering information to re-submit their application and, in the meantime, had ceased offering the TelexFREE program in Montana.”
But despite TelexFree’s claim it had stopped operating in the state, Montana “subsequently received information to the contrary,” according to the C&D.
One TelexFree participant, for example, made five purchases in the state after TelexFree claimed it no longer operated there, according to the C&D.
By February 2014, according to the C&D, the attorney informed the state TelexFree would not resubmit the application and again stated the firm was not operating in Montana.
As of April 23, 2014, according to the C&D, Montana had identified at least 34 participants in the state, saying it believed “more Montana participants may exist.”
The C&D accuses TelexFree of operating an MLM unlawfully in Montana, withholding facts and lying about ceasing its operations there. The document also cites fraud actions filed against TelexFree April 15 by the Massachusetts Securities Division and the U.S. Securities and Exchange Commission. Meanwhile, the C&D notes that TelexFree filed for bankruptcy in Nevada earlier this month.
TelexFree says it is a VOIP firm. Montana noted that the TelexFree “software could be used for unlimited calls to landlines and mobile phones to about 70 countries for a fixed monthly price of $49.90. A VOiP competitor, Vonage, sells a similar product for $12.99 a month.”
(UPDATED 10:13 A.M. EDT APRIL 30 U.S.A.) Back in October 2012, two California members of the collapsed Zeek Rewards MLM “program” filed a self-written pleading with the federal judge presiding over the Zeek Ponzi- and pyramid case in North Carolina.
Just two months earlier — in August 2012 — the U.S. Securities and Exchange Commission had filed an emergency complaint against Zeek to halt its operations. At the time, the SEC described Zeek as a scam that had gathered about $600 million. Over time, the number swelled to about $850 million.
One of the core allegations in the Zeek case was that Zeek’s “advertising” component in which members spammed ads all over the Internet was a sham to help mask Zeek’s massive fraud scheme and the sale of unregistered securities. The 2008 AdSurfDaily Ponzi scheme ($119 million) had a similar “advertising” component and a daily payout rate somewhat on par with Zeek, which duped members into believing they’d receive an average return of about 1.5 percent a day.
The California Zeek members advised Senior U.S. District Judge Graham C. Mullen that Zeek had left them “on the verge of financial devastation.”
They were lured into the scheme based on suggestions it was legal and that members were accumulating wealth, according to the pleading. And the former Zeek members claimed that Zeek pitchman Tom More had acquired “over a million VIP points.”
In March 2014, Zeek receiver Kenneth D. Bell sued alleged Zeek winners and insiders based in the United States, alleging their gains had come from Zeek victims. The complaint against the named winners includes “a Defendant Class of Net Winners” who effectively are being sued in a prospective class action.
Listed as one of the thousands of “Net Winners Who Received $1,000.00 or More” from Zeek was Thomas A. More of Newport Beach, Calif.
In July 2013, Newport Beach became a staging ground for the alleged TelexFree Ponzi- and pyramid scheme, which the Massachusetts Securities Division (MSD) alleged had gathered more than $1.2 billion and told members they were getting paid for posting ads on the Internet. MSD filed an action against TelexFree two weeks ago today. So did the SEC.
When the SEC went to federal court in Massachusetts on April 15 to file a Zeek-like emergency complaint against TelexFree, the agency pointed to the Newport Beach TelexFree rah-rah session. There is a video of the event titled “TelexFree Corporate Speakers at Newport Beach Extravanganza.”
The video includes “comments” by TelexFree co-owners or executives James Merrill, Carlos Wanzeler and Steve Labriola, according to the SEC complaint.
One of Merrill’s comments, according to the video, was to thank “Tom” for putting together the “fabulous” July 2013 Newport Beach event, which occurred about a month after a court in Brazil froze TelexFree-related assets in that country and imposed a registration ban.
Among Merrill’s other comments, according to the video, was that “large corporations” for which he once provided services “squeeze you . . . until there’s nothing left.”
