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

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

Following Lawyer's Suicide, Victims Of $30 Million Ponzi Scheme Face Bleak Outlook

Victims of a $30 million Ponzi scheme allegedly orchestrated by a New York lawyer who committed suicide several years ago reportedly face a bleak prospect of recovery, with a bankruptcy proceeding resulting in just $85,000 recovered thus far.  Jay Korn, who jumped off an office building in March 2010, was accused of operating a real estate Ponzi scheme through his law firm, Korn & Spirn, that took in nearly $30 million from clients and investors.  The entirety of the $85,000 recovered has come from a settlement with a company that purportedly recruited investors for Korn's scheme.

Korn solicited clients and friends for what he touted as a real estate investment program that promised annual returns ranging from 12% to 15%.  Korn was well known in his community, serving as president of the Middle Bay Country Club and the Oceanside Board of Education.  According to victims, Korn represented that investments would be used to help people who could not afford typical mortgages by offering them the ability to borrow money.  In total, nearly $28 million was raised from investors.

While there were no complaints from investors prior to Korn's death, his suicide resulted in dozens of complaints to authorities about both investments and other funds that had been entrusted to Korn - including at least one instance of Korn allegedly converting client funds for his own use.   Korn's firm was subsequently placed into involuntary bankruptcy, and an investigation by the district attorney's office later concluded that Korn had acted alone.  At the time of Korn's death, records later showed that the firm had only $2,500 in assets - most of which was contained in a checking account.  The court-appointed bankruptcy trustee is also currently pursuing Korn's wife for $1.25 million.

Five Years Later, Victims Of $25 Million Ponzi Scheme Recover 10%

More than five years after the Securities and Exchange Commission alleged that J.V. Huffman operated a massive Ponzi scheme that raised more than $25 million from at least 350 investors, the court-appointed receiver has announced that those victims will soon receive a first, and likely final, distribution check representing 10.5% of their losses.  Walt Pettit, the court-appointed receiver for Huffman and his company, Biltmore Financial Group, Inc. ("Biltmore"), indicated in a letter to victims that the check represented the fruits of a five-year effort to recover funds, and would likely be the only distribution absent any further recovery.

The SEC filed an emergency enforcement action against Huffman in November 2008, charging him with violations of the anti-fraud provisions of federal securities laws in connection with Huffman's operation of Biltmore.  While Huffman initially started Biltmore in the early 1990's as a mutual fund, he sought to placate investor fears after the terrorist attacks of 9/11 by repositioning the company as a buyer and seller of mortgages.  Many of Huffman's more-than 350 investors were members of the Lutheran community around his North Carolina home, and were drawn to the scheme by Huffman's guarantees of steady profits at market rates and the guarantee that the investment would not lose money and was insured by the FDIC, SIPC, and Thrivent Financial Services.  

After the scheme collapsed in November 2008, Huffman confessed to authorities that investor funds were not used to purchase mortgages, but rather were used in typical Ponzi fashion to pay returns to existing investors, as well as to sustain a lavish lifestyle that included the purchase of an Aston Martin luxury car, a $1 million recreational vehicle, and vacation and rental properties.  Huffman later pleaded guilty to criminal charges, and was sentenced to a thirty-year prison term in January 2010.

The Receiver's appointment was initially complicated by the seizure of both Huffman and Biltmore's books and records by criminal authorities, which apparently hindered the ability to gain an understanding of the scheme's inner-workings.  Additionally, while a significant amount of jewelry, real estate, and personal property were seized by the Receivership, their realizable value was depressed as the Receivership coincided with the financial crisis of 2008 - 2010.  According to the Receiver, many of the properties were not receiving high enough offers to pass muster with overseeing U.S. District Judge Richard Voorhees, who ultimately was tasked with approving the sale of Receivership property.  

In the Receiver's final report, Pettit reported recovering a total of $3.26 million.  Of that amount, approximately $750,000 was allotted to expenses due to the Receiver and his professionals, leaving $2.49 million available for distribution.  This distribution ultimately amounted to 10.567% of victims' approved losses.

Authorities Allege "Virtual Concierge Machine" Business Pitched On YouTube Was $40 Million Ponzi Scheme

Authorities instituted civil and criminal proceedings against two Florida companies and their principals, alleging that their YouTube videos advertising 80% - 120% annual returns from investments in "Virtual Concierge machines" were part of a massive Ponzi scheme that took in at least $40 million from hundreds of investors nationwide.  JCS Enterprises, Inc. ("JCS"), T.B.T.I. Inc. ("TBTI"), Joseph Signore, and Paul L. Schumack, II were named as defendants in an emergency civil enforcement action by the Securities and Exchange Commission.  In a parallel action, the U.S. Attorney's Office for the Southern District of Florida also announced criminal charges.

According to the SEC, Signore and Schumack solicited potential investors to participate in the 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.  

In addition to instituting an asset freeze, the Court also approved the appointment of a Receiver over JCS and TBTI.

A copy of the SEC's complaint is below:

comp-pr2014-70