telexfree-logoAs we barrel towards the May 2nd showdown in the Nevada bankruptcy court, two additional filings were made on Monday the 29th.

Also of note was a new cease and desist issued in the US state of Montana.

Motions Filed

1. Objection to TelexFree’s motion that certain sections of the TRO are invalid (SEC, April 29th)

On April 23rd, TelexFree filed a motion alleging that certain sections of the temporary restraining order (TRO) granted against the company were invalid (for more information, see April 24th court update).

On the 29th of April the SEC filed their objection to this motion, arguing that TelexFree was using “outdated law”.

In their motion, TelexFree is arguing that an automatic stay was evoked when they filed for bankruptcy, which should override the TRO granted to the SEC.

In their objection, the SEC write:

The commission and other government units utilize their police and regulatory powers in the public interest.

Because of the importance of their public mission, Congress has granted governmental units an exception from certain of the prohibitions (sic) of the Bankruptcy Code’s automatic stay provisions.

The Debtors fail to address this controlling statute, and instead base their argument on pre-1998 statutory language. (TelexFree’s) argument that the TRO violates the automatic stay is frivolous.

Other points challenged by the SEC include:

  • TelexFree misunderstand the purpose and effect of the TRO – This argument is based on TelexFree’s “belief” that the TRO equates to an “enforcement of a money judgement”. The SEC argue that seeing as no money judgement has thus far been made in the case, that there is no basis for this argument.
  • That the TRO was granted incorrectly using Section 362(b)(4) – TelexFree argue that Section 362(b)(4) of the bankruptcy code does not override the automatic stay granted in Chapter 11 applications. The SEC claim this argument is “nonsensical”, in that Section 362(b)(4) ‘is designed to allow government entities to use litigation to exercise their police and regulatory power, which includes by necessity stopping violations of the law.’ The SEC claim that the District Court ‘merely ordered (TelexFree) to stop soliciting investors in… an ongoing securities fraud‘.
  • TelexFree’s notion that the ‘invocation of the (bankruptcy court’s) jurisdiction is not only in (TelexFree’s) best interest, but also in the best interests of (TelexFree’s) creditor (sic) and the SEC‘. The SEC claim this notion is “flat out wrong”.

2. Objection to SEC’s motion to move bankruptcy proceedings to Massachusetts (TelexFree, April 29th)

TelexFree have filed an objection to the SEC’s motion to move the bankruptcy hearing, declaring that the SEC’s allegations are “unsupported and inflammatory”. They argue that Nevada is where the bankruptcy proceedings should take place, because

the interest lies in preserving the Company going forward so that the Company can continue to operate and creditors can be repaid. The people who can do
that are not located in Massachusetts and made the decision to file in Nevada.

Thus Nevada provides the most efficient and economic location for these Chapter 11 Cases to proceed.

One can surmise that the reason James Merrill and Carlos Wanzeler stepped down from their managerial positions, was precisely so TelexFree could make the above argument (both Wanzeler and Merril are based out of Massachusetts).

There’s not too much information in the filing, however a few new tidbits are evident in the accompanying declaring of TelexFree’s CEO in hiding, Stuart Macmillan:

  • Macmillan is pretty much running the show now. Wanzeler and Merrill hired him to take over and clean up the $1 billion dollar Ponzi mess they created.
  • Joe Craft, when caught with a bag full of checks, was acting under orders from Macmillan.
  • TelexFree’s AdCentral compensation plan was “problematic” (read: it was an unsustainable Ponzi scheme)
  • TelexFree are paying MacMillan $50,000 a month on top of a $180,000 retainer
  • Macmillan believes that TelexFree’s VOIP offering will be able to maintain 140,000 retail customers and generate $50 million a year going forward. This despite there currently being little to no retail activity within the business (any customers are incidental to the AdCentral Ponzi scheme).

Most obviously, Macmillan’s declarations (worth a read just to see how much TelexFree affiliates have been bulshitted), require the reader to enter into a state of amnesia and completely forget about the two year old $1 billion dollar Ponzi scheme TelexFree ran.

Basically, with nothing more than a business registration and nothing else tying them to the state, TelexFree are arguing that it’s in everybody’s best interest to keep the bankruptcy application in Nevada, because that’s where Macmillan filed it.

The real reason?

The laws of the State of Nevada will be critical to the resolution of those claims.

“Those claims” mentioned above are the AdCentral contract positions TelexFree sold to affiliates. What’s the best Nevada is more corporation friendly than Massachusetts when the time comes to wriggle out of what the company promised? And we’re not just talking monopoly money here either – kiss initial investments goodbye too.


1. Order granting expedited hearing for the DoJ’s Motion for the appointment of a Chapter 11 Trustee

On April 25th the DoJ filed a motion requesting an expedited hearing for their motion requesting a Chapter 11 Trustee be appointed in the TelexFree bankruptcy application.

Judge Landis granted the expedited hearing motion, setting the Chapter 11 Trustee hearing to be heard on May 2nd.

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

May 2nd is only two days away and personally I’m not seeing how both the SEC’s request that proceedings be moved to Massachusetts or the DoJ’s motion for the appointment of a Chapter 11 Trustee will be denied.

The DoJ’s application appears to be well-rooted in the bankruptcy code, which clearly states what needs to be done in cases of fraud. Meanwhile the SEC have pretty much just destroyed TelexFree’s argument against the proceedings moving to Massachusetts, and also any objections raised against the TRO.

Using outdated laws and consciously to omit certain exclusions that were vital to the granting of the TRO in the first place, probably isn’t going to get the company very far come May 2nd.

TelexFree’s objections would appear to thus be moot in both instances.

Barring any additional paperwork filed between now and Thursday, I don’t anticipate any changes to the upcoming schedule. My next update should be sometime late on May 2nd or early May 3rd, when the orders for what has been decided on May 2nd start to filter through.

Meanwhile Patrick Pretty is reporting that the state of Montana have issued a separate cease and desist against TelexFree:

TelexFree sought to register as a multilevel distribution company in July 2013, but the form submitted to the state was “obsolete and no longer accepted by the [Office of the Commissioner of Securities and Insurance,]” the C&D alleged.

TelexFree ultimately refused to provide Montana with accurate documentation, and instead insisted they weren’t doing business in the state anymore. Montana, through their own research, went on to identify at least thirty-four individuals participating in TelexFree after the assurance has been issued, prompting the state to issue the notice on April 23rd.

The C&D accuses TelexFree of operating an MLM unlawfully in Montana, withholding facts and lying about ceasing its operations there.

Montana noted that the TelexFree “software could be used for unlimited calls to landlines and mobile phones to about 70 countries for a fixed monthly price of $49.90. A VOiP competitor, Vonage, sells a similar product for $12.99 a month.”

I doubt the C&D will have any effect on the May 2nd hearing, but it is interesting to note the observation by Montana that TelexFree’s VOIP service is a sham. It pretty much kills the whole “we’ll make legit money selling VOIP” argument TelexFree have based their bankruptcy application on.

Looking forward, I expect we’ll see similar arguments raised on May 2nd by the SEC and DoJ.