TelexFree file for bankruptcy in the US
It wasn’t even a week ago that I wrote about the maths behind TelexFree’s 2013 profit and loss statement not adding up.
Using conservative figures, I estimated that by the close of 2014 TelexFree would be liable for around $1.14 billion dollars. With the company taking in $689 million in 2013 (what would probably be their biggest year investment wise), it was obvious that the company was going to collapse.
Even if we ignore every commission except AdCentral ROIs, and attribute TelexFree’s entire commission payouts ($622 million) to AdCentral ROIs, that still leaves a deficit liability of $518 million going into 2014. And remember, we’ve totally discounted any other commission payouts.
The latest round of problems for TelexFree investors began a few days ago when their payouts were delayed. Typically paid on the Friday, affiliates were still left wondering where their money was come Sunday.
Unofficially this was apparently due to issues with their payment processor, however the real reason finally surfaced a few hours ago.
TelexFree is bankrupt.
On April 13, 2014 at 8:11 pm a special meeting of the Board of Directors (the “Board”) of Telexfree, Inc. (the “Corporation”) was held telephonically.
All of the parties present were able to be heard. All the directors of the Corporation, James Merrill and Carlos Wanzeler, were present. Also present were:
(1) from Greenberg Traurig LLP Nancy Mitchell, Jody Davis, Maria DiConza, Jonathan Bell, Matt Hinker, Avi Fox, Zack Polidoro, and Michael Cohen;
(2) from Gordon Silver Greg Garman and Teresa Pilatowicz;
(3) from Alvarez & Marsal Lawrence Hirsh, Bill Runge, Tim Meighan, and Aileen Daversa;
(4) from Joe H. Craft, CPA Joe H. Craft; and
(5) from Impact This Day, Inc. Stuart A. MacMillan.
The meeting was called to order by Carlos Wanzeler, President and a director, and on the agenda was the approval of the filing of a voluntary petition for relief under the provisions of Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101, et seq. (the “Bankruptcy Code”).
Upon motion duly made and seconded, the Board unanimously approved the following resolutions:
RESOLVED, that in the judgment of the Board of the Corporation, it is desirable and in the best interests of the Corporation, its creditors and other parties in interest, that the Corporation file or cause to be filed a voluntary petition for relief, along with certain affiliated entities, under the provisions of Chapter 11 of the Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court for the District of Nevada.
Filed on the 13th of April 2014, TelexFree’s Chapter 11 bankruptcy application is for TelexFree Inc., TelexFree LLC and TelexFree Financial Inc.
Checked on the application is an estimation of between $0-$50,000 owed in liabilities, which I can only describe as a gross underestimation. Especially considering a list is included with the application detailing TelexFree’s “creditors holding the 30 largest unsecured claims”.
Listed as “trade debts”, I believe these creditors are TelexFree’s top investor affiliates. I’ve reproduced the list of the creditors (including the amounts owed) below:
- Jozelia Sangali – $1,346,731
- Leonardo Fransisco – $903,813
- DL1 Inc – $740,910
- Renato Alves – $737,264
- Benjamin Argueta – $673,543
- Marco Almeida – $553,579
- JMC Inc – $500,308
- Edwin Herman Maina Lima – $496,201
- David Martinez – $493,707
- Paola Zollo Alecci – $456,342
- Robert Bourguinon – $439,901
- Carla Peres – $4390,901
- Pedro Taveras – $438,318
- Nathana Santos Reis – $402,462
- Jose Anominondas Jr. – $388,771
- Vagner Roza – $386,447
- Noberto Rey – $374,237
- Jacqueline Zieff – $367,109
- Jose Carlos Maciel – $364,086
- Michael Calazans – $350,420
- Bruno Graziani – $344,505
- Renato Ribeiro – $340,479
- Marcelino Salazar Bacilio – $337,291
- Edison Oswaldo Jurado Aleman – $312,890
- Roman Mishuk – $310,913
- Rosa Marina Cabral Souto – $303,026
- Du Painting Dba – $302,831
- Graca Luisa Andrade – $298,988
- Paulo Fransico da Silva – $295,946
- Leone da Silva Santos – $295,946
Absent from the list are company “insiders”, which, among other parties (lawyers for example), would cover all of TelexFree management.
A name of note on the list is Edwin Herman Maina Lima, who used an Acre government email address to sign up:
Not sure what’s going on there…
Looking forward, no doubt the burning question TelexFree affiliate investors are now asking themselves is “will we get paid?”
After already lying to their affiliates by telling them existing AdCentral ROIs would be paid out to the end of their 52 week maturity period, this latest slap in the face is probably going to have many of them pushing their panic buttons.
TelexFree don’t have the money they said they’d pay them with.
Laid out in an “Emergency motion” filed on the 13th of April, TelexFree is pegging their hopes on TelexApp, the TelexFree99 VOIP service and “other new products”;
TelexFree is operated as a multi-level marketing company, and currently has over 700,000 associates or promoters (the “Promoters”) worldwide.
Prior to the filing of these Chapter 11 Cases, TelexFree compensated Promoters for the sales of the VoIP product, the placing of advertisements and the recruitment of other Promoters down line.
