DoJ on TelexFree: Fraud, dishonesty & gross mismanagement
The Unites States Trustee program is
a component of the Department of Justice responsible for overseeing the administration of bankruptcy cases and private trustees.
Under the party name “US Trustee”, the DoJ has now filed what is the first major opposition to TelexFree’s bankruptcy proceeding. The DoJ’s motion to appoint a “Chapter 11 trustee” addresses the elephant in the room that is as of yet untackled in TelexFree bankrupty proceeding: That being of course the serious allegations laid out against the company by the SEC and Massachusetts Securities Division.
Both agencies have filed complaints against TelexFree, alleging it to be a pyramid and Ponzi scheme respectively.
Supported by damning evidence against the company, here’s a breakdown of the DoJ’s latest filing.
The Chapter 11 Trustee the DoJ are seeking the appointment of, is an
Individual appointed by the United States Trustee to administer a bankrupt company.
In a nutshell, the DoJ are seeking to take over TelexFree because company
management has lost the confidence of its creditors and investors (and) the appointment of a Chapter 11 trustee would clearly be in the interests of the creditors of this estate.
Of note is that the DoJ’s motion mentions “impending promoter class actions for monetary damages”, which if I’m understanding correctly would pave the way for TelexFree affiliates to sue the company. That’s not typically how we’ve seen large-scale Ponzis play out in court, so it’ll be interesting to watch that play out.
Evidence in support of the DoJ’s motion covers much of what was already revealed in the SEC and Massachusetts’ Securities Division complaints, however it does bring some new information to light.
There 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. (collectively, “TelexFree” or the “Debtors”).
There are reasonable grounds to suspect that the members of the governing board who selected the Debtors’ new executives participated in actual fraud, dishonesty and criminal conduct in the management of TelexFree.
First and foremost is the revelation that the new TelexFree compensation plan was brought about in direct response to subpoenas issued by the Massachusetts Securities Division (MSD):
It is clear that the pyramid has collapsed. 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.
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.
This explains the surreal scenario of affiliates storming TelexFree’s offices, while management hid under their desks and pretended everything was hunky-dory. Despite Steve Labriola’s “the new plan is awesome” webinar calls, and Carlos Costa’s “perfect investment strategy“, the fact of the matter is the new plan killed off new investment into TelexFree.
the Debtors developed a “new” compensation plan for Promoters making it much harder for them to qualify for payments. The new plan, which went into effect March 10, 2014, was called the “Revised Comp Plan.”
It has proven to be very unpopular with Promoters because they actually have to sell the VoIP products in order to get paid. Not surprisingly, the revenues generated under the new plan “have been disappointing” and do not allow the Debtors to meet their obligations.
And with $20 a week still owed to TelexFree’s 700,000 affiliates per position invested in, this lack of new investment funds subsequently triggered your standard Ponzi scheme collapse. But not before TelexFree had taken ‘in approximately $1 billion in revenues in 2013, or approximately $3 million in revenue per day‘.
So, where did all that money go?
Most of it was paid out to TelexFree’s top Ponzi pimps, and those listed as the top 30 creditors on TelexFree’s bankruptcy application.
As for the rest of it…
Part of the reason for the Debtors’ cash flow problems was the diversion of funds to insiders.
Mark Albers, a Forensic Accountant with the SEC in Boston, was asked to review certain documents pertaining to the Debtors’ bank and brokerage accounts, federal wire transfer records and credit card payment processor records. During the course of his review, he found evidence of the following transfers:
a. TelexFree Financial, Inc. received $4,105,000.00 on December 30 and 31, 2013.
b. In December 2013, approximately $14.3 million was transferred to newly created brokerage accounts in the name of TelexFree LLC.
c. Merrill received $3,136,200.00 on December 26 and December 27, 2013.
d. Wanzleler received $7,317,800.00 on December 26 and December 27, 2013.
e. Two companies controlled by Craft received more than $2,010,000.00 between November 19, 2013 and March 14, 2014.
f. Federal wire transfer records show that Wanzeler wired $3.5 million to the Oversea-Chinese Banking Corporation in Singapore on January 2, 2014.
