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Tag: Stuart MacMillan

  • TelexFree A No-Show At Alabama Hearing; Litigation Involving Firm Piles Up

    newtelexfreelogoUPDATED 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.

    As the PP Blog reported on April 21 (italics added):

    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.”

  • TelexFree’s Merrill Trashes Law Enforcement, Pins Hope For Pretrial Release On Stuart MacMillan, William Runge, Gerald Nehra — And Alexa Rankings

    James Merrill.
    James Merrill.

    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.

    Nehra also got a mention today by Merrill, the second in eight days.

    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.

    NOTE: Our thanks to the ASD Updates Blog.

  • BULLETIN: Merrill May Be Turning Against Wanzeler

    James Merrill. Source: YouTube
    James Merrill. Source: YouTube

    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.”

    NOTE: Our thanks to the ASD Updates Blog.

  • BULLETIN: Trustee: ‘It Appears That [TelexFree’s] Merrill, Wanzeler, And Craft Have All Fallen Down The Rabbit Hole And Are Now Expecting The [Bankruptcy] Court To Follow’

    breakingnews72BULLETIN: In a blistering response to TelexFree’s bid to continue its business and move forward with its Chapter 11 bankruptcy case, the United States’ trustee said the embattled firm has not engaged “in full and fair disclosure.”

    “The former CFO and board members have disappeared with no explanation,” U.S. Trustee Tracy Hope Davis alleged. “The only declarations in support of the Debtors’ requests for relief have been signed by individuals that have been on the job for less than 3 weeks. Yet, Debtors are pressing forward with their motions for ’emergency’ relief so they can continue business ‘as usual.’ It appears that [James] Merrill, [Carlos] Wanzeler, and [Joe] Craft have all fallen down the rabbit hole and are now expecting the Court to follow.”

    Davis’ argument came in response to assertions by TelexFree interim CEO Stuart A. MacMillan that he had fired Wanzeler and caused the resignations of Merrill and Craft on April 17.

    “At the hearing on April 17, 2014, Craft was not present in the Courtroom,” Davis argued. “Counsel for Debtors informed the Court during the hearing that Craft was no longer an officer, director, or authorized signatory of the Debtor. No explanation was offered to the Court for the sudden change of management and the short duration (3 days) of Craft’s tenure.”

    And, Davis continued, MacMillan has provided “no explanation for why he felt it necessary to terminate Debtors’ entire former management team.”

    Among the trustee’s witnesses is Julio J. Defigueiredo Jr., a sheriff’s deputy from Bristol County, Mass. In a declaration to the bankruptcy court, Defigueiredo said he was present at an April 15 raid of TelexFree’s Massachusetts office by the U.S. Department of Homeland Security.

    Defigueiredo, according to the declaration, observed Craft “entering an office and attempting to grab a laptop and bag.”

    Craft, according to the deputy, claimed the items were “personal.”

    But nearly $38 million in TelexFree-related cashier’s checks were discovered in the bag, the deputy said.

    Davis described the situation as a series of “extraordinary changes of circumstances” and part of a confluence of events that makes it “unfathomable” that TelexFree is “still going forward on their cash management motions . . . as if business were proceeding as usual.”

    “Currently,” Davis argued, “Debtors have no operating business. Due to the TRO [in the TelexFree fraud case filed by the SEC on April 15], their accounts have been frozen and remain frozen for the foreseeable future. MacMillan admits their offices in Massachusetts have been shut down since the Federal raid and all remaining employees have been laid off.”

    MacMillan contended earlier this week that he did not believe that “Mr. Craft was attempting to divert any of the Debtors’ cash or other resources.”

    Davis appears not to be buying that assertion, alleging that “Craft was apprehended attempting to walk out the back door of Debtors’ offices with $38 million in negotiable cashier’s checks.”

    She further asserted that William Runge, a turnaround specialist hired to “to safeguard existing cash” by TelexFree three days before its bankruptcy filing, “[a]pparently . . . wasn’t able to perform his new job duties very well” given the circumstances surrounding Craft.

    MacMillan contended earlier this week that Craft “was acting at the direction of Mr. Runge and me to secure the cashier’s checks in a safe and reliable location for the benefit of the Debtors’ constituencies.”

    Key bankruptcy hearings for TelexFree are scheduled tomorrow.

    But emergency motions filed by the firm “have not been amended to reflect any change of circumstances in Debtors’ business operations such as the raid on their offices by Special Agents from Homeland Security, or the freezing of all their banks accounts and sources of revenue, or the fact that Craft, their former accountant, Chief Financial Officer, Board Member and signatory is no longer associated with the Debtors in any capacity,” Davis asserted.

  • BULLETIN: U.S. Trustee Says ‘Compelling Evidence Of Fraud’ And ‘Reasonable Grounds’ To Believe ‘Criminal Conduct’ Occurred On Road To TelexFree Bankruptcy Filing

    breakingnews72BULLETIN:  (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.

