Claim Deadline Set For Victims In TelexFree Bankruptcy

Victims of the alleged TelexFree pyramid and Ponzi scheme, including over 700,000 so-called "promoters" promised annual returns exceeding 200%, must file a Proof of Claim in TelexFree's bankruptcy proceeding on or before August 13, 2014 according to a Notice filed today.  The Nevada Bankruptcy Clerk of Court filed a Notice of Chapter 11 Bankruptcy Cases, Meeting of Creditors, and Deadlines (the "Notice") today setting various deadlines, including the initial meeting of creditors and the due date to file a proof of claim.

According to the Notice, a Meeting of Creditors is scheduled for May 15, 2014 at 1:01 P.M. in the Jury Assembly Room of the Lloyd D. George U.S. Courthouse in Las Vegas, Nevada.  The meeting, known as a 341 Meeting in Bankruptcy parlance for its reference in the U.S. Bankruptcy Code, does not require attendance of all creditors but does require attendance of the debtor(s).  At the 341 Meeting, the debtor will be examined under oath, and there is typically the opportunity for creditors to pose questions to the debtor. 

In addition to the scheduling of the 341 Meeting, the Notice also established the deadline by which any creditor must file a proof of claim.  Pursuant to the Notice, all creditors (except governmental units) must file their Proof of Claim within 90 days after the 341 Meeting - resulting in a claim deadline of August 13, 2014.  Creditors must file their Proof of Claim forms with the Claims Agent for the Debtor, whose address is:

TelexFree Claim Processing

c/o Kurtzman Carson Consultants LLC

2335 Alaska Avenue

El Segundo, CA 90245

The Notice specifically forbids creditors from filing Proof of Claim forms with the Court, and failure to heed this warning could result in serious consequences - including denial of the claim.

Previous Ponzitracker coverage of TelexFree is here.

[UPDATE - This article and applicable deadlines have been modified to reflect a May 15, 2014 scheduled 341 Meeting]

A sample Proof of Claim form is below.  Ponzitracker will provide an in-depth guide to submitting a Proof of Claim form in the near-future:

SEC Seeks To Move TelexFree Bankruptcy To Massachusetts

Citing a "coordinated effort to avoid the Massachusetts courts," the Securities and Exchange Commission filed a motion in a Nevada bankruptcy court seeking to transfer venue of the TelexFree bankruptcy to a Massachusetts bankruptcy court.  In its Motion for Change of Venue (the "Motion"), the Commission alleged that the overwhelming facts and circumstances warranted the transfer of the pending bankruptcy filed by three TelexFree entities from Nevada to Massachusetts.  

According to the Commission, TelexFree, Inc., TelexFree, LLC, and TelexFree Financial, Inc. (collectively, "TelexFree") "hastily filed their Chapter 11 petitions the evening of Sunday, April 13, 2014."  Despite the fact that only TelexFree, LLC was a Nevada limited liability company and maintained a "rent-a-space office" in Las Vegas, the bankruptcy petitions claimed that venue was proper in Nevada.  The bankruptcies appeared extremely coordinated, with a flurry of motions accompanying the petitions - including a motion for court approval to "reject" hundreds of millions of dollars in obligations to "promoters" under old and current compensation plans.  Approximately 36 hours after the filing of the bankruptcy petitions, both the Massachusetts Securities Division ("MSD") and the Commission filed civil complaints against TelexFree in Massachusetts.  

In its Motion, the Commission stressed the overwhelming evidence it alleged supported a finding of venue for the bankruptcies in Massachusetts rather than Nevada.  This included the fact that:

• All of Debtors' physical assets are located in Massachusetts (or in Florida);
• Most of TelexFree's bank accounts are located in Massachusettts;
• The 50% owners and only directors of TelexFree reside in Massachusetts;
• One-third of the 30 largest creditors listed by TelexFree reside in Massachusetts, while none reside in Nevada; and
• Both the MSD's administrative complaint and the Commission's emergency enforcement action are pending in Massachusetts courts.

The federal statute governing venue in a bankruptcy case specifies that venue is proper in the district in which "the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the 180 one hundred and eighty days..." prior to commencement of the bankruptcy proceeding.  28 U.S.C. 1408.  Further, Nevada caselaw provides a six-factor test to determine whether a case should be transferred for the convenience of the parties:

• proximity of creditors of every kind to the court;
• proximity of the debtor;
• proximity of witnesses necessary to the administration of the estate;
• location of the assets;
• economic administration of the estate; and
• necessity for ancillary administration if liquidation should result.

