Would TelexFree survive the SEC WCM777 shutdown?
Earlier this month, Massachusetts Secretary of State William Galvin’s office revealed that they were
investigating a Marlborough-based telephone marketing company that has already been banned in Brazil for running a pyramid scheme.
The inquiry stemmed from the office’s investigation into a similar company that was accused of targeting Brazilian immigrants in Massachusetts with a multi-marketing scam, said Brian McNiff, a spokesman for Galvin.
The “telephone marketing company” they were investigating was of course none other than TelexFree, with the company later confirming they were indeed under SEC investigation.
Meanwhile the “similar company” mentioned above is WCM777. Shutdown yesterday by the SEC after it was revealed to be a $65 million dollar Ponzi scheme. In taking down WCM777, the SEC filed a 24 page complaint with a Californian District Court.
Given the “similarities” between TelexFree and WCM777 and the former also being under SEC investigation, I thought it’d be worthwhile to go through the SEC complaint and see how TelexFree stacks up.
Foreword: Given that the SEC are likely to be investigating the compensation plan TelexFree used prior to the most recent changes, that is what has been focused on in this article.
Much confusion surrounds the recently changed TelexFree compensation plan, with the company failing to release any current official plan documentation to affiliates or the general public. /end foreword
The SEC WCM777 Ponzi complaint opens with the SEC providing some background information on the scheme:
This matter involves an ongoing pyramid scheme, Ponzi scheme, and misappropriation of investor funds through an unregistered securities offering that targets members of the Asian-American and Hispanic-American communities, as well as foreign investors.
That TelexFree are actively targeting Hispanic-American communities is no secret. In a spammy paid advertisement for TelexFree, eReleases recently wrote
You say you haven’t heard of TelexFREE? Then you probably aren’t one of the more than 1 million Portuguese-speaking residents of the Commonwealth of Massachusetts.
Before TelexFREE, Portuguese speakers calling home to Brazil or Portugal were paying high international rates or suffering the frustration of trying to teach elderly parents how to use Skype…after they taught them how to get online.
As for the Asian-American community, Randy Crosby, credited as a “TelexFree leader”, recently revealed on an affiliate investor call that the company had “opened an office in Hong Kong”.
Whether or not this will translate into targeting of the Asian-American community remains to be seen but by establishing roots in Hong Kong, TelexFree appears to be adopting a proactive approach to securing Asian-American investor funds.
Moving onto WCM777’s business model, the SEC wrote that the company
do(es) not realize any appreciable revenue other than from the sale of “packages” of cloud services to investors.
WCM777 is not profitable, and is a pyramid scheme. Defendants use some of the investor funds to make Ponzi payments of returns to investors.
To date TelexFree have never released figures detailing how many non-affiliate VOIP customers they have, versus “VOIP contracts” purchased by affiliates to qualify for commissions.
In another paid advertisement, in which TelexFree accuses the Rwandan Ministry of Trade and Industry of lying after they recently banned the company from operating in Rwanda, TelexFree claims to have ‘half a million customers worldwide‘.
How many of these customers are unused commission qualification positions is unknown, but in the advertisement TelexFree claims they ‘booked 10,859,669 minutes of VOIP calls internationally‘ last month.
This equates to 21 minutes of monthly calls per TelexFree VOIP account, or just 43 seconds a day of VOIP calls in a standard 30 day calendar month. At $49.90 a month, why TelexFree’s VOIP service never caught on should be obvious.
Infact, and again sourced from one of eReleases paid advertisements, TelexFree owner Jim Merril revealed that
We have been in VOIP telecommunications for more than a decade; but it wasn’t until about two years ago that we found a niche community that expressed such overwhelming need for our product. Combined with a distribution method that takes our services to them economically.
As per Merril’s confession above, it wasn’t until TelexFree began accepting $299 investments in AdCentral positions from affiliates that anybody started to use their VOIP service.
These AdCentral positions were invested in by affiliates on the promise of a 52 week $20 weekly ROI, as advertised by TelexFree themselves on the company’s website:
Via a series of five “plans” bundled with cloud-computing services, WCM777 accepted investment deposits from affiliates ranging from $399 to $1999:
And here’s what the SEC thought about that:
In the WCM777 offering, Defendants offer and sell five different levels of “packages” of cloud-based computing services. In addition to the computing services, each package level promises returns in the form of cash and “points.”
