SEC Freeze TelexFree Assets, Allege $1.1 Billion Pyramid Scheme

SEC CHARGES TELEXFREE, FREEZE ITS ASSETS

As federal agents raided the headquarters of TelexFree Inc. in Marlborough earlier this week, the company’s chief financial officer tried to flee with a laptop and a bag holding cashier’s checks worth nearly $38 million, according to court records made public Thursday.

Following hot on the heels of that raid, the U.S. Securities and Exchange Commission has announced it filed charges on April 15, 2014, against multiple companies under the TelexFree umbrella. In addition to TelexFree, the Commission also named eight TelexFree officers and promoters as defendants.

In addition to TelexFree, the SEC also named eight TelexFree officers and promoters as defendants.

SEC Charge TelexFree and Associates

The fraud charges against Telexfree and its group of associates (collectively, “Defendants”) are categorized into three distinct classes:

1. The company (TelexFree) - Telexfree Inc. and TelexFree LLC
2. Four Principals - James M. Merrill, Carlos N. Wanzeler (co-owner and treasurer), Joseph H. Craft (CFO), and Steve M. Labriola (international sales director);
3. Four Primary Promoters - Sanderley Rodrigues de Vasconcelos, Santiago De La Rosa, Randy N. Crosby, and Faith R. Sloan of Chicago.

The Massachusetts-based Telexfree is charged with orchestrating "...a large pyramid scheme that mainly targeted Dominican and Brazilian immigrants in the U.S." and took in at least several hundred million dollars from investors worldwide.

Federal agents from the FBI and Homeland Security raid Telexfree Inc headquarters two days ago
(Photo: Allan Jung/MetroWest Daily News)

On the other hand, the eight TelexFree officers and promoters have each been charged with multiple violations of federal securities laws. According to the official SEC press release:

The SEC alleges that TelexFree, Inc. and TelexFree, LLC claim to run a multilevel marketing company that sells telephone service based on “voice over Internet” (VoIP) technology but actually are operating an elaborate pyramid scheme.

In addition to charging the company, the SEC charged several TelexFree officers and promoters, and named several entities related to TelexFree as relief defendants based on their receipt of investor funds.

...the complaint charges TelexFree co-owner James Merrill, of Ashland, Mass., TelexFree co-owner and treasurer Carlos Wanzeler, of Northborough, Mass., TelexFree CFO Joseph H. Craft, of Boonville, Ind., and TelexFree’s international sales director, Steve Labriola, of Northbridge, Mass.

The SEC also charged four individuals who were promoters of TelexFree’s program: Sanderley Rodrigues de Vasconcelos, formerly of Revere, Mass., now of Davenport, Fla., Santiago De La Rosa, of Lynn, Mass., Randy N. Crosby, of Alpharetta, Ga., and Faith R. Sloan of Chicago.

Going further, the SEC gives reasons, including that there was a clear violation of "...the registration and antifraud provisions of U.S. securities laws and the SEC’s antifraud rule":

The SEC’s complaint alleges that TelexFree, Inc., TelexFree, LLC, Merrill, Wanzeler, Craft, Labriola, Rodrigues de Vasconcelos, De La Rosa, Crosby, and Sloan violated the registration and antifraud provisions of U.S. securities laws and the SEC’s antifraud rule.

The SEC also charged three entities related to TelexFree as relief defendants based on their receipt of investor funds.

The SEC's major grouse in charging TelexFree and associates with fraud is the fact that they were "...paying earlier investors, not with revenue from selling its VoIP product but with money received from newer investors." The press release points out:

The SEC complaint alleges that TelexFree’s VoIP sales revenues of approximately $1.3 million from August 2012 through March 2014 are barely one percent of the more than $1.1 billion needed to cover its promised payments to its promoters.

As a result, in classic pyramid scheme fashion, TelexFree is paying earlier investors, not with revenue from selling its VoIP product but with money received from newer investors.

SEC Freeze TelexFree Assets

In addition to the charges against TelexFree, made two days days ago on 15th April but which could not be made public until today for obvious reasons, the Commission also announced it had obtained an asset freeze securing millions of dollars in funds:

The charges were filed under seal, in connection with the Commission’s request for an immediate asset freeze. That asset freeze, which the U.S. District Court in Boston ordered on Wednesday, secured millions of dollars of funds and prevented the potential dissipation of investor assets.

After the SEC staff implemented the asset freeze, at the SEC’s request the court lifted the seal today, permitting public announcement of the SEC’s charges.

The release, in clear terms, expressed certain worries that were borne by the SEC in the consideration of its current action:

“Even after the SEC and other regulators have alleged that such programs are a fraud, the promoters of TelexFree continued selling the false promise of easy money.”

According to the SEC’s complaint, the defendants have continued enrolling new investors but recently changed TelexFree’s method of compensating promoters, requiring them to actually sell the VoIP product to qualify for payments that TelexFree had previously promised to pay them.

The most troubling, at first glance, is the fact that the SEC might also have been hinting at some form of 'foul-play' by TelexFree against its associates:

The complaint also alleges that since December 2013, TelexFree has transferred $30 million or more of investor funds from TelexFree operating accounts to accounts controlled by TelexFree affiliates or the individual defendants.

According to this release by the Commission, while investors continue to enroll every day, it is clear the pyramid has collapsed and the company has been transferring their hard-earned money to the accounts of its "...affiliates or the individual defendants."

Of course, you and I already know who the named "individual defendants" are! Scroll up, their names are all on this page. But can you guess who the SEC was referring to as "affiliates"? Of course, your guess is as good as mine because I'm also guessing they are 30 in number. No wonder TelexFree submitted 30 names while filing for bankruptcy protection.

Thus, the SEC has effectively frozen the assets of TelexFree and its eight principals and associates, alleging the company has been running an “illegal pyramid scheme’’ that recruited victims from around the world.

Plan of distribution amongst affiliates?

In closing out their complaint, the SEC have asked the court to:

enter a preliminary injunction, order freezing assets, and order for other equitable relief in the form submitted with the Commission’s motion for such relief.

There is also civil penalties and the "requirement that defendants disgorge their ill-gotten gains and losses avoided, plus pre-judged interest, with said monies to be distributed in accordance with a plan of distribution to be ordered by the Court‘."

A “plan of distribution” will no doubt gladden the hearts of affiliates and promoters, who are only now coming to terms with the amount of money lost in Telexfree.

You may read the complete SEC complaint at the SEC website. If you have problems accessing the official complaint document at the SEC website, you may also access it at the Scribd website.

It will be recalled that the Massachusetts Securities Division accused TelexFree of being a Pyramid scheme, and charged the company, in a move to avoid its top officers walking away free, shortly after TelexFree filed for bankruptcy protection, another brilliant legal move that was immediately punctured by the Massachusetts charge and a raid of TelexFree's official Marlborough headquarters by U.S federal agents.