Merrill wants all seized TelexFree evidence suppressed
James Merrill’s criminal trial is currently scheduled for October 3rd, just over four months away.
Thus far whatever defense Merrill has planned has been kept under wraps. On the offense side of things though, Merrill has gone all out in a hilarious set of motions filed from May 20th…
According to his filed motions, Merrill wants all seized evidence against him suppressed.
In the misguided belief that doing so would absolve them of civil and criminal liability for operation of a $3 billion dollar Ponzi scheme, TelexFree filed for bankruptcy on April 13th, 2014.
On April 17th the Department of Homeland Security and FBI raided TelexFree offices.
Through three filings made on May 20th, Merrill argues that evidence collected during these raids should be suppressed.
This includes all evidence collected from
- TelexFree, 225 Cedar Hill Street, Marlborough, Massachusetts
- Exigo Office Inc., 8130 John W. Carpenter Freeway, Dallas, Texas
- Xand Corporation, 34 St. Martin Drive, Marlborough, Massachusetts, and
- James Merrill’s personal email account, Jim-Merrill(at)comcast.net.
Merrill contends that the search warrants behind the seizure of evidence, supported by an affidavit by Special Agent John S. Soares,
contained false statements and/or reckless misstatements of fact, as well as material omissions of facts, all of which ultimately render the search warrants invalid.
Moreover, in averring that TelexFree constituted a pyramid scheme that derived 99% of its revenue from the recruitment of promoters, rather than actual sales, Agent Soares provided the Court with many false and misleading statements regarding TelexFree’s business operations, its systems and the usage of its product, and Agent Soares failed to apprise the Court of many significant, material facts readily available to him.
Like I was, you’re probably dying to know what the misstatements, omissions of fact and false and misleading statements Merrill is referring to.
Well grab some popcorn, we’re about to venture deep into Ponzi denial country.
In short, Agent Soares’ affidavit is built upon the following foundational premise: TelexFree was a pyramid scheme that derived less than 1% of its revenue from the sale of its product
As documented herein, however, Agent Soares’ foundational premise rests upon a revenue analysis that is fundamentally and demonstrably flawed.
In assessing TelexFree’s revenue, Agent Soares examined only TelexFree’s banking and credit card records, and thereby ignored TelexFree’s “back office” accounting system, which Agent Soares knew or had reason to know served as the primary revenue stream for TelexFree.
Huh? How can a “backoffice” serve as a revenue stream?
By limiting his financial analysis to banking and credit card records, Agent Soares ignored the primary method of payment by TelexFree’s VoIP customers— namely, the “back office” system of debits and credits.
Oh right, I see.
Merrill’s talking about money that didn’t exist. Here’s the thing, when you’re running a Ponzi scheme, the money you claim is being transferred around within your system largely doesn’t exist.
Instead one has to look at funds paid into the system, which from the sounds of it is exactly what Agent Soares did.
Rather than directly purchasing the product from TelexFree with a credit card, a customer could pay the $49.90 monthly fee directly to a promoter; then the company would deduct/credit the amount from commissions owed to the promoter in the “back office.”
Agent Soares’ omission of this significant stream of revenue for TelexFree renders his financial analysis fundamentally flawed and materially misleading.
Uh, the TelexFree Trustee has already gone over all of the relevant seized information, concluding tha, within the backoffice or otherwise, there was no substantial retail activity taking place within the company.
Had Agent Soares’ financial analysis properly included all incoming revenue from the “back office” he would not have been able to portray TelexFree as a pyramid scheme.
You’re asking the court to ignore the fact that TelexFree was a Ponzi scheme with little to no retail activity taking place, based on Soares’ assumption on the only evidence he had at the time, that being verifiable funds paid into TelexFree by and large only by investors, despite the fact that his analysis was later proven correct based on examination seized data you’re now trying to suppress?
What manner of Ponzi illogical idiocy is this?
The recklessness of Agent Soares’ financial analysis is illustrated by the government’s own undercover interaction with a TelexFree promoter.
In his affidavit, when Agent Soares recounts how an undercover agent signed up to become a TelexFree promoter, he actually notes that the government agent joined TelexFree by “using a check made payable to the Person A,” not a credit card or even a check made payable to TelexFree.
As such, the very funds paid by the government agent would not have appeared in TelexFree’s banking or credit card records.
Yeah but… Soares’ signed up as an affiliate. The hell does that have to do with retail customer activity?
Agent Soares knew the “back office” accounting system existed. Indeed, in his affidavit, he acknowledges that the “back office” represents a potential repository of incoming revenue.
None of which had anything to do with retail activity, because retail customers weren’t paying affiliates directly for Ponzi positions – only affiliates were.
Any VOIP activity was recorded externally as revenue entering TelexFree.
