Pyramid unfolded: TelexFree (Brazil) shut down in June 2013 continued its $1 billion international pyramid business in the US

TelexFree (illustration)- Tesco VoIP phonePhoto by fsse8info

Starting in 2012, TelexFree claimed to sell its VoIP service by recruiting promoters to market the product online. But TelexFree was shut down in Brazil in June 2013 amid allegations of operating a $1 billion international pyramid scheme with 1.9 million participants. The business continued in suburban Boston, where the company was headquartered, until April 2014 when the SEC filed a complaint. U.S. criminal proceedings have been repeatedly delayed because of the company filing for bankruptcy and other complexities in the case. The bankruptcy trustee involved in the case said TelexFree brought in the bulk of its $1 billion in revenue after operations were already shut down in Brazil.

The company allegedly attracted participants by promising large returns for investments in increments of about $1,400, in exchange for promoting the company among their friends and family.

TelexFree was shut down in Brazil in June 2013, but it thrived in suburban Boston until April 2014, prosecutors alleged. Co-owners James Merrill and Carlos Wanzeler would face criminal fraud charges and up to 20 years in prison if found guilty.

The US criminal proceedings have been repeatedly delayed due to the voluminous evidence gathering in what court officials call a “complex case” in the filings.

Among other things, the government has produced 45 gigabytes of TelexFree YouTube videos, back-up data, and Merrill’s personal e-mails. The Brazilian prosecutors are expected to deliver 100 gigabytes of information.

US officials also have been waiting for an English translation of a forensic report by Ernst & Young commissioned by the Brazilian government on whether TelexFree was a pyramid scheme.

The bankruptcy trustee in the TelexFree Inc. fraud case said the former Marlborough company took in $1.03 billion from investors in just 16 months, according to its internal records.

The alleged global fraud, which was run from a small city west of Boston after being shut down in Brazil, had nearly 1.9 million participants, according to the trustee’s filing in federal court in Boston.

The list of people was so long that it would have filled 35,110 pages, the trustee said – the largest alleged pyramid scheme in history in terms of the number of people affected.

Stephen Darr, the court-appointed trustee, said in his filing submitted late Friday that he could not be certain the information was accurate because “the physical books and records available to the trustee are extremely limited and incomplete.” He also said the debtor’s principals, who have been indicted on criminal fraud charges, have provided no assistance to his office.

According to an FBI statement, as a TelexFree promoter, posting the online ads amounted to cutting and pasting ads into various classified ad sites that were already saturated with ads from other promoters.

On or about March 8, 2014, TelexFree announced changes to its compensation system. On April 14, 2014, Telexfree filed for bankruptcy. In its filings with the bankruptcy court, Telexfree stated, among other things, that it changed its compensation plan “because questions were raised” about the prior plan and that, after changing the plan, the “discretionary payments…quickly became a substantial drain on the company’s liquidity.”

On April 16, 2014, the Securities and Exchange Commission obtained a restraining order to freeze assets of Telexfree and eight related individuals. Since then, the U.S. Attorney’s Office has executed 37 seizure warrants for assets in the tens of millions of dollars.

It is further alleged that in 2013, 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.

Photo by fsse8info 

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