Merrill and Wanzeler indicted for fraud and conspiracy

Filed on the 23rd of July, a grand jury has indicted James Merrill and Carlos Wanzeler on eight counts of wire fraud and one count of conspiracy to commit wire fraud.

Reading like a BehindMLM review, the grand jury described TelexFree as a pyramid/Ponzi hybrid:

Pyramid schemes typically feature a marketing or sales program in which, among other things, participants pay into the program for the opportunity to be compensated for recruiting other people as well.

Pyramid schemes typically involve a seemingly legitimate business that may in fact sell a legitimate product, but they derive the bulk of their revenue, not from bona fide sales of that product, but from new participants buying into the program.

These schemes typically promosie substantial returns for doing little beyond paying into the organization and convincing others to do the same.

The sales programs underlying pyramid schemes are often layered with jargon, procdural complexities, a formalized heierachy of participation, and other trappings, all of which create the appearance of a legitimate company pursuing a legal marketing program.

But, as in “Ponzi”-type schemes, the otganizers simply take in money from newly-invested participants and use those funds to pay the returns promised to earlier participants.

These schemes are ultimately unsustainable because the returns promised to an ever-growing pool of participants must be paid using funds deposited by a necessarily finite pool of new participants.

At some point the scheme must become too big, that is, it must eventually lack enough incoming funds to cover its financial commitments and, because underlying product sales cannot sustain the company, the scheme collapses.

(Ozedit: This is typically where I’d add a “kaboom!”)

As for how Merrill and Wanzeler (right), the owners of TelexFree, fit into the above, the grand jury nailed them for having

devised, and intended to devise, a scheme to defraud, the purpose of which was to obtain money and property by means of materially false and fraudulent pretenses, representations, promises and omissions by, among other things, recruiting, and inducing existing promoters to recruit, an every expanding group of new promoters for TelexFree, all of whom paid significant sums to join the company, which sums the defendants used to pay promised returns to existing promoters and to enrich themselves.

Not withstanding the true nature and status of TelexFree’s business operations, Merrill and Wanzeler misled TelexFree promoters about the viability of the company; and encouraged new promoters to recruit others.

Moreoever, in public representations to current and potential promoters, Merrill and Wanzeler omitted, and caused others to omit, material information about the condition of the company and investigations of the company by carious civil regulatory authorities in the United States and Brazil.

Perhaps the most notorious example of this occurring was the response disgraced Ponzi lawyer Gerry Nehra gave when asked about the regulatory shutdown of TelexFree in Brazil.

Speaking at an official TelexFree corporate event, when asked about the Brazilian shutdown, Nehra replied

I am the MLM specialist and attorney for TelexFree in the United States only. So I gotta duck the question.

TelexFree used the same Ponzi business model globally, so Nehra’s response at the time made little sense. During the same presentation, he would later go on to give TelexFree his “legal blessing”.

Merrill and Wanzeler similarly deceived regulatory authorities about various aspects of TelexFree’s business operations, including the fact that, at its core, TelexFree operated as a pyramid scheme.

Other examples cited by the grand jury include

• the advertising of the TelexFree Ponzi scheme on the TelexFree website
• a presentation by James Merrill used to market the scheme, that told viewers they could ‘make money without being required to sell anything‘
• the use of YouTube videos (Carlos Costa) ‘to communicate with TelexFree’s thousands of promoters’
• the electronic distribution of recordings of TelexFree corporate events
• ensuring US affiliates that “there was nothing to worry about” in the wake of the Brazilian regulatory shutdown, despite “TelexFree’s compensation system in Brazil” being “nearly identical to the US system” and sharing “the same website”
• ensuring US affiliates that “there was nothing to worry about”, despite the Massachusetts Securities Division opening up a pyramid scheme investigation on the company in April of 2013
• providing the Massachusetts Securities Division with “false and misleading information about the company”
• having a TelexFree executive, “in response to rumors reported on Internet blog about investigations of TelexFree”, declare that “there was no pending investigations of TelexFree in any way, shape or form” (Steve Labriola)

Getting back to the grand jury indictment, TelexFree’s Ponzi compensation plan in particular is called out and held against Merrill and Wanzeler:

All new promoters were required to first pay a $50 membership fee to TelexFree.

After paying the fee, TelexFree set up a new “back office” page for that user on the TelexFree website.

The user then had the option of buying an “AdCentral” package, for $289, or an “AdCentral Family” package, for $1375.

With both packages, TelexFree purported to give the promoter a “stock” of VOIP packages to sell. No actual product was conveyed to the promoter.

The promoter could then copy small “classified”-type advertisements from the TelexFree website and post them on one of several classified ad sites.