He then asserts, however, that it was “unlikely” that “significant retail sales of 99TelexFree to genuine third-party customers are accomplished in this manner.”
An assertion that proved to be true following analysis of the seized data. Had it of not been true and TelexFree had billions of dollars in non-recorded retail revenue, Merrill wouldn’t have been indicted for Ponzi fraud.
So uh, what is it you’re arguing again Merrill?
This statement was profoundly misleading, and Agent Soares’ reasons for quickly dismissing the “back office” as a “significant” source of incoming revenue ignores several realities.
The reality that what, he was 100% correct and TelexFree had no significant retail sales activity generated from within its backoffice?
These arguments from Merrill just keep on getting weirder and weirder.
There are several problems with Agent Soares’ assertion that credit cards were the “likely option” for TelexFree customers.
First, with a customer base composed predominantly of immigrants and residents of emerging countries, many TelexFree customers either did not possess credit cards or were more comfortable providing direct payment to a promoter (who they knew personally, as contrasted with a distant corporation).
Yet what little retail activity was taking place was traceable via credit activity. It is only the investors who participated in the paying of affiliates, which has nothing to do with retail sales activity.
Second, and importantly, it was in TelexFree’s and the promoter’s interest to avoid credit card processing and bank wiring fees wherever possible.
A company as large as TelexFree could lose millions of dollars in transaction costs and processing fees.
What does that have to do with retail customers? When was the last time you purchased a product or service as a retail customer and gave consideration to fees the merchant might be charged?
All Merrill is doing is disingenuously trying to apply the backoffice recruitment scheme to non-existent retail sales, which he quite obviously can’t prove existed – because they didn’t!
How’s that popcorn going? Need a refill?
In his affidavit, Agent Soares claimed
paying via a promoter—instead of simply paying the site itself—implies a level of familiarity and trust between the promoter and the new customer, that is, that the promoter knows the customer…
Anyone paying for the VOIP product in that manner—even assuming they actually use the product instead of simply buying it to satisfy TelexFree eligibility requirements—is most likely a newly-recruited promoter.
there is no factual basis to support Agent Soares’ proffered conclusion that an implied “level of familiarity and trust between the promoter and the new customer” translates to the “customer” actually being a “newly-recruited promoter.”
Naturally, a new customer that is familiar with the promoter would feel comfortable providing the promoter with a direct payment for the service.
There is simply no foundation for Agent Soares’ wild speculation that direct payments must have been by newly-recruited promoters, rather than actual customers.
Well y’know, except for the fact that paying an affiliate off the books is not typical retail customer activity.
Nevermind TelexFree provable had little to no retail activity taking place, with transactions through the backoffice by and large attributable to affiliate recruitment.
But uh yeah sure, there was “no foundation” for Agent Soares’ totally correct speculation.
Agent Soares omitted significant, material information from his affidavit that would have critically undermined his foundational conclusion that TelexFree had no real customer base.
Common sense dictates that the use of a phone service is easily tracked by two ways: payment and actual usage.
As detailed during the bail hearing in this case, the actual invoices and records from the companies that provided the backbone service for TelexFree, including companies such as Liga Telecom and IDT Telecom, unequivocally established that there was substantial usage of the TelexFree product.
Yeah, by affiliates and a miniscule percentage compared to the total amount of VOIP minutes bundled with TelexFree Ponzi positions.
Based on analysis of the seized evidence Merrill is trying to suppress, the TelexFree Trustee concluded:
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.
$6.6 million might sound like a lot, but it’s a tiny percentage of the $3 billion in Ponzi fraud TelexFree stands accused of.
Again, sounds like Agent Soares was right on the money. The ratio of VOIP minutes used versus what was bundled with Ponzi positions is insignificant.
Merrill also challenges Soares on the assertion that ‘purchasing 99TelexFree is “exceptionally cumbersome” and “not indicative of a genuinely competitive product.”‘
Putting aside the obvious fact that TelexFree had proportionally little to no retail activity taking place, which all but proves the above assertions, Merrill argues
As for the “exceptionally cumbersome” allegation, this apparently derives from one anecdote in which an undercover agent bought the product and was required to provide personal identifying and credit card information to verify his identity and the validity of a credit card.
Beyond the fact that this is but one example, Agent Soares fails to explain why requiring a customer to provide appropriate information as to their identity and ability to pay for the product exhibits that the product is illusory.
Indeed, requiring such verifiable information is typically the hallmark of a legitimate business.
This shouldn’t really need to be explained… but here’s why.
If I sign up with Skype, I give them what, my email address and credit card. That’s it. It’s all done online, there’s no bullshit with me having to photocopy identification documents and wait for verification yada yada yada.