In re B.L. of Miami, Inc., 294 B.R. 325, 329 (Bankr. D. Nev. 2003).   Reviewing these factors, the Motion indicated that, while preliminary data shows that only 205 victims may be located in Nevada, more than 2,500 victims were located in Massachusetts.  Additionally, both TelexFree's principal place of business and its owners are located in Massachusetts.  These owners are also primary witnesses in the case.  Interestingly, the Commission also alludes to the possibility under current law that entry of any orders in fraudulent transfer actions against any of the individual defendants or other non-claimants will have to be coordinated with the Nevada district court - whereas the Commission's civil enforcement action is currently pending in the District of Massachusetts and thus the Court there will already be familiar with the facts and circumstances of the case.  Finally, the Commission also indicates that the current Chapter 11 status of the case is in doubt, hinting that "liquidation of the estate may become necessary".  In that event, the Commission argues that liquidation in Massachusetts would complement the establishment of a distribution fund that would likely be under the auspices of the Massachusetts District Court.  As the Commission argued, the factors heavily weighed towards a transfer of venue to Massachusetts bankruptcy court.  

Previous Ponzitracker coverage of TelexFree is here.

A copy of the Motion is below:

Transfer Motion

TelexFree Trustee Says "Compelling Evidence of Fraud," Seeks Appointment Of Independent Trustee

 Given the facts alleged in the SEC Case, TelexFree appears to be engaged in a classic Ponzi scheme.

- Tracy Hope Davis, U.S. Trustee 

The United States trustee overseeing the bankruptcy cases of TelexFree, LLC, TelexFree, Inc., and TelexFree Financial, Inc. (collectively, "TelexFree") has filed a motion seeking the appointment of a Chapter 11 Trustee based on "compelling evidence of fraud, dishonesty and gross mismanagement of the affairs of [TelexFree]."  Tracy Hope Davis, the U.S. Bankruptcy Trustee for the region in which TelexFree's bankruptcy petitions were filed, filed a Motion For Order Directing the Appointment of a Chapter 11 Trustee Pursuant to §1104 (a) (the "Motion") today, arguing that "for the Debtors' investors and creditors seeking financial accountability, it is in their interests for an independent fiduciary to be appointed forthwith."

Pursuant to Federal Bankruptcy rules, while the appointment of independent trustees is common practice in bankruptcy petitions under other Chapters, a Chapter 11 bankruptcy typically only includes a U.S. Trustee associated with the Department of Justice. The reasoning behind this is that, in a Chapter 11 bankruptcy where the petitioning entity(ies) seek to continue doing business and eventually emerge from bankruptcy, the filing entity is best equipped to oversee day-to-day operations and thus would assume the majority of the duties of an independent trustee.  

However, as Ponzitracker noted in an article several days ago, the appointment of an independent trustee is specifically contemplated in a Chapter 11 case under 11 U.S.C. 1104, which provides that a case trustee may be appointed:

for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.

The Motion specifically cites Section 1104, noting that "the appointment of a Chapter 11 trustee would clearly be in the interests of the creditors of this estate" in light of the pending civil actions by the Securities and Exchange Commission and the Massachusetts Securities Division ("MSD").  The Motion notes that "the pyramid has collapsed," and also recounts the discovery of nearly $38 million in cashier's checks in the possession of TelexFree's interim CFO during a raid of the company's Massachusetts headquarters.  The Motion also thoroughly summarizes the pertinent facts alleged in the complaints filed by the Commission and the MSD.

The Motion argues that cause for the appointment of a Chapter 11 trustee is clearly established by the "fraudulent and dishonest acts committed by the principals and the officers of [TelexFree]."  Fraud is also evident by the very nature of Ponzi schemes, which are "fraudulent by definition." Donell v. Kowell, 533 F.3d 762, 767 n2 (9th Cir. 2008).  Under the definition of a Ponzi scheme as set forth by a recent Ohio Bankruptcy Court, the Motion concludes that:

Given the facts alleged in the SEC case, TelexFree appears to be engaged in a classic Ponzi scheme.

Finally, the Motion dismisses TelexFree's recent appointment of a CFO and CEO, arguing that these appointments do not negate past or protect against future fraudulent acts of the Debtors' board members James Merrill and Carlos Wanzeler.  The Motion expresses doubt that the CFO and CEO truly have control or are independent of former management, and suggests "it is more likely than not that anyone handpicked by [Merrill and Wanzeler] to manage their wholly owned companies will be another cohort."

Should a trustee be appointed, their duties are set forth in Section 1106.  These duties include the filing of a statement of investigation, as soon as practicable, that includes "any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor..."  Additionally, the trustee may recommend the conversion of the case to another Chapter under the Bankruptcy Code, including a liquidation under Chapter 7.  

TelexFree will have an opportunity to respond to the Motion pursuant to Court rules.

PatrickPretty also has coverage of the Motion.

