Bankruptcy Judge rules TelexFree a Ponzi scheme
One of the primary hurdles in establishing a claims process for TelexFree victims, was obtaining legal certification that TelexFree was a Ponzi scheme.
To that end the TelexFree Trustee filed a motion in October. In it, Stephan Darr requested a Judge rule on whether or not TelexFree operated a Ponzi scheme. This in turn would render them liable to pay out claims, for which the Trustee had attached a proposed “net equity” process.
On November 25th Judge Hoffman ruled on the matter, declaring TelexFree to be a Ponzi scheme.
As per Hoffman’s order;
Each of the debtors (TelexFree) in these jointly administered cases operated a Ponzi and pyramid scheme.
The debtors are jointly and severally liable for the claims of the Participants (affiliate victims).
With criminal proceedings against TelexFree’s owners ongoing and the SEC’s civil proceedings on hold, Hoffman’s declaration is the first legal certification that TelexFree was a Ponzi scheme.
What effects Hoffman’s ruling, if any, will have on the criminal or civil proceedings is unclear. Ponzi bankruptcy proceedings are uncharted territory for me, so unfortunately I’ve got nothing to go on.
Jordan Maglich of Ponzi Tracker, who’s of a much more legal orientated mind than myself, offers this insight:
While the trustee ostensibly sought the Ponzi/pyramid finding as part of his proposed claims procedure, the reality is that the ramifications of such a finding will be much farther reaching.
Indeed, former TelexFree principals Wanzeler and Merrill filed a limited objection opposing “the Trustee’s request that the Court’s findings made pursuant to the Motion ‘shall be applicable throughout these proceedings, for all purposes.'”
In addition to the potential ramifications in the criminal proceeding involving Merrill, the finding will also simplify the process by which Mr. Darr may seek to recover transfers made by TelexFree to insiders and other parties.
Under both state law and the Bankruptcy code, a trustee may seek to recover transfers made during the course of a Ponzi or pyramid scheme that were made with actual fraudulent intent.
Numerous courts around the country have been nearly uniform in holding that a transfer was made in the course of a Ponzi scheme satisfies the requisite fraudulent intent required by statute.
Thus, in gaining a finding thatTelexFree was engaged in a Ponzi scheme, Darr may not only target the nearly-70,000 unique accounts which profited from TelexFree by an average of $20,000, but also those individuals or entities which provided services to TelexFree.
Looking forward, another hearing has been scheduled for January 26th, 2016. This is a non-evidentiary hearing, meaning no further evidence will be presented to the court.
In effect, it’s a procedural hearing, during which I suspect Darr’s proposed net equity claims process will be discussed and ultimately approved.
A second clarification order passed on November 25th states that if approved, Darr’s requested claims process will
cause all prior claims filed by any person against the debtors (TelexFree) or governmental authorities to be disqualified.
This will see the redundant claims filed by TelexFree investors, hoping to circumvent a court-approved claims process, unilaterally dismissed.
Stay tuned…
Footnote: Our thanks to Don@ASDUpdates for providing a copy of Judge Hoffman’s November 25th orders.
we sure got our work cut out for us…
i found an interesting para in the above motion filed by the trustee in october:
so, herbalife got an honorable mention in darr’s motion!
i wonder if darr is aware that herbalife is currently under FTC investigation.
even otherwise, saying ‘MLMP businesses can be legitimate’ and then providing ‘notable examples’ of herbalife, avon and amway in the same breath is not correct, as it ‘implies’ legitimacy of these companies..
only amway has been found to be a legitimate MLMP by a court. herbalife and avon have not been legally tested, or cleared an investigation by regulators. they are ‘assumed’ to be legitimate.
there was no need for darr to provide names of ‘notable’ MLM’s in a legal document, based on ‘assumptions’. any examples given, should have been backed by case law.
this ^^ is a booboo by darr, but i’m just happy he likes herbalife!
Telexfree case’s prosecutor found dead in her apartment. Suspects of suicide ac24horas.com/2015/11/30/policia-confirma-que-morte-promotora-foi-suicidio/?doing_wp_cron=1448884801.9435720443725585937500
Shame. Hopefully it has no bearing on the case though.
shocking! my first doubts raced to the earlier death threats against brazilian judges by some telexfree crazies.
but it seems this prosecutor was suffering from depression and it ‘appears’ to be a suicide.
we should wait for the investigation to be completed.
wanzeler and merill had filed a limited objection to darr’s motion which sought a finding of ponzi/pyramid which ‘shall be applicable throughout these proceedings, for all purposes.’”
basically they argued that such a finding by the bankruptcy court could not be applicable over the civil and criminal proceedings pending against them, as a finding of ponzi/pyramid could not be arrived at without full discovery and without an adversarial hearing.
the bankruptcy courts order is not available to me atleast, but is important to check whether the court limited the finding of ponzi/pyramid for the purpose of the bankruptcy proceedings, or not.
darrs motion
kccllc.net/telexfree/document/1440987151007000000000001
wanzeler/merril objection
kccllc.net/telexfree/document/1440987151112000000000012
There may or may not be foul play, but working in such a job is very stressful This is a terrible tragedy.
the ruling of the bankruptcy court is based on this definition of a ‘ponzi scheme’:
this^^ is the basic financial description of a ponzi scheme and it is easy to find telexfree a ponzi under this definition.
however the SEC civil case complaint described telexfree as an illegal pyramid scheme which was selling ‘unregistered securities’ in the form of ‘memberships’. though the SEC complaint does not use the term ‘investment contract’, ‘memberships’ fall under the head of investment contracts.
thus the SEC civil case needs a finding of investment contracts [securities] alongwith the financial characteristics of a ponzi.
wanzeler, who is a defendant in SEC/telexfree civil case, has said in his reply to the SEC complaint:
i’m seeing echoes of zeek here. defendants like to needle the SEC with the ‘investment contracts’ question, because courts are all over the place in deciding this question.
