telexfree-logoFurther seeking to watertight their criminal case against James Merrill and Carlos Wanzeler, the Department of Justice (DOJ) has asked the Massachusetts District Court to order a stay on discovery in the SEC’s civil trial.

The primary reason behind the request is the belief that Merrill and Wanzeler will use the discovery process in the civil trial to undermine due process and legal procedures in the DOJ’s criminal case.

Without a stay, Merrill and perhaps Wanzeler – charged in both actions – would use the civil discovery process in a manner that impairs proper administration of the criminal case.

This is not a theoretical concern: for example, depositions and interrogatories targeting the key percipient witnesses in both matters would nullify the Jencks Act and most other criminal rules; broadly disclose the essentials of the government’s trial case at an early stage, thus allowing the defense to tailor factual and legal defenses to fit the anticipated proof; and needlessly harass and intimidate the witnesses themselves, who are civilians (not law enforcement personnel).

The DOJ puts forth that their case should take precedence over the SEC’s, because

realistically, the criminal case will be resolved before (the SEC civil case, and) that resolution will dramatically impact the result (of the civil case).

The criminal case against TelexFree will operate under a specific set of discovery and procedural rules honed over decades and centuries to balance state and personal interests.

But that balance is upended, and thus the public’s and potential victims’ rights impacted, if the defendant is able to use civil discovery to evade the criminal rules.

For example, a conviction in the criminal case could have an estoppel effect as to the civil liability of Merrill and Wanzeler (TelexFree itself has already effectively conceded liability in its answer to the complaint).

For those unfamiliar with the phrase “estoppel effect” (I know I certainly wasn’t), the Wikipedia entry on it states

In law, estoppel is a set of doctrines in which a court prevents a litigant from taking an action the litigant normally would have the right to take, in order to prevent an inequitable result.

Estoppel occurs when a party “reasonably relies on the promise of another party, and because of the reliance is injured or damaged”.

For example, estoppel precludes “a person from denying, or asserting anything to the contrary of, that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative officers, or by his own deed, acts, or representations, either express or implied”.

Basically, the DOJ are stating that if Wanzeler and Merrill go down in the criminal case – that most of the defense arguments likely to be presented in the civil case will be rendered moot.

The DOJ have approached most of the parties in the SEC civil case, with seven of the nine defendants assenting to a stay of discovery.

Faith Sloan is holding out on the off-chance her Motion to Dismiss is granted, and Merrill is still ‘considering the government’s proposal‘.

In summary, the DOJ argue that

without intervention, the government cannot protect its interest in the criminal prosecution.

Bundled in the DOJ’s latest filing are also some juicy clarifications regarding the respective DOJ and SEC investigations into TelexFree:

In or about June 2013, the government, having received a lead from the U.S. Department of Homeland Security, began investigating TelexFree, James Merrill and Carlos Wanzeler on the suspicion that TelexFree was a pyramid scheme.

Meanwhile, about six months later, in January 2014 the SEC opened its own investigation of TelexFree, also on the suspicion that TelexFree was a pyramid scheme and that it was selling unregistered securities to its promoters while making affirmative misrepresentations and material omissions about TelexFree’s business.

The government’s investigation proceeded – it thought covertly – until Monday, April 14, 2014.

On that day, in a surprise move, TelexFree filed for bankruptcy protection in the District of Nevada. That same day, TelexFree’s then-counsel called the U.S. Attorney’s Office.

On April 15, 2014, fearing destruction of evidence, the government executed search warrants at TelexFree’s headquarters in Marlborough, Massachusetts, and at two businesses housing TelexFree’s corporate servers.

As to the SEC, it filed a complaint and motion for a temporary restraining order to freeze assets belonging to TelexFree, Merrill and Wanzeler and other principals, and several of TelexFree’s most successful promoters.

Later that day, Wanzeler fled to Canada and from there to Brazil.

Wanzeler is currently a fugitive living in Brazil. He has not appeared in the criminal matter.

The DOJ maintain that both Merril and Wanzeler ‘were wholly ignorant of the government’s and the SEC’s activities until April 2014‘, which I suppose explains Steve Labriola’s public insistence that there were absolutely no regulatory investigations open into TelexFree at the time.

A take-away lesson for Labriola (and other Greg Caldwell’s of the industry)? Don’t issue public statements regarding regulatory investigations with information you’ve sourced from your ass.

Meanwhile to give you an idea of just how long it takes to litigate a billion dollar MLM Ponzi scheme, the DOJ reveal that suggested trial date has been penciled in for March 2016 – some eighteen months away.

And remember that, if run concurrently, the DOJ assert that it is their criminal case that is likely to conclude first.

God knows how many years more it will take to clean up TelexFree’s trail of wanton financial fraud and destruction on the civil side.

But it’s not all doom and gloom though, with the DOJ also revealing that

TelexFree had approximately 785,000 investors worldwide. Even at this early stage, thousands of alleged victims have submitted information and requests for restitution to the government and state authorities.

The government has seized about $140,000,000 from TelexFree accounts and additional millions, as well as physical assets, from Merrill and Wanzeler.

If the government proves that Merrill and Wanzeler committed fraud, these assets will compensate thousands of victims worldwide.

The seizure of more funds post discovery is pretty much a given, ditto the delicious clawbacks that will likely take place sometime over the next few years. And for some Ponzi pundits, the effects of clawback litigation will be two-fold, with some of them already feeling the sting of the Zeek Rewards Receivership’s recovery efforts.

Two years ago we thought Zeek Rewards was the mother of all MLM Ponzi scheme litigation. And then TelexFree came along.

I wonder if whichever company is next will be able to top it…


Footnote: Our thanks to Don @ ASDUpdate for providing a copy of the DOJ’s “Motion For Leave To Intervene And For A Stay Of Discovery Pending Resolution Of Parallel Criminal Proceedings, And Memorandum In Support”.


Update 19th September 2014 – Merrill has filed his response, in which he states he ‘does not oppose the government’s motion to stay discovery (or its request to intervene)‘.

The SEC have also filed a response, stating that they too do ‘not oppose the motion to stay discovery‘.

And despite her Motion to Dismiss having yet to be ruled on, Faith Sloan has filed a response objecting to the DOJ’s request.

Sloan requests the DOJ’s request for a stay on discovery be denied because she is “unable to financially support herself“.