That money is now all frozen, as per the temporary restraining order against TelexFree granted on April 15th.
Summing up their argument for the appointment of a Chapter 11 Trustee, the DoJ write
The United States Trustee requests the Court to order the appointment of Chapter 11 trustee pursuant to 11 U.S.C. § 1104(a)(1). Cause has been established in these cases by the fraudulent and dishonest acts committed by the principals and officers of the Debtors, as detailed herein.
Specifically, 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.
Once cause is established, the Court must order the appointment of a trustee pursuant to section 1104(a)(1).
And given that Chapter 11, Section 1104(a)(1) is as follows,
At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest or the United States trustee, and after notice and a hearing, the court shall order the appointment of a trustee
(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.
I imagine the court will grant the DoJ’s motion any day now, provided the court find ‘substantial basis in the (SEC’s) facts‘. And when they do, that will be the end of TelexFree’s misguided adventures in bankruptcy court.
Simply put, the bottom line is this:
Given the facts alleged in the SEC Case, TelexFree appears to be engaged in a classic Ponzi scheme.
Ponzi schemes are fraudulent by definition. A Ponzi scheme is a financial fraud that induces investment by promising extremely high, risk-free returns, usually in a short time period, from an allegedly legitimate business venture.
The fraud consists of funneling proceeds received from new investors to previous investors in the guise of profits from the alleged business venture, thereby cultivating an illusion that a legitimate profit-making business opportunity exists and inducing further investment.
Fraud, before or after the filing of a bankruptcy case, is a ground to appoint a trustee.
Looking forward, the DoJ’s motion observes that
most of the first day motions have been continued to May 2, 2014, however, those concerning cash management, payments to employees and to taxing authorities will be moot if the SEC’s TRO becomes a preliminary injunction.
There’s a hearing on April 24th, during which it’s expected the current TRO against TelexFree will be “upgraded” to a permanent injunction. What happens after that remains to be seen.
Finally, just incase anyone was wondering why Stuart Macmillan, TelexFree’s CEO in hiding, wasn’t named in the SEC or Securities Division complaints –
While (on information and belief) there have been no allegations to date regarding the involvement of MacMillan (the new CEO) or 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.
The 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.
Stay tuned for possible criminal charges later down the track, as regulators reveal more of the sordid details behind the running of the largest MLM Ponzi scheme to date.
Footnote: The full DoJ motion for a Chapter 11 Trustee, filed on April 22nd, can be read over at Kurtzman Carson Consultants’ website.
It’s funny how they keep trying to trick people, just check what they posted on telexfree.com:
And the worse part, is that they’re idiots who still believe in all that crap. Here in the Dominican Republic there’re a lot of idiots with the “let’s pray for the successful return of telexfree” thing, it’s hilarious.
Meanwhile in Brazil…
Let me see if i get it right, you’re telling me brazilians are so stupid they’re going to actually sue their own govement who’s trying to protect them from a fraud? Humans are amazing don’t you think?
Document Name: Order for Admission Pro Hac Vice of Frank Huntington, Deena Bernstein and Sandra W. Lavigna to Represent TelexFree, LLC:
SEC attorneys just arrived at the Nevada Court.
Facebook and Faith Sloan are both still telling people Telefree is “moving forward”. Of course, they don’t give a destination, so I guess it’s technically accurate.
I’m not sure who the “ecumenical acts with religious leaders” is intended to trick. God, maybe?
Someone is saying that Telexfree atroney are trying to delay things for 6 weeks?
According to this report at least there, they have frozen on time to return 100% of the money to those who lost 3 months before closing down! While here in the USA???
Sorry guys!!! you guys might get something!! Because we don’t know where the money went!!
Please, let’s not compare Massachusetts state (one of the richest state in the world) with Acre (a poor state).
