telexfree-logoThe notion that a global Ponzi scheme be able to file bankruptcy in a state it registered a shell company in, solely to evade financial, criminal and civil liabilities for the running of said Ponzi scheme, was always going to be a stretch.

Still, hats off to TelexFree’s lawyers for putting on a good show in fighting for the absurd.

At the conclusion to the mammoth 8 hour hearing conducted last Friday in Nevada’s bankruptcy court, Judge Landis used a series of prongs to determine whether or not TelexFree’s bankruptcy case should be transferred to Massachusetts (where the company is currently being sued by the SEC and Massachusetts Securities Division).

The prongs Judge Landis used to reach his decision were as follows:

  • “Neither schedules nor statements of affairs have been filed.  Evidence developed at hearing that there are no known secured creditors of debtor, bulk of creditors are promoters owed money due to original failed comp plan, approximately 90% of debtor’s creditors reside outside of Nevada and Massachusetts, approx. 75% of customers and promoters reside outside U.S.  While less than 5% live in MA, there are fewer customers and promoters in Nevada and Massachusetts, and 10 of largest unsecured creditors reside in MA.” Conclusion: favors transfer to Massachusetts
  • Proximity of Debtors – “LLC shares headquarters with Inc. in MA.  Chief restructuring officer stated he would have performed restructuring duties in MA headquarters before search warrant execution; thereafter, he would perform his duties from Georgia.  Neither Financial nor LLC has office presence or employees in Nevada.” Conclusion: favors transfer to Massachusetts
  • Proximity of Assets – “All of (TelexFree’s) IT and office equipment (is) located in Massachusetts.” Conclusion: favors transfer to Massachusetts
  • Judicial Economy and Economical Administration – “Access to books and records most readily available in Massachusetts.” Conclusion: favors transfer to Massachusetts
  • Necessity of ancillary administration in case of liquidation – (reasons above), Conclusion: favors transfer to Massachusetts

Also called out for knowing next-to-nothing about TelexFree’s current and past business ventures were CEO Stuart MacMillan and “hide the money” stooge William Runge:

While credentials of MacMillan and Runge not subject to question, court finds they have little knowledge related to business administration of LLC and Financial – couldn’t identify competitors. Proximity of witnesses weighs in favor of transfer.

One of the more comedic aspects of the May 2nd hearing was that, when they weren’t being fed questions by TelexFree lawyers, Runge and MacMillan’s answered rarely fell outside of the range of “I don’t know” to “I don’t have that information”.

Personally I thought it was great to see Landis see through TelexFree’s “we know nothing!” ruse and better still, cite it as a determining factor in his reasons for judgement.

Ultimately, in analysing whether or not a transfer to Massachusetts served the “interests of justice”, Judge Landis concluded that

Access to (TelexFree’s) books and records (are) in Massachusetts. (TelexFree has) no business presence or employees in Nevada. Judicial economy would also be better served (by transfer of the case to Massachusetts).

Debtors have national law firm. Nothing in record to suggest that any party would be divided fair trial in either Nevada or Massachusetts – neutral factor. Fewer customers and promoters in Nevada than Massachusetts.

Transfer to Massachusetts would also aid in enforcement of judgments. Enforceability of judgment in SEC’s enforcement action would be aided by transfer. As to original choice of forum, court exercises its discretion to conclude venue is properly in Massachusetts.

I thought that was the end of it, but Judge Landis went on to further conclude that due to his belief that TelexFree bankruptcy case involved “unusual circumstances”, and ordered that pending a transfer of the application to Massachusetts,

(The) court finds that abstention in form of suspension of all proceedings is warranted until such time as transfer to District of Massachusetts is completed.

Or in layman’s terms, TelexFree bankruptcy is now dead in the water until it is moved to Massachusetts. TelexFree’s lawyers fought hard against the movement of the proceedings, indicating that Massachusetts is a much less desirable environment for TelexFree to try to shirk its Ponzi liabilities in.

A major contributing factor to this is that the same judge hearing the SEC complaint might be appointed to oversee the bankruptcy proceedings. What that will mean for TelexFree should be obvious…

One side-effect of the Nevada courts abstention of the proceedings, is that the DoJ’s Chapter 11 Trustee nomination has been shelved until the proceedings are transferred. Whereupon presumably the motion will be given a new hearing date.

That is of course if TelexFree management don’t realize it’s over and do a runner.

At this stage and with Landis’ judgement only handed down minutes ago, no date has been set for the transfer to Massachusetts – but I suspect that will be out either by the end of the week or early next week.

Pending any additional information contained in Landis’ written order (expected to be filed within 48 hours), that’s all for tonight.

Looking forward, TelexFree’s next defeat will likely come on Thursday, when they face off against the SEC to argue whether or not a preliminary injunction should be granted against the company, its management and two of its top promotors.

In light of today’s defeat and that a preliminary injunction has already been granted against two top promoters, it’s wholly expected that on May 8th the requested injunction will be granted.

As always, stay tuned…


Footnote: My sincere thanks to Jordan Maglich @ PonziTracker for covering the May 6th order hearing live. Without his dedication the live updates those following the case have enjoyed would not have been possible.

Please consider donating to PonziTracker to help cover expenses, as the cost otherwise comes directly out of Maglich’s pocket (Paypal donate button is at the bottom of the coverage linked to above).