TelexFree advised of pyramid scheme in August 2013
TelexFree is not shut down in Brazil, there’s a lot of news there, it’s liar (sic). Everything you hear from news, it’s not true.
Our company, everything is ok.
Nothing will affect the US. Please continue your continued dedication, this company will persevere.
-Carlos Wanzeler (TelexFree owner, now a fugitive), June 2013
To the very bitter end, TelexFree maintained it was not a Ponzi scheme.
Indeed, down in Brazil and despite all evidence to the contrary, today Carlos Costa (also an owner of TelexFree) still insists that the company is legitimate.
TelexFree (under the name Ympactus) was shut down in Brazil via injunction back in June of 2013. The injunction, granted in the Brazilian state of Acre, prompted Carlos Wanzeler to get on an affiliate phonecall and make the statements quoted above.
TelexFree used the same Ponzi business model in Brazil as it did in the US. Naturally this raised questions over the legal status of the company in the US.
Unknown publicly at the time, US regulators had already began investigating the scheme as far back as April 2013.
While the SEC quietly continued to investigate the company, TelexFree management sought out legal opinions to ascertain the legal status of Ponzi schemes in the US.
At the time TelexFree had already retained Gerry Nehra (Nehra & Waak), who wrote to BehindMLM in February 2013 and demanded we take down our analysis of the company.
None the less and for reasons they haven’t made public, TelexFree corporate sought additional legal input as to the status of their business model in the US.
These revelations are part of a recent filing made by court-appointed Chapter 11 Trustee Stephen Darr. Darr revealed this new information in an opposition filed against the payment of fees to the law firm Gordon Silver.
Gordon Silver are currently trying to wrangle payment for services they performed for TelexFree as part of their efforts to circumvent regulatory action via bankruptcy proceedings.
In August of 2013, Jeffery Babner
of Babener & Associates, an attorney retained by the Debtors who claimed to have extensive MLM experience, advised the Debtors that their business plan constituted a pyramid scheme.
When TelexFree first retained Babener and when they might have stopped retaining him is unclear.
Regardless, despite Babener’s legal advice, TelexFree continued on business as normal.
Gerry Nehra would go on to give TelexFree his “legal blessing” in August of 2013, so he was obviously of the legal opinion that TelexFree was a legitimate enterprise.
Around this time TelexFree engaged two additional law firms.
In late summer or early fall of 2013, the Debtors retained The Sheffield Group (“Sheffield”), a consulting firm with extensive MLM experience, to ostensibly revise their business plan so that it would comply with applicable laws.
In late summer or early fall of 2013, the Debtors retained Robert Weaver (“Weaver”), an attorney with extensive white collar crime expertise, and the firm of Garvey, Schubert, Barer based in Seattle to, upon information and belief, provide legal advice respecting potential and/or ongoing violations of federal and state law.
What exactly The Sheffield Group and Robert Weaver advised TelexFree about their Ponzi business model has not been made public. Comments by Stephen Darr in his filing however suggest that Weaver came to the conclusion TelexFree was a pyramid scheme.
What we do know for sure is that,
despite the shutdown of Ympactus on the basis that its business was a pyramid scheme, and being advised in August of 2013 that the Debtors’ business plan was a pyramid scheme, the Principals continued to operate their business in accordance with that scheme throughout 2013 and into March 2014.
In February 2014, the regulatory heat surrounding TelexFree was turned up. This resulted in TelexFree seeking out yet another legal firm, Greenberg Traurig LLP, to assist them with regulatory investigations.
On or about February 5, 2014, the Commonwealth of Massachusetts, Securities Division (“MSD”) issued a subpoena to the Debtors in furtherance of an investigation into whether the Debtors’ were operating in violation of applicable securities laws.
On or about February 7, 2014, the Debtors retained Greenberg Traurig LLP (“Greenberg”) to represent the Debtors in connection with the MSD investigation.
In order to respond to the pending MSD investigation and subpoena, Greenberg needed to conduct an investigation of the Debtors’ business plan which by necessity would include reviewing and becoming familiar with the Debtors’ sales program, preparing the Principals for examination and interviewing third parties.
Through this process, it should have become apparent that the Debtors were operating a pyramid scheme.
In fact, shortly after its retention, Greenberg was informed by both Weaver and Babener that the Debtors were operating a pyramid scheme.
At least three legal opinions after Babener’s initial August 2013 warning, TelexFree would only finally make changes to its compensation plan in March of 2014.
In March 2014, more than six (6) months after it was advised that is business constituted a pyramid scheme, the Debtors introduced a modified business plan to Promoters to take effect on March 13, 2014.
The modified plan purportedly would remedy the illegality of the existing plan and address the trailing liabilities under the existing plan that exceeded $5,000,000,000.
In response to fears that affiliates would not be paid the Ponzi returns TelexFree had promised them under the revised compensation plan, corporate deployed their International Marketing Director, Stephen Labriola, to defuse the situation.
On March 17th, less than a week after the new compensation plan took effect, Labriola addressed a mob of angry affiliates and told them:
We’re still going all out. We’re still going to keep building a future. We’re still going to give you all of the things that we promised you… just be patient with us and help us work through this.
Despite Labriola’s assurances, in the weeks that followed, TelexFree then announced it was reneging on all Ponzi ROIs that had been promised affiliates.
This resulted in affiliates storming TelexFree’s Massachusetts offices.
Labriola was again sent out to address the mob, but could only tell them that the changes were implemented because the company “needed customers”.
TelexFree corporate were in the building but refused to face their affiliates. They remained hidden in the company’s offices behind the reception desk.
When the angry mob of affiliates refused to leave, police were eventually called in to defuse the standoff.
What wasn’t revealed at the time was that TelexFree had the Sheffield Group go over their new model. After crunching some numbers it was eventually realised that,like every Ponzi scheme that had come before it, you cannot pay out more than you bring in.
Within days of the modified plan’s attempted implementation, it became clear that it also was a pyramid scheme.
On or about April 3, 2014, Sheffield performed a stress test on the revised plan and concluded that it was unsustainable because promised payouts to Promoters substantially exceeded revenues from actual product sales.
The rest is of course history.
On April 12, 2014, Greenberg attended a board meeting for the Debtors, one purpose of which was to authorize the Chapter 11 filings. Also during that meeting, MacMillan was appointed as a director to serve with Wanzeler and Merrill.
At the April 12, 2014 board meeting, upon information and belief, Greenberg observed that the redesigned business plan also appeared to violate applicable securities laws.
US regulators in Massachusetts continued to close in on the company. When TelexFree management finally realized all was lost, they then filed for bankruptcy in Nevada.
TelexFree corporate and their lawyers hoped that the Chapter 11 Nevada bankruptcy proceedings would eliminate any accountability for their running of what was later revealed to be a billion dollar Ponzi scheme.
To this day, TelexFree management continue to publicly deny any wrongdoing on their part.
Footnote: TelexFree Trustee Stephen Darr’s objection to Gordon Silver’s “Allowance of Compensation” can be read over at Kurtzman Carson Consultants.