telexfree-logoThe 25th saw the hearing in Massachusetts for a preliminary injunction against TelexFree Faith Sloan, Santiago De La Rosa, Randy Crosby, Sann Rodrigues and Steve Labriola. Further objections and notices were also filed in the Nevada Chapter 11 bankruptcy case too.

As of April 25th, here’s where we’re at.

Motions Filed

1. Objection to Application to expedite hearing of TelexFree’s TRO objection (SEC, April 25th)

TelexFree filed an application to expedite a hearing on their “certain parts of the TRO are void” motion filed yesterday (see #1 on the “Motions Filed” list for April 24th). This motion was filed ex-parte.

The SEC have objected to this application on the grounds that, by virtue of granting the TRO, the Massachusetts court has already nullified the argument that the TRO will ’cause irreparable harm to (TelexFree’s) business operations’.

They SEC are asking a hearing be set as per normal scheduling, so that they might be given adequate time to reply to the motion.

2. Application for expedited hearing for DoJ’s request that a Chapter 11 Trustee be appointed (United States Trustee (DoJ), April 25th)

The Department of Justice have requested that an expedited hearing be set for their application that a Chapter 11 Trustee be appointed in TelexFree’s bankruptcy application. You can read more about the specifics of the DoJ’s request here.

The shortened time is necessary because of the serious nature of the allegations of securities fraud and gross mismanagement contained in
the complaint filed by the Securities and Exchange Commission (the “SEC”) against (TelexFree).

The DoJ are asking the motion be heard on May the 2nd, a hearing date already scheduled during which a number of other motions and applications are to be heard.

3. Objection to TelexFree’s proposed interim orders (United States Trustee (DoJ), April 25th)

The Department of Justice has filed an objection to a number of recent applications and motions filed and/or granted to TelexFree. There’s a few interim orders they’re objecting to, so I’ve listed them below along with the DoJ’s arguments against them.

 

Order Authorizing Joint Administration of Chapter 11 Cases

In this order the DoJ are objecting to the recently made joint administration order (see #3 in the “orders” list for April 24th updates).

This order contains the following statements:

  • finds that the Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334.
  • this is a core matter pursuant to 28 U.S.C. § 157(b)(2)
  • (the) venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409
  • notice of the Motion and the Hearing were sufficient under the circumstances and that no further notice need be given

The DoJ argue that according to audio transcripts of the First Day Motions hearings, the Court never actually found any of the above.

 

Interim Order (I) Authorizing the Debtors to Pay Prepetition Income, Franchise and Similar Taxes and Regulatory Fees in the ordinary Course of Business, and (II) Authorizing Banks and Financial Institutions to Honor and Process Checks and Transfers Related Thereto

In this order the DoJ are objecting to the following statements

  • finds that the Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334
  • this is a core matter pursuant to 28 U.S.C. § 157(b)(2)
  • venue in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409
  • notice of the Motion and the Hearing were sufficient under the circumstances and that no further notice need be given
  • such relief is necessary to avoid immediate and irreparable harm to the Debtors’ business and estates

The DoJ again argue that according to audio transcripts of the First Day Motions hearings, the Court never actually found any of the above.

 

Interim Order (A) Authorizing Debtors to Pay (I) All Prepetition Employee Obligations, (II) the Independent Contractors’ Fees and (III) the Contracting Agencies’ Fees and (B) Directing the Disbursing Bank to Honor Related Transfers

In this order the DoJ object to the following statements:

  • and the Court having jurisdiction to consider the Motion, and the relief requested therein in accordance with 28 U.S.C. §§ 157 and 1334
  • and consideration of the Motion and the relief requested therein being a core proceeding pursuant to 28 U.S.C. § 157(b)
  • and venue being proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409
  • and due and proper notice of the Motion having been provided; and it appearing that no other or further notice need be provided

The DoJ argue that the Court never actually found any of the above.

 

Interim Order Approving Motion of the Debtors Pursuant to Section 105(a) of the Bankruptcy Code , Bankruptcy Rules 1007, 2002(l), 2002(m) and 9007, Local Rule 2002 For Entry of an Order Approving Notice Procedures

In this order the DoJ object to the following statements:

  • it appearing that this Court has jurisdiction to consider the Motion pursuant to 28 U.S.C. §§ 157 and 1334
  • and it appearing that venue of these Chapter 11 Cases and the Motion in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409
  • and it appearing that this matter is a core proceeding pursuant to 28 U.S.C. § 157(b)
  • and this Court having determined that the relief requested in the Motion is in the best interests of the Debtors, their
    estates, their creditors and other parties in interest
  • and it appearing that proper and adequate notice of the Motion has been given and that no other or further notice is necessary

Again, the DoJ argue that the Court never actually found any of the above.

 

All four objections are supported by a declaration by Anabel Santos, an employee of the US Trustee, who reviewed audio recordings of the First Day Motions proceeding held on April 17th.