“They squeeze the employees until there’s nothing left,” Merrill said. “They use you up.”
Although the precise context of a follow-up remark by Merrill was unclear, the Zeek executive suggested that the government of Colombia “feared” network marketers and the “freedom” they represented.
Merrill next set his sights on the U.S. government.
Indeed, he went on to quiz an audience member (“Jay”) about whether Jay could “help the U.S. government with their credit, ’cause I don’t think anybody else . . .” Merrill’s remark appears to be related to a credit-repair service TelexFree had in the offing before it filed for bankruptcy April 13 in Nevada..
“No, he doesn’t want their business,” Merrill said at the Newport Beach “extravaganza,” answering his own question months ahead of the bankruptcy filing. He then suggested that the U.S. government, like the Colombian government, “feared” TelexFree and members of its MLM.
He added, “Those corporations fear your success because they can no longer squeeze you, they can no longer squeeze your wallet.”
JSS/JBP offered a return (precompounding) of 730 percent a year — more than Zeek, more than AdSurfDaily, more than TelexFree. In TelexFree, members said, $289 returned $1,040 in a year, $1,375 returned $5,200 and $15,125 returned $57,200.
Regulators have been warning for years that HYIPs switch forms and put on new disguises. The core scam, however, remains largely the same: claims that average people will become rich by posting ads or clicking on them or by doing nothing at all because visionary business leaders are running the “program.”
The Internet has opened the door to all sorts of viral scams, but electronic virality is not the only concern. Hotel conventions for MLM HYIPs are held in city after city. Madrid, Boston, Newport Beach and other cities were on the TelexFree tour. Certain pitchmen were taped in individual cameos.
TelexFree California organizer Tom More, late of Zeek, had such a cameo.
Here is part of what he said: “Bust and move on this now. Run, don’t walk. Get started today.”
TelexFree appears to have supplanted Zeek as the largest HYIP scam in U.S. history. It likely is the largest in world history.
Florida “Expat” and Zeek Rewards Ponzi-scheme figure T. LeMont Silver yuks it up in the Dominican Republic. Source: YouTube.
(UPDATED 9:33 A.M. EDT, APRIL 27 U.S.A.) T. LeMont Silver, a pitchman for the $850 million Zeek Rewards Ponzi scheme and the OneX pyramid scheme, is now a spokesman for the “Florida Expat” lifestyle in the Dominican Republic, which recently has been rocked by what the U.S. Securities and Exchange Commission describes as the collapse of the TelexFree pyramid scheme.
The Massachusetts Securities Division has described TelexFree as a “financial pariah” that gathered more than $1.2 billion.
Whether Silver ever had a position in TelexFree is unclear, and he is not referenced in any TelexFree-related court files. What is clear is that the court-appointed receiver in the Zeek case sued Silver in March 2014, alleging that Silver was a Zeek “net winner” of more than $1.71 million.
Karen Silver, Silver’s wife, also is an alleged Zeek winner. In her case, the receiver says she received “more than $600,000.”
Kenneth D. Bell, the Zeek receiver, wants the money returned, saying it came from Zeek victims.
Like her husband, Karen Silver has emerged as a fan of the “Florida Expat” lifestyle in the Dominican Republic.
A video dated Jan. 16, 2014, and posted on YouTube features the Silvers being interviewed on the subject of their decision to move to the Dominican Republic. The logo of an enterprise known as DRESCAPES rolls on the screen.
The website of DRESCAPES says its clients will “Survive the Collapse of Fiat Currencies, Including the Dollar & Euro.”
“In our opinion, it’s time to take proactive steps to protect your assets and provide a safe fallback position for your family,” the site ventures.
Prior to relocating to the Dominican Republic, Silver told his downline in a failed MLM “program” known as GoFunPlaces to take advantage of “low-hanging fruit” (other disaffected GoFunPlaces members) and become recruiters for a “program” known as Jubimax. The “programs” ultimately accused each other of fraud.
