E&Y audit of TelexFree reveals evidence of Ponzi scheme
Much importance has been placed on the Ernst & Young report on TelexFree that was due out this month.
Despite the SEC’s case against TelexFree, criminal proceedings currently taking place against its owners and Trustee Stephen Darr’s damning evaluation of the company earlier this month, many Brazilian investors believed the Ernst & Young audit would somehow absolve the company.
Those hopes appear to have been dashed, with preliminary reports of Ernst & Young reports confirming fraudulent activity has been found.After a series of delays, attributed to the complexity of auditing TelexFree’s business operations, Ernst & Young’s report was due on the 11th of February 2015.
Thus far Judge Borges, currently hearing the case, has only acknowledged receipt of the audit.
According to information obtained from the Acre Court, the magistrate of the 2nd Civil Court, Thais Borges, who is responsible for the Telexfree case, acknowledged receipt of the expertise, but stated that she will not provide any information or summary of the content.
“The magistrate will not provide any information to the press. It will not speculate, because in their understanding, speculation can harm the (judicial) process, since (the case) has not yet reached the final stage, that is the conclusion, ” she said through an assistant.
“Those who would like information about what is contained in the report can get it through TelexFree company representatives involved or even the MPE,” concluded the assistant.
Already it would appear those interested in the report have done just that, with several reports written about the contents of Ernst & Young’s audit.
At the forefront of the information released thus far, is the claim that ‘that there is evidence that the activities of Telexfree have characteristics of a “financial pyramid”‘.
The term “financial pyramid” is commonly used in Brazil to describe what are otherwise known as Ponzi and pyramid schemes.
For more information we turn to Acre Alert, a blog otherwise known for being quite pro-TelexFree, who have published what they claim are various excerpts from Erst & Young’s audit:
Sale and viability of the product or service
We observed evidence that even in a “financial pyramid” there can be the existence of a product or service, but with low utilization.
The results of our tests (in relation to TelexFree) indicate that in addition to low utilization of minutes (there were) limitations regarding the guaranteed functionality of the product.
Telexfree guarantees providing only 10% (ten percent) of quality service and does not allow the use of the minutes made available for commercial activities.
We also note that (i) the principal advisers did not use the minutes that they had at their disposal; and (ii) the use of minutes of Telexfree Network comprises 0.23% (twenty three percent) of the total available to its users.
Describing what is otherwise known as a “product-based pyramid scheme”, where a product is attached to a Ponzi or pyramid scheme solely to lend it some credibility (“how can we be a scam, we have a product?”), Ernst & Young state that only 0.23% of the minutes TelexFree’s investors accumulated were actually used.
This is typical of product-based pyramid and/or Ponzi schemes, where the attached product or service is purchased in large quantities as a side-effect of participating in the scam, but is ultimately insignificant (in this case, the VOIP minutes bundled with TelexFree investment were not used).
The definition of staggered gains permeates the fact that the members at higher levels within a financial pyramid, would show higher yields with respect to lower levels of members.
(In TelexFree), the Promoters may purchase more than one kit, and therefore have more than one access login.
To observe the existence of scaling, we selected certain participants and noted that they had several access logins and the sum of their incomes were higher compared to the other levels.
We emphasize that we were not able to examine the entire Telexfree Network to collect evidence of staggered gains, due to limitations in the quality of the database in relation to advisers and partner’s registration.
Did TelexFree investors who invested more receive a higher ROI than those who invested less?
As described in the Technical Note 116 of the Department of Consumer Protection and Defense, one of the clues to the identification of a “financial pyramid” would be free access to transfer of benefits between participants of the pyramid.
As shown in the aforementioned aspect, we observed the existence of elements that show that they have made transfers of balances between Promoters and Partner’s, totaling the equivalent of USD $4,555,256,256.86 (four billion, five hundred fifty-five million, two hundred and fifty-six thousand , two hundred fifty-six US dollars and eighty-six US cents), which correspond to 7,141,821 (seven million, one hundred forty-one thousand, eight hundred twenty-one) transfers.
