telexfree-logoOne of the bolder moves we’ve seen in the ongoing DOJ litigation against TelexFree and its owners, are motions by James Merrill seeking to suppress seized evidence against the company.

Not bits and pieces or a tidbit here and there… but all of it – the whole kit and caboodle.

Supporting his motions, Merrill argued that

the search warrants behind the seizure of evidence, supported by an affidavit by Special Agent John S. Soares, contained false statements and/or reckless misstatements of fact, as well as material omissions of facts, all of which ultimately render the search warrants invalid.

The DOJ’s opposition to Merrill’s motion was inevitable, with a response in opposition filed yesterday on July 1st.

As per the DOJ’s filing, Merrill’s

motions basically argue

(a) that the affidavit supporting the warrants for TelexFree’s offices and two related locations (Xand Corporation and Exigo, Inc.) contained reckless misstatements and did not establish probable cause; and

(b) that the warrants executed at TelexFree’s offices, the two other locations, and later for Merrill’s email account were defective in scope and execution.

There is no basis for granting these motions.

The search of TelexFree’s headquarters

In dismissing Merrill’s challenge to the search of TelexFree’s headquarters, the DOJ rely on the role of the court-appointed TelexFree Trustee.

Concerning Merrill’s motions challenging the search of TelexFree’s headquarters … they are at this point genuinely moot.

TelexFree chose to file for bankruptcy and its affairs are now controlled by a court-appointed trustee.

By law, the Trustee stands in the shoes of TelexFree management, is the legal custodian of its books and records, and has legal authority to consent to the government’s use of them.

The Trustee has given that consent, and so the government would have access to TelexFree’s books and data regardless of the result of these three motions.

TelexFree filed for bankruptcy prior to the raid on its offices. That bankruptcy saw the appointment of the Trustee, who has consented to providing the DOJ will full access to the seized evidence in question.

Seems pretty straight-forward to me.

The search of TelexFree’s offices was “unconstitutionally broad”

If Merrill’s motions are to be taken at face value, authorities raided TelexFree’s offices and “unconstitutionally” made off with everything.

This is incorrect.

The warrant provided a detailed description of items related to TelexFree’s pyramid scheme, including TelexFree’s revenue and the compensation of its participants.

TelexFree, at its core, was a fraud: its central mechanism – the underlying compensation system – was a pyramid scheme.

Consequently, fraud pervaded the operations of the company, justifying seizure of a wide range of documents and records.

Given what was at stake, you can hardly expect the government to be picky and choosy with what was seized. Especially considering they weren’t privy to the contents of TelexFree’s offices to begin with.

The search of independent businesses

Some of the evidence obtained against Merrill was seized from ‘independent businesses storing TelexFree data‘.

Merrill doesn’t have standing to contest … searches at separate, independent businesses storing TelexFree data (Xand and Exigo).

TelexFree chose to expose its books to Chapter 11 reorganization and, in any
event, Merrill had no personal privacy interest in TelexFree’s business headquarters or the other two locations.

Merrill also argued that

the parameters and execution of the warrants for Xand and Exigo were defective , and that the magistrate judge did not have the authority to issue a warrant for Exigo’s premises in Texas.

This is incorrect.

TelexFree was fundamentally fraudulent – its problems were not confined to one corner of its operations – and the entire data set driving its business was housed at Xand Corporation (which the company was in the midst of migrating to Exigo).

Finally, the magistrate judge had clear statutory authority to issue the warrant for Exigo, a remote computing service under 18 U.S.C. § 2703.

For reference, 18 U.S.C. § 2703 pertains to the “required disclosure of customer communications or records”.

The search of Merrill’s Comcast email account

In his motions, Merrill objected to authorities accessing his personal Comcast email account.

In seizing communications contained in the account, Merrill argued authorities had accessed ‘information of the most personal and sensitive nature‘.

Merrill also argued the search warrant used to access the account ‘was unconstitutionally overbroad and lacking in particularity.

This is also incorrect.

In keeping with both the federal rule and cases on this subject, the warrant allowed the government to seize all data in the email account.

The government’s search of that data was then sufficiently limited by search parameters in the warrant, including restrictions as to date range and substance.

The Comcast production spanned October 12, 2012 – October 5, 2014, while the warrant authorized review of email spanning October 1, 2012, to “present.”

Before the Comcast email was released to HSI, it was first routed through a taint review to remove any attorney/client communications with attorneys representing Merrill in his individual capacity.

Merrill’s request for a “Franks hearing”

Just to recap, a Franks hearing is

a court proceeding wherein the court is asked to determine if the police officer lied in obtaining a search warrant.

Merrill contends a Franks hearing is required to ascertain whether or not Agent Soares was “reckless” in his obtaining of search warrants.

The DOJ contend Merrill

cannot come close to the “substantial preliminary showing” required to justify such a hearing, because there is nothing remotely reckless in Agent Soares’s affidavit.

Merrill essentially criticizes the government for “ignoring” revenue data from TelexFree’s “back office,” a Web-based software system that kept track of transactions by TelexFree’s participants.

As an initial matter, this is demonstrably false: the government discussed the “back office” data several times, including all of the revenue TelexFree said was reflected in it.

The government explicitly said that, in theory, the back office could be a source of revenue and later explicitly presented the total revenue TelexFree itself claimed was reflected in the “back office data,” (presenting revenue “paid through System” (that is, the “back office”), facts Merrill does not mention.

Moreover, it is important to keep in mind that when the government executed its search warrant at TelexFree, it could not make more detailed use of the “back office” data to support the warrant because the government did not have the data and had no way to get it.

The whole point of the search warrants was to get the data in the first place.

There is nothing reckless about any of this.

“Reckless” would have been omitting any mention the “back office” data when the government knew it existed.

Instead, the government included what it knew at that point, what it could surmise, and the steps in its reasoning.

Lastly, to support a Franks hearing Merrill also disputes several specific conclusions the government drew about the details of TelexFree’s compensation system.

Merrill debates these points and then claims that his conclusions are sound while the government’s were reckless. But these kinds of disputes do not support a finding of recklessness by the agent or disregard for the truth.

Merrill does not, for example, claim that the government’s factual assertions about TelexFree’s operations were false, but only that the government’s interpretation of them was incorrect.

Merrill is free to make those arguments at trial.

Meanwhile, the affidavit the government submitted

(a) accurately summarized TelexFree’s compensation system as the government understood it at that time and

(b) was transparent in its reasoning based on that summary.

That is what matters.

Owing to the substantial nature of Merrill’s suppression motion and the DOJ’s reply, a decision on the matter might take a while. That said, hopefully we’ll hear something by the end of the month.

Stay tuned…


Update 8th July 2016 – A hearing on James Merrill’s suppression motion was held on July 7th, with Judge Hillman taking the the matter under advisement.

Another hearing on the suppression motion has been scheduled for August 23rd, 2016. Hopefully we’ll know more then.