SEC file “illegal pyramid scheme” case against TelexFree
Hot on the heels of the Massachusetts Securities Division alleging TelexFree to be a $1 billion dollar Ponzi scheme, now comes a new complaint from the SEC.
Filed on the 15th of April in a Massachusetts District Court, the SEC have named eight defendants in the case, and have grouped them into three distinct categories:
- The company – TelexFree
- Four principals (owners and employees) – James Merril, Carlos Wanzeler, Steve Labriola and Joseph Craft
- Four primary promoters – Faith Sloan, Randy Crosby, Santiago de la Rosa and Sann Rodrigues
Noticeably absent from the list is Carlos Costa, the third owner (principal) of TelexFree.
Much of the complaint echoes the earlier Securities Division complaint, however the SEC are a little more specific on numbers:
Since at least November 2012, TelexFree and its principals, Merrill, Wanzeler, Labriola and Craft, acting through promoters such as Rodrigues de V ancelos, De La Rosa, Crosby and Sloan, have raised more than $300 million, largely from the Brazilian and Dominican immigrant communities in Massachusetts and twenty other states, through a fraudulent and unregistered offering of securities.
The problem the SEC have with TelexFree is of course again the AdCentral investment scheme:
The securities take the form of “memberships” that promise substantial returns – 200% per year or more – for becoming promoters of the business.
TelexFree promises to pay promoters for:
(a) placing duplicative TelexFree ads on internet sites -a process which, by itself, generates no revenue; and
(b) recruiting other investors who pay the membership fees that constitute the lion’s share of monies taken in by TelexFree.
As has been reported here on BehindMLM for nearly two years, the VOIP component of TelexFree is and always has been just smoke and mirrors.
What’s more, the SEC reveal that the money TelexFree took in from VOIP sales (purchased by affiliates), constitutes just 1.3% of the AdCentral ROI liability the company has amassed:
Despite the misleading appearance of having a legitimate VoiP business, the defendants are actually operating an elaborate pyramid scheme. Documents available to date indicate that its VoiP sales revenues – approximately $1.3 million – have generated barely 1% of the nearly $1.1 billion needed to honor its promises to promoters for placing internet ads.
Note that the Securities Division figures were slightly different, with the SEC’s $1.1 billion figure pretty much on par with my $1.14 billion estimate made last week.
And here is the crux of the matter, spelled out for all and sundry:
As a result, in classic pyramid fashion, TelexFree is paying its older investors, not with revenue raised from the sale of its VoiP product, but with money received from newer investors.
End of story.
Well, actually that’s just the surface. While affiliates have been calling for calm and swallowing the bullshit TelexFree have been feeding them through official channels, here’s what’s really been going on behind the scenes:
TelexFree has been a money-making machine for the defendants. The company’s financial records indicate that, since mid-November 2013, TelexFree has transferred approximately $30 million to be transferred from TelexFree operating accounts to themselves and to affiliated companies in the past few months to accounts owned and controlled by TelexFree or the individual defendants.
Tens of millions of additional investor funds received by TelexFree are presently unaccounted for.
$30 million dollars of affiliate investor money has been transferred to TelexFree’s top dogs alone these last few months, and tens of millions of dollars are currently MIA (might I suggest checking with the Brazilian IRS?).
In an effort to immediately put a stop to TelexFree’s shenanigans, the IRS are asking for a preliminary injunction.
The Commission seeks emergency equitable relief, including a temporary restraining order and preliminary injunction, to:
(a) prohibit the defendants from continuing to violate the relevant provisions of the federal securities laws;
(b) freeze the defendants’ and the relief defendants’ assets;
(c) require the defendants and relief defendants to repatriate all proceeds of the fraud that are now located abroad;
(d) require the defendants and relief defendants to submit an accounting of investor funds and other assets in their possession; (e) prevent the defendants and relief defendants from destroying relevant documents; and
(f) authorize the Commission to undertake expedited discovery.