Sec appears in Nevada Court and asks for immediate transference of the court to Massachusetts. Also included is the hearing at Boston which granted the TRO.
They’re going to fail, IMHO.
….”in the interest of justice and the convenience of the parties…”
This case is rather complicated, with multiple entities / multiple countries.
* Promoters often had multiple accounts, e.g. 1 main account plus multiple sub accounts, potentially with fake ID.
* Promoters generated fake customer accounts to qualify for binary commissions.
* Promoters used payouts to the back office to pay internal payments, e.g. paying for the monthly VOIP qualifiers.
* Promoters transferred “back office funds” internally between each others’ accounts, and between their own accounts (sub account –> main account –> withdrawal through e-Wallet).
* Promoters received CASH from newly recruited people, and used “back office funds” to pay for AdCentrals for the people they recruited.
* Promoters sold old contracts for CASH to other promoters.
* i-Payout offered several different transaction options, e.g. check, wire transfer, debit card, transfers to other payment processors.
* i-Payout doesn’t seem to have KYC Know Your Client routines.
* i-Payout moved transactions to Germany (in early 2014?).
* There’s TelexFree companies registered in several states, e.g. Massachusttes, Nevada, Florida.
* There’s Telexfree companies registered in several countries, e.g. UK, Canada, Rwanda.
* There’s probably Telexfree companies registered in different offshore tax havens. That’s one of the standard solutions offered by Bridgeway (Adams, Ewing, Craft).
In short, the case is a little more complicated than most others we have seen. “4 highly motivated men” with a car, an office and some lunch money will probably need more than 2 weeks to sort all the details.
Unfortuntely, it’s easy to understand why politicians are supporting Telexfree. In October, there will be elections for President, Governors, Congress (House of Representatives and one third of the senate) and State Senates.
Since Telexfree was paying everyone until the moment it was blocked, many people still believe in the company. It doesn’t matter how many times we explain to those people how Ponzi Schemes work, and in which point they collapse: they simply don’t believe.
I predicted that result 5 days ago, but I used slightly different arguments.
I suppose they are hoping they can sell this coming the so expected 2nd of May as:
“Telexfree won the Nevada Court!!!!! We are now moving to Massachusetts to fight SEC in his own hole!”
You can add to that list the fraud on top of the fraud which is reported to have been common here in Madeira:
* Promoters received 1400€ CASH from naive newly recruited people profiting from the currency difference (should be 1400$, or little more than 1000€). It should perhaps be noted that $ is very similar to the symbol of our old currency, the Escudo.
I have been reading the court documents, and there are intriguing facts in the DoJ motion for the court jurisdiction, like the fact that they know that there were 250 investors from 2012/14 in Nevada and 3000+ in Mass.
The source is the SEC documents so maybe the SEC is already extracting data from the Telexfree data base from their raid in the HQ.
I’m currently going over the latest jurisdictional filing. Will have an article up shortly.
(70 pages, son of a bitch!)
I´m from Madeira to and I have been getting reports of way bigger values like the average of investment is around 6000/8000€.
I have a report of an investor that put 110000€ 3 weeks before the closure and has seek legal advice for coming forward whit a criminal charge against one of the top promoters here.. for “burla”.
No, they straight out asked Merrill from the Massachussetts audit they did earlier this year or last year. Basically, please point out what sales of VOIP have you done since January 2012, and they counted it left and right, and only came up with less than 2 million.
If you need any legal expertise I can give a some support OZ, I have a Major in Law althougth it´s Continental system not anglo-saxon law..
I can usually work out what they’re saying… it’s just I have to pick out the relevant bits for an article (lest it become 70 pages long itself).
I stupidly took last night off and came back to the news of the DoJ filing. Had three hours sleep, woke up to take the dogs for a walk and then saw the SEC filing.
