TelexFree Co-Owner Arrested, Another On The Run In Major Escalation Of Events

JAMES MERRIL ARRESTED, CARLOS WANZELER ON THE RUN

The two owners of the Marlborough-based TelexFREE accused of defrauding investors in a global $1 billion pyramid scheme were criminally charged in a US federal court yesterday, Friday, in a major escalation of events in the ongoing investigation of the firm.

Earlier this week, on Tuesday, TelexFree’s separate bankruptcy case was suspended and moved to Massachusetts by a federal judge in Las Vegas after the SEC argued there were no grounds for the case to be filed in Nevada.

The Arrest and the Charges

James M. Merrill, 53, of Ashland, co-owner of TelexFree Inc., was arrested yesterday afternoon in Worcester. In addition, a warrant for the arrest of co-owner Carlos N. Wanzeler, 45, of Northborough, who is now a fugitive has also been issued by authorities. Federal officials believe Wanzeler has fled to Brazil.

According to charges filed in a US District Court in Worcester, the men are charged with conspiracy to commit wire fraud. Wire fraud has been a federal crime in the United States since 1872.

Header of US Attorney Office Criminal Complaint Document Against Telexfree

As the US Securities and Exchange Commission, SEC, and Massachusetts state Secretary of State William F. Galvin investigate TelexFree, reports allege that victims in the USA are mostly Brazilian and Dominican Republic immigrants. However, reality is that victims abound in several countries worldwide.

The SEC had frozen TelexFREE’s assets April 16 and filed a civil suit, two days after TelexFREE filed for bankruptcy.

The Boston Globe reports:

TelexFree claimed to be an Internet telephone services company, but authorities say it was really a pyramid scheme that recruited thousands of “promoters” to post ads for its product online. The promoters were required to buy into TelexFree, paying anywhere from about $300 to about $1,400, then were compensated weekly, according to the complaint.

The money they received came not from sales generated by the ads, but from other people lured into the scheme, authorities said.

An undercover Homeland Security investigator recruited to TelexFree in October was told that a $1,425 investment would yield $100 a week just by posting ads online and recruiting others, according to the criminal complaint filed Friday. Homeland Security agents typically investigate cases of international financial fraud.

The undercover investigator ultimately posted more than 700 ads without selling any products, according to court records. But a company recruiter told the agent that it wasn’t necessary to sell products to earn money; the recruiter said that he himself had earned $1.6 million “without selling a TelexFree product.”

Court Records and Other Evidence

Documents filed by federal authorities against Wanzeler and Merrill on Friday aim to prove that TelexFree was a pyramid scheme. A US Attorneys Office criminal complaint is accompanied by a press-release from the Department of Justice, DOJ, and supported by an affidavit from Homeland Securities Special Agent, John Soares.

Carlos Wanzeler and James Merrill

The Soares affidavit explains TelexFREE's business model in detail and concludes thus:

(TelexFree) derived only a fraction of its revenue from VOIP services – about 1% of TelexFree’s hundreds of millions of dollars in revenue over the last two years.

The overwhelming majority of its revenue came from new people buying into the scheme. In fact, TelexFree was only able to pay the returns it had promised to its existing promoters by bringing in money from newly recruited promoters.

The affidavit goes on to detail TelexFree running out of money, launching bankruptcy proceedings and Joe Craft’s attempt to flee with what was left of TelexFree’s money. It also touches on the Brazilian regulatory investigation, mentioning that Brazilian authorities have $350 million dollars of TelexFree funds frozen by court order. Finally, it talks about the role of i-Payout (TelexFree’s last payment processor), and infers money laundering bank activities by TelexFREE.

Other reports put it this way:

Authorities said in court records that their review of TelexFree’s bank accounts shows that out of thousands of deposits, only 19 were the result of selling the company’s service, commonly called a VOIP, or voice over Internet protocol. Between June 2012 and May 2013, TelexFree made 1,133 deposits totaling $12.2 million to one Bank of America account, according to court records. Only nine deposits were in the amount of $49.90 — the VOIP purchase price.

