telexfree-logoIn one of the more comedic episodes of the TelexFree saga, we saw the company and their lawyers place much emphasis on a court-ordered audit last year.

The audit, to be conducted by the firm Ernst & Young, was ordered to provide the court with answers to specific questions – the answers to which were to assist Judge Borges in determining whether or not TelexFree was a scam.

The implication behind getting a neutral third-party to perform the audit was that TelexFree themselves could not be trusted with the task.

Hardly surprising when you consider the company already had a history of misleading and failing to provide information to the court when requested to do so.

Anyway, upon the order being made, TelexFree were quick to reassure their Brazilian investors that the audit would absolve the company – proving once and for all that it wasn’t a Ponzi scheme.

After three lengthy delays, Ernst & Young finally submitted their audit report last month.

The conclusion drawn from the data analysed and questions the court had asked them to find the answers to, was that TelexFree had ‘ characteristics of a “financial pyramid”‘.

Immediately TelexFree sought to denounce the report, claiming it was full of errors and “inconclusive”.

Unhappy with the work of E&Y being publicly trashed by TelexFree and their lawyers, Acre’s Public Prosecutors recently approached the Acre Court and asked that the audit report be made public.

TelexFree naturally weren’t too happy about that.

The specific reason given for the Public Prosector’s request was that

more than one million investors have the right to be informed about the business model used by (TelexFree) and also to prevent further social unrest.

The social unrest part I’m guessing is due to Carlos Costa appearing in YouTube videos and telling the world that E&Y’s report was inaccurate and full of lies.

With Judge Borges stating she won’t publicly comment on the report until she’s made a decision, that’s left Brazilian TelexFree investors wondering who to believe.

Making the report public would allow Brazilian investors to decide for themselves the merit of the report.

TelexFree didn’t want this to happen, arguing that

the information in the expert report is protected by tax secrecy and also because there are mistakes in it, meaning that disclosure of the document could lead to hasty, erroneous and unjust interpretations.

Riiiiiiiight. What errors TelexFree claim Ernst & Young have made has of course yet to be clarified by the company.

In making a decision on the matter, Judge Borges wrote

It must be remembered (that any) decision (will) directly affect thousands of people who (have) participated in (TelexFree’s) activities (as) promoters.

Also worth mentioning is the fact that the procedural secrecy imposed on the actions in question do not arise from any procedural circumstances, but only due to the fact banking information and tax secrets of some of the parties are contained in the records.

Based on these premises, one must accept in part the request made by the author (E&Y) in order to enable all interested parties directly or indirectly in the demarcation of the information in the report pertaining to the outcome of the expert evidence made, if stressing that as the central theme of the action (whether or not TelexFree’s business model is lawful) is tipped in favour of no reason for secrecy.

The very nature of action requires the acceptance of the (E&Y’s) claim, since as noted, the rights that it seeks to protect are collective and vast, arousing understandable interest from the community on the progress of the process.

It’s a bit hard to digest, but bear in mind English legal jargon can be a task to get your head around at times. Here I’m translating Portuguese legal jargon into English as best I can.

The issue of tax secrecy appears to have been raised by TelexFree, with the Judge having this to say specifically on TelexFree’s claims:

Moreover, contrary to what (TelexFree) has claimed, the contents of the expert report are not all protected by tax secrecy, because the document contains a range of information from the analysis not only of tax or bank details of (TelexFree), but also several other factors and circumstances unaffected by secrecy.

The argument that disclosure of the expert report content could give rise to hasty interpretations, misleading or unfair can not therefore be upheld.

Judge Borges went on to grant the Public Prosecutor’s request, omitting the specific parts in the report that relate to TelexFree’s taxes.

Here’s the thing though, other than the Brazilian IRS, does anybody care?

Nope.

Everybody is interested only in what E&Y had to say regarding TelexFree being an illegal Ponzi scheme, and that information is now what the general public are going to be given access to.

When the documents will be made public is unclear, but one would imagine sometime soon (after the relevant tax information has been removed).

Based on information already leaked from the report, we understand Ernst & Young concluded that

  • 0.23% of the total VOIP minutes issued to investors were actually used
  • those who invested more with the company were paid a higher ROI, for no other reason than they had invested more money with the company
  • some $4.4 billion was invested by Brazilian investors with TelexFree
  • 67% of the funds paid out by TelexFree were attributed to automated  high-yield low-effort activities (the spamming of TelexFree ads)
  •  30% of the funds paid out by TelexFree were attributed to recruitment commissions
  • re-investment was encouraged, by TelexFree requiring investors to re-invest 20% of their ROI at the end of the 12 month maturity period if they wished to extend their investment contract (“This reinvestment design was aimed at propping up the pyramid scheme for longer”)
  • TelexFree’s business operations were “not sustainable”
  • TelexFree used newly invested affiliate funds as “advanced payments” to pay off existing investors (referred to as “short-term debt settlement”)
  • based on the above, E&Y concluded that TelexFree has “characteristics of a financial pyramid”

Given that this information was sourced directly from TelexFree’s own records and audited by a completely neutral third-party, their claims that the report is inaccurate and full of mistakes are nothing short of comedic.

Once the report is made publicly available, it will be interesting to see how Brazilian investors who, despite TelexFree confirmed to be a $1.8 billion dollar Ponzi scheme in the US, have thus far still refused to acknowledge they were scammed.

Oh and, now facing a “the emperor has no clothes” scenario, TelexFree’s public reaction to the decision is bound to be amusing as always.

Stay tuned…

 

Footnote: A copy of Judge Borges’ decision is available from the Acre Court diary.

To find the order, scroll down to the last order. Look for the name “HORST VILMAR FUCHES”, one of TelexFree’s lawyers (defendant “Y.C.” stands for “Ympactus Comercial”, TelexFree’s operating name in Brazil).

Our thanks to the BehindMLM reader Joaldro Dalla Costa who provided a heads up for this story.