As Merrill and Wanzeler knew, most of these sites hosted page after page of dozens of nearly identical TelexFree advertisements, as numerous promoters copy and pasted their ads to the same sites.

If a promoter posted ads for seven consecutive days, TelexFree would “buy back” the unsold VOIP stock from the promoter for $20 (under the AdCentral plan) or $100 (under the AdCentral Family plan), and would do so every week for the length of the year-long agreement.

As Merrill and Wanzeler knew, and as they advertised on the TelexFree website, this system provided every TelexFree promoter a return of over 200% on his or her initial investment without being required to sell a singe unit of TelexFree’s VOIP product.

As Merrill and Wanzeler also knew, many promoters bought multiple positions with TelexFree, that is, they signed up multiple times as a promoter in order to multiple their weekly and annual returns without having to sell any TelexFree product.

To qualify for various additional recruitment-related income streams that TelexFree made available, TelexFree purported to require each promoter to make one retail sale of the VOIP product.

But as Merrill and Wanzeler knew, numerous promoters met this requirement by simply buying the VOIP product themselves, using a different user name, and paying the $49.90 monthly cost of the service with “credits” the promoter had accumulated in TelexFree’s virtual “back office” system.

Many of these promoters did not use the TelexFree product. Moreover, under TelexFree’s compensation system, promoters received a 90% commission on the first month of usage by a VOIP customer they recruited.

That is, after buying the VOIP product themselves with virtual credits, promoters were then reimbursed for 90% of the up-front cost.

Moreover, there was no obligation to pay for subsequent months.

Promoters were paid to recruit other people, and further compensated when those people recruited additional people, and so on, without any one level of participants being required to make genuine retail sales of TelexFree’s VOIP product.

For example, promoters were rewarded for direct recruitment of new promoters.

For each direct recruit who bought into TelexFree at the AdCentral level (a total of $339), the recruiting promoter received a $20 “fast start” bonus.

For each direct recruit who bought into TelexFree at the AdCentral Family level (A total of $1,425), the recruiting promoter received $100.

As above, and as Merrill and Wanzeler knew, excluding the purported “retail” sale of one VOIP product, promoters received these bonuses without any genuine retail product sales.

Also used against the duo are the financials of TelexFree, which the grand jury reasoned blatantly illustrated the Ponzi scheme Wanzeler and Merrill were running.

Merrill was the signatory on most of TelexFree’s bank and payment processing accounts, and Merrill and Wanzeler together were the signatories on others.

As Merrill and Wanzeler knew, these accounts showed TelexFree bringing in only small amounts of money – about 1% – from people paying $49.90 a month to use its VOIP product, while the vast majority of the income cash to these account came from people paying in $339 or $1425 to sign up as promoters.

Moreover, as both men knew, during the course of the scheme several banks closed TelexFree’s accounts because of concerns about TelexFree’s activities.

And here’s where things get really murky, with revelations that Merrill and Wanzeler tampered with statistical data to perpetuate the myth that retail activity was taking place within TelexFree (remember those silly press-releases TelexFree put out about VOIP minutes being used?):

The back office system was generally managed by TelexFree employees in Brazil, but Merrill and Wanzeler had Internet-based access to the system and could request data from the Brazilian employees.

The back off system enabled Merrill and Wanzeler to manipulate how TelexFree’s revenue figures were presented, including by overstating TelexFree’s revenue from the sale of VOIP packages.

For example, as noted above, to qualify for certain bonuses promoters purportedly had to make at least one retail VOIP sale, and many promoters met that requirement by simply “buying” the VOIP product themselves with back office credits.

Every time a promoter “bought” a VOIP package in this manner, the purported sale was recorded in the back office system as a retail sale of TelexFree’s VOIP product, even though, in reality, no one had sold the product to a real customer.

The issue of actual retail sales is of significant importance, as there are many who would have you believe that retail sales in the MLM industry do not matter.

Here’s what happens when you run around telling porky pies about your actual retail revenue:

Merrill and Wanzeler repeatedly made public statements to TelexFree’s promoters at TelexFree’s corporate events, often called “extravaganzas”.

These events were staged in various locations around the world, involving hundres or thousand of promoters and presentations by Merril, Wanzeler, and other TelexFree personnel.

One such event, staged off the coast of Brazil in or about December 2013, was hosted on a cruise ship leased by TelexFree.

During the events, Merrill and Wanzeler promoted an exciting, upbeat image of the company and its prospects.

Merrill spoke of how excited he was about the company, his confidence in Wanzeler and other “leaders”, and how TelexFree was “fighting for” its promoters.

During a TelexFree event in or about March 2014, presenters, including Merrill and Wanzeler, touted the quality of TelexFree’sVOIP product and the opportunity to “market” it.

