telexfree-logoJust like their “European office” in London, TelexFree’s presence in Nevada constitutes nothing more than a smoke and mirrors cover for the scheme.

Identified by the SEC as being nothing more than a “rent-a-space office in Las Vegas”, TelexFree ‘transacts virtually no business in the state, other than the recruitment of participants in the scheme‘.

And it is now on this primary fact that the SEC are asking the bankruptcy court of Nevada to move TelexFree’s Chapter 11 application to Massachusetts.

In support of their application, the SEC point out the obvious: TelexFree filed their bankruptcy petition in Nevada, simply to “avoid the Massachusetts courts”.

(TelexFree) hastily filed their petitions in the District of Nevada on a Sunday night in a rather transparent effort to avoid the Massachusetts courts.

They were aware of the investigation by the Massachusetts Securities Division… and became aware of the Commission’s interest at the latest (TelexFree) filed their respective petitions.

The interests of justice requires that (TelexFree’s) blatant forum shopping (so as to avoid Massachusetts) not be rewarded.

Specifically, the SEC nominate six points of support for their motion. Those being:

  1. proximity of creditors of every kind to the court (“A small fraction” of TelexFree affiliates (creditors) live in Nevada.)
  2. proximity of the debtor (TelexFree “transact no business in Nevada”, other than the recruitment of affiliate-investors. TelexFree owners James Merrill and Carlos Wanzeler also live in Massachusetts, and together are referred to as the “nerve-center” of TelexFree.)
  3. proximity of witnesses necessary to the administration of the estate (All employees of TelexFree are located in Massachusetts.)
  4. location of the assets (TelexFree’s physical assets are “virtually” all located in Massachusetts. The only physical connection to Nevada is the aforementioned rent-a-office.)
  5. economic administration of the estate (see below)
  6. necessity for ancillary administration if liquidation should result (The SEC believe “liquidation (of TelexFree) will become necessary (they hint at the prospect of a Receivership being set up), which would be far more efficient if carried out within Massachusetts as opposed to Nevada.)

Point 5. was a bit of a lengthy explanation so I’ve included the main arguments supporting it below:

  • The bankruptcy application in Nevada extends only to TelexFree, whereas the Massachusetts complaints are far broader in scope. As such it would be much easier for the Massachusetts District court to coordinate with the Massachusetts bankruptcy court as that’s where the complaints have been filed.
  • As per Chapter 11 bankruptcy laws, should of the individuals named in the SEC complaint become “subjects of fraudulent transfer actions” by TelexFree, the Nevada bankruptcy court will “have to coordinate with the Nevada District Court for entry of any final orders. This would obviously be a much more efficient dialogue between the Massachusetts bankruptcy court and District Court (who would already be familiar with the case).
  • There is a question of undue burden for the Massachusetts Securities Division (who filed their own enforcement action against TelexFree),  to cover proceedings in a jurisdiction “2500 miles away” from the state.

In summary,

Massachusetts has a definitive in having the controversy decided within its borders, whereas Nevada’s interest is merely that manufactured by (TelexFree).

These cases can proceed more economically and more conveniently in Massachusetts, saving enormous travel costs and avoiding the potential for conflicting orders from from federal courts in different Districts.

To that end the SEC have filed a Venue Motion to the Nevada bankruptcy court on the 23rd of April. Accompanying the motion is an additional request that a decision on the motion be expedited, owing to the SEC’s belief that

since proceedings in the bankruptcy cases should be taking place in Massachusetts, no further proceedings should be going forwarded in the cases here (Nevada).

The next hearing in the TelexFree bankruptcy is currently scheduled for May 2nd, with the SEC noting that

to the extent proceedings continue in Nevada until a regular-notice hearing on the Venue Motion, and should the Venue Motion be granted, there may also be a risk of rulings being entered in the interim that conflict with the law of the First Circuit, or that would vary from the preferences of the Massachusetts bankruptcy judge, whose positions and views would be informed by local concerns.

I think it was TelexFree who stated in their initial application that the average turn-around on a motion was about three weeks, so with the May 2nd Nevada bankruptcy hearing only 8 days away – why the SEC are asking for an expedited order is understandable.

Personally I can’t see why the SEC’s motion won’t be granted, as I’m really not seeing any valid argument as to why it should be heard in Nevada in the first place. Discount trying to circumvent regulatory action in Massachusetts (which is not a valid argument), and TelexFree doesn’t have a leg to stand on.