In place of the orders being made, the DoJ are asking that they be made interim orders, to be heard and ultimately decided upon at the May 2nd Nevada bankruptcy court hearing.

Orders

1. Granting of expedited hearing for TelexFree’s objections to the TRO (April 25th)

TelexFree’s “Certain Portions of the TRO violate the automatic stay that comes with a Chapter 11 filing” objection (see #1 under “Motions Filed” in the April 24th Update), has been granted.

The motion is to be heard on May 2nd 2014, along with several other motions, applications and objections.

2. Granting of expedited hearing for SEC’s request to move bankruptcy application to Massachusetts (April 25th)

The SEC’s request for an expedited hearing on their motion to change the venue of the proceedings to Massachusetts has been granted.

It will now be heard on May 2nd, along with several other motions, applications and objections.

3. TRO Interim Orders (April 25th)

A hearing was held in Massachusetts to decide whether or not a preliminary injunction should be granted against TelexFree, Randy Crosby and Santiago De La Rosa. The court has taken this matter under advisement, with an order expected to be made on April 30th.

The court has urged the SEC and Crosby and De La Rosa ‘to resolve the matter’ before the 30th, failing which a decision will be made.

The issue of a preliminary injunction against Faith Sloan and Sann Rodrigues has been moved to May 7th, on which a hearing has already been scheduled to decide whether the same injunction should be granted against TelexFree, Carlos Wanzeler, Jim Merrill and Joe Craft.

Important Upcoming Dates

  • April 30th (Massachusetts) – Expected decision on a preliminary injunction against Randy Crosby and Santiago De La Rosa
  • May 2nd (Nevada) – Mammoth hearing to decide on SEC’s request to move bankruptcy proceedings to Massachusetts, DoJ’s request that a Chapter 11 Trustee be appointed, TelexFree’s objections to the TRO, the final First Day Orders and ‘whether the interests of creditors and the various debtors are better served by the suspension of all (bankruptcy) proceedings in these jointly administered cases
  • May 7th (Massachusetts) – Hearing in the SEC case to decide on whether a preliminary injunction will be granted against TelexFree, Carlos Wanzeler, Jim Merrill, Joe Craft, Faith Sloan and Sann Rodrigues
  • May 22nd (Nevada) – First meeting of TelexFree creditors
  • May 28th (Nevada) – Hearing to decide on TelexFree’s motion for employment of their lawyers

Final Thoughts

The cases and back and forth between the parties and the courts is getting quite complicated, but I think it’s safe to say May the 2nd is shaping up to be a big day of decisions.

As I’m reading it, the Judge is piling up every emergency motion for this date, upon which the DoJ, SEC and TelexFree are going to battle it out in court.

My prediction is that either the SEC’s “venue-change” motion or DoJ’s “appointment of a Chapter 11 Trustee” request are going to be granted. Both of which effectively nullify TelexFree’s use of the bankruptcy court to negate their liability for running a Ponzi scheme.

A third possibility exists, that being a Judge suspend the proceedings altogether. According to the Judge, this is to be decided based on whether or not the bankruptcy proceedings are in the best interests of the creditors. Ignoring the fact that it’s monopoly money that doesn’t exist, how victims of TelexFree being told to suck eggs (if TelexFree are granted Chapter 11 bankruptcy protection), is in their best interests is beyond me.

The outcome of the discussion is far from certain however, as the Judge also mentions the best interests of the debtors (TelexFree). Naturally bankruptcy proceedings are in the best interest of the company as it absolves them of both liability for their Ponzi scheme and the $1 billion dollars in ROIs they promised their affiliates.

One other interesting point is the separation of Randy Crosby and Santiago De La Rosa from the other defendants in the SEC preliminary injunction motions. I initially thought this might be due to a lack of co-operation but according to declarations filed, both Crosby and De La Rosa have refused to hand over financial information and co-operate with the SEC (as previously ordered by the court).

Faith Sloan didn’t sound too co-operative in the same declarations (she hung up on the SEC when they called her), and there’s been no word on Sann Rodrigues. It could be the other way around, with these two co-operating with the SEC, however given TelexFree’s determination to abuse Chapter 11 bankruptcy proceedings to get away with securities fraud, this seems unlikely (Rodrigues and Sloan have been grouped together with TelexFree, its owners and inner-management).

One aspect of the problematic nature of so many motions, objections and applications being filed can be seen in the request for an expedited hearing on TelexFree’s TRO objections on April 24th. The SEC filed their objection to the expedition motion on April 25th, with a Judge later that same day approving TelexFree’s initial motion.

Whether the Judge saw the SEC’s objection before making the ruling is unclear (there’s no mention of it in the order). That means there’s a possibility things might change early next week.

Things are getting a bit messy but hopefully today’s update will make the current situation a bit easier to follow.