Uh what?
In Zeek all the executives except Douglas settled (paid back everything and more). Most of the insiders have settled too.
The diehards have had default judgement entered against them and will have to pay up in due time.
That’s on the civil side of things and on the criminal side, Burks is yet to face trial and Wright-Olivares and son have already plead guilty.
Sure the specific wording in complaints might differ slightly, but otherwise it seems pretty consistent to me. You’re basically going after the same underlying behavior, hidden behind different ruses (penny auction bids, VOIP service contracts, pseudo cryptocurrency points etc.).
Not sure where you’re getting “the courts are all over the place” from.
That’s two different cases. Number one is the bankruptcy case, number two is the SEC action. They are not “co-ordinated actions” by a group of plaintiffs.
* Number one is focusing on the Ponzi scheme side of TelexFree, number two is focusing on the pyramid scheme side of it and the unregistered securities.
* Number one is primarily about fraudulent transfers, number two is primarily about securities laws violations.
* Number one is using bankruptcy laws as the primary set of rules, number two is using securities laws. Those laws are not “one and the same”, they actually have different functions.
CONCLUSION?
“How we see the problem IS the problem”.
You probably introduced one or more dysfunctional ideas yourself for how to look at those two cases, e.g. some “same company = same rules” idea.
Number one is a bankruptcy court, number two is a District Court. They are handling different legal issues.
The question about “investment contracts” is irrelevant for the bankruptcy court. It’s outside its jurisdiction, and the question is already being handled by a different court.
You have simply asked the wrong questions. You can’t expect to get meaningful answers or conclusions in a case like that.
Brazilian public prosecutor who initiated proceedings against Telexfree commits suicide in Acre.
g1.globo.com/ac/acre/noticia/2015/11/mae-de-promotora-achada-morta-ligou-para-colega-da-filha-e-pediu-socorro.html
uh this, that the trial is pending in both the civil and criminal cases, in both zeek and telexfree.
the civil case [clawback] in zeek is centered around the question of whether zeek was a ponzi which sold investment contracts [securities].
according to wanzelers reply to SEC civil case in telexfree, it appears that he too is planning to argue the presence of investment contracts [securities].
hence i said, that i see ‘echoes of zeek’ in the telexfree civil case.
defendants in ponzi schemes like to needle the SEC with the ‘investment contract’ and ‘howey test’ arguments, because courts have been inconsistent in applying the howey test to ponzi/pyramid schemes.
different circuit courts interpret the ‘common enterprise’ prong and the ‘efforts of others’ prong of the howey test, differently. so, ponzi/pyramid defendants in SEC cases take a swing at the ‘investment contracts’ question because, who knows if they will get lucky in court?
for example the fourth circuit appeals court, under which the district court of north carolina falls [zeek], found a pyramid scheme [sell america] not to be a ponzi, because of the sales efforts of the participants.
for example the first circuit court under which the district court of massachusetts falls [telexfree] found a scheme to be a ponzi [SG ltd] because recruitment was not ‘compulsory’.
yes sir, and the definitions of ponzi used in the two courts are different.
the definition of ponzi in the district court includes the definition of ‘investment contracts’.
hence i feel the finding of ‘ponzi’ by the bankruptcy court cannot be binding or affect the proceedings in the district court.
That’s probably correct. The decision from the bankruptcy court can’t be binding for the District Court. The other court ca’t “close the case” base on that decision.
I’m not sure about whether it can affect that other case. Some facts may be common for both cases.
The other case is generally based on a different set of facts and different laws (Massachusetts Uniform Securities Act, or Chapter 110A of Mass. Gen. Laws). It’s about individual defendants and a different plaintiff.
Oops, I may have looked at the wrong complaint there, Massachusetts Securities Division instead of SEC’s complaint.
@anjali
I’ve yet to see an MLM Ponzi scheme get off because of this.
Do you really think Burks and/or Wanzeler and Merril are going to get off due to perceived inconsistencies?
Wright-Olivares has already plead guilty. All of the insiders have settled. Burks is toast.
Similarily the bankruptcy Judge just ruled TelexFree a Ponzi scheme. Wanzeler and Merril are toast.
In these two specific examples, I don’t recall there being any uncertainty in court as to whether Zeek and TelexFree were Ponzi schemes.
The TF bankruptcy was a minor spanner in the works, but otherwise the only reason Merrill isn’t in jail now is the volume of discovery in the case.
there is no recent case law [at least i could not find any] that tests an MLM ponzi against howey.
people seem to rely on the courts finding of securities in SEC vs koscot and SEC vs dare to be great [DTBG], but in both those cases participants had limited roles in recruitment, with the company itself closing sales.
i found two cases after SEC vs koscot [1970’s] where in sell america [1997] the court found the recruitment work of participants valuable. sell america was found to be a pyramid but not a ponzi. in the SG ltd case [2001], the court did not go into the discussion of whether recruitment work was valuable, because they found recruitment was not necessary to receive returns.
so, the courts opinion in zeek [IIRC recruitment necessary in the matrix] and telexfree [recruitment not necessary], will be interesting to see, not only for academic interest but also to know the extent of the laws that can apply to MLM.
on the other hand, like many other SEC litigation , after wasting several years of time, the zeek clawback case and the telexfree SEC case may be settled. this will be a real pity because 5 years later people will still be discussing whether MLM ponzi’s can be defined as securities or not.
there is no final decision from the court in either zeek or telexfree finding the presence of ‘securities’.
the finding of the bankruptcy court in telexfree, does not address the existence of ‘securities’ and is not valuable for the MLM industry for any guidance.