In the “Expat” video, Silver says he pays his housekeeper in the Dominican Republic $175 a month and that she does an “excellent” job. How many hours she worked to earn her wages was unclear.
Many MLM “programs” sell dreams of riches to low-wage workers. Tens of thousands of Dominicans are believed to be members of TelexFree, which filed for bankruptcy in Nevada April 13.
In March, prior to the April bankruptcy filing, a TelexFree pitchman explained at a convention in Boston that he’d recently been a passenger with other TelexFree pitchmen on a “private jet” that had flown from the Dominican Republic to Haiti. The jet purportedly was met at the airport by “the Prime Minister of Haiti’s motorcade,” which triggered “high-fiving.”
“I felt like a rockstar,” the man said.
Disaffected TelexFree members are now “low-hanging fruit” for other MLM “programs.” Many pitches have been targeted at them.
The SEC said last week that TelexFree mainly targeted Dominican and Brazilian immigrants in the United States.
William Galvin. Source: State brochure on avoiding pyramid schemes.
BULLETIN: (UPDATED 5:56 P.M. EDT U.S.A.) The Massachusetts Securities Division (MSD) has published a complaint form for TelexFree investors. Massachusetts Commonwealth Secretary William Galvin, who oversees MSD, also has published a brochure titled, “Illegal Pyramid Schemes Disguised as Multi-level Marketing Businesses (MLMs).”
Galvin’s investigators alleged on April 15 that TelexFree was a combined Ponzi- and pyramid scheme that had gathered more than $1.2 billion and sold unregistered securities. In November 2013, MSD alleged that WCM777, another “program” promoted in the state, also had sold unregistered securities. The U.S. Securities and Exchange Commission (SEC) later sued WCM777, alleging it was a “worldwide” pyramid scheme that had gathered at least $65 million. Likewise, the SEC has brought fraud allegations against TelexFree.
Both WCM777 and TelexFree were targeted at specific population groups, according to the allegations. Online promos show that the schemes had promoters in common and that prospects were encouraged to buy in at higher levels to receive higher payouts. Both “programs” were positioned as technology suppliers — TelexFree in VOIP and WCM777 in “cloud” computing.
As Galvin’s brochure notes (italics added):
In many illegal schemes the promoter spends little time explaining the product because the product is ancillary to the overall scheme. Recent schemes have involved products related to internet services, mobile marketing platforms, app sales, cloud computing services, and voice-over-internet applications.
These are just three of the bullet points in a warning by Galvin’s office today:
Don’t invest because your friends tell you it’s a good investment — use your own judgment and make your own decision.
Be wary of promoters who urge the purchase of higher positions in the distribution network to immediately increase payouts.
Be wary of promoters who urge quick establishment of distribution networks by adding family members, children, pets, etc.
There are plenty more. Read the online warning here. Download the PDF of the brochure. Access the TelexFree complaint form here.
(3nd Update 9:16 A.M. EDT, May 11, 2014 U.S.A.) When contacted by the U.S. Securities and Exchange Commission April 17 by phone, alleged TelexFree promoter and securities swindler Faith Sloan shot back, “Why are you picking on me? There are bigger promoters than me.”
The assertion is contained in new SEC filings dated yesterday in the agency’s Ponzi- and pyramid case against TelexFree, which filed for bankruptcy protection April 13 and was sued by state and federal regulators on April 15.
Sloan, whom the SEC says is 51 and lives in Chicago, is a former promoter of the Zeek Rewards “program” (1.5 percent a day, not including “compounding”), and Profitable Sunrise (up to 2.7 percent a day, not including “compounding”). She also promoted the collapsed Noobing HYIP scheme that became popular after the collapse of the AdSurfDaily HYIP Ponzi scheme (1 percent a day) in 2008.
