Trustee: TelexFree fraud tops out at over $3 billion dollars
Stephen Darr, the court-appointed TelexFree Trustee, submitted a report earlier this year identifying TelexFree was a $1.8 billion dollar Ponzi scheme.
With TelexFree’s bankruptcy proceedings on hold, Darr has submitted another damning assessment.
The guarantee of an astronomical return on the initial investment without the requirement to sell any product created perverse incentives for Participants.
Participants opened multiple User Accounts for the sole purpose of leveraging their fictitious profits, without the need to sell any product or recruit any individuals.
Some Participants appear to have invested a substantial portion of their life savings into the scheme seeking to quickly triple or quadruple their investment.
Participants opened hundreds of User Accounts, ultimately resulting in an exponential rise in the number of User Accounts.
In Darr’s latest report, he reveals the TelexFree’s Ponzi empire processed over $3 billion dollars.Darr’s motion seeks to push the bankruptcy proceedings forward, which requires the court to acknowledge TelexFree ‘engaged in a Ponzi and pyramid scheme‘.
Writes Darr in support of his motion;
(TelexFree) ostensibly operated a multi-level marketing company engaged in the sale of voice over internet service but, as detailed herein, the (TelexFree’s) operations actually were a massive Ponzi/pyramid scheme that ensnared as many as a million or more participants from multiple countries.
Participants opened approximately 11,000,000 User Accounts (as hereafter defined) and purchased membership plans and/or Voice over Internet Protocol (“VoIP”) service with a transaction value of approximately $3,070,000,000 during the approximately two years of (TelexFree’s) operation of their scheme.
The startling $3 billion dollar figure was calculated following ‘an extensive investigation into the operations of the Debtors’ scheme and Participant involvement therein.‘
The actual extent of TelexFree’s fraud was made possible due to recently granted access to TelexFree’s computer system and internal records. Both of which were seized when the February report was submitted.
(TelexFree) maintained two computer applications for accessing and processing information from the Debtors’ database relating to User Account activity, referred to as “SIG” and the “Back Office”.
SIG stands for Sistemas de Informacoes Gerenciais, which is Portuguese and translates roughly to “Information Management System.”
SIG tracked the activity for Participants by User Account, and the User Accounts are the only records available to the Trustee to confirm Participant activity.
SIG was complicated, written in more than one language, and poorly maintained, and system documentation was unavailable.
The Trustee’s access to SIG was the culmination of a painstaking data recovery and analysis project implemented by the Trustee and his team of professionals with the assistance of investigators from HIS (sic) and the SEC.
I had no idea of TelexFree’s actual size at the time, but BehindMLM reviewed TelexFree back in July of 2012.
A pyramid scheme is a type of Ponzi scheme in that, in both instances, the scheme can only be sustained by the continued influx of new investors/participants to fund amounts needed to be paid to earlier investors/participants.
A Ponzi scheme generally involves only a direct, linear relationship between the owner of the scheme and the investors.
The pyramid scheme, however, has two additional elements: the ostensible right to sell a product, and the payment to participants for the recruitment of new participants, thereby creating the pyramid structure.
(TelexFree’s) compensation scheme had elements of both a Ponzi and pyramid scheme.
In my review I arrived at the same conclusion as Darr (above), that being TelexFree was obviously a Ponzi scheme.
As a result of the investigation, the Trustee has concluded that and requests a finding from the Court that the Debtors were engaged in a Ponzi/pyramid scheme, that any claim or portion of claim of Participants based upon accumulated credits arising from fictitious profits or commissions in Participants’ User Accounts as of the Petition Date should be disallowed, and that Participant claims should be determined on a “net equity” basis.
Translation: TelexFree’s promised ROIs were complete bullshit. Thus any claims of losses should be restricted to an affiliate’s investment, sans any withdrawals they made.
Looking towards eventually reimbursing victims for their losses, Darr’s motion reveals ongoing efforts to recover assets from TelexFree, it’s principals and insiders.
In connection therewith, the federal government seized more than $107,000,000 in cash, including funds on deposit and checks payable to the Debtors, their principals, or their affiliates. Federal authorities have also made forfeiture claims against approximately forty (40) other items of real and personal property standing in the name of the Debtors’ principals and their affiliates, including automobiles, real properties, and notes secured by mortgages on real properties.
The sum total of assets thus far recovered is not disclosed.
What is disclosed is the scope of TelexFree’s fraud, with some $360 million supporting over $3 billion dollars in Ponzi fraud.
While invoices associated with the sale of membership plans or VoIP Packages had a face value of approximately $3,070,000,000, only $360,000,000, or approximately twelve percent (12%) of that amount, was paid in cash to the Debtors.
The balance of these invoices was satisfied by the use of Participants’ credits.
$360 million went in, with compounding of monopoly money payouts resulting in over $2.7 billion in recorded but non-existent funds.
At the time it of its shutdown in April 2014, calculated ROIs owed to TelexFree affiliates was in the vicinity of over 5 trillion dollars.
Of the $360 million paid in, ‘$6,600,000 was from the sale of VoIP Packages.‘
But while $6.6 million in VOIP sales might sound impressive, 77% of the VOIP sales were made only after TelexFree changed it’s compensation plan.
The new compensation plan saw TelexFree affiliates required to purchase or sell a VOIP service, per AdCentral account they were receiving a weekly ROI on.
