telexfree-logoTwo days ago saw the latest TelexFree bankruptcy hearing take place, with the outcome being the almost certainty that TelexFree’s management and owners would lose control of the company.

In their place a Chapter 11 Trustee would be appointed, which would effectively put TelexFree in the control of US regulators (specifically the Department of Justice).

Initially TelexFree, or at least their lawyer Joseph Davis, welcomed the decision:

A lawyer for TelexFree said at the hearing that the company wouldn’t object to the trustee’s appointment.

“We agree that it makes sense to put in place a Chapter 11 trustee,” said Joseph Davis, a lawyer for TelexFree. “I understand why control of the company should not remain in the hands of management that preceded the bankruptcy.”

At the time, I didn’t quite grasp the punchline behind that last statement. TelexFree do indeed not object to the appointment of a Trustee. But as with all things TelexFree, turns out there’s a catch.

One of the side-effects of a Chapter 11 Trustee being appointed is that Carlos Wanzeler and Stuart MacMillan lose control of the company. They are shut out completely and have no voice in any decisions made.

As evidenced by TelexFree’s latest filing in the bankruptcy court, this isn’t a prospect they’re too happy with.

In a Motion requesting the authorization to retain Stuart MacMillan as TelexFree’s CEO, the company writes

(TelexFree) request entry of an order authorizing the retention and employment of Stuart A. MacMillan as Interim CEO to the Debtors nunc pro tunc as of the (bankruptcy) Petition Date.

Mr. MacMillan will make decisions regarding the Debtors’ reorganization efforts and their Chapter 11 Cases, as further described below.

Mr. MacMillan is well qualified to act on the Debtors’ behalf given his knowledge and expertise with respect to multi-level marketing companies. In addition, Mr. MacMillan has taken steps to become familiar with the Debtors’ business and financial affairs.

Accordingly, the Debtors submit that the retention of Mr. MacMillan on the terms and conditions set forth herein is necessary and appropriate, is in the best interests of the Debtors’ estates, creditors, and all other parties in interest, and should be granted in all respects.

TelexFree go on to argue that MacMillan should be retained because

Pursuant to the terms of the Engagement Letter, Mr. MacMillan has the authority to make decisions regarding management and operations of the Debtors and the Debtors’ restructuring process and execute binding agreements on behalf of the Debtors, and has been performing such duties for the Debtors since his retention.

Further, pursuant to the Engagement Letter, Mr. MacMillan performs all services, acts, or things necessary or advisable to manage and conduct the business of the Debtors which are normally associated with the position of Chief Executive Officer.

If you’re like me, the question of impartiality has probably raised its head by now. I mean isn’t that one of the core reasons the bankruptcy Judge is going to appoint the US Trustee in the first place?

Here’s TelexFree’s answer:

To the best of the Debtors’ knowledge, information, and belief, Mr. MacMillan has no connection with, and holds no interest adverse to, the Debtors, their creditors, or any other party in interest, or their respective attorneys or accountants, or the Office of the United States Trustee or any person employed in the Office of the United States Trustee, in the matters for which the Interim CEO is proposed to be retained except as disclosed in the MacMillan Declaration.

The Debtors attach the MacMillan Declaration, which discloses, among other things, any relationship that Mr. MacMillan has with the Debtors, their significant creditors, or other significant parties in interest.

Based upon the MacMillan Declaration, the Debtors submit that Mr. MacMillan is a “disinterested person” as that term is defined by section 101(14) of the Bankruptcy Code.

The Debtors submit that the retention of Mr. MacMillan on the terms and conditions set forth herein is in the best interests of the Debtors, their creditors, and all parties-in-interest.

Putting aside the fact that Stuart MacMillan was brought in solely to try to negate $1 billion in Ponzi liabilities through Chapter 11 bankruptcy (that benefits affiliate creditors how?), there’s one glaring admission that blows TelexFree’s “disinterested” assertion out of the water:

(TelexFree) agreed to pay Mr. MacMillan a monthly, non-refundable fee of $50,000.

Prior to the Petition Date, the Debtors remitted to Mr. MacMillan a retainer in the amount of $180,000 (the “Retainer”).

If we backdate these “non-refundable” payments to March, that’s around $330,000 of stolen investor money TelexFree have paid MacMillan thus far.

And $50,000 “non-refundable” payments for as long as he holds the position of CEO? Sounds like a pretty heavy “adverse interest” in TelexFree to me.

Hell I’ll even go one step further: Disinterested my ass, Stuart MacMillan is being paid directly by TelexFree.

And do we really need to dig up MacMillan’s humiliating “I know nothing about TelexFree” testimony at the May 2nd Nevada bankruptcy hearing?

Let’s cut the crap and call this out for what it is: Carlos Wanzeler is looking to keep his inside man in place while regulators do their thing.

If you consider:

In the United States, criminal provisions relating to bankruptcy fraud and other bankruptcy crimes are found in sections 151 through 158 of Title 18 of the United States Code.

Bankruptcy fraud includes filing a bankruptcy petition or any other document in a bankruptcy case for the purpose of attempting to execute or conceal a scheme or artifice to defraud.

Bankruptcy fraud also includes making a false or fraudulent representation, claim or promise in connection with a bankruptcy case, either before or after the commencement of the case, for the purpose of attempting to execute or conceal a scheme or artifice to defraud.

Bankruptcy fraud is punishable by a fine, or by up to five years in prison, or both.

Knowingly and fraudulently concealing property of the estate from a custodian, trustee, marshal, or other court officer is a separate offense, and may also be punishable by a fine, or by up to five years in prison, or both.

The same penalty may be imposed for knowingly and fraudulently concealing, destroying, mutilating, falsifying, or making a false entry in any books, documents, records, papers, or other recorded information relating to the property or financial affairs of the debtor after a case has been filed.

Certain offenses regarding fraud in connection with a bankruptcy case may also be classified as “racketeering activity” for purposes of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Any person who receives income directly or indirectly derived from a “pattern” of such racketeering activity (generally, two or more offensive acts within a ten-year period) and who uses or invests any part of that income in the acquisition, establishment, or operation of any enterprise engaged in (or affecting) interstate or foreign commerce may be punished by up to twenty years in prison.

Bankruptcy crimes are prosecuted by the United States Attorney, typically after a reference from the United States Trustee, the case trustee, or a bankruptcy judge. (Wikipedia)

The U.S. Trustee does not have prosecution powers, but is required by law to refer information regarding potential criminal violations of bankruptcy laws to the United States Attorney. (Wikipedia)

Specific responsibilities of the United States Trustees include:

  • Taking legal action to enforce the requirements of the Bankruptcy Code and to prevent fraud and abuse
  • Referring matters for investigation and criminal prosecution when appropriate

(They)  also identify and help investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies. (The Department of Justice)

The appointment of a US Trustee (which TelexFree filed an objection to when it was first requested by the DoJ), has likely resulted in the soiling of more than a few undergarments.

And the prospect of having your $1 billion Ponzi scheme combed over by forensic accountants and DoJ investigators must be terrifying.

Whether a Judge grants Wanzeler permission to retain MacMillan so he can send reports down to Brazil (where Carlos Wanzeler is currently hiding from US authorities), and attempt to skew recovery efforts in favor of TelexFree’s owners, remains to be seen.

It is expected that a US Trustee will be formally appointed by week’s end (if not early next week). Meanwhile the criminal and civil regulatory cases against TelexFree and its management continue.


Footnote: You can read TelexFree’s latest “retention of Stuart MacMillan” filing over at Kurtzman Carson Consultants.