Can’t wait for the dust to settle on this one. Zeek was over and done with when the SEC moved in. TelexFree management on the other hand seem hell bent going for gold in the criminality olympics by any means possible.
Most of the TelexFree cheerleading sites and Facebook groups have gone quiet, but the demand for information hasn’t gone away. So I’ll keep at it I guess till we get to resting point.
I´m refering 2 this point on page 5 to 6 (Proximity of the Creditors) on this document: http://www.kccllc.net/telexfree/document/1412524140423000000000003
Any chance we can get a rough translation?
Oz, you should make a report for some major news channel, I also think you deserve a Pulitzer on this one ,for all the cover and diging around you did, you deserve way more credit for all you hard work.
The source for those numbers is, according to the SEC (in the same sentence you’ve red those numbers), “an analysis of data obtained from credit card payment processors”. I believe credit card payments are a minor part of the actual transactions involving Telexfree, but they do serve to show a very significant preponderance of Mass. over Nevada.
I dunno about Pulitzers and what not, but BehindMLM’s kept me pretty busy since I began trying to cover the industry at large.
Big busts are always crazy time but that comes with the territory. I know I might sound like I’m complaining sometimes but at the same time I find the whole situation fascinating.
With no money in the game, it’s really interesting to watch and analyse it all playing out. Most people will have not heard of TelexFree, yet here we are at the forefront of digital investment fraud.
Update, the SEC have moved to expedite their venue-change motion. It looks like they don’t want to waste any time after the permanent injunction is granted tomorrow.
It´s in south american spanish and mutch of the words are in slang, but I almost died from laugthing.
rough translation it´s about investing all your savings in telexfree going in to debt to invest, posting add´s for TF, being brainwashed in meetings for ptomotors buying things whit money from Tf, putting family in TF, buying thing on credit and then TF runs away whit your money and know you are broke living whit your mother and some on is going after you for the kill lol…
It’s a guy whining about his misfortune with Telexfree to his family, friends, etc.
Something along the lines of:
“If you are hearing my cries, it’s not that I’m not a true man, but I had some nickels and invested them in Telexfree and they knocked down my little pesos… I had a little business, and it was going so pretty…” and so on.
Of course in Spanish it’s much more funny. 🙂
It’s funny, they want any date before May 2, while Telexfree attorneys want any date including or after May 2. Obviously Telexfree wants to have something to say (“Victoryyyyy!” probably) when that infamous hearing of May 2 comes.
Thanks guys. Have to admire the culture popping up around the bust.
Zeek and WCM777 were relatively quiet when they got shot down.
Oh thank goodness. The jurisdiction motion is so long because it contains exhibits (original complaint and some declarations).
Well, I think TF is going to be a case study for years to come not only in the perspective of the typical Ponzi/pyramid scheme but also in a social and cultural perspective since it´s not normal for a scheme of this scale, reaching so many diferent countrys and managing to draw in diferent classes of people.
It´s not your typical scheme that targets a specific group of people or a specific country…you can almost call it the democratization and globalization of the Ponzi scheme in XXI century lol
The Telexfree website is active again.
It worked briefly for me, and is now throwing up this message:
When it was up, I noticed mention of Gerry Nehra and TelexFree’s legal department had been removed from the site.
Gotta hand it to management, they’re hell-bent on getting steamrolled as much as possible in court.
You don’t restart the website of your global Ponzi scheme when you have a temporary restraining order out on you.
Just got off the phone whit a source that has an acount he manage to log in and is “Back office” is blank/clean. Maybe they are deleting the adcentral accounts data???
More likely that they’ve just bought the site back online with the backend disconnected. Perhaps management aren’t determined to breach the TRO.
By the way, there is a video circulating among TF groups and affiliates about an interview of Carlos Castilho (top promoter) with Horst Vilmar Fuchs, who is said to be Ympactus attorney.