Merrill told the crowd, among other things, “You’re gonna get paid”, and, “We are here to help you make money”. Wanzeler announced that, in the preceding month, “Over 600,000 customers paid $49.90 to TelexFree99”.

During these events, neither Merrill nor Wanzeler indicated that TelexFree generated the bulk of its cash – the money it needed to pay commissions and bonuses – not from the sale of its VOIP product, but rather from the sale of TelexFree memberships to new promoters.

Moreover, and as Merrill and Wanzeler knew, TelexFree did not have 600,000 retail VOIP customers, but only a small fraction of that number.

You get called out on your lies. There’s no backtracking bullshit about end-users or whether or not the accounts were resold… either you have significant actual retail activity taking place within your MLM business or you don’t.

TelexFree didn’t and so here we are.

For their efforts to promote and operate the billion dollar TelexFree Ponzi scheme, Merrill and Wanzeler were indicted on nine counts of wire fraud and conspiracy to commit wire fraud.

The single count of conspiracy to commit wire fraud holds Merrill and Wanzeler responsible for

having knowing devised, and intending to devise, a scheme and artifice to defraud and to obtain money and property by means of materially false and fraudulent pretenses, representations and promises, transmitted and caused to be transmitted, by means of wire communications in interstate and foreign commerce, writings, signs, signals, pictures and sounds, for the purpose of executing the scheme and artifice to defraud.

The eight counts of wire fraud cover

• a transfer of $136,200 on December 26th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Middlesex Savings account held in the name of James Merrill
• a transfer of $500,000 on December 26th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Fidelity Co-operative account held in the name of Carlos Wanzeler
• a transfer of $136,200 on December 26th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Fidelity Co-operative account held in the name of Carlos Wanzeler
• a transfer of $158,900 on December 26th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Fidelity Co-operative account held in the name of Carlos Wanzeler
• a transfer of $22,700 on December 26th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Fidelity Co-operative account held in the name of Carlos Wanzeler
• a transfer of $3,000,000 on December 27th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Waddell & Reed Inc. account held in the name of James Merrill
• a transfer of $3,000,000 on December 27th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Fidelity Co-operative account held in the name of Carlos Wanzeler
• a transfer of $3,500,000 on December 27th 2013 from a Fidelity Co-operative account held in the name of TelexFree, to a Fidelity Co-operative account held in the name of Carlos Wanzler

The grand jury has also made a forfeiture allegation, upon conviction of Merrill and Wanzeler, that they forfeit “any property, real of personal, that constitutes, or is derived from, proceeds traceable to the commission of the offenses”.

This includes

• $6,152,341.44 payable to TelexFree by way of a cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $27,855.57 payable to TelexFree by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $16,970,714.14 payable to TelexFree by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $1,968,777.06 payable to TelexFree by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $10,398,000 payable to TelexFree Dominicana SRL (used by Wanzeler to launder money through the Dominican Republic), by way of cashier’s check issued by Wells Fargo Bank on April 3rd 2014
• $2,000,634.76 payable to Katia B Wanzeler by was of cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $50.03 payable to JC Real Estate Management Co by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $728.44 payable to JC Real Estate Management Co by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $74.91 payable to JC Real Estate Management Co by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
• $3,798,629.63 payable to Carlos Wanzeler by way of cashier’s check issued by Wells Fargo Bank on April 3rd 2014
• $34,615,900 seized from i-Payout/International Payout
• $4,561,874.25 seized from Pro Pay, Inc.
• $10,536,667.55 seized from Base Commerce LLC
• $98,419.02 seized from a Bank of New England account held in the name of TelexFree
• $421,115.17 seized from Commerce Bank accounts held in the name of Brazilian Help Inc.
• $129,087.84 seized from a Digital Credit Union account held in the name of Above & Beyond the Limit LLC
•  $10,643 seized from a Middlesex Savings Bank account held in the name of Cleaner Image Associates
• $104,988.64 seized from a Middlesex Savings Bank account held in the name of James and Kristin Merrill
• $2,487,204.68 seized from a PNC Bank account held in the name of TelexFree Financial
• $601,608.61 seized from a Wells Fargo Bank account held in the name of TelexFree Financial
• $71,450.82 seized from a Wells Fargo Bank account held in the name of TelexFree Financial
• all funds deposited into accounts with Infinex Financial Group, Massachusetts Financial Services and Waddell & Reed held in the name of TelexFree
• all funds deposited into accounts with Waddell & Reed held in the name of James and Kristin Merrill
• all funds deposited into accounts with Wells Fargo Advisors LLC held in the name of Katia H. Barbosa (aka Katia Wanzeler)
• approximately $1,159,847.52 payable to TelexFree by way of cashier’s checks that were turned over to the United States around May 9th 2014
• $16,343 seized from TelexFree related properties on April 15th and April 18th

All in all, a whopping $96.1 million of specified funds appear on the indictment, with the grand jury acknowledging that there are likely to still be other funds and assets subject to forfeiture.

