telexfree-logoUnavailable at the time the order denying James Merrill’s supression motions was published, Judge Hillman’s accompanying memorandum has since surfaced.

In the memorandum the reasoning behind Judge Hillman’s decision is explained. In great detail too I might add, with the memorandum coming in at a whopping twenty-five pages.

At issue is Merrill’s request for a Franks hearing and suppression of evidence collected against him.

Search warrants were granted to the DOJ based on affidavits filed by Special Agent Soares. Merrill contends the affidavits contain false and misleading statements.

One point of dispute Merrill raised was Agent Soares’ assertion that

TelexFree derived a miniscule amount of revenue from sales of VOIP service – less than 1% of TelexFree’s hundreds of millions of dollars in revenue over the last two years,” and that the “overwhelming majority of its revenue – the other roughly 99% – came from new people buying into the scheme.

Merrill argues that this conclusion was fundamentally unreliable because it was based on “[a]n analysis of the bank and credit card processing accounts” while ignoring the primary method of payment by TelexFree’s customers, which was a “back office” system of debits and credits.

The DOJ argue that Soares knew of the backoffice when he drafted his affidavits, and that his ‘opinion was a reasonable interpretation of the information available‘.

Judge Hillman concluded that Merrill, in his motions, had

not shown any material misstatements of fact in Soares’s analysis of TelexFree’s incoming revenue.

Rather, he disagrees with Soares’s conclusions based on the facts set forth in the affidavit.

Even if that conclusion was questionable, the underlying facts were disclosed in the affidavit, and Merrill has not challenged their veracity.

Accordingly, he has not shown any material misstatements to warrant a Franks hearing.

In a nutshell, Merrill was arguing on pseudo-compliance (in that the possibility of a conclusion drawn meant Soares was intentionally being deceptive), rather than pointing out “material misstatements” as required.

Other points of contention shot down include

  • the omission of VOIP minutes being sold constituted reckless behaviour
  • usage of TelexFree’s VOIP product countered Soares’ assertion that 99TelexFree was not a “genuinely competitive product”
  • TelexFree’s Alexa ranking had nothing to do with advertisements TelexFree affiliates were required to spam on classified websites (“the Alexa rating was likely boosted by the promoters themselves”)
  • that the aforementioned required spam could generate VOIP sales does not automatically mean that it did
  • TelexFree’s weekly ROI buyback was “discretionary” and “not guaranteed” (pseudo-compliance)
  • Brazilian Help was not an MLM company and therefore had nothing to do with TelexFree (despite Wanzeler testifying otherwise before the Massachusetts Securities Division)

A recurring theme was Merrill simply disagreeing with Soares’ opinion, rather than providing facts and information to disprove conclusions drawn in the affidavits.

For the reasons set forth above, I find that Merrill has not made the requisite showing that Soares’s affidavit contained intentional or reckless false statements or omissions regarding information that was necessary to the establishment of probable cause.

Accordingly, he is not entitled to a Franks hearing, and the evidence derived from the search warrants that relied on Soares’s affidavit will not be excluded on this basis.

Merrill’s motion for a Franks hearing and to suppress will be denied.

With respect to the search warrants issued and suppression of evidence collected, Merrill argued that

all four subcategories (in the search warrant) were overbroad because Soares’s affidavit did not establish probable cause that Brazilian Help and Diskavontade were engaged in criminal behavior.

He further contends that the subcategories were overbroad with respect to these companies because there was no time limitation with regard to the records sought.

Merrill contends that, even if Brazilian Help and Diskavontade were sufficiently connected to TelexFree to establish probable cause to search for records pertaining to them, there is no indication that any criminal activity occurred prior to 2012.

Countering this is Wanzeler’s testimony before the Massachusetts Securities Division, during which he claimed

“Brazilian Help, Inc./Diskavontade provided VOIP service and used a compensation structure that encouraged company promoters to recruit both customers and new promoters.”

Wanzeler described the relationship between TelexFree and Diskavontade as “the same company for me”.

Based on this, Judge Hillman found

Soares’s affidavit established probable cause to search for all records located at TelexFree’s headquarters that pertained to these other companies.

A 2012 date restriction was not necessary because, although it appears that TelexFree was not incorporated until 2012, Wanzaler testified that he
considered TelexFree to be the same company as Brazilian Help/Diskavontade, which was formed in 2002.

Merrill’s Fourth Amendment argument was thus thrown out, because

It is not a Fourth Amendment violation to seize computers in order to take them to a secure location to search for the materials for which there is probable cause.

Merrill’s arguments that the Xand data storage facility raid warrant was overbroad were the same as his arguments that the TelexFree office raid was the same.

Having already found probably cause to grant the office raid warrant, the same was found with respect to the Xand warrant.

Finally with respect to Merrill’s personal email account, he claimed the warrant issued was again  “overbroad and lacking in particularity”.

Merrill argues that the warrant was unconstitutionally un-particularized because it did not include a date restriction in the first step of the search process, in which Comcast was to create an electronic duplicate of Merrill’s entire email account.

Merrill asserts that probable cause existed only as far back as 2012, and that the government could have easily limited the scope of the seizure
by restricting its request.

Judge Hillman disagreed, finding

that the two-step process set forth in the warrant to search Merrill’s email
account was consistent with federal law and did not violate the Fourth Amendment.

Merrill’s motion to suppress the evidence seized pursuant to the warrant to search his personal email account will be denied.

One concession Merril was granted however pertained to email evidence collected that postdated his arrest.

The government concedes that the search of the post-arrest material was “potentially problematic” because the supporting affidavit did not
contain allegations of post-arrest activities such as hiding evidence or attempting to cover up the alleged conspiracy.

The government has agreed not to use at trial any materials in Comcast’s production that postdate Merrill’s arrest.

Seeing as Merrill would have to be bonkers to have further incriminated himself after he was arrested via email, I don’t see this as an issue with respect to the DOJ’s case against him.

All in all I’m seeing Judge Hillman’s order as a preview of what’s to come at Merrill’s trial.

The DOJ have a strong case against him and it’s probably going to be another Paul Burks trial.

Merrill is currently scheduled to go on trial on October 24th. Stay tuned…


Footnote: Our thanks to Don@ASDUpdates for providing a copy of Judge Hillman’s Memorandum (filed August 31st).