Did TelexFree investors transfer funds among their respective investor accounts (including multiple accounts owned by the same investor to reduce withdrawal processor fees?
Of note is that four billion dollar figure. Darr recently pegged TelexFree at $1.8 billion, with this latest figure more than doubling that.
Promise to pay, sales efforts and attraction for the benefits
As described throughout the detailed reply in this regard, the high remuneration promise in a short time, with low sales effort is indicative of the existence of pyramid.
As a result of our procedures on this point we observed the existence of elements indicating promises of high returns and high financial returns in a short time.
In addition, we can see the attraction of Promoters and Partner’s by high yields, since they and their advisers networks, have low use of minutes and a high volume of ad posting, activity this that allowed access to the volume of benefits to the universe of publishers, without generating economic value for this activity, and, representing 67% (sixty-seven percent) of the total compensation of Telexfree.
We also note that we observed the existence of computer programs that perform the posting of notices automatically, a fact that was confirmed in the database, and that would be evidence of low effort (“work”) to achieve the goals for the benefit of gain.
This is probably the most damning finding in Ernst & Young’s audit. That being that TelexFree and its affiliates advertised low to no effort “high-renumeration” (ROIs) within a short period of time.
AdCentral ROIs are attributed to 67% of the total commissions paid out by TelexFree, with the rest likely being recruitment commissions (the pyramid scheme component of the opportunity).
Ernst & Young note that the publishing of AdCentral ads failed to provide “economic value” to TelexFree (ie. it was a waste of time), and that automation of the posting of such ads (widely promoted by TelexFree investors), meant that the activity was also “low effort”.
In short, Ernst & Young found TelexFree investors were compensated large sums of money for performing meaningless tasks for the company.
With the tasks performed themselves generating no significant revenue for the company, left unsaid is the fact that the funds paid out were sourced from affiliate investors themselves.
Proportion of income
According to the CFE Manual at least 70% (seventy percent) of the commissions of a “distributor” must come from direct sales.
In regards to TelexFree, we note that the relative proportion of direct and indirect compensation arising from publishing advertisements, is 67% (sixty-seven percent) of all remuneration generated by Network Telexfree.
Regarding the direct commissions, we observed that these represent 30% (thirty percent) and indirect fees 3% (three percent), both on the total remuneration of the Network.
Here Ernst & Young apply TelexFree’s business model to a CFE Manual (not sure what that is) rule, which states that 70% of commissions must come from direct sales.
Finding that 67% of commissions paid out to affiliate investors were AdCentral ROI payments, TelexFree quite obviously failed this criteria.
Direct commissions, which I believe are the affiliate recruitment commissions component of TelexFree’s compensation plan, constituted 30% of commissions paid out.
Due to the high earnings generated by Promoters, contracts of Telexfree products and services required a position of Reservation Cost (CRP), which deducts 20% of all remuneration of Promoters and Partner’s obtained during the the contract period, in order for the Promoter’s position in the network to be maintained.
Thus, we understand that the CRP constitutes a way of encouraging reinvestment and hence the maintenance of the promoter in Telexfree Network indefinitely.
This reinvestment design was aimed at propping up the pyramid scheme for longer.
Was the 20% fee TelexFree charged affiliates a meaningless excuse to claw invested funds back into the system to stall the inevitable Ponzi scheme collapse?
Economic and financial viability of the services and products offered by Telexfree
We observed that Telexfree had the following scenarios regarding the financial viability of the operation:
Based on the preparation of financial information Combined “Pro-forma” of Telexfree Network, we can observe the absence of liquidity.
We developed four product feasibility studies on hypothetical scenarios and as a result of reviews, we noted the lack of financial support from the Telexfree business model; and we developed a projection considering the result of Telexfree Network from its 17th operating month and evaluated the viability of operations considering its actual results to June 2013.
As a result, we also observed that there was a lack of sustainability of the operation.