The whole process takes a few minutes and is indicative of norms within the VOIP industry.
TelexFree being a Ponzi scheme with shaky banking channels, was an “exceptionally cumbersome” exception.
As evidenced by the lack of retail adoption of their VOIP service.
Agent Soares’ characterization of the sign-up process as illegitimate, simply because the company went to great lengths to avoid credit card fraud, is yet another misleading aspect of his affidavit.
Credit card fraud and Ponzi schemes go hand in hand, the hell does it have to do with making what little retail customers you have jump through “exceptionally cumbersome” hoops?
Of course, Agent Soares does not provide any poor reviews, customer complaints, or comparable examples except to point out that signing up for Skype takes less time.
Does he have to? How many paying customers does Skype have? How many did TelexFree have?
Likewise, there is no reliable basis to assert that TelexFree did not offer a “genuinely competitive product.”
The reality is that the TelexFree product was legitimate and it provided a valuable service to the immigrant community—a fact reflected in the actual usage figures discussed above.
So valuable that, by and large, only those participating in the Ponzi scheme paid for it.
At this point in time I’m down three buckets of popcorn and starting to get a sugar headache.
Merrill’s not done though…
Agent Soares misrepresents the motivations and realities of TelexFree’s compensation system.
In describing the compensation structure, Agent Soares outright dismisses it as having “no obvious business rationale.”
After an initial $50 fee, promoters could buy a package costing either $289 or $1,375.
The $289 package credits a promoter ten VOIP products in the “back office.”
Thus, the promoter pays $28.90 per plan ($289 divided by 10). The $1375 package operates essentially the same way, except that the numbers are multiplied by five (50 weekly products, five daily advertisements, and $100 per week).
With the larger package, the promoter pays $27.50 per plan ($1375 divided by 50).
For each sale to a new customer, promoters received a 90% commission ($44.99 of $49.99) for the first month of a customer’s VOIP service and 10% for each subsequent month.
The problem with Agent Soares’ analysis is that it fails to recognize or even take into consideration the most basic incentive of a promoter – to make more money.
As noted, when a promoter sells a VOIP plan, he or she makes a $44.99 commission for the first month alone. This is more than double the $20 a promoter would potentially get for the daily advertisements.
Also, the promoter could receive additional commissions when the customer continues the service beyond the first month.
Thus, a promoter has a greater motivation to actually sell the product than to simply advertise it.
Yet the majority of revenue paid out by TelexFree was tied to Ponzi ROIs, with little to no sale of VOIP services to retail customers.
By all means, throw up all the hypotheticals you want but acknowledge that, on paper and verified through TelexFree’s financial records, nothing related to TelexFree VOIP service negates the core focus of the business being the AdCentral Ponzi positions.
Agent Soares ignores this basic truth. Instead, he vastly embellishes an anecdote in the affidavit about the interaction between an undercover officer and a single promoter to unfairly generalize that hundreds of thousands of promoters joined TelexFree without ever intending to sell the product.
And based on the lack of retail sales of 99TelexFree, what’s your point?
You can’t negate $3 billion in financial fraud with $6 million in VOIP sales. That’s 0.2% of TelexFree’s generated revenue!
You’re not seriously going to argue TelexFree affiliates joined to sell VOIP when 0.2% of the company’s total revenue is attributable to VOIP sales, are you?
What a joke!
Having finished all of the popcorn in my pantry, I’ve now moved onto a jar of jelly babies.
As part of his critique of TelexFree’s business model, Agent Soares recklessly asserts that the large volume of posted advertisements did “nothing to promote TelexFree’s VOIP product” and was merely “busywork.”
Moreover, he generalizes that TelexFree “was not concerned with advertising the VOIP service; the ad-posting requirements were a meaningless exercise.”
This is simply not fair or accurate, and a common-sense further inquiry would have revealed that the advertisements served a legitimate purpose.
Spammy advertisements required to collect Ponzi ROIs, on websites nobody but TelexFree investors were visiting, “served a legitimate purpose”?
First, the repetitive posting of advertisements served a core-business function—it increased TelexFree’s Alexa rankings.
How? The websites TelexFree investors spammed were tanked in Google for… spam. They didn’t rank and nobody visited them except TelexFree investors.
Case in point? Merrill can’t provide a figure, estimated or otherwise, attributing VOIP sales to TelexFree investors spam – which again they only did because it was a requirement to collect Ponzi ROIs.
An Alexa ranking below 100,000 means a company enjoys substantial internet traffic.
As noted during the bail hearing in this case, at one point in time, TelexFree had a global ranking of 881 and a Brazil ranking of 1,054.
TelexFree was one of the most visited websites in the entire world.
Obviously, increased online visibility creates the potential for increased sales, which is a standard commercial rationale underlying advertisements.
