telexfree-logoThe big news on the 30th was the granting of a preliminary injunction against TelexFree top pimps Santiago De La Rosa and Randy Crosby.

In addition to this order, which was handed down in Massachusetts, several other filings were made in the Nevada bankruptcy court.

As at the 30th of April 2014, here’s where we’re at.

Motions Filed

1. Objection to TelexFree’s motion for an extension of time to file schedules and statements (DoJ, April 30th)

Complaining about regulators seizing their equipment and having to “spend significant time addressing” the SEC and Massachusetts Securities Division complaints against them, TelexFree filed for an extension to file schedules and statements in their bankruptcy application.

Typically the required time to file the documentation is fourteen dates, which created an April 28th deadline. TelexFree stated that due to the above reasons, it would ‘not be possible to complete the Schedules within the 14 days allowed‘.

A decision has yet to be made on the motion, with the April 28th deadline already come and gone.

Now, filing an objection against the extension, comes the DoJ.

Without additional information regarding what efforts Debtors have made to obtain the return of their records, or to at least obtain hard copies of their customer and promoter lists allegedly seized by federal agents, the Court cannot determine whether Debtors’ request for a 49 day extension of time to file schedules is reasonable or necessary.

TelexFree had asked for a June 16th extension, with the DoJ instead arguing that a May 16th extension would be more reasonable.

If the Schedules were filed by this date, the Meeting of Creditors could go forward on May 22, 2014, as currently scheduled.

2. Memorandum of points and authorities regarding abstention (SEC, April 30th)

Filed against the possibility that the bankruptcy court might deny the SEC’s motion to move TelexFree’s bankruptcy hearings to Massachusetts, the SEC have filed a memorandum asking the court to then consider an alternative:

If the court denies the venue motion, the Commission submits that the most appropriate course of action is for the court to abstain from hearing these cases or suspend these proceedings in favor of the Commission’s pending enforcement case in Massachusetts.

The basis of the SEC’s argument is of course that TelexFree ‘operated an illegal pyramid scheme in the form of a “multi level marketing” company‘.

Late on April 13, 2014, in an apparent attempt to hinder impending civil enforcement actions by the Massachusetts Securities Divisions and the Commission to halt (TelexFree’s) brazen pyramid scheme, (TelexFree) filed for bankruptcy protection in this court.

It thus appears that this case is essentially a dispute between the pyramid scheme (TelexFree) and the state and federal police and regulatory authorities in Massachusetts; the filing of these cases in Nevada is a mere litigation tactic and was not initiated for the benefit of (TelexFree’s) creditors.

The first mention of a Receiver is made in the SEC’s filing, which notes

Because the majority of (TelexFree’s) unsecured creditors are also victims of its securities fraud, the Commission action, pursuant to which the Commission may propose a distribution plan with or without the benefit of a receiver, will provide (TelexFree’s) creditors with a convenient and equitable forum to resolve their claims.

The SEC also make the argument that the TRO and preliminary injunction in place against TelexFree, its management and top promoters would ‘render continuation of (the bankruptcy case) in Nevada an exercise in futility‘. The reason for this being that ‘any action taken by TelexFree that affects their properties’, would put them in violation of the TRO and/or preliminary injunction.

This next point raised was particularly interesting.

The SEC name themselves TelexFree’s largest unsecured creditor, because they are ‘seeking disgorgement of all ill-gotten gains raised by’ TelexFree, in addition to any civil penalties that are to be handed out.

If, when the dust settles, and the SEC prevail in their action against TelexFree (and with TelexFree thus far seemingly ignoring the Massachusetts action, by all appearances they will),

(the SEC’s) claim will not be dischargeable in (TelexFree’s) Chapter 11 cases.

According to the Chapter 11 bankruptcy code, section 1141(a)(2)(A)&(B) and 523(a)(2)(A)&(B),

fraud debts owed to a governmental unit, such as the Commission (are) excepted (in Chapter 11 cases).

In summary, the SEC argue

it is likely that the securities laws regulatory actions will be the most significant issues facing (TelexFree) and their principals, and determination of securities laws issues will predominate.

3. Objection to DoJ’s request that a Chapter 11 Trustee be appointed (SEC, April 30th)

This objection against the DoJ’s application is based on the argument that the appointment of a Chapter 11 Trustee would be a “moot point”, should the SEC prevail in either having the Chapter 11 proceedings abstained or moved to Massachusetts.

Furthermore the SEC claim that given there’s “no current business activity” within TelexFree (due to the TRO currently in place), that the appointment of a Chapter 11 Trustee is not required.


1. Preliminary Injunction granted against Santiago De La Rosa and Randy Crosby

On the 30th of April, the Massachusetts District court granted the SEC their requested preliminary injunction against TelexFree top promoters Randy Crosby and Santiago De La Rosa.

You can read more about the preliminary injunction being granted in our separate article, published earlier today.

Important Upcoming Dates

  • 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

Bit of a mixed bag today but in a round-about way I suppose things make sense legally.

The preliminary injunction against De La Rosa and Crosby was to be expected, they basically had no argument against it. Neither does TelexFree and the remaining defendants, so expect to see more of the same on May 7th.

The motion against TelexFree’s request for an extension of time is neither here nor there IMO, as I imagine the bankruptcy case will be either moved, abstained (ignored) or suspended on May 2nd.

The abstention could be interpreted as a sign of weakness in the SEC’s case, but I think it’s more of a covering of their bases.

Basically the argument being made is that the appoint of a receiver or alternative distribution plan initiated by the SEC, is a far better option for recovering funds for TelexFree affiliates over the “suck eggs” TelexFree are proposing with a Chapter 11 bankruptcy.

Given that TelexFree only made $1 million in VOIP sales in two years, most of which was no doubt affiliate purchases for ROI qualification, the notion that the company will be able to make anywhere near what is owed to investors is laughable.

That of course didn’t stop Stuart Macmillan from yesterday declaring that he believes TelexFree ‘will be able to maintain 140,000 retail customers and generate $50 million a year going forward‘. What a riot.

Initially I thought the SEC’s objection against the DoJ’s request a Trustee be appointed, but after going through the objection I can see it makes some sense. The SEC (and rightfully so) seem pretty confident that they’ll either have the proceedings moved or abstained from by the court. As such there’s not really any need for a Chapter 11 Trustee.

Personally I’d have thought the two departments would have had some communication between them as to work out the best approach here, but I digress. Meanwhile I’m not sure why the SEC just didn’t leave the motion unopposed.

Should, for whatever reason, both their motions (venue change and abstention) be denied, then at least regulators have a fall-back with the Chapter 11 Trustee appointment (which would put TelexFree in control of the DoJ).

Then again, if the SEC are confident the included case-law in their respective motions wholly supports what they’re asking, why not oppose the Trustee motion. It’d certainly add a bit less confusion on May 2nd, which is shaping up to be a big one.

I’ve cleared my schedule Saturday and expect to be stuck behind the computer for most of the day.

In related news, TelexFree was also fined R$5.6 million ($2.5 million USD) by Brazil’s “National Consumer” (Association), for ‘injuring thousands of consumers across the country‘.

Senacom, a division of the Ministry of Justice, began investigating TelexFree back in June 2013 after the company was shut down in Brazil. Senacom issued the fine yesterday, after their investigation revealed TelexFree to be “pyramid scheme”.

iG attempted to contact TelexFree’s Brazilian lawyers, but received no response. Carlos Costa, TelexFree’s Brazilian spokesperson, hasn’t been seen or heard from since TelexFree tried to pass off his wife as its largest creditor back in mid-April.