In 2012, the SEC shut down Zeek, alleging a combined Ponzi- and pyramid scheme that had collected hundreds of millions of dollars and potentially had affected hundreds of thousands of people. In 2013, the SEC filed charges against Profitable Sunrise, effectively alleging it was being operated by a ghost from a “mail drop” in England and had used a pyramid scheme to defraud thousands of people potentially out of tens of millions of dollars. Money allegedly was diverted on a cross-continental basis, with investors left holding the bag.
The Federal Trade Commission (FTC) effectively shut down Noobing in 2009, after alleging a related firm under an umbrella company had orchestrated a government-grants swindle. Noobing in part was targeted at people with hearing impairments. The enterprise was based in Kansas, and had an offshoot in Nevis. [May 11, 2014, edit.]
Like TelexFree and other schemes, Noobing had a strong presence on YouTube. The SEC says in court filings that it has watched lots of TelexFree promos on YouTube.
Any number of HYIP fraud-scheme promoters wrongly have believed that no individual liability can attach as a result of their participation in such schemes. The TelexFree case — like the Legisi HYIP case before it — demonstrates the falsity of the belief. Legisi promoter Matthew John Gagnon first was sued by the SEC. He later was charged criminally by the U.S. Secret Service and federal prosecutors in Michigan.
Like the AdSurfDaily HYIP Ponzi case, the Legisi case was initiated in 2008 and began with an undercover probe in which government agents interacted with participants and kept notes of the contacts. Gagnon, who had a secret deal with Legisi’s operator to promote the scheme, was sentenced to five years in federal prison. Legisi operator Gregory McKnight was sentenced to 15 years.
It is known that there is a parallel criminal investigation into the activities of TelexFree. The mechanics of that probe and whether it dovetailed with state and federal civil investigations into TelexFree are unclear.
What is clear is that Sloan was not pleased when an SEC investigator informed her by phone on April 17 that she’d been charged with fraud, according to court filings by the SEC.
Sloan first wanted to know if the investigator was state [Massachusetts Securities Division] or federal [SEC]. When the investigator informed Sloan he was with the SEC, she responded that the agency was “picking on” her and implied it should go after bigger fish.
Eight TelexFree managers or promoters (including Sloan) have been sued, according to SEC filings.
“Sloan then asked where she could find the complaint,” the SEC investigator asserted in an affidavit. “I walked her through the SEC website and to the location of the press release and the complaint.”
Sloan then said, “I need to speak to my lawyers,” according to the affidavit.
The SEC investigator then asked Sloan if she had counsel. “Sloan did not respond” to the question, according to the affidavit.
Whether TelexFree will provide Sloan a lawyer is unclear. Any number of accused fraud promoters over the years have been left in the lurch by “management” or “corporate” when “programs” have been sued.
The SEC investigator asked Sloan for her home and email addresses, according to the affidavit. Sloan refused to provide them.
“You just sued me,” she responded, according to the affidavit. “You must know everything about me so you can figure it out.”
It remained unclear this morning whether Sloan had hired counsel or responded to the complaint, which charged her with securities fraud and selling unregistered securities.
But in the HYIP sphere, the small fish are what create the bigger fish — and “small” appears no longer to provide much cover in HYIP-related prosecutions and lawsuits.
Kenneth D. Bell, the court-appointed receiver in the Zeek case, has filed lawsuits against thousands of Zeek winners. The lawsuits are in the form of a class-action, with the threshold for being sued set at only $1,000, according to court filings.
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.
BULLETIN: (11th Update 2:35 p.m. EDT U.S.A.) The United States’ trustee who serves the region (Nevada) in which TelexFree’s bankruptcy case was filed on April 13 has alleged there are “reasonable grounds” to believe that “criminal conduct” occurred at TelexFree.
Trustee Tracy Hope Davis, who works for a division of the U.S. Department of Justice, says in Bankruptcy Court filings that the court should appoint a Chapter 11 trustee because “[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.
The motion by Davis cites separate fraud actions against TelexFree filed April 15 by the Massachusetts Securities Division (MSD) and the U.S. Securities and Exchange Commission (SEC). MSD is the state-level securities regulator in Massachusetts. The SEC is the top securities regulator in the United States.