    Davis was appointed trustee of the region by U.S. Attorney General Eric Holder in November 2013.

    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.”

  • URGENT >> BULLETIN >> MOVING: TelexFree Says It Has Filed For Bankruptcy In United States; Uganda’s Central Bank Issues Fraud Warning

    newtelexfreelogoURGENT >> BULLETIN >> MOVING: (6th update 2:36 p.m. EDT U.S.A.) TelexFree LLC and “certain of its subsidiaries and affiliates” have filed for bankruptcy in Nevada, the firm said in a statement this morning.

    In its statement, the company did not directly identify the other TelexFree firms involved in the filing. A link in the statement, however, identifies the firms as TelexFree LLC, TelexFree Inc. and TelexFree Financial Inc.

    A schedule included in the bankruptcy filing suggests that TelexFree owes its 30 largest unsecured creditors nearly $14 million. As much as $36 million may be owed other unsecured creditors, the filing suggests.

    TelexFree is seeking to reject contracts that existed with affiliates both before and after the “program” changed its compensation plan on March 9, according to the bankruptcy filing.

    Stakeholders and affiliates are called “constituents” in the statement, which attributes a remark to Stuart MacMillan, “interim Chief Executive Officer of TelexFREE.”

    TelexFree is under investigation by the Massachusetts Securities Division. Prosecutors in Brazil have described TelexFree as a pyramid scheme.

    Separately, the central bank of Uganda has issued a fraud warning on TelexFree and other programs, according to a report in African media. The warning follows a move by the government of Rwanda last month that banned a TelexFree enterprise.

    TelexFree’s announcement of the bankruptcy filing occurred just days after the enterprise, citing unspecified “scheduling conflicts,” sought the postponement of a hearing in Alabama to consider its application for “Resale Interexchange Authority.”

    TelexFree says it is in the VOIP business and provides other telecommunications services. How the bankruptcy filing would affect various TelexFree phone-service applications in various states was not immediately clear. In regulatory filings, TelexFree LLC said it posted more than $691 million in “total income” last year.

    Affiliates of the TelexFree MLM “program” have been complaining about not getting paid.

    The filing also takes place against the backdrop of public appeals by TelexFree for affiliates to recruit more customers. A promo earlier this month included the logos of prominent media firms in the United States, planting the seed that the firm’s MLM “program” had the backing of the companies, many of which are affiliates of major television networks in the United States.

    A TelexFree arm in Brazil sought bankruptcy protection last year. Carlos Costa, a TelexFree executive in Brazil, curiously waved the flags of Portugal and Madeira while announcing the Brazil filing. Police in Europe later issued warnings that TelexFree was targeting the Madeiran community.

    Alvarez & Marsal North America, LLC is serving as restructuring advisor to the Company and Greenberg Traurig, LLP and Gordon Silver are serving as legal advisors to TelexFREE, according to the statement.

    Among other things, the bankruptcy filing says TelexFree has generated more than $1 billion in revenue since 2012. The revenue surge “put tremendous pressure on the Company’s financial, operational and management systems,” TelexFree contends.

    The filing seeks to reject contracts with TelexFree promoters under both an existing compensation plan implemented March 9 and an “original compensation plan” that existed prior to that date.

    “At the time of the roll-out of the Revised Comp Plan, the Company decided to honor certain discretionary payments to Promoters under the Original Comp Plan,” TelexFree said in bankruptcy filings. “These discretionary payments quickly became a substantial drain on the Company’s liquidity. The Company discontinued the Pre-Petition Comp Plans and ceased making discretionary payments under the Original Comp Plan prior to Petition Date.”

    TelexFree affiliates have claimed that $289 sent to the firm returned $1,040 in a year and that $1,375 returned $5,200. Some TelexFree groups solicited sums of $15,125, saying such a sum would return $57,200.

    From the TelexFree bankruptcy filing, which requests contracts with affiliates to be rejected (italics/bolding added):

    Under the Original Comp Plan, Promoters have and are continuing to assert substantial claims against the Debtors. While the Debtors believe that many of those claims are invalid, the Debtors continue to be burdened by the demands made under the Original Comp Plan. In addition, questions were raised as to whether the Original Comp Plan is compliant with law, which jeopardized the Debtors’ business. Although the financial demands are less under the Revised Comp Plan, the Revised Comp Plan does not generate sufficient revenues for the Debtors to continue operating their business.”

    Said MacMillan, in the TelexFree media statement:

    “We are taking this major step because we continue to believe in our business, our products and the enthusiasm of our world-class team.  We believe that this restructuring plan, which will include significant enhancements to our governance practices and internal controls, will help us to build a stronger and more sustainable financial and operational foundation for the future.”