This was a bit of a headache to understand, but I believe Ernst & Young sought to ascertain the feasibility of TelexFree’s advertised VOIP product, by comparing it to the actual revenue generated till June 2013 (the month TelexFree was shut down in Brazil).
After running four product feasibility studies using separate hypothetical scenarios, they were unable to come up with a suitable model that would demonstrate the sustainability of TelexFree relying on its service product alone.
We observed that the services and products offered by Telexfree are paid in advance by Promoters and Partners.
However, this element itself is a feature that aggregate to the others and becomes clear when we supported the feasibility study.
Thus, as noted elements that show a lack of financial support Telexfree Network, there is evidence that the advance payment would have been used for short-term debt settlement with members of higher levels of the network.
What we’re talking about here is, in it’s most simple break down, the use of new affiliate funds to pay off existing investors.
Ernst & Young reason that TelexFree’s affiliates clearly weren’t using the service, so by making them pay for a year upfront (AdCentral’s were sold on 52 week contracts), TelexFree was quite obviously using new funds to pay off those they already owed.
It’s important to note that Ernst & Young weren’t charged with determining whether or not TelexFree was a Ponzi and/or pyramid scheme. They were handed a set of questions by the Acre Court which, through a thorough audit of TelexFree’s operations in Brazil, they have answered.
The court itself (Judge Borges) will now take that report and draw a conclusion.
That said, the writing is pretty much on the wall at this point. Any shred of hope Carlos Costa had of walking free from this Ponzi mess is dashed.
Or so one would think. Paid to do what they do, TelexFree’s lawyers were quick to denounce the Ersnt & Young report as “inconclusive”.
“It is one thing is to say that there are elements that indicate a pyramid (scheme), but another thing to say that it is a pyramid (scheme).
The report is inconclusive, so Telexfree is not a financial pyramid, “says Wilson Furtado.
I don’t know what crack TelexFree’s Brazilian legal team are smoking, but from what little we’ve seen of the 200 page Ernst & Young report – it sounds pretty darn conclusive to me.
Looking forward, both the Acre Public Prosecutor’s Office and TelexFree’s legal team now have 30 days to discuss the finer points of the audit in court.
After that, it’s game over.
CFE stands for ‘certified fraud examiner’, an exhaustive manual, which is used by anti fraud professionals to detect, examine and prosecute fraud, internationally.
an example of what the CFE provides is:
this CFE manual is published every year, to keep it on trot with the ‘present’. currently the 2014 version is available.
So the resolution will be whether or not Carlos Costa goes to jail or also if scammed investors will get a refund of their investment?
Is there any money left frozen somewhere for a refund or not?
Hey buddy see in this notice site tha anyone know about the pericial results…lol.
If you get back 50% you’d be very lucky. Most have been given out to the top tier. Though since it’s frozen early in Brazil… odds are better for a good chunk of refund.
The courts aren’t discussing the report but it is available via other means.
The courts ain’t saying anything, but the reports already leaked. Who knows if it’s accurate or not.
Good thing we don’t have Costas holding some paper proclaiming he’s completely innocent and he’s suing the government for damages. Wait, did I just gave him ideas?
Acre PP’s case is all about Ympactus. Regardless of what is decided there, there’s another case in Espirito Santo state regarding both Ympactus and Telexfree (USA). Both cases have frozen funds belonging to scammers and related companies.
Besides all that, there’s also federal cases in Brazil about Ympactus/Telexfree tax evasion.
So, answering your question: I don’t think people will see any money unless justice get it back from all scammers and not only the owners of the scam.
The court assistant (clerk) did tell one media organization they can get a copy from TelexFree or request one from MPE (investigators).
I’m guess the excerpts that appeared on a pro-TelexFree blog were sourced from TelexFree-side.
i don’t think it is ‘leaked’. once a document is filed with the judiciary, it is for public consumption, unless the court specifies otherwise. and this E&Y report, should especially be publicized, for the telexfree members in brazil, so that their confusion about telexfree is clarified.
this is similar to judge hoffman asking the trustee darr, to put up his telexfree report, on the claims site, for easy public access.
the report must be accurate, because it practically buries telexfree. an inaccurate report, would have created doubt, in favor of telexfree.