“In response to subpoenas issued by the MSD in January and February, 2014, TelexFree changed its compensation plan so that promoters would now be required to sell its VoIP product in order to qualify for the payments that TelexFree had previously promised to pay them,” Davis alleged. “The rule change has generated a storm of protests from promoters who cannot recover their money. The change has also caused a precipitous decline in investor revenue which has pushed TelexFree into bankruptcy.”
Meanwhile, the Davis motion cites an SEC complaint and emergency motion in Massachusetts federal court on April 15 that successfully sought an asset freeze against alleged TelexFree co-owners James Merrill and Carlos Wanzeler and TelexFree CFO Joseph Craft (and others), along with a Temporary Restraining Order.
“Millions of additional investor funds received by TelexFree are presently unaccounted for,” Davis alleged. “Fortunately, the TRO was granted by the District Court for the District of Massachusetts and all of the Debtors’ accounts have been frozen pending a preliminary injunction.”
As a result of TelexFree, Davis alleged, “[t]wo companies controlled by Craft received more than $2,010,000.00 between November 19, 2013 and March 14, 2014.” Millions more allegedly went to Merrill and Wanzeler.
Among the assertions by Davis:
The Debtors did not disclose that several banks and at least one payment processor stopped doing business with them, apparently due to concerns about the legality of its multi-level marketing program.
It appears that part of the reason for the Debtors’ cash flow problems was the diversion of funds to insiders.
Craft was caught “holding the bag” when the U.S. Department of Homeland Security was executing a search warrant at TelexFree headquarters in Massachusetts on April 15.
“When Craft was caught ‘holding the bag’ during the execution of the HSI search warrant on April 15, 2014, nine of the ten cashier’s checks that were confiscated were dated April 11, 2014 and were remitted to Merrill,” Davis asserted. “Of these checks, five were made out to TelexFree, LLC totaling $25,548,809.00, and one was made out to Katia B. Wanzeler (Wanzeler’s wife) in the amount of $2,000,635.00. The tenth check, dated April 3, 2014, was remitted to Wanzeler and was made out to TelexFree Dominicana SRL in the amount of $10,398,000.00.”
Davis also expressed concern about a TelexFree board meeting that occurred in the hours leading up to the bankruptcy filing. (See April 21 PP Blog story that references the same meeting.)
From the Davis motion to appoint a trustee (italics added):
The minutes of the special meeting of the Board of Managers of TelexFree, LLC held on April 13, 2014, indicate that Merrill and Wanzeler comprise the entire Board of Managers (the “Board”). . . At this meeting, Merrill and Wanzeler selected Craft and [Stuart] MacMillian as the Debtors’ “Authorized Persons,” empowered to execute and file pleadings on behalf of the Debtors, to employ counsel and other professionals (including Craft’s accounting firm), and to exercise signature authority over the Debtors’ accounts. Although the minutes include language revoking any prior signature authority of other individuals, there is no language stating that Merrill and Wanzeler are stepping down from the Board or that anyone else is stepping up to serve as their replacements. On information and belief, the new interim CFO and CEO still report to and take direction from the Board which is still comprised of 2 individuals – Merrill and Wanzeler.
And, Davis alleged, “Merrill, Wanzeler, Craft, and possibly others have engaged in securities fraud, withheld material information from investors, and improperly diverted millions of dollars of estate property to themselves or their entities, as set forth in the SEC Complaint and Memorandum.”
In the trustee’s view, according to the allegations, “[t]he modus operandi of Merrill and Wanzeler and their cohorts suggests that it is more likely than not that anyone handpicked by them to manage their wholly owned companies will be another cohort.”
Davis asserted “on information and belief” that there have been “no allegations to date regarding the involvement of MacMillan (the new CEO) or [William] Runge (the new CRA) in the Debtors’ Ponzi scheme, neither is there any indication that these interim officers are truly independent of the fraud of ‘former’ management.”