Speaking of assets, in addition to the $96.1 million, a total of 30 real estate properties, six luxury cars and  two boats are subject to forfeiture.

It is believed these properties, cars and boats all belong to Carlos Wanzeler. US regulators have previously referred to a “real-estate empire” Wanzeler built from funds he withdrew from TelexFree.

Wanzeler also used significant funds to build a “real estate empire”, which he acquired through a multitude of money laundering corporations in his name. All in all, Wanzeler pumped $6.3 million into 34 properties during July 2012 and February 2014.

Wanzeler also spent stolen funds on two Ferrari F340 Spyders, a Porsche, three BMWs, a Toyota Highlander and three boats (including a 40ft yacht).

As for what happens next (Wikipedia),

An indictment, in the common law system, is a formal accusation that a person has committed a crime.

In jurisdictions that maintain the concept of felonies, the most serious criminal offence is a felony; jurisdictions that lack the concept of felonies often use that of an indictable offence—an offence that requires an indictment.

Historically, in most common law jurisdictions, an indictment was handed up by a grand jury, which returned a “true bill” if it found cause to make the charge, or “no bill” if it did not find cause.

Indictable offenses are normally tried by jury, unless the accused waives the right to a jury trial.

Although the Sixth Amendment mandates the right to a jury trial in any criminal prosecution, the vast majority of criminal cases in the United States are resolved by the plea-bargaining process.

I haven’t seen anything from Merrill indicating he’s waived the right to a jury trial (Wanzeler is still hiding out in Brazil), so one would assume a jury trial date being set is what happens next. When that might be though I have no idea (lawyers?).

The possibility of a plea-bargain is interesting, especially when one considers Merrill might be a little raw at having been ditched by his partner in crime and each indictment count carries a maximum 20 year jail penalty.

Once the whole “we’re innocent and TelexFree wasn’t a Ponzi scheme facade” is dropped, who knows what might come out in the wash. And with Wanzeler seemingly determined to live off whatever he’s laundered away, nothing he says through his various proxies is likely to be taken seriously.

That leaves the ball entirely in Merrill’s court. And if he’s truly the family man his wife and friends portray him to be, he’s likely going to want to minimize his jail time as much as possible.

Meanwhile in the immediate aftermath of his indictment, the Wall Street Journal reported prosecutors have issued a federal arrest warrant for Wanzeler.

Things could get very interesting indeed.

 

Footnote: Our thanks to Don @ ASDUpdates for providing a copy of the grand jury indictment against Merrill and Wanzeler.

 

Update 24th June 2014 – The Milford Daily News has just published a response from Wanzeler and Merrill’s lawyers:

Merrill’s lawyer, Robert M. Goldstein, said, “Mr. Merrill steadfastly maintains his innocence and, in the strongest terms possible, disputes the government’s allegations.”

Wanzeler’s lawyer, Paul Kelly, said in a statement, “There is nothing new in this indictment that we were not already aware of or prepared to defend. These are allegations only, and when the actual evidence is produced, it will demonstrate that the government’s theories are unsupported and that Mr. Merrill and Mr. Wanzeler are not guilty.’’

“Our clients are genuinely concerned for their customers and business partners, and look forward to working with them to once again offer the company’s valuable telecommunications products to the public,” Kelly added.

Whether or not Paul Kelly is aware of the US Trustee recently declaring he ‘has no intention of reorganizing or reactivating‘ TelexFree is unclear.

I’m going with “no”.

 

Update 24th June 2014 #2 – The US Department of Justice has put out a press-release formally announcing the indictments, in which they provide some insight into the agencies involved:

United States Attorney Carmen M. Ortiz, Bruce M. Foucart, Special Agent in Charge of Homeland Security Investigations in Boston and Vincent B. Lisi, Special Agent in Charge of the Federal Bureau of Investigation, Boston Field Division, made the announcement today.

The case is being prosecuted by Assistant U.S. Attorneys Cory Flashner and Andrew Lelling of Ortiz’s Worcester Branch Office and Economic Crimes Unit, respectively.

The United States Attorney’s Office received valuable assistance from the Securities & Exchange Commission in the course of investigating this case.

No mention of cooperation with or assistance from Brazilian regulators…

 

Update 10th September 2016 – On September 8th a superseding indictment was filed against Wanzeler and Merrill.

The superseding indictment adds an additional eight counts of money laundering and a forfeiture allegation.