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Recent SEC Releases
Thursday
Apr172014

As Regulators Closed In, TelexFree Execs Scrambled To Move Assets

It reads like a spy thriller you would expect out of Hollywood.  As authorities closed in on a massive fraud, one of the company's top executives sought to elude a raid on the company's headquarters by walking out the front door with nearly $40 million in cashier's checks concealed in his briefcase.  Except this series of events actually occurred - albeit not as successfully as a Hollywood story might pan out.  

Earlier this week, both the Securities and Exchange Commission (the "Commission") and Massachusetts securities regulators filed civil fraud charges against TelexFree, LLC and several related entities, alleging the operation was a massive pyramid and Ponzi scheme that had raised at least several hundred million dollars from investors worldwide.    The companies, which filed bankruptcy the beginning of the week, were also the subject of an asset freeze by the Commission in an effort to prevent the dissipation of investor funds.  

On Tuesday morning, the same day civil charges were filed against TelexFree, federal authorities executed a search warrant on the company's Marlborough headquarters.  In a sworn statement filed by a Commission attorney, the following events were detailed.  During the course of the search, sheriff's deputies noticed that a man named Joseph H. Craft was attempting to remove a laptop and laptop bag from an office, claiming they were personal items.  Craft claimed he was a "consultant" helping TelexFree file for bankruptcy.  

However, deputies informed Craft that he would not be permitted to remove his "personal items" from the premises, and subsequently searched the bag.  During the subsequent search, no "personal items" ere discovered.  Instead, nearly $40 million in recently-issued cashier's checks were discovered.  These included (i) multiple cashier's checks totaling over $25 million payable to TelexFree's current President; (ii) a $2 million cashier's check to a TelexFree principal's wife; and (iii) a $10.39 million cashier's check to a TelexFree subsidiary.  With the checks bearing issue dates of April 11, 2014, just three days before TelexFree would declare bankruptcy, the checks likely served as a source of liquidity for insiders gearing up for possible civil and criminal charges.  

After authorities discovered the cashier's checks, it also turned out that Craft was not being forthright about his occupation.  Rather than a lowly "consultant" assisting with the company's bankruptcy, Craft was actually the Chief Financial Officer of TelexFree.  

Meanwhile, recently-appointed Chief Executive Officer James M. Merrill, to whom more than half of the cashier's checks discovered in Craft's possession had been payable to, was also trying to ensure he had access to unfrozen funds.  The SEC Declaration recounted a conversation with a representative of Waddell & Reed, where Merrill maintained a brokerage account, revealing that Merrill had placed an unsolicited order to sell $1.15 million of his mutual fund holdings on the same day of the TelexFree raid.  

 
A copy of the SEC's Declaration is below:
Wednesday
Apr162014

Authorities Charge Rothstein CFO With Conspiracy

Federal authorities continued their quest to prosecute those connected to the massive $1.2 billion Ponzi scheme perpetrated by Scott Rothstein, with Rothstein's former CFO becoming the 18th person to face charges to date.  Irene Shannon, f/k/a Irene Stay, was charged with a single count of conspiracy to commit money laundering and bank fraud.  The charge carries a maximum prison term of five years as well as up to a $250,000 fine.  Shannon was charged in a criminal information, which suggests that a plea agreement is likely.  

According to authorities, Shannon was Rothstein's "trusted agent," carrying out Rothstein's directions to shuffle hundreds of millions of dollars between investors, sustain the law firm's operations, and keep the scheme afloat.  This even included collaborating with Rothstein to determine the fictitious returns that investors thought were derived from lucrative purported legal settlements that, in reality, did not exist.  

Shannon's name has come up frequently since Rothstein's sentencing, including testimony from former chief operating officer Debra Villegas that Shannon played the most important role in the scheme. Additionally, Rothstein himself testified at a deposition that Shannon definitely knew what she was doing when he asked her to move around millions of dollars.  Of course, Rothstein has made it no secret that he is actively cooperating with prosecutors in an effort to eventually win a reduction in his 50-year prison sentence.  

The charges represent the 18th person to be charged in connection with Rothstein's fraud - ranking even above the prosecutions in the Bernard Madoff Ponzi scheme, which to date has resulted in 14 convictions. 