The complete video is here:
The part about teh conversation with Horst Vilmar Fuchs is moreless as follows:
-The attorney said the company BO servers will be connected shortly;
-The company CEOs were absolutely caught by surprise by the spectacular growth of TF, and were confused about the way to go, taking wrong decisions like the ones related with the new plan; now there is the intention to do some housekeeping in Telexfree;
-That (and this is quite interesting) Telexfree plans to channel VOIP payments and new members trough the now resurrected VOIP BO (allowing affiliates to continue selling packages). They expected to do this before 2 May, using the already working VOIP structure;
It seems TelexFree website is unstable… but if you can load it, there is a message I didn’t know. If you guys already knew about it, just ignore:
I take it nobody has told Fuchs that the only VOIP services sold were to affiliates so that they could qualify for their Ponzi ROI.
There’s no retail activity within the company so putting VOIP services back online would appear to be yet another “wrong decision”.
That message went up shortly after the compensation plan change. It predates both the bankruptcy filing and regulatory actions.
@Oz: Ok, I just haven’t read it.
I can attest as well that telexfree.com was working for me – No, it IS working for me at this very moment! Incredible. Even subpages are working now, like telexfree.com/contact
It seems to alternate with this message:
then it is up again.
Could be that thing Carlos Castilho said yesterday about channeling the former BO by the VOIP BO to allow Telexfree VOIP service and sells to continue.
I think the site is just getting hammered and can’t keep up. If you get the 503 error and look at the XID number, then refresh – I think that tells you how many pageloads have just occurred.
I was seeing jumps in the thousands between refreshes (waiting a few seconds each time).
Did you guys notice the “about the founders” section is gone? 🙂
They are trying to reload the same scam using the VOIP service, not bad for a “company” seeking bankruptcy protection…this guys are pulling a rabbit out of the hat in front of the SEC and everyone else…
Why the authorities don’t seize the domain?
Not sure if the permanent injunction covers that, but in any case it hasn’t been granted yet. Hearing is April 24th in the US.
If a permanent injunction covers domain seizure, expect the website to go down sometime tomorrow evening or Friday morning.
telexfree website is open.
Oz The SEC has to stop these guys
That seems to be caused due to some “backup version” being restored. I’ve seem that site before they have changed the “about the founders” stuff and it was just as it is now.
Which makes me wonder: WTF do those guys at TF think (in case they do actually think)? I’m sure they were told to remove the site stuff and now, after all the motions we’ve watched being published by DoJ today, they just decided it was a good idea to come back with that site?
I ask myself if those scammers are just plain stupid, just a bunch of arrogant people of if there’s a bigger agenda behing all that.
This was just posted in TelexfreeStrategy:
BO is back?
If you see me crying (crying man)
Is not that i’m not a little man (Crying man)
Is that i had some cash and in that little business they took my penies
If you see me crying (crying man)
Is not that i’m not a little man (Crying man)
Is that i had some cash
I invested it in telexfree they took my penies (wow)
Mommy we got all screwed
They told me that i had won
that they had everything calculated
You only had to get up in the morning and post some ads
That i myself who send you (how do i tell my old lady that they’re 1500 $ missing) (and for what daddy)
I sold the medicine she used for her feet her sugar her preassure and a face cream that i myself bought her (WAS IN DOLLLAR THAT YOU INVESTED!?)
They offered a little deal
That looked pretty
I invested some pennies but in the end they scam me like a little kid
They offered a little deal
That looked pretty
I invested some pennies but in the end they scam me like a little kid
Mommy the chain that i told you that they mugged me is in the pawn shop and the receip in telexfree
Do you remember the reunion that i told you that i went
they brainwashed me and ever ritch i got out
You get the idea
Thanks for taking the time to type all of that out Peter!
My grammar is not perfect so any grammar nazi please forgive me, english is not my native language, the song is not complete but there’s a part that i don’t know how to translate to english with it’s meaning.
if i did an raw translation it would lost meaning, but in the last part he’s saying that people is blaming him and asking for the money, that is, the people he made go into telexfree.