And, Davis continued, “[t]he only way to ensure honest and independent management of these Debtors going forward is for the Court to direct the United States Trustee to appoint a Chapter 11 trustee.”
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.
From PonziTracker’s April 18 story (italics added):
. . . a casual read of the Motion makes clear that the company accused by regulators of being an “egregious” pyramid scheme seeks now to use the Bankruptcy Court’s power to eliminate the obligation to pay accrued compensation likely totaling hundreds of millions of dollars to “promoters” – under the theory that elimination of these obligations will allow the company to “ultimately prove successful and profitable.” Ironically, one of the chief concerns cited by TelexFree related to questions “raised as to whether the Original Comp Plan is compliant with law, which jeopardized the Debtors’ business.
On the same day, the PP Blog reported that TelexFree was the top story in Thursday’s infrastructure report by the Department of Homeland Security. Meanwhile, the Blog reported that TelexFree is calling the actions by Massachusetts and the SEC “precipitous and unnecessary.”
The Blog noted that some TelexFree members appear errantly to believe that the company already has been cleared of the Ponzi and pyramid charges. Uplines could be feeding them misinformation. Separately, BehindMLM.com reported that the federal judge in the SEC action has granted a Temporary Restraining Order against TelexFree.
As BehindMLM noted in its coverage, quoting the judge (italics added):
the Commission has shown that
1. It is reasonably likely to establish that TelexFree and the individual defendants James Merrill, Carlos Wanzeler, Steven Labriola, Joseph Craft, Sanderly Rodrigues de Vasconcelos, Santiago De La Rosa, Randy Crosby and Faith Sloan have directly or indirectly engaged in the violations alleged in the complaint . . .
At the moment, major civil litigation against TelexFree in the United States is occurring on at least two fronts. The number could rise, given that TelexFree allegedly operated in at least 20 U.S. states. And because the SEC has described a “search warrant” that was executed in Massachusetts, it is almost certain a criminal probe by at least two U.S. agencies is under way.
TelexFree also is under investigation in Brazil.
To hear some TelexFree members tell it, however, none of these things seem to matter or can be regarded as ordinary events.
At least two petition drives in support of TelexFree have started in recent hours. One of them asks a U.S. Bankruptcy Judge to “Bail out Telexfree.” Another appears not to petition a specific judicial officer. Rather, it appears to ask TelexFree members to support the firm’s bankruptcy filing because TelexFree “has meant a real opportunity to bring sustenance to each of our homes.”
Similar petitions popped up after the SEC alleged in 2012 that the Zeek Rewards “program” was a Ponzi- and pyramid scheme that had gathered $600 million. Further investigation now puts that number at between $845 and $897 million. In the interim, two Zeek insiders have been charged with federal crimes and the court-appointed receiver in the case is pursuing clawback claims from thousands of alleged Zeek winners.
In the 2008 AdSurfDaily MLM Ponzi-scheme case, petitions to support ASD also popped up. The Ponzi dollar figure in that case mushroomed from $53 million to $119 million over the course of the probe. Like Zeek, the ASD case started as a civil prosecution with a parallel criminal investigation. ASD President Andy Bowdoin has been in prison since mid-2012. He was sentenced to serve 78 months.
The Zeek and ASD proceeds combined total at least $969 million. If the $1.2 billion asserted in the Massachusetts complaint proves accurate, it means that TelexFree not only fetched more than Zeek and ASD combined, but also may end up holding the title of the largest MLM HYIP Ponzi- and pyramid scheme in history.
There is no doubt that Zeek and ASD members helped fuel the TelexFree machine.
Effectively having been accused of rivaling Scott Rothstein’s epic Ponzi scheme, TelexFree issued a statement this afternoon that calls the government actions against it “precipitous and unnecessary.”
Rothstein’s Florida-based Ponzi scheme collapsed in 2009. It gathered about $1.2 billion before toppling, and is one of the largest Ponzi schemes in U.S. history.