Wednesday
Apr162014

Judge Revokes Bond For Accused Ponzi Schemer After Contact With Victims

A federal judge has revoked bail for a Florida man accused of orchestrating a $70.9 million Ponzi scheme, siding with prosecutors' allegations of "brazen" violations of a "no-contact" condition of his bail.  Joseph Signore, previously free on $100,000 bail after being charged with twelve counts of mail fraud and wire fraud, was "regretfully" remanded into custody by U.S. Magistrate Judge Dave Lee Brannon.  In revoking Signore's bail, Judge Bannon found that Signore's contact with several investors violated the terms of his release, but also conceded that some responsibility for the violations lay with the attorneys that crafted the terms.  Unless Signore is able to obtain new bail terms, it is possible he could remain incarcerated until the case goes to trial.

Background

According to authorities, Signore and Paul Schumack solicited potential investors to participate in JCS Enterprises' ("JCS") Virtual Concierge program, which involved the purchase of a virtual concierge machines ("VCM") through a one-time fee ranging from $2,600 to $4,500 per VCM.  The VCM, which resembles an ATM, is a free-standing or wall-mounted machine placed in various businesses that purportedly allowed the advertisement of products or services and even the ability to print tickets or coupons.  Potential investors were told that the VCMs generated substantial returns, which in turn would allow the payment of annual returns to investors ranging from 80% to 120%. In addition, investors were provided with the location of the VCMs they had purportedly purchased, and even given the ability to track the VCM activity online.

Investors were solicited in several ways, including several websites controlled by the entities and through videos posted on popular video-sharing website Youtube.  The videos promised that the VCM would "generate income for years," and promised that a $3,500 investment could produce "huge returns."  Potential investors also received emails from Schumack, who touted his graduation from West Point Military Academy in 1979 and whose email signature also featured a Bible passage intended to create a false sense of security for investors.  

However, authorities allege that the outsized returns touted by the defendants were the result of a Ponzi scheme.  According to the SEC, the production of VCMs was not close to the amount of VCMs purportedly sold to investors, and the guaranteed returns were "a farce."  Instead, investor funds were commingled and used for a variety of unauthorized purposes, including the unauthorized transfer of more than $2 million to Signore and his family.  An additional $56,000 in investor funds were used for expenses including restaurants, stores, and a tanning salon.  Finally, approximately $4 million in investor funds were transferred to an unrelated account from which Schumack and others allegedly made more than 100 cash withdrawals of nearly $5 million. 

Signore's Release and My Gee Bo 

Following the pair's arrest last Tuesday, Judge Brannon set bond for each at $100,000.  As part of the conditions of release, Signore was permitted, to no objection, to continue operating My Gee Bo ("My Gee Bo"), another company Signore operated from his same address.  However, it soon emerged that Gee Bo had been operated in tandem with JCS, and the receiver subsequently filed an emergency motion seeking to include Gee Bo as part of the entities placed in receivership.  In that motion, the receiver detailed Gee Bo's ties to JCS, disclosing that Gee Bo had received at least $770,000 in transfers from JCS or for Gee Bo's benefit - including the payment of hundreds of thousands of dollars in JCS funds for a celebrity sponsorship from Shark Tank's Barbara Corcoran.  The Court granted the motion to include Gee Bo.  

In addition to the close ties between Gee Bo and JCS, Judge Brannon was also informed by prosecutors that Signore had engaged in contact with several individuals, including scheme victims and Gee Bo employees, in violation of a "no-contact" condition of his release.  This included communications with a JCS shareholder, Gee Bo investors, and the JCS records custodian.  According to Judge Brannon, these "evidence gathering" activities were sufficient cause to revoke Signore's bail.