The Commission also seeks:
(a) a permanent injunction prohibiting the defendants from further violations of the relevant provisions of the federal securities laws;
(b) disgorgement of the defendants’ and relief defendants’ ill-gotten gains, plus pre-judgment interest; and
(c) civil penalties due to the egregious nature of the defendants’ violations
In a nutshell, the sought injunction would immediately cease any and all of TelexFree business operations, and make it illegal for the company and it’s top earners to try and hide and/or continue to spend the money they made.
And to think it was only a week ago that Sloan was boasting on Facebook about buying a new house for her parents:
Ruhroh! I hope they saved some of the cardboard boxes they moved with…
Much of the background of TelexFree’s owners is identical to what the Securities Division has provided, but there is some new information regarding Joseph Craft and the top Ponzi pimps:
Joseph Craft – Joseph H. Craft, age 50, lives in Boonville, Indiana He is a Certified Public Accountant with offices in Indiana and Kentucky.
He is the chief financial officer of TelexFree, Inc. and TelexFree, LLC and prepares the company’s financial statements. He has been the chief financial officer of other multi-level marketing companies.
Sann Rodrigues – Sanderley Rodrigues de Vasconcelos, age 42, previously lived in Revere, Massachusetts, and now lives in Davenport, Florida He is one of the most successful promoters of TelexFree, especially among the Brazilian community in Massachusetts and elsewhere.
He has appeared in TelexFree promotional videos that have been posted on the internet (he posted at least one himself), and he publicly claims to be the first U.S. promoter to become a millionaire.He is the owner of WWW Global Business Inc., a Massachusetts corporation that he founded in February 2013.
In 2007, he settled charges brought by the Commission for operating a fraudulent pyramid scheme known as Universo FoneClub Corporation. He was permanently enjoined from violating Section lO(b) of the Exchange Act and Rule lOb-S, and Sections S(a), S(c) and 17(a) of the Securities Acts. He was also ordered to pay approximately $1.8 million of disgorgement.
Santiago De La Rosa – Santiago De La Rosa, age 42, lives in Lynn, Massachusetts. He is one of the most successful promoters of TelexFree, especially among the Dominican community in Massachusetts and elsewhere.
He has appeared in TelexFree promotional videos that have been posted on the internet. He is the owner of Magica Media Corp., a Massachusetts corporation that he founded in March 2013.
Randy Crosby – Randy N. Crosby, age 51, lives in Alpharetta, Georgia. He is one of the most successful promoters of TelexFree and has appeared in TelexFree promotional videos that have been posted on the internet. He has also promoted TelexFree through a website called “everybodygetspaidweekly.biz”.
Faith Sloan – Faith R. Sloan, age 51, lives in Chicago, Illinois. She is one of the most successful promoters of TelexFree and has appeared in promotional videos for TelexFree that have been posted on the internet.
She has also promoted TelexFree through a website called “telexfreepower.com”.
Unfortunately no specifics on how much money these pimps made is provided, however I expect the figures will definitely come out in the wash at a later date.
What is provided are figures on some of the attempts to launder money through various TelexFree shill corporations.
The Commission has not yet been able to obtain a complete set of statements from the defendants’ banks, brokerage firms, and credit card payment processing services.
However, the information available to date, from bank records and other financial records as well as from statements made by various defendants, indicates that Merrill and Wanzeler, who had sole authority to transfer TelexFree corporate funds until the bankruptcy filing, have caused more than $30 million to be transferred from TelexFree operating accounts to themselves and to affiliated companies in the past few months:
TelexFree Financial, Inc. (“TelexFree Financial”) is a Florida corporation with its principal place of business in Coconut Creek, Florida. It was incorporated by Craft on December 26,2013. Its officers and directors are Wanzeler and Merrill, and Wanzeler is its registered agent.
On December 30 and December 31,2013, it received wire transfers totaling $4,105,000 from TelexFree, Inc. and TelexFree, LLC.
On April 14, 2014, TelexFree Financial filed for bankruptcy protection in Nevada under Chapter 11.
TelexElectric, LLLP (“TelexElectric”) is a Nevada limited partnership with its principal place of business in Las Vegas, Nevada. It was formed on December 2, 2013. Its general partners are Wanzeler and Merrill.