Each of the five different levels of membership units purport to provide purchasers with some combination of cloud computing services, with more services being provided to members who purchase higher levels.
Each of the five levels of packages promises to pay a return in 100 days, which is called the “Global Business Bonus.”
The first four levels of packages promise to pay a total return of approximately 100% of the amount invested, with half paid in cash and half paid in points.
The fifth, or highest, level offers to pay a total return 160% of the amount invested, with half paid in cash and half paid in points.
Thus, the fifth level offers to pay an 80% return in cash in 100 days. The packages and the points are also securities in the form of investment contracts. They represent an investment of money, in a common enterprise, with the expectation of profits to be derived from the efforts of a third party.
The investments purportedly gain in value depending on the success of the WCM777 enterprise, and returns are based on, among other things, its growth and profitability.
It should be noted that WCM777 did not offer their cloud service at a retail level, whereas TelexFree does have a retail VOIP offering. That said TelexFree began forcing affiliates to purchase “99 TelexFree” VOIP services beginning mid 2013 if they wished to invest in AdCentral positions.
As I’ve mentioned previously, to date TelexFree have failed to release any figures on their retail VOIP sales figures. Personally, based on comments made by TelexFree affiliates trying to market the service, I believe anything north of 1% would be optimistic at best.
In any case, one can simply substitute WCM777 and their cloud-service mentioned in the extract from the SEC complain above, and it still reads as accurately as the original.
In the TelexFree AdCentral offering, Defendants offer and sell AdCentral “packages”. In addition to the VOIP service, each package level promises returns in the form of cash.
Each AdCentral membership units purport to provide purchasers with some combination of VOIP services, with more services being provided to members who purchase more AdCentral positions.
Each AdCentral position promises to pay a return in 52 weeks, which is called the “be our promoter bonus.”
The AdCentral packages promise to pay a total return of approximately 347% of the amount invested.
The AdCentral positions are securities in the form of investment contracts. They represent an investment of money, in a common enterprise, with the expectation of profits to be derived from the efforts of a third party.
The investments purportedly gain in value depending on the success of the TelexFree enterprise, and returns are based on, among other things, its growth and profitability.
It almost fits too perfectly.
Note that the 347% ROI was calculated by multiplying the advertised $20 a week ROI by 52 and then dividing it by the initial $299 investment.
Top TelexFree affiliates purportedly have thousands of open AdCentral positions, which, despite the SEC investigation and recent changes made to the compensation plan, TelexFree have promised to continue to pay out $20 a week ROIs till the positions expire.
Looking forward it’s noted that the WCM777 SEC investigation began in earnest last October, which means it took them roughly six months to shut the scheme down.
When exactly the TelexFree investigation began is unclear (the SEC do not publicly comment on open investigations), but TelexFree revealed they were first ordered to hand over documentation to the agency back in April 2013 and again in January of this year.
With a much broader affiliate investor-base and charges of money laundering and embezzlement being raised in Rwanda and Brazil, I imagine the scope of the SEC TelexFree investigation is much more complex.
To his credit, when Xu became aware he was being investigated he immediately “closed” WCM777’s US operations. Xu did keep affiliate investor money already deposited but, at least on the public record, put a stop to new US investor funds entering the scheme.
TelexFree meanwhile if anything are amping up their recruitment efforts in light of their SEC investigation.
Company owner Carlos Costa recently cut a video sharing his TelexFree investment strategy. In addition to the newly announced office in Hong Kong, Randy Crosby invited “Stephan” to speak on the previously mentioned TelexFree affiliate call.
Stephan, who Crosby introduces as being “out of Haiti”, tells listeners:
[32:28] We have meetings going on every day and today I have a meeting at 5pm. I’m going to get ready to go after the call here.
[32:54] This is amazing, TelexFree is the real deal. People need to join ASAP. Don’t think twice. Whoever invited you to this call, they love you, they care about you. Join TelexFree.
This is the company of the future. And right now I know that alot of you on the call need this opportunity. That’s my message to you: Join TelexFree ASAP.
For those unfamiliar with the Caribbean nation, Haiti is “the poorest country in the Americas“.
Footnote: The Randy Crosby TelexFree affiliate investor call cited in this article can be listened to below in its entirety.
The call is believed to have taken place over the last few days, having been only recently uploaded just a few hours ago: