The Securities and Exchange Commission has announced it filed civil fraud charges on April 15, 2014, accusing multiple companies under the TelexFree umbrella, as well as officers and promoters, of orchestrating a massive pyramid scheme that targeted Dominican and Brazilian immigrants and took in at least several hundred million dollars from investors worldwide. In addition to the TelexFree entities, the Commission also named eight TelexFree officers and promoters: James M. Merrill, Carlos N. Wanzeler, Steven M. Labriola, Joseph H. Craft, Sanderley Rodrigues de Vasconcelos, Santiago de la Rosa, Randy N. Crosby, and Faith R. Sloan (collectively, “Defendants”). Each has been charged with multiple violations of federal securities laws. In addition to the charges, the Commission also announced it had obtained an asset freeze securing millions of dollars in funds. According to the Commission, while investors continue to enroll every day, “it is clear the pyramid has collapsed.”
The unsealing of the charges come days after TelexFree declared bankruptcy in a Nevada federal court and was subsequently the target of an administrative action by Massachusetts securities regulators accusing the company of being a massive $1.1 billion pyramid and Ponzi scheme. According to authorities, TelexFree advertised itself as a substitute to landline phone services through the sale of its voice over internet protocol (“VoIP”) program, 99TelexFREE. In addition, the company also sought participants for a passive income program that promised outsized returns through either a $289 or $1,375 investment (as well as a $50 administrative fee). Investors were able to invest by credit card. The $289 program offers one advertisement kit and ten VoIP Programs, while the $1,375 option allows the purchaser to receive five advertisement kits and fifty VoIP Programs. By using the so-called advertisement kits, which is an “effortless” process consisting of several minutes of work per advertisement, participants are purportedly able to generate extensive returns without the need for any VoIP Program sales. In addition, participants received an additional VoIP Program for posting a daily advertisement, which they were then able to sell to TelexFree for $20.
Through these efforts, participants in either program were promised astronomical returns. For example, a participant investing $289 that simply placed one advertisement per day could receive an annual profit of at least $681 – a return exceeding 200%. Similarly, a participant investing $1,375 and placing five advertisements daily could receive profit of $3,675 – a return over 250%. Not surprisingly, these large returns spurred the participation by many thousands of investors worldwide.
TelexFree also paid handsome commissions to promoters, including bonuses of up to $100 per member recruited and further incentives for direct and indirect participants in their “network.” Additionally, promoters were promised 2% of all payments to each participant in their network that had at least one active VoIP customer. According to the Commission, Defendants Vasconcelos, De La Rosa, Crosby, and Sloan were among “the most successful promoters of TelexFree.”
The Commission accused TelexFree of multiple material misrepresentations and omissions to investors, including but not limited to:
- Advertising that Merrill had a B.A. in Economics from Westfield State University when he had only attended the university for two years before dropping out;
- Including a photo of Merrill in front of a three-story building purportedly owned by TelexFree when in fact the company only occupied a single suite in the building; and
- Representing the company had been in the “VOIP telecommunications” business for a decade
Seal of the U.S. Securities and Exchange Commission. (Photo credit: Wikipedia)
According to the Commission, TelexFree’s VoIP sales revenue from August 2012 to March 2014 was approximately $1.3 million – barely one percent of the more than $1.1 billion accumulated by participants. As a result, TelexFree was accused of operating as a classic pyramid scheme – by paying earlier investors not through ongoing operations but from funds from new investors. Despite the approximately $1.3 million, the Commission also alleges that more than $30 million of investor funds was transferred to TelexFree affiliates or Defendants.
In addition to the Defendants, the Commission also charged several related entities as Relief Defendants, alleging they had received proceeds from the scheme. According to the Commission, nearly $7 million was loaned or transferred to TelexFree Financial, Inc., TelexElectric, LLLP, and Telex MobileHoldings, Inc.
The Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties. Notably, the Commission is not seeking the appointment of a receiver. Rather, it appears that future efforts to secure and marshal assets for the benefit of TelexFree victims will come through the efforts of the court-appointed bankruptcy trustee.
At this point, TelexFree has faced charges from solely civil regulators, despite recent news that criminal authorities from the FBI and Department of Homeland Security recently raided the company’s Boston headquarters. The Boston Globe also reported that TelexFree has retained criminal defense counsel from a high-powered law firm.
Updates Will Follow.
Jordan Maglich is a securities law attorney in Tampa, Florida. Follow Jordan on Twitter at@Ponzitracker or visit Ponzitracker.
No comments:
Post a Comment