A copy of Signore's motion opposing the government's motion to revoke bond is below:

 

Defense Response to Govt's Motion to Revoke Bond (1)

 

Tuesday
Apr152014

Massachusetts Regulators Allege TelexFREE Is $1 Billion Ponzi Scheme

This article originally appeared on Forbes.com on April 15, 2014

Massachusetts securities regulators have initiated civil proceedings accusing a Massachusetts and Nevada company of operating a massive pyramid andPonzi scheme targeting Brazilian-Americans that, through the promises of guaranteed annual returns exceeding 200%, raised more than $90 million from Massachusetts residents alone and nearly $1 billion worldwide.  TelexFREE, Inc., a Massachusetts corporation, and TelexFREE, LLC, a Nevada limited liability company (collectively, “TelexFREE”), were accused of violations of the Massachusetts Uniform Securities Act by engaging in the fraudulent offering and sale of unregistered securities.  The Massachusetts Enforcement Section of the Massachusetts Securities Division is seeking, in relevant part, a permanent cease-and-desist order, an accounting, restitution to victims, and disgorgement of profits and ill-gotten gains.

The complaint likens TelexFREE’s operations to the “once common phone card frauds of the mid 2000s while supercharging its reach through an elaborate internet marketing machine.”  Its business purportedly centers on the sale of its voice over internet protocol (“VoIP”) program, 99TelexFREE, which advertises itself as a substitute to the use of traditional landline phone services.  However, that business is offered along with a passive income program that allows the purchase of either a $289 or $1,375 investment.  The $289 program offers one advertisement kit and ten VoIP Programs, while the $1,375 option allows the purchaser to receive five advertisement kits and fifty VoIP Programs.  By using the so-called advertisement kits, which is an “effortless” process consisting of several minutes of work per advertisement, participants are purportedly able to generate extensive returns without the need for any VoIP Program sales.  In addition, participants received an additional VoIP Program for posting a daily advertisement, which they were then able to sell to TelexFREE for $20.

Through these efforts, participants in either program were promised astronomical returns.  For example, a participant investing $289 that simply placed one advertisement per day could receive an annual profit of at least $681 – a return exceeding 200%.  Similarly, a participant investing $1,375 and placing five advertisements daily could receive profit of $3,675 – a return over 250%.  Not surprisingly, these large returns spurred the participation by many thousands of investors worldwide.   Additionally, participants were handsomely compensated for recruiting new investors – including as much as $100 per participant and eligibility for revenue sharing bonuses.

In addition to the incentives for participants to recruit new investors, TelexFREE solicited potential investors by hosting wild parties with a “rock concert atmosphere” and raucous cheering that included the “wave.”  Potential investors were told that the investment was the “opportunity of a lifetime,” and, like many other schemes, were enticed by stories of wealth realized by top participants.

According to the Enforcement Section, however, TelexFREE was a veiled pyramid and Ponzi scheme   whose revenues were significant dwarfed by the rapidly-growing obligations to investors.  For example, in 2012 and 2013, TelexFREE identified approximately 4.4 million VoIP Program transactions totaling over $238 million.  Resulting net revenue was significantly less due to commission payments.  However, over the same period, nearly 800,000 investments were made that totaled nearly $900 million.  Even assuming that each investor participated in the $289 program and satisfied the minimal requirements, this meant that TelexFREE would owe those participants a total of nearly $800 million.  Additionally, as the percentage of investments skewed towards participation in the $1,375 investment, this further increased investor obligations – to nearly $4 billion if all investors participated in the more expensive plan.  Indeed, according to TelexFREE, nearly 90% of Massachusetts-based investors opted for the $1,375 investment.  Regardless of the breakdown, these figures were significantly higher than the corresponding revenues derived during the period.

Recently, TelexFREE has attracted increasing scrutiny from local, state, and foreign regulators.  This culminated in the recent petition for bankruptcy filed by TelexFREE, LLC in a Nevada bankruptcy court, which is described in further detail here.  The Complaint indicates that TelexFREE has been under investigation for at least a year  , as evidenced by an April 4, 2013 request by the Enforcement Section for profit and loss statements.  Oddly enough, two profit-and-loss statements furnished on two different occasions for the same time period showed significant discrepancies in income, expenses, and net income.

If the allegations are proven to be true, TelexFREE would rank not only as the largest scheme uncovered in the past few years, but one of the largest Ponzi schemes in history.  A previous article chronicling the harm inflicted by Ponzi schemes over the past five years is available here for reference.

