“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.”
U.S. Attorney Carmen Ortiz
Federal authorities have arrested one of the co-owners of a suspected $1.1 billion Ponzi and pyramid scheme, and a warrant has been issued for the remaining co-owner thought to have fled to Brazil. James Merrill, who owns a 50% stake in the consortium of companies known as TelexFree that is currently the subject of state and federal regulatory actions on charges it was a massive pyramid and Ponzi scheme, was arrested by Homeland Security Agents in Worcester, Massachusetts, as reported by the Boston Globe. Additionally, authorities have also issued an arrest warrant for co-owner Carlos Wanzeler, who is believed to be in Brazil and is now a fugitive. Each are charged with a single count of conspiracy to commit wire fraud, which carries a maximum 20-year prison term. It is anticipated that further charges are likely.
The filing of criminal charges comes nearly four weeks after Massachusetts regulators and the Securities and Exchange Commission each accused TelexFree of perpetrating a worldwide scheme that is believed to have taken in $300 million from the United States alone. Authorities alleged the company took in over $1 billion from hundreds of thousands of "promoters," who were promised astronomical returns for placing advertisements and recruiting new investors. Yet, the VOIP service allegedly sold by TelexFree constituted less than 1% of the revenue that flowed to the company over a two-year period. After the company revised its compensation plan in March 2014, investors sought to withdraw nearly $200 million, and the company declared bankruptcy on April 13, 2014, maintaining that reorganizing through a Chapter 11 bankruptcy would allow the company to emerge as a legitimate company with a revenue-generating voice-over-internet-protocol product.
Both the Commission and the U.S. Trustee opposed these efforts, claiming that there was clear evidence of fraud and criminal conduct, and a Nevada bankruptcy judge recently granted a request to transfer the bankruptcy proceedings to Massachusetts where the Commission's civil enforcement action is currently pending. During a hearing last Friday in the Nevada Bankruptcy Court, the first hint that criminal authorities might be prepared to get involved came when it was disclosed that asset forfeiture actions had been initiated by the U.S. Attorney.
At a hearing earlier this week in the Commission's enforcement action, Wanzeler's lawyer suggested he that while he was unaware of the whereabouts of his client, he would not be surprised if Wanzeler had traveled to Brazil recently, where he is a citizen.
A Commission attorney stated that, according to TelexFree's books and records, there are approximately $100 million in assets that could eventually be distributed to victims. "Clawback" proceedings to recover transfers to insiders and investors that received profits from their investment are also possible. However, a claims proceeding is likely months, if not years, away, and will require authorities to determine the net loss of each victim by accounting for any "interest" payments received.
Individuals who believe they are a victim of TelexFree are urged to send their contact information to USAMA.VictimAssistance@usdoj.gov.
Previous Ponzitracker coverage of TelexFree is here.
UPDATE (6:24 P.M. EST): According to @SteveFoskettTG, Merrill has made his first appearance in Federal Court, where government lawyers argued that he is considered a flight risk and should remain jailed until a bail hearing can be scheduled. The Court agreed, and Merrill was ordered remanded into custody until a bail hearing next Friday.
James Merrill just appeared in Fed court in #worcester on charges of conspir to comm wire fraud in conn./w TelexFree alleged pyramid scheme— Steven H. Foskett Jr (@SteveFoskettTG) May 9, 2014
Mr. Merrill will be held in RI pending bail hearing next Fri. Govt says he is a flight risk.— Steven H. Foskett Jr (@SteveFoskettTG) May 9, 2014
A copy of the affidavit is below (special thanks to ASDUpdates):