Because questions were raised about its compensation plan, the Company on March 9, 2014, discontinued its original compensation plan (the “Original Comp Plan”) and replaced the Original Comp Plan with a revised compensation plan (the “Revised Comp Plan” and together with the Original Comp Plan, the “Pre-Petition Comp Plans”).
At the time of the roll-out of the Revised Comp Plan, the Company decided to honor certain discretionary payments to Promoters under the Original Comp Plan. These discretionary payments quickly became a substantial drain on the Company’s liquidity.
The Company discontinued the Pre-Petition Comp Plans and ceased making discretionary payments under the Original Comp Plan prior to the Petition Date.
The Company believes the sales of the 99TelexFree product, the TelexFree “app,” and other new products will ultimately prove successful and profitable.
The reason the payments to existing affiliates who had invested became a “substantial drain” was because, after TelexFree changed the rules, nobody was investing any new money with them.
Ponzi ROI liabilities are always going to be a “substantial drain”, but cut off your new affiliate investment revenue and the results are disastrous (as in “can we please have bankruptcy because we have no money” disastrous).
Or as TelexFree puts it:
The trailing liabilities arising from the Original Comp Plan are difficult to quantify and have resulted in substantial asserted liabilities against the Company, a number of which may not be valid.
As a result, the Company filed these Chapter 11 Cases to obtain the breathing room to address its operational and regulatory issues, revise the Pre-Petition Comp Plans, and quantify and address the claims against it.
In a nutshell? As with all Ponzi schemes, things cannot go on as they have because the money just isn’t there.
Now, as I watch my inbox implode with questions from TelexFree affiliates, I’m going to preface my thoughts with the acknowledgement that US bankruptcy law is way above my pay grade.
As I understand the situation, TelexFree have run a Ponzi scheme for a few years, racked up huge sums of unpayable ROI liabilities and now, through bankruptcy, are seeking a “get out of jail free and we don’t have to pay anyone” card.
Not only that, they’re also looking to “legally” get out of the $1.12 billion+ they will owe affiliates by the end of 2014.
The bullshit they’re feeding the US courts to justify all of this?
The Company believes that a restructuring of its debt, adoption of a post-petition revised compensation plan, unveiling of new products (including the TelexFree app), and return to growing its Customer base will allow the Company to realize its full potential and generate significant value for its constituents.
Hardly news to anyone involved or watching TelexFree, is the problem of there being a negligible amount of legitimate customers within the company.
Nobody is buying TelexFree’s products and services other than affiliates, and even then only so that they could qualify for their AdCentral ROIs. Cancel those payments via “compensation plan revisions” and you’ve got nobody at all paying TelexFree for their products and services.
It’s just that simple.
Again, I’ll strongly emphasize the fact that US bankruptcy law and Ponzi schemes is something I haven’t come across in my five years of covering the MLM industry, but honestly how the SEC are going to let this all go through unopposed leaves me speechless.
I suspect the next 24-48 hours are going to one hell of a show to watch (or however long it takes for the SEC or other applicable party to shoot this down). Given the nature of TelexFree (a billion dollar plus Ponzi scheme), I can’t see them getting their application approved.
You don’t get to stash away who knows how many millions of dollars during the course of two years and then shaft everyone by pulling a fast one under the guise of bankruptcy. It’ll be an absolute travesty of a miracle if TelexFree are granted their Chapter 11 proposal.
Meanwhile, for any TelexFree affiliates wondering where their money is – check with those people you see on stage at TelexFree events. Your money has been transferred over to their bank accounts and now Carlos Wanzeler, James Merril and Carlos Costa are trying to legally get you to “suck eggs”.
Or as TelexFree CEO in hiding Stuart Macmillan puts it:
We anticipate that our global operations will continue to provide our customers with the high-quality products and services they have come to expect.
We are taking this major step because we continue to believe in our business, our products and the enthusiasm of our world-class team. We believe that this restructuring plan, which will include significant enhancements to our governance practices and internal controls, will help us to build a stronger and more sustainable financial and operational foundation for the future.
As a result of the filing of the chapter 11 cases, TelexFREE anticipates that it will have the time to build a solid foundation based on a compensation plan that rewards sales associates and promoters for customer acquisition and the promotion of well-established and new products.
Our collective success depends on our united commitment to offer our customers the finest communications products and services available anywhere in the world. I look forward to moving through the process quickly with the support of our independent sales associates during this transition and the ongoing dedication of our customers.
Update 14th April 2014 – The top TelexFree affiliate named in the bankruptcy proposal, Jozelia Sangali, is apparently the wife of TelexFree owner Carlos Costa:
Carlos Costa indirectly was playing the TelexFree AdCentral Ponzi scheme through his wife, to the tune of $1.2 million dollars. Whodathunkit?
Update 13th April 2014 #2 – TelexFree’s initial bankruptcy proposal has been rejected due to “incomplete and/or insufficient filing”.
Thirteen required declarations were absent from the initial filing:
– Summary of schedules
– Real property
– Personal property
– Creditors holding secured claims
– Creditors holding unsecured priority claims
– Creditors holding unsecured nonpriority claims
– Executory contracts and unexpired leases
– Declaration concerning debtor’s schedule
– Statement of financial affiars (guess why they didn’t include this lol!)
– Statement of compensation
– Tax identification number
– Declaration under penalty of perjury (guess why they didn’t file this either!)
TelexFree have 14 days to file the above (April 28th).