Administrative Complaint TelexFREE 4-15-14

 

Monday
Apr142014

Company With 'Shark Tank' Link Added To Receivership In Suspected $70 Million Ponzi Scheme

A Florida federal judge approved an emergency request by the court-appointed Receiver of a suspected $70.9 million Ponzi scheme to expand the receivership to include a company whose mobile app was endorsed by prominent 'Shark Tank' personality Barbara Corcoran.  In a hearing this morning, U.S. District Judge Donald Middlebrooks granted an emergency motion filed by court-appointed receiver James Sallah to include My Gee Bo, Inc. ("Gee Bo") in the recently-instituted receivership over JCS Enterprises, Inc. and T.B.T.I., Inc. (collectively, the "Receivership Entities"), which stand accused along with principals Joseph Signore and Paul Schumack of operating a massive Ponzi scheme using ATM-like "Virtual Concierge" machines.  Notably, Gee Bo reportedly paid $400,000 to secure the endorsement of Corcoran, one of the personalities of CNBC's hit show 'Shark Tank.'  Following news of the alleged fraud, Corcoran has announced she will be withdrawing her endorsement.

The Securities and Exchange Commission filed an emergency enforcement action last week, accusing Schumack and Signore of operating a massive Ponzi scheme that touted the sale of "Virtual Concierge" machines ("VCMs") to investors.  The VCM, which resembles an ATM, is a free-standing or wall-mounted machine placed in various businesses that purportedly allowed the advertisement of products or services and even the ability to print tickets or coupons.  Potential investors were solicited to participate in the Virtual Concierge program, which allowed investors to purchase one or multiple VCMs for a one-time fee ranging from $2,600 to $4,500 per VCM.   In exchange, investors were promised substantial annual returns ranging from 80% to 120% purportedly derived from the revenue generated by the VCMs.  Investors were provided with the location of their VCM(s), and were even given the ability to track the activity of each VCM online.  In total, at least $70 million was raised from numerous investors.

In addition to the civil fraud charges, Schumack and Signore were also indicted on criminal charges.  At Schumack's bond hearing last week, his link to Gee Bo was raised without any objection, and the court-ordered conditions of release explicitly allowed Schumack to continue his employment with Gee Bo, which operates a mobile shopping and payment app.  However, the receiver's initial investigation showed that Gee Bo had multiple links to the Receivership Entities, including (1) ownership and control by Defendant Schumack and his wife; (2) the receipt of at least $770,000 in transfers from Receivership Entities; the use of an office paid for by JCS Enterprises; and (4) the use of JCS employees and materials.  

Upon learning of Gee Bo's links to the Receivership Entities, the receiver filed an emergency action seeking to expand the receivership to include Gee Bo.  This is a common occurrence in receivership context, as a receiver's investigation reveals the existence of other less-known entities that may have received diverted investor funds. Indeed, as the receivership progresses and a forensic accounting is completed, it is possible that additional entities could be placed under the receiver's control to preserve investor monies.

According to the receiver, at least $770,000 was transferred to or paid for the benefit of Gee Bo, including a transfer of $500,000 in October 2013, the purchase of a $20,000 white van, a $50,000 marketing plan, and the payment of at least $200,000 to an unnamed "celebrity" to market and promote Gee Bo.  The Palm Beach Post identified this unnamed celebrity as Barbara Corcoran, one of the regular personalities on the popular CNBC show 'Shark Tank.'  According to the Receiver's Motion and the Palm Beach Post, the agreement with Corcoran was finalized back in October 2013, and included the agreement to 

appear in thirty and sixty second TV commercials..., social media, Twitter, PR, internet promotions, direct mail, point-of-sale, [and] the smartphone app...

This included at least two YouTube videos that were published under the YouTube account of JCS Enterprises, which are embedded below:

Following news of the Ponzi scheme allegations, the Palm Beach Post reported that Corcoran has "immediately" withdrawn her endorsement of Gee Bo.  However, Corcoran apparently does not plan to return the money she received to promote Gee Bo - a position that may contrast with the Receiver's duty to recover funds for investors.  As the receiver's motion makes clear, at least $770,000 of investor funds were diverted for the unauthorized purpose of funding Gee Bo's operations.  Thus, the payment to Corcoran could potentially be the subject of an action for recovery under Florida's Uniform Fraudulent Transfer Act ("FUFTA").  

A copy of the Motion is below:

 

Motion to Expand