telexfree-logoYesterday saw the filing by TelexFree co-owner James Merrill, asking the District Court of Massachusetts to grant him pre-trial release. Charged with wire fraud for his part in the running of a $1 billion Ponzi scheme, Merrill was arrested on May 10th and is currently awaiting trial.

Merrill’s arguments for pre-trial release largely centered on ties to his family, the local community and comparisons to Carlos Wanzeler, Merrill’s partner in crime who fled the US upon realizing we was likely to be arrested.

james-merril-founder-president-telexfreeThe basic gist of the motion was that, $1 billion Ponzi schemes aside, James Merril (right) was a swell guy and unlikely to flee.

Hell, on face value Merrill’s motion more than successfully portrays him as a harmless old man who naively got caught up in something his long-time friend orchestrated. He even had me convinced by the end of it:

I do think Merrill might have a solid argument to justify a pre-trial release. Especially if any or all of the following proposed conditions are imposed.

I still think under condition home detention, GPS monitoring the surrendering of his passports that Merrill’s release might still be justified. But gone is any sympathy I might have had.

Today the SEC their opposition to Merrill’s motion, and with it comes a boatload of information that’s likely to enrage TelexFree affiliates wondering where their money is.

First and foremost, the SEC address Merrill’s heavy reliance on family ties and his alleged good-standing within the Ashland, Massachusetts community.

In his motion, Merrill argues that he has substantial local ties. There is no question that he does. But as analysis shows, highlighting Merrill’s local ties misses the point.

This is not the usual white collar case. It doesn’t matter how strong Merrill’s ties are to Ashland, Massachusetts, or how many of his friends or family express support or help post bond.

These are familiar elements of many white collar cases, since most white collar defendants live otherwise normal suburban lives.

You have close ties to your family and community? Yeah… and? So does every other white-collar criminal out there.

Ironically, it is these very ties (particularly to his family) that Judge Hennessy held against Merrill (right) in his detention hearing:

In my view, it’s a double-edged sword. The strong ties that the defendant has to his children and his commitment to them is both a reason he would stay here, but also a reason that he would flee, in order to avoid the fact that he may go to jail and be separated from them in that way.

If convicted, ‘Merrill faces an advisory Guideline range of life (by about seven levels)‘. At what point as the case progresses is it no longer credible to argue against him fleeing on the possibility of being permanently separated from the family that apparently means so much to him?

Judge Hennessy was fully aware of Merrill’s ties to the community, but, as that judge noted, they must be balanced against Merrill’s potential
connections abroad. That is, focusing on Merrill’s local ties is focusing on half of the evidence.

And that brings us to unavoidable reality pertaining to Merrill’s involvement in TelexFree. Specifically the fact that, should he choose to, Merrill would be quite capable of fleeing the US and “setting up shop” elsewhere.

Note that the following isn’t from the SEC, it’s from Judge Hennessy himself (he granted the original detention order):

As indicated at the outset, the offense, and I’m not saying that this was the defendant’s intention, but the offenses created a number of substantial ties for this defendant outside the United States: In South America, in the Caribbean and Europe.

In these places, there are bank accounts that may or may not be under the control of the defendant, or that may have funds that he can access, but as the co-owner of Telex, as one of its founders, as the person with signatory authority, as one of the faces of the company, it’s fair to infer that the defendant is in a position where he may be able to finance a life outside the United States to avoid the charges here, and that is probably the principal concern of this Court.

In contrast you’ve got Merrill’s motion, which focuses squarely on the known bank accounts he had his signatory privileges removed from as part of the TelexFree bankruptcy circus.

What about all the TelexFree bank accounts held “off the books” though?

TelexFree has substantial assets overseas. The government has managed to freeze millions of dollars in United Kingdom and Singapore accounts, but various accounts remain unfrozen.

There is a TelexFree account in Cayman with the Royal Bank of Canada. It remains unfrozen and the account balance is unknown. Similarly, the government has seized a $10,000,000 cashiers’ check made out to TelexFree Dominicana SRL – TelexFree’s Dominican entity – but no Dominican accounts are frozen.

Finally, in or about 2013 Merrill and Wanzeler traveled to Singapore, where we know there are three accounts in the names of TelexFree and Carlos Wanzeler. One of these accounts is frozen, but not the other two.

And keep in mind these are the accounts that regulators in the US currently know about.  At last count there was around $100,000,000 (down from an initial $300,000,000) of TelexFree funds that remain “unaccounted for”.

carlos-wanzeler-and-james-merrill-telexfree-management-criminalsThese same funds are what Carlos Wanzeler (right, with Merrill) is using to fund his new life in Brazil. Is it really a stretch to suggest he wouldn’t be instrumental in setting up his old buddy (in Brazil or elsewhere)?

Wanzeler has access to substantial funds and has been Merrill’s close friend for 20 years. Years ago, Merrill sponsored Wanzeler and his wife for their green cards. One witness has described the two men as “like brothers.”