Investigators have found 14 bank accounts used by TelexFree over about two years as banks kept shutting the accounts after flagging TelexFree for possible financial misconduct or money laundering, according to court documents. During a raid of TelexFree’s Marlborough headquarters last month, officers intercepted the company’s chief financial officer trying to leave the building with a bag full of Wells Fargo cashier’s checks totaling $38 million.

Brazilian authorities began investigating TelexFree, which operated under a different name in that country, in January 2013, saying they had uncovered “evidence of crimes.” Several months later, officials successfully barred the company from recruiting new promoters and eventually shut the firm down, freezing about $350 million in funds.

The press-release from the Department of Justice sums up the criminal charges against TelexFree:

James M. Merrill and Carlos N. Wanzeler, principals of TelexFree, Incorporated and related entities, were charged today in a federal criminal complaint, charging them with conspiracy to commit wire fraud.

Merrill, 53, of Ashland, Mass. and Wanzeler, 45, of Northborough, Mass., were charged in a one count criminal complaint filed in U.S. District Court in Worcester, Mass.

If convicted, each face up to 20 years in prison.

Merrill was arrested today by federal authorities and made an initial appearance in U.S. District Court in Worcester. A federal arrest warrant was issued for Wanzeler who is a fugitive.

United States Attorney Carmen Ortiz said, “The scope of this alleged fraud is breathtaking. As alleged, these defendants devised a scheme which reaped hundreds of millions of dollars from hard working people around the globe.”

“I am very proud of the tireless efforts of my special agents. Investigating the flow of illicit money across U.S. borders and the criminal enterprises behind that money is one of our top priorities,” said Bruce Foucart, Special Agent in Charge of Homeland Security Investigations.

“While pyramid schemes are nothing new, the potential scope of this case will hopefully serve as an educational lesson for all. The main point is clear; if it sounds too good to be true, it probably is.”

TelexFree reported sales of $1.016 billion, while known sales of the TelexFree VOIP product represented less than 0.1% percent of TelexFree’s total revenues.

United States Attorney Ortiz, SAC Foucart and Vincent B. Lisi, Special Agent in Charge of the Federal Bureau of Investigation, Boston Field Division, made the announcement today. The case is being prosecuted by Assistant U.S. Attorneys Cory Flashner and Andrew Lelling of Ortiz’s Worcester Branch Office and Economic Crimes Unit, respectively.

The Aftermath. What Now for Victims?

First of all, and most importantly, the DOJ in its press release, encourages and invites all victims to contact it by sending in their personal information.

If you believe that you are a victim of the alleged TelexFree, Inc. scheme, please send your contact information to the following address: USAMA.VictimAssistance@usdoj.gov

Secondly, victims can come together for class action lawsuits against TelexFREE, as depicted in a report.

A lawyer for several of the people who lost money to TelexFree said his clients were happy about Merrill’s arrest and the criminal charges leveled against the company’s other owner.

“I think they should put them in jail and throw away the key,” Robert J. Bonsignore said. “These were very hard-working people they preyed on.”

Finally some reports appear to indicate that monies frozen from TelexFREE may be available to legitimate victim promoters. Frank Huntington, a SEC lawyer, while in court replying TelexFREE lawyers assertion, made this indication.

Lawyers representing the company have argued in court that the company’s owners have a legitimate business selling Internet-based telephone service for long-distance calls and a mobile phone application to accompany it. They said TelexFree filed for federal bankruptcy protection in Nevada last month so it can reorganize the business and generate more revenue for its participants.

But the SEC said in court this week that there is no meaningful business to speak of at TelexFree. “We believe there’s nothing to reorganize here,’’ said Frank Huntington, an SEC lawyer.

Huntington said that, by TelexFree’s accounting, the company has about $100 million in assets that could be available to creditors, most of whom are the company’s participants and promoters.

As a FINAL REMINDER, if you are a victim, send your information to the United States DOJ at USAMA.VictimAssistance@usdoj.gov.

To access SEC TelexFREE Complaint Form (in English), visit here: http://www.sec.state.ma.us/InvestorComplaint/telexfree.aspx; Or (in Spanish): http://www.sec.state.ma.us/InvestorComplaint/telexfree_spanish.aspx.