Financial statements prepared by Craft indicate that TelexFree made a $2,022,329 “loan” to TelexElectric.
Telex Mobile Holdings, Inc. (“Telex Mobile,) is a Nevada corporation with its principal place of business in Las Vegas, Nevada. It was incorporated on November 26,2013. Its officers are Wanzeler and Merrill.
Financial statements prepared by Craft indicate that TelexFree made a $500,870 “loan, to Telex Mobile.
Joseph Craft would appear to behind this diversification of stolen funds strategy, and I suspect is likely the primary reason he’s been named in the complaint.
Much of the SEC’s complaint focuses on the fallacy of “posting ads to get paid”, citing many YouTube videos, statements from the named four Ponzi pimps and reasons why the ads were “ineffective” (primarily because they generated no revenue).
The sheer volume of virtually identical advertisements for TelexFree’s VoiP service rendered them largely meaningless, especially because anyone who used “telexfree” as an internet search term would be led to the company’s own website.
In early April 2014, one website, Adpost.com, contained more than 33,000 ads for TelexFree, while another, ClassifiedsGiant.com, contained more than 25,000 ads posted just since February I, 2014.
Called out in the complaint, are also numerous TelexFree lies affiliates (and us here at BehindMLM) have been fed over the past two years:
TelexFree and its promoters made numerous false public statements about the company, its founders, and its business:
a. The TelexFree website, in a section entitled “Founder”, states that Merrill received a B.A. in Economics from Westfield State University. The statement is false. Merrill dropped out of Westfield State after only two years.
b. The “Founder” section of the TelexFree website includes a photo of Merrill standing in front of a large three-story building, with the caption “Mr. Merrill in front of the headquarters of Telexfree in the USA.” At least two versions of the marketing presentation on the company website contained a photo of Merrill and a photo of the same building with the caption “The Company HS: United States.”
The use of the building photo is misleading.
TelexFree, Inc. does not own or occupy the entire building. In fact, it originally shared a single suite (consisting of a receptionist, conference rooms, and cubicles) with 28 other companies.
Only in December 2013 did it move into its own suite, which occupies a portion of the first floor. TelexFree, LLC has no physical office at all, just a mailing address in Nevada.
On March 21, 2014, TelexFree issued a press release with the following quote from Merrill: “We have been in VOIP telecommunications for more than a decade.”
The statement is false.
As noted above, Common Cents was founded in 2002, and its business was marketing “10-10” long-distance plans for WorldxChange – not VoiP technology.
The public portion of the TelexFree website contains a picture of a Best Western hotel and a banner reading “Hotel Best Western Opportunity.” The TelexFree. “back office” website includes an icon with the logo of Best Western Hotels that is entitled “Best Western, Telexfree Tijuca”.
At least one version of the marketing presentation on the company’s website included descriptions of Best Western’s activities in the United State and South
America. Crosby stated in his April 2013 video, “This company has a joint venture with Best Western.”
The representation and other suggestions that TelexFree has a business relationship with Best Western is false. Ympactus Comercial Ltda. (“Ympactus”), a Brazilian corporation controlled by Wanzeler and Costa, has a promotional agreement with a Brazilian company that is partnering with Best Western on a new hotel. TelexFree has no relationship at all with Best Western.
The “Founder” section of the TelexFree website states, “Being well versed in one of the new technologies in the era (V oiP), in 2002 he [Merrill] decided to found TelexFree, Inc. to serve this market.”
On August I, 2013, Wanzeler told a gathering of TelexFree promoters, “We have a company since 1995. It’s a VoiP product company.”
The statements are false, for several reasons. First, Common Cents – not TelexFree – was founded in 2002. Second, Wanzeler, Merrill and Labriola- not just Merrill-incorporated Common Cents. Third, the business of Common Cents was marketing “10-10” long-distance access plans for WorldxChange- not VoiP technology.
Quite an exhaustive list there, and an insight into just how much smoke and mirrors BS Ponzi kings will blow up your ass if you let them.