Apparently the BO is connected, at least one user seem to have been able to get in his BO, see
Notice the access dates. It’s from few moments ago.
Then it would seem TelexFree management are indeed playing with fire.
They would most certainly appear to be in breach of the TRO and Massachusetts Securities Division cease and desist.
In another verse he say that he made his cousin sell his motorcycle and the money to buy a refrigerator to investe in telexfree. Lol.
In a serious note I feel the bad guys are winning :(.
this guys are kidding can only!
The site is gone, back to the usual screen.
For a moment I was able to login to my back office and get the same screen…
Well I hope they didn’t delete/modify anything – as that would be a breach of the TRO. It explicitly states they aren’t permitted to make any modifications to anything.
At the end of the song he also says “again we got tricked with little mirrors”. That’s referring about the History of the Taino Indians in the Hispaniola that got tricked by The Spanish and christopher columbus, trading gold for am amazing magical thing as mirrors for gold.
It may seem that way if you have never watched it happen before.
Rest assured, the bad guys are NOT winning and are, in fact, digging themselves into a hole so deep they may never get out.
It may take time, but when the SEC, FBI and DoJ combine to nail someone to the wall, they STAY nailed
About the cousins who sold his motorcycle and the money for refrigerator he says he got his money, but virtual money.
There’s been a few occasions I could have sworn I’d caught my reflection in Carlos Costa’s sweaty forehead… I guess where I saw myself, others saw stacks of cash.
Can’t anyone send that TF’s BO screen capture to any justice department/section whatever, and alert them about what just happened?!?
Who knows what those scammers are capable of, after all the lies they’ve been telling to everyone, including American and Brazilian judiciary?
And it’s back again…
And more affiliates are logging in to their back office:
At least people now have an opportunity to print their data for future use, if it stands until tomorrow.
Hey Oz, the telexfree.com site is back online, how is this posible?
It’s like they’re pulling their pants down and mooning everybody.
I hope the SEC take a big dido and shove in their you know what!
If history is any guide, I wouldn’t mind betting the SEC / FBI /DoJ have more screen captures and documentation than they’ll ever need to bring these guys to justice.
Lol good one!
hmmm. getting confused the more…have to pay the 5 people i brought to telexfraud! damn!!!!!!!!!
Clearly the TF website is down again, but even if it were back up and people can access the BO, it’s irrelevant unless people can do two things:
1. Post ads
2. Manage their money (which at this point means mass withdrawals)
This is all TF affiliates care about. One theory is that TF management may have put the website back up to allow for VOIP retail sales so that they can show that this is what their main focus is. But this is not what the affiliates care about.
They just want passive ROI and, more importantly, at this point salvage whatever they can.
So unless people are getting money into their banks (which will not be happening) the opening of the TF website is nothing more than a symbolic gesture that is sure to appease many of the TelexZombies. Move along… Nothing to see here…
I can name at least two Facebook profiles with tons of screen captures and descriptions as: “yahoooo… TF is back… See here my posted and validated ads”. They include date and time of the access.
So, I’m quite sure that’s a violation of current TRO, isn’t it?
I have myself saved those posts, just in case anyone has any idea on how to warn authorities about what happened.
I don’t know if merely posting an ad is a violation of the current TRO, but I’m sure that moving funds in and out of TF is. What affiliates want to do now is to get whatever money they can out of TF and I don’t know how that will ever happen with the TRO in place as well as cutting off ties with E-Wallet. Plus there is the little problem of the Ponzie well drying out and the company not having any money.
From what I have read the authorities are on top of what’s going on and they will be seriously pissed if TF is moving money around. I guess if affiliates want to waste their time, they can post ads till they are blue in the face. I don’t think it’s even worth complaining about.
It’s just sad to see the blatant manipulation that’s taking place. There could be a thousand red flags, but one promoter shouts “TelexFree is back” and there is a frenzy among affiliates who are just looking for news that fits in with their belief system; regardless of how warped that belief system is.