Here we go again…another Costa video proclaiming his innocence.
It was announced in their Facebook page that in response to the E&Y audit report, Carlos Costa will be posting a video on the 23rd of February.
He will probably be waving all 200 pages saying how inconclusive it was and how they couldn’t prove anything, bla, bla, bla…
….while sweating all over the video!
stock up on the deodorants, people, before the 23rd! 🙂
Easier to claim how E&Y doesn’t understand MLM, new economy, then blame the public on why didn’t they elect him, he could have changed things, blah blah blah. 😀
here’s something which may impede, carlos wanzelers extended beach bum life in brazil:
Carlos Wanzeler is a Brazilian citizen (dual citizenship). Brazil can’t be expected to extradit him as easily as the Jack Utsick guy.
Hey Oz, here’s Carlos Costa’s latest video.
He never explains why he was missing for about 5 months (and it also seems the “election fiasco” never happened).
He says EY is completely wrong in what they’ve found because he – the onwer – knows the numbers by heart and he could see how the “lack of MLM understanding” has affected EY’s audit.
He tries to prove how EY’s figures are incorrect, how they don’t know how to add A to B, because they do not have the needed knowledge, because everyone is stupid but telexfree-ers… meh meh meh.
He then says his lawyers will prove EY’s audit report is worth nothing, that they should have written “it’s a pyramid scheme” or not, but instead they come up with with a weak, fragile, inconclusive report.
Then enters the good old Carlos Costa and his “god” evocations along with “justice is against us”, “no one can prove us wrong”, “don’t stop believing”… blah blah blah.
How can anyone believe in a guy who was publicly caught lying in more than one occasion?
According to an Acrean news portal, tomorrow (Feb-26) Acre’s PP will held a press conference to talk about next steps after the audit has been concluded.
However, Acre’s PP already warned the press they will not answer any question that may violate the “classified” status of the case’s data. Only pre-registered reporters may join the conference.
Source (in Portuguese): ac24horas.com/2015/02/25/mpe-apresentara-entendimento-e-medidas-sobre-a-legalidade-da-telexfree/
Isn’t Judge Borges waiting for additional information to be filed by the PP’s Ofice and TF, then she makes a decision.
We already know TF’s input is going to be full of garbage as per Costa’s nonsense video, guess it’s up to the PP’s to point that out.
Otherwise time for Borges to make a decision methinks. Doesn’t seem to be any point holding a press conference on the matter.
From that source.
TelexFree exceeded ZeekRewards in number of people affected in Brazil alone, according to that source. But it doesn’t specify whether it’s about promoters only or about the total number of people (promoters plus VOIP users).
She sure is. Nevertheless, that press conference seems to be an effort from Acre’s PP to clarify some items to the population, since A LOT of Telexfree victims (per say) lives in Acre.
Judge Borges will not make an appearance or comment on anything, as she has already stated.
Oh, and you might like this: since Carlos Costa has publicly shown parts of a classified document that NO ONE is allowed to disclose, you may expect him to face appropriate penalties soon.
As you say: “stay tuned”. 😉
Told you! 😀
LOL… True that!
Just to update you guys: Acre’s PP press conference has been canceled. There’s been new developments regarding Carlos Costa x EY audit that cannot be disclosed right now, but they’ll make Costa’s life not that easy.
I guess that’s what you get for going public and calling everyone stupid…
In another news: Sann Rodrigues is now considered a fugitive from Brazilian justice. After that GAEP/Paulinia episode, an order preventing Sann from leaving Brazil was issued.
Nevertheless, Sann left Brazil and fleed for the US (not clear whether he did it through other country or directly from Brazil, illegaly). More details should hit Brazilian media soon.