On Tuesday, Massachusetts Commonwealth Secretary William Galvin described TelexFree as a combined Ponzi- and pyramid fraud that had fetched about $1.2 billion. On Thursday, the U.S. Securities and Exchange Commission — the nation’s top securities regulator — described TelexFree as a collapsed pyramid scheme that recorded $1.3 million in sales of its VOIP product between August 2012 and March 2014, but racked up liabilities of about $1.1 billion because of an attached investment scheme and tiered payouts due members.
TelexFree largely was targeted at Brazilian and Dominican immigrants, the SEC said.
In its statement today, TelexFree said it disputed “the material allegations made by these agencies and regrets that their actions impede our ability to continue to serve our customers, restructure our operations, and thereby emerge as a stronger and more competitive company.”
“Unfortunately,” TelexFree said, “the precipitous and unnecessary actions taken by the state and federal agencies have temporarily suspended the VoIP services TelexFREE customers rely on.”
Meanwhile, it asserted its Sunday Chapter 11 bankruptcy filing in Nevada demonstrated its “belief in the strength of our core business and products and the enthusiasm and dedication of our independent sales associates as well as our determination to protect the assets of the Company and maximize the recoveries for all constituents.”
The statement did not say whether four alleged hucksters charged by the SEC with fraud for pushing the TelexFree “program” would have to pay for their own lawyers. Four alleged TelexFree executives or co-owners also were charged.
TelexFree’s statement was at odds with claims made by some of its own promoters today. While TelexFree itself acknowledged the litigation filed against it by the Massachusetts Securities Division and the SEC and acknowledged its own unfinished bankruptcy case, some promoters claimed the firm had been ruled not to be Ponzi scheme and that the court had confirmed the legality of TelexFree.
From yesterday’s national infrastructure report by the U.S. Department of Homeland Security. Red highlight by PP Blog.
TelexFree — specifically the Ponzi- and pyramid complaint filed against it Tuesday by Massachusetts Commonwealth Secretary William Galvin — was the top story yesterday in the U.S. Department of Homeland Security’s daily infrastructure report.
DHS was formed after the terrorist attacks of Sept. 11, 2001. Galvin alleged that TelexFree had gathered more than $1.2 billion in a massive, international fraud scheme.
Yesterday’s infrastructure briefing singled out four “Top Stories” in the United States, with TelexFree listed at the top of the thumbnail reports.
“The Massachusetts Securities Division charged TelexFREE Inc., with running a Ponzi scheme targeting Brazilian-Americans that has raised over $90 million from Massachusetts residents and around $1 billion globally,” the thumbnail read.
DHS pointed to a story by Jordan Maglich in Forbes on the Massachusetts action. The agency listed the TelexFree matter in the infrastructure category of “Financial Services.”
Yesterday’s infrastructure report did not mention that DHS itself had a role in executing a search warrant and securing the premises of TelexFree’s headquarters in Marlborough, Mass.
Agents were at the site Tuesday, the same day Galvin filed a state-level action and the SEC filed a federal action. An SEC affidavit credits DHS and a Bristol County Sheriff’s Deputy with stopping a bid by an accused TelexFree executive to remove nearly $38 million in cashier’s checks from the premises.
The DHS infrastructure report is culled from various media reports. Although yesterday’s report highlighted four top stories across a broad spectrum, it also listed stories in various categories of infrastructure protection.
These include:
Energy
Financial Services
Chemical
Transportation Systems
Nuclear Reactors, Materials, and Waste
Information Technology
Critical Manufacturing
Communications
Defense Industrial Base
Commercial Facilities
Dams
Government Facilities
Food and Agriculture
Emergency Services
Water and Wastewater Systems
Healthcare and Public Health
The DHS Daily Open Source Infrastructure Reports are available here.
BULLETIN: The state of Montana has issued a Cease and Desist order to TelexFree, revealing it had been unsuccessfully seeking 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.