According to bank records, in February 2013, Wanzeler gave Merrill a check for $865,000, using funds drawn from TelexFree’s Brazilian operations. In December 2013 – around the time he withdrew $3,000,000 for himself – Merrill authorized the transfer of about $7,000,000 to Wanzeler from TelexFree accounts.

The real risk here is not Merrill fleeing to Brazil, but Wanzeler helping him from that location.

And even if one were to discount Wanzeler, what of the vast global network of TelexFree Ponzi supporters scattered throughout the world?

Like many “multi-level marketing” companies, TelexFree has a disturbingly cult-like quality. Egged on by the company itself, promoters spoke of “reaching their dreams” and being “100% TelexFree.”

TelexFree’s promoter extravaganzas – in the United States, Brazil and Spain, among other places – were recorded and posted on YouTube. These events had a “boisterous . . . rock concert atmosphere,” at which crowds of promoters cheered James Merrill when he took the stage. Merrill would have the crowd “do the wave.”

As the “American face” of TelexFree, crowds of foreign promoters lined up to have their pictures taken with Merrill; his wife conceded that he was “treated like a minor celebrity.”

In or about November 2013, TelexFree rented a cruise ship and invited thousands of promoters to join a cruise off the coast of Brazil. Merrill addressed the crowd of (at least) hundreds from the promenade deck, helicopter hovering in the background.

Thousands of these promoters do not live in the United States, but in Canada, the Caribbean, and Central and South America.

Thousands remain fanatically loyal to the company which, despite the bankruptcy and three government enforcement actions, they see as helping hard working people make a little money on the side (see binder of hundreds of letters of support for TelexFree, submitted by promoters worldwide in the SEC civil action).

According to Canadian corporate filings, Merrill and Wanzeler are the directors of TelexFree Canada, the Facebook page for which lists 7,691 “likes” and shows dozens of supportive messages, all written after the bankruptcy and enforcement actions were filed.

Merrill and Wanzeler are also the directors of TelexFree’s Dominican entity.

This is nothing, however, compared to TelexFree’s presence in Brazil, where thousands of Brazilian promoters took to the streets in June 2013 when the Brazilian government sued TelexFree’s Brazilian entity for running a pyramid scheme.

This happened again when enforcement activity ramped up in the United States.

Finally, Merrill’s network of supporters is not just overseas. He knows several TelexFree promoters in the United States who made substantial sums with the company, and would be in a position to assist him.

Many TelexFree promoters, at least the earlier ones, made substantial sums from their involvement.

Furthermore to the SEC’s points above, evidence of TelexFree affiliates helping TelexFree management escape prosecution already exists.

The car Carlos Wanzeler escaped the US in was driven back from Canada to Wanzeler’s wife by none other than two TelexFree affiliates (surnamed Nunes). It is believed that while Wanzeler lay low and waited to board a plane to Brazil, he stayed with the Nunes and/or other Canadian-based TelexFree affiliates.

Should Merrill flee in the face of spending the rest of his life behind bars, that a support network exists for him outside of US jurisdiction is certain.

Add to that the hidden TelexFree Ponzi funds under Wanzeler’s control and Merrill could easily see out the rest of his days living comfortably off stolen Ponzi riches.

Given that phone records reveal that Wanzeler and Merrill were in communication on the day Wanzeler fled, and that he was arrested on Route 9, a local highway that runs between two international airports – is it really plausible that the above doesn’t even “remotely support (Merrill’s continued) detention”, as his lawyer suggests?

There is no “new evidence” that the Court must now consider. There is only new counsel’s conviction that he has a better handle on the case than prior counsel.

But new counsel wanting his own shot at it is not a justification for doing all this again.

Merrill is over 50 years old. He potentially faces life in prison or, even if something substantially less, still a sentence that may keep him imprisoned into his senior years.

Facing this kind of personal disaster, in light of available refuge elsewhere in the United States and overseas, bond is not reasonably likely to keep him here.

Also note that, as Judge Hennessy observed, this case is fundamentally about deceit. As Merrill and Wanzeler revved up investors, they hid the fact that TelexFree was a huge, teetering, pyramid scheme.

See 5/20/14 Trans. at 14 (“The second thing about the offense is that it involves deceit. This was a scheme that depended on TelexFree constantly recruiting new promoters, and the defendant played a very large role in that deception.”).

Someone willing to maintain that deception for months and years is someone who would consider finding ways to avoid this Court’s reach.

For better or worse, Merrill was one-half of the ownership team that ran TelexFree. With his partner avoiding prosecution and continuing to live off stolen investor money stashed away in hidden offshore bank accounts, despite a preliminary injunction in place, it’s an incredibly difficult argument to make that, should he be released, Merrill won’t uproot his family and follow suit.

Perhaps not in Brazil, but when you’ve got potentially millions in Ponzi funds stashed away, the possibilities are endless.

With a hearing set for June 5th, stay tuned for a ruling on Merrill’s pre-trial release later this week.


Footnote: Our thanks to Don @ ASDUpdates for providing the SEC’s objection to Merrill’s pre-trial release.