For a legitimate business, sure – but even then you’d have to track advertising campaigns and match it to consumer behaviour.
TelexFree didn’t because it’s affiliates were spamming non-trackable links on websites nobody visited.
Traffic to the TelexFree domain was a result of its Ponzi scheme and had nothing to do with retail VOIP sales or spammy advertising – as evidenced by just 0.2% of TelexFree’s revenue attributable to retail VOIP Sales.
Moreover, as noted in Agent Soares’ affidavit, if a customer purchased the VOIP product by clicking on an advertisement, TelexFree could link the advertisement to the promoter (through an IP-link), and thereby credit the promoter in the “back office.”
This feature would not exist if TelexFree did not believe the advertisements had some capacity to produce actual sales.
What TelexFree believed or didn’t believe is irrelevant – when 0.2% of TelexFree’s generated revenue was attributed to retail VOIP sales.
The fact of the matter is the Ponzi ads the company had investors publish daily were indeed “a meaningless exercise”.
Halfway through my jar.. but Merrill’s still going…
Agent Soares asserts that TelexFree “agreed” to repurchase all unsold product for $20 on a weekly basis.
TelexFree did not expressly guarantee that it would provide promoters $20 for unsold products – it was discretionary.
Discretionary to the tune of over $5 billion in promised Ponzi ROIs?
Yeah, I’m sure TelexFree investors pumped $3 billion into the scheme on discretion alone. Bloody hell, talk about plumbing the depths of pseudo-compliance.
Agent Soares also omitted relevant information while discussing another corporation owned by Mr. Wanzeler, Brazilian Help, Inc., to imply that the pyramid scheme was not just limited to TelexFree.
He points to statements about its similar business practice and the fact that TelexFree and Brazilian Help, Inc. have the same listed office address.
Specifically, Agent Soares references Mr. Wanzeler’s statements that Mr. Merrill received profits from Brazilian Help, Inc., that the company also sold VOIP plans with a compensation structure encouraging promoters to recruit more promoters, and that Mr. Wanzeler considers the companies to be one and the same.
Agent Soares regards the companies as interwoven, also noting that a contract with one of the VOIP service providers replaced Brazilian Help, Inc. with TelexFree.
Brazilian Help, Inc. was not, in fact, a multi-level marketing company.
TelexFree was the culmination of Carlos Wanzeler’s failed business ventures before it. That Brazilian Help didn’t exist after the launch of TelexFree renders its relevance obsolete.
Agent Soares mentioning it to provide background information on Wanzeler’s business ventures is neither here nor there. I don’t believe Soares at any time inferred Brazilian Help itself was a Ponzi scheme.
Based on the ridiculous nonsense in his motion, Merrill has asked the court for
a Franks hearing and, ultimately, suppression of all evidence seized during the searches that relied upon Agent Soares’ affidavit.
If granted, that would render all evidence that irrefutably proves TelexFree was a Ponzi scheme suppressed.
For those unfamiliar with a “Franks hearing“, it’s
a court proceeding wherein the court is asked to determine if the police officer lied in obtaining a search warrant.
Given that Agent Soares’ assertions were entirely made on documented evidence available at the time, and later irrefutably verified upon examination of the seized evidence in question – we wish James Merrill the best of luck at his Franks Hearing.
Oh and just for good measure, Merrill is additionally arguing that
the search warrants for Exigo Office, Inc. and Xand Corp. are overbroad and unparticularized, in violation of the Fourth Amendment.
For those not familiar with the Fourth Amendment;
The Fourth Amendment of the U.S. Constitution provides, “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”
I’m pretty sure the suspected operation of a $3 billion dollar Ponzi scheme isn’t “unreasonable” and evidence provided at the time constituted “probable cause” but hey, what do I know.
Also regarding the seizure of Merrill’s Comcast email address,
The warrant did not limit the seizures to the date range of the alleged fraudulent scheme and avoid search categories likely to turn up information of the most personal and sensitive nature, the warrant was unconstitutionally overbroad and lacking in particularity.
In addition, because the warrant was so obviously overbroad and lacking in particularity, it was invalid on its face and no reasonable law enforcement officer could have relied on its validity, thus depriving the government of the “good faith” safe harbor.
I for one look forward to the DOJ’s response and inevitable judicial smackdown.
And let’s hope none of this delays Merrill’s October trial date which, let’s face it, is probably the ultimate goal behind these filings.
Footnote: Our thanks to Don@ASDUpdates for providing a copy of James Merrill’s May 20th “Motion for Franks Hearing” and “Motions to Suppress”.
Update June 24th, 2016 – A hearing on Merrill’s motions has been scheduled for July 7th. The DOJ have been directed to file an opposition before July 1st.