By and large, the few VoIP Packages that were sold were not used.
Of the $6,600,000 in VoIP Package cash sales, less than one percent (1%) of available minutes contained in these packages were actually utilized, further demonstrating that the Debtors were not operating a bona fide MLMP and the VoIP Packages were not a legitimate product.
This change was implemented in March of 2014, one month before the SEC shut down the company.
As to the eleven million TelexFree affiliate accounts;
There are approximately 900,000 unique Email Addresses in SIG associated with approximately 11,000,000 Debtor User Accounts.
The number of User Accounts associated with an Email Address varies widely.
A particular Email Address may be associated with only a single User Account or may be associated with hundreds or thousands of User Accounts.
Because each User Account may represent a separate Participant and some Participants entered the scheme using the Email Address of another Participant, the number of Participants is unknown but is likely in excess of 1,000,000.
Bear in mind, that’s just TelexFree’s US data.
When combined with TelexFree’s Ympactus operations,
SIG includes more than 17,000,000 distinct User Accounts associated with approximately 2,000,000 Email Addresses for both the US-based and the Brazilian-based operations.
Separate to the funds TelexFree processed, Brazilian authorities have seized around $300 million in TelexFree assets.
The Trustee is exchanging information with Brazilian authorities and is trying to develop a common protocol for administering claims and pursuing recoveries in the respective cases of Ympactus and (TelexFree).
Criminal and civil proceedings in Brazil meanwhile are “pending”.
The certification that TelexFree was a Ponzi scheme that Darr seeks meanwhile, would see investors barred from claiming the 5 trillion owed in ROIs.
Claims based on the accumulated credits should be disallowed because, in a Ponzi/pyramid scheme, investors who had no knowledge that the scheme was fraudulent are generally entitled to a claim only for the net amounts invested in the scheme and not for fictitious profits.
The accumulated credits based on the posting of meaningless advertisements are equivalent to the fictitious profits promised in Ponzi schemes.
The Participants were guaranteed an astronomical return by merely purchasing a membership plan and posting internet advertisements reportedly supplied by (TelexFree). Participants were not required to sell a product to receive payment.
Accordingly, claims based on the accumulated credits for the posting of advertisements should be disallowed.
The accumulated credits based on the recruitment of later Participants should also be disallowed because the recruitment activity only contributed to and perpetuated the (TelexFree) scheme and provided no value to (TelexFree’s) estates.
What would then follow is a claims process, using the aforementioned “net-equity” model:
The Net Equity claim of Participants should be determined as follows:
The amount invested by the Participant into the Debtors’ scheme, including amounts paid by the Participant pursuant to the Triangular Transactions, less amounts received by the Participant from the Debtors’ scheme, including amounts received by the
Participant pursuant to the Triangular Transactions.
“Triangular Transactions” refers to payments TelexFree investors made to their downline when they signed up, rather than to TelexFree itself.
These payments would still need to be verified (by way of transfers in the TelexFree backoffice), but otherwise would be permitted under the net-equity claim model.
Multiple accounts would also be aggregated, so as to calculate the total aggregate sum an affiliate invested weighed against their withdrawals.
Concluding that Carlos Wanzeler, James Merrill and Carlos Costa ‘worked in concert with one another to develop, market, and operate
their Ponzi and pyramid scheme‘ concert with one another to develop, market, and operate their Ponzi and pyramid scheme’, therefore rendering them ‘jointly and severally liable for the allowed claims of Participants‘, the Trustee has asked the court
- to find TelexFree operated a Ponzi and pyramid scheme
- to order that any claim or portion of claim of Participants based upon accumulated credits in Participants’ User Accounts as of the Petition Date shall be disallowed, and that claims should be determined on a “Net Equity” basis
- to order that (TelexFree) shall be jointly and severally liable for the claims of Participants
- to order that the Trustee’s findings made pursuant to this Motion shall be applicable throughout these proceedings and
- to grant such other and further relief as the Court finds just and proper.
If the court signs off on the Trustee’s finding and claims proposal (why wouldn’t they), the Trustee has then asked for authorization to contact TelexFree investors via email, regular mail and
via public notice on the Portal, the KCC website and the websites of certain multi-level marketing associations.
This contact would be to advise investors of the claims process and make them aware ‘the portal hosting the electronic proof of claim process is operational‘.
Claims from TelexFree victims will only be accepted via the online claims portal.
A bar date of ninety days from this communication would then be set, after which no further claims from investors would be accepted.
The Bar Date Notice will be provided to Participants, on the KCC website, and on the Portal in English, Spanish, and Portuguese.
The Trustee will also provide public notice of the Bar Date Notice in the following online multi-level marketing websites: behindmlm.com, theponzibook.blogspot.com and Ponzitracker.com.
Pending a Judge signing off on Darr’s motions, stay tuned…
Footnote: A copy of Darr’s October 7th Motions are available from Kurtzman Carson Consultants, filed as case documents #623, #624 and #625 respectively.
Update 10th October 2015 – Judge Hoffman has signed off on Darr’s motions with endorsed orders filed on the 9th of October.
A hearing on the matter has been scheduled for October 14th to hear any objections. If those are overruled, the orders will become permanent and permit Darr to move forward and establish a claims process.