Meanwhile it turns out the recent compensation plan changes debacle, was initiated shortly after TelexFree was gutted in Brazil (June 2013):
In its bankruptcy filings on April14, 2014, however, TelexFree claims that after the Brazilan enforcement action against Ympactus, it began planning to restructure its compensation program- planning which resulted in the changes announced on March 9, 2014.
Or perhaps they were just too busy counting the money that was coming in:
Based on the information available to date, it is clear that TelexFree’s VoiP revenue has been only a small fraction of the money it promised to pay to AdCentral promoters.
Credit card transactions from August 2012 to March 2014 indicate that TelexFree received slightly more than $1.3 million from the sale of approximately 26,300 VoiP contracts. During the same period, TelexFree received more than $302 million from approximately 48,000 AdCentral promoters and 202,000 AdCentral Family promoters.
Through the sale of those one-year contracts, TelexFree promised to pay more than $1.1 billion to the promoters who placed the required internet ads.
In other words, the receipts from selling VoiP packages covered barely 1% of TelexFree’s obligations to pay promoters who placed ads.
The disparity between TelexFree’s VoiP revenues and its AdCentral obligations was actually worse than that, because the $1.1 billion of estimated obligations does not include the commissions and incentives that TelexFree promised to pay to promoters under the additional programs described above.
In short, TelexFree was operating a classic pyramid. Because revenues from VoiP sales were so small, TelexFree was forced to use money from newer investors to make its payments to older investors.
TelexFree management’s cut of the affiliate investor funds?
Bank statements show that Merrill received $3,136,200 on December 26 and December 27,2013.
Bank statements show that Wanzeler received $4,317,800 on December 26 and December 27,2013.
Bank statements show that two companies controlled by Craft received more than $2,010,000 between November 19,2013 and March 14, 2014.
Federal wire transfer records show that Wanzeler wired $3.5 million to the Oversea-Chinese Banking Corporation in Singapore on January 2, 2014.
In addition, a bank has infonned the Commission that TelexFree, LLC sent $10,389,000 to an entity known as TelexFree Dominicana, SRL on April3, 2013.
Also, on April 11 Gust before TelexFree filed for bankruptcy), Merrill and the wife of Wanzeler obtained cashier’s checks in the total amount of$25,552,402. The checks are payable to TelexFree, LLC.
TelexFree’s 2013 profit and loss statement recorded a net-income of $36 million. No wonder TelexFree filed for bankruptcy, Merril and Wanzeler’s wife withdrew whatever was left in March!
Also the mention of a Chinese bank is news to me. That TelexFree were using Chinese banking channels to transfer funds out of the scheme only shows the extent to which they were willing to secure their ill-gotten funds.
On April14, 2014, defendants TelexFree, Inc. and TelexFree, LLC and relief defendant TelexFree Financial Inc. filed for bankruptcy in Nevada under Chapter 11.
The three companies claimed to have liabilities of as much as $600 million but assets of no more than $120 million. The companies stated that, in the five weeks after the March 9 rule change, promoters submitted claims for $174 million, primarily for AdCentral ad placements.
The companies also stated that revenues under the new March 9 compensation plan – which requires AdCentral promoters to sell VoiP products in order to get paid – have been so disappointing that the companies cannot meet their obligations.
Confirming that VoiP sales have not generated enough revenue to honor their promises to AdCentral promoters, the companies seek authority to reject all existing AdCentral contracts.
The whereabouts and/or disposition of much of the more than $300 million of investor funds raised by TelexFree is unknown.
Did TelexFree launder $300 million? If so, holy crap. You can bet none of the named defendants are going anywhere until the matter is settled.
In closing out their complaint, the SEC have asked the court to
enter a preliminary injunction, order freezing assets, and order for other equitable relief in the form submitted with the Commission’s motion for such relief.
Civil penalties and the ‘requirement that defendants to disgorge their ill-gotten gains and losses avoided, plus pre-judged interest, with said monies to be distributed in accordance with a plan of distribution to be ordered by the Court‘.
A “plan of distribution” will no doubt be music to the ears of many affiliate investors, who are only now coming to terms with the amount of money lost in Telexfree.
Footnote: The complete SEC complaint can be read in its entirety over at the SEC website.