The Securities and Exchange Commission has filed civil fraud charges against two Massachusetts companies operating as Wings Network, alleging that the purported digital and mobile solutions venture was, in reality, a fraudulent Ponzi and pyramid scheme that took in at least $23.5 million from thousands of unsuspecting investors. Tropikgadget FZE and Tropikgadget Unipessoal LDA (collectively, "Tropikgadget"), along with three principals and twelve promoters, were charged by the Commission with multiple violations of federal securities laws in a complaint filed on February 25, 2015. The Complaint seeks injunctive relief, disgorgement of ill-gotten gains, pre-judgment interest, and civil monetary penalties. Wings had attracted scrutiny from state and federal regulators around the same time that another Massachusetts company, TelexFree, was accused in April 2014 of operating a massive Ponzi and pyramid scheme. Massachusetts securities regulators accused Wings of operating as a fraudulent pyramid scheme last May in an administrative proceeding.
Background and Allegations
According to the Commission, Tropikgadget FZE and Tropikgadget Unipessoal LDA are UAE and Portuguese entities, respectively, that were formed in November 2013. Tropikgadget FZE holds the rights to the Wings Network marketing and brand services, which includes the names Wings Network, Wingsnetwork, and Wingsnetwork.com. Sergio Tanaka served as the President of the board of directors of Wings Network, Carlos Luis da Silveira Barbosa ("Barbosa") was the CEO, and Claudio de Oliveira Pereira Campos ("Campos") was the Director of Operations.
Beginning in November 2013, Wings Network began operating in the United States by attempting to build a distribution network of associates who were told that Wings Network was in the business of selling games, apps, cloud storage, marketing tools, and a personal page. Indeed, while the company advertised itself using vague claims like the "First Mobile Multilevel" and that it would help members "achieve your dreams and enjoy your life," the Commission alleged that most, if not all, of these amorphous products were never provided to members to sell. Rather, the Commission claims that the only tools provided to members were designed to help recruit more members.
Wings aggressively courted potential investors through social media, posting several online presentations on popular video sharing site YouTube in January and February 2014. Additionally, promoters, who were incentivized for recruiting as many new investors as possible, used both traditional face-to-face sales and social media such as Facebook for these recruitment efforts. Potential investors were required to purchase memberships, which included a $49 membership fee and a choice of three tiers with increasing price points: a $299 "start pack," a $749 "executive pack," and a $1,499 "elite pack." Each of the "packs" came with a varying amount of "points" that could later be exchanged for compensation, as well as cloud storage and access to a web-based recruiting system with various templates to allow for personalization. Further, the "packs" did not offer any mechanisms for participants to sell products; rather, each "pack" provided tools to allow participants to recruit new members. Finally, purchasers of the elite pack were promised $750 per month simply for recruiting new members.
After purchasing a "member pack," participants learned of Wings' complex multi-level marketing structure that featured eight different bonus plans - only one of which was correlated to the sale of an actual product. Participants were told they could earn "bonuses" based on the number of new members they recruited to join Wings as well as the sale of "packs" to new and existing members.
Company principals and promoters also made representations to potential investors to convince them of the safety and legitimacy of an investment in Wings. For example, Barbosa stated in a YouTube video that Wings was in the "pre-screening" process to become a member of the Direct Selling Association ("DSA") - a national trade association of legitimate multi-level marketing companies that abided by a strict code of ethics. Additionally, promoters and participants claimed to potential members that their initial investments in "member packs" were 100% guaranteed through an insurance policy issued by the fourth-largest insurance company in Brazil. Finally, investors were assured they could request a full refund of their initial investment within fourteen days of signing up. In total, Wings took in more than $23 million from investors from November 2013 to April 2014.
Despite these claims and the attempts to portray itself as a seller of goods and services, the Commission alleged that Wings derived all of its revenue from fees associated with the sale of Member Packs - a classic Pyramid scheme in which the exponential revenues can be sustained only through the recruitment of additional investors. Nor was there such a thing as a "pre-screening" process for the DSA nor did Wings ever file a membership application. Finally, participants' initial investments were not covered by an insurance policy.
Where's the money?
The Massachusetts Securities Division subpoenaed Wings following the collapse of TelexFree in April 2014 after it noticed that the company's sales strategy appeared similar to that used by TelexFree. The Boston Globe reported that Wings' then-lawyer, D.J. Poyfair, confirmed that Wings had met with the MSD during the first week of May 2014 and that it "intend[ed] to address quickly any problems that it discovers.’’ The MSD filed an administrative complaint against Wings several days later, accusing the company of engaging in the unregistered sale of securities through the operation of a pyramid scheme.
However, according to the Commission's complaint, Wings' idea of quickly addressing any problems that it discovered consisted entirely of transferring millions of dollars to individuals and offshore companies - presumably in an attempt to place the funds outside the jurisdiction and reach of regulators. For example, the Commission alleged that the following entities received transfers from Wings in the days leading up to the MSD's complaint:
- Compasswinner LDA - received $8.7 million wire transfer from Tropikgadget on May 8, 2014;
- Happy SGPS SA - received a $1.18 million wire transfer from Tropikgadget on May 12, 2014; and
- Paulo Hideki Koga - received 13 transfers totaling $570,750 between November 1, 2013 and May 21, 2014.
A copy of the Commission's Complaint is below.