Trustee: TelexFree was a $1.8 billion dollar Ponzi scheme
Ahead of a status conference in the TelexFree bankruptcy proceedings to be held tomorrow, comes a status report filed by the court-appointed Trustee, Stephen Darr.
In the report, among other things, it’s revealed that the extent of fraud that took place within TelexFree far exceeded any previous estimates.
(TelexFree) purported to be operating a multi-level marketing company engaged in the sale of voice over internet protocol services, but they were, in actuality, perpetrating a pyramid scheme involving as many as a million or more participants.
(TelexFree) and an affiliated company located in Brazil, known as Ympactus Comercial Ltda. (“Ympactus”), together obtained as much as $1,800,000,000 from individuals located throughout the world over a period of approximately two years.
$1.8 billion dollars?! Bloody hell.
The new figure reestablishes TelexFree as the biggest MLM Ponzi scheme of all time. Previous estimates by the SEC suggested TelexFree had only stolen around billion dollars or so.
No doubt largely contributing to a more accurate picture of TelexFree’s fraud, was the locating of a “key database” within seized equipment belonging to the company.
After obtaining a copy of the Debtors’ servers from federal authorities, MFC, through a process of experimentation, ultimately located a large database operating on one of the Debtors’ servers that appeared to contain much of the Debtors’ “big data”.
MFC attempted to access the contents of the database through a variety of means, initially without success.
MFC also determined that its copy of the database did not contain all of the information on the Debtors’ server from which it was copied due to the manner in which the data was stored.
MFC worked with HSI to access the missing data and through a variety of means, HSI and MFC were able to acquire the necessary data from the Debtors’ servers to allow MFC to access all relevant data from the Debtors’ database.
Through the process of virtualizing the Debtors’ network, MFC identified additional servers that were necessary to operate the Debtors’ network.
MFC and HSI worked together to locate and copy the missing drives. Once the key component servers were operating, it was necessary to obtain system passwords.
Passwords were ultimately obtained through a combination of research into various document productions received by the Trustee, communications with federal authorities, and password cracking.
After considerable research, the Trustee was able to ultimately determine that three (3) physical servers virtualized by MFC were necessary to access most of the essential data to understand the Debtors’ operations and Participant activity.
HSI are currently working on the TelexFree criminal case, so expect this new information to be presented there too.
To give you an idea of why this all took so long though, consider that
the database contains billions of records and perhaps over a trillion individual data points.
There was no instruction manual or documentation of any kind. The database was developed by programmers in Brazil; hence all field references are in Portuguese.
The developers apparently lacked the expertise to create and manage a system of this magnitude. As a result, system modifications were often done in a haphazard and disorganized fashion.
The Trustee’s report claims that
reconstructing the Debtors’ electronic records without configuration details was akin to assembling an airplane based upon 1,000 parts scattered on a manufacturing floor without assembly instructions.
Additionally, further information from Brazil has yet to be pored over;
The Trustee is informed that additional electronic records of the Debtors, including electronic mail communications, may reside on servers in Brazil, and the Trustee is working with law enforcement authorities in Brazil and the United States to obtain access to these records.
Additionally some interesting facts and figures in the run up to TelexFree being shutdown in the US are also provided:
- by the end of 2013 and early 2014, TelexFree was generating cash of as much as $50,000,000 per month
- when TelexFree changed its compensation plan affiliate investors initiated a “run on the bank” (rush to withdraw)
- $58,000,000 or more was paid out to certain Participants in the several weeks leading up to the filing of the (bankruptcy) petitions
- an additional $100,000,000 was requested by Participants but was not paid
Other interesting bits of information include:
- approximately 25,000 claimants have filed proofs of claim, either hard copy or electronic versions, with the Debtors’ claims agent, Kurtzman Carson Consultants or the Clerk of the Court
- approximately 10,000 Participants have submitted victim notification forms with the Federal Bureau of Investigation or the Commonwealth of Massachusetts, Secretary of State
- James Merrill might have a secret ownership stake in Ympactus (TelexFree’s Brazilian operations)
- TelexFree and Ympactus investor activity was recorded in the same database
- some 2.1 million email addresses and 17 million affiliate investors accounts (affiliates could have more than one account), are recorded in the TelexFree key database
- including monopoly money reinvestment, TelexFree generated approximately $4.2 billion dollars of non-existent investment funds ($1.8 billion in actual money went in)
- $151 million was paid by TelexFree insiders to certain investors for no apparent reason (the report describes these transactions as “a fraud within the larger fraud”)
- the “telexfree.com” domain name is registered to Carlos Wanzeler’s company, Disk a Vontade – as such the registrar has thus far refused to hand over control of the domain (which would include the TelexFree website) to the Trustee
- a filing of schedules and statements (pertaining to the bankruptcy case) is expected to be filed by the end of this month
- claim forms to address indirect investment with TelexFree (money paid to uplines etc.) are in the works
All in all,
the Trustee’s investigation is by no means complete.
The Trustee has made substantial progress toward the administration of these cases, particularly given the chaotic state of affairs that existed upon his appointment – the absence of any accessible books and records, the reluctance of the Debtors’ principals and some key employees to provide assistance, the proliferation of litigation involving the federal government, state government, and private plaintiffs, and the competing concerns of each constituency.
Since the Trustee’s appointment, a working version of the Debtors’ electronic records has been established and is being dissected, substantial assets have been recovered, and a framework has been established for working with governmental bodies and administering the cases.
The bankruptcy status conference is scheduled for February 5th. I’m not anticipating any surprises and expect that the court will direct the Trustee to continue his work.
Footnote: A copy of the TelexFree Trustee’s 3rd February 2015 Status Report is available from Kurtzman Carson Consultants.
Update 5th February 2015 – Following the publication of Stephen Darr’s Status Report, Judge Hoffman has now cancelled the scheduled February 5th Status Conference.