A copy of the Motion is below:

Trustee Motion

TelexFree Seeks Six-Week Extension To File Financial Information

Attorneys for TelexFree have filed a motion seeking court approval for a six-week extension to provide the required supplements to their bankruptcy filing, including financial disclosure statements, summaries of assets, and lists of creditors.  TelexFree, LLC, TelexFree Inc., and TelexFree Financial, Inc. (collectively, "TelexFree") filed for Chapter 11 bankruptcy protection last week shortly before state and federal regulators accused it of operating a massive pyramid and Ponzi scheme.  In a Motion for Extension filed yesterday, TelexFree argued that a six-week extension was necessary in light of the ongoing actions by the Massachusetts Securities Division and the Securities and Exchange Commission, as well as the company's alleged inability to access its corporate documents following a raid of its headquarters last week by federal authorities.

Federal Bankruptcy Rule 1007 sets forth a list of the required documents and schedules to be filed in connection with initiation of a Chapter 7, 9, 11, or 13 bankruptcy.  In addition to a bankruptcy petition, a debtor is also required to file:

• schedules of assets and liabilities;
• a schedule of current income and expenditures;
• a schedule of executory contracts and unexpired leases; and 
• a statement of financial affairs.

In addition, other required schedules include lists of creditors holding secured and unsecured claims, personal and real property holdings, and executory contracts and expired leases.

In the initial filings made by TelexFree, none of these required schedules were included.  These schedules contain information, such as current assets and income, that will be crucial to determining whether TelexFree will be permitted to move forward with a Chapter 11 reorganization or if it is instead ordered to proceed with a Chapter 7 liquidation.  Indeed, one of the threshold requirements for receiving approval to proceed with a Chapter 11 bankruptcy is that creditors must receive more than they would receive under a Chapter 7 liquidation.  The bankruptcy court issued a Notice of Incomplete and/or Deficient Filing on April 14, 2014, and ordered that all of the missing schedules were to be filed no later than 14 days after the initial filing date of April 13, 2014.

In the Motion to Extend filed April 21, 2014 (the "Motion"), TelexFree stated that the deadline to file the schedules is currently April 28, 2014 (when in reality the deadline is April 27, 2014 - 14 days after the petitions were filed on April 13, 2014).  It first noted that it had included a list of all known creditors in its bankruptcy petition - with the exception of "the complete list of Promoters, believed to exceed 700,000 parties."  With the Schedules currently due in less than one week, the Motion referenced several parallel actions that it argued warranted a six-week extension until June 16, 2014.  This included (1) the execution of federal government search warrants on TelexFree's Massachusetts office resulting in the inability to access complete records; and (2) the "significant time" TelexFree is spending to address complaints filed by the Massachusetts Securities Division and the Commission.  Indicating that these issues would prevent TelexFree from completing the Schedules within the statutorily-prescribed time, TelexFree requested an extension to June 16, 2014.  Oddly enough, it appears that TelexFree originally had planned to seek an extension until May 31, 2014 - as indicated by the date set forth in the proposed order that accompanied the Motion.

While the exact reasons for the Motion are unknown, it is likely that TelexFree did not anticipate the swift response their bankruptcy filing would provoke from the Massachusetts Securities Division and the Commission, which have served only to magnify the spotlight currently on the company.  In addition, federal authorities executed a search warrant on TelexFree's Massachusetts office the same day.  The information required to be filed in the Schedules is certainly likely to garner an intense amount of scrutiny, and TelexFree lawyers may feel that a six-week extension may be sufficient breathing room to deal with the competing actions and ensure that any figures eventually submitted are accurate.

Yesterday, TelexFree filed an ex parte motion to shorten the time requirement to schedule a hearing on the Motion, and requested that the Motion be added to the list of motions currently scheduled for hearing on May 2, 2014.  

A copy of the Motion is below:

Motion to Extend

Zeek Receiver Slams Lawyers' Efforts To Redirect Claim Distributions

The court-appointed receiver overseeing efforts to recover funds for victims of the $600 million ZeekRewards Ponzi scheme has again reserved strong words for efforts by certain victims' lawyers to have distributions sent to their law offices, rather than directly to victims, saying that it "ought not to be the responsibility of the Receiver to act as the Movants’ attorneys’ collection agent."  The Receiver, Kenneth D. Bell, filed his Reply in Opposition to a Motion for Clarification And/or Reconsideration filed by a group of several hundred scheme victims.  While Bell initially characterized the efforts to compel the mailing of distribution checks to victims' attorneys as "at least questionable" back in January, he used stronger words in his Reply, arguing that the victims' attorneys were simply "unable to let go of their pecuniary interests."

The dispute arose in December 2013, after the Receiver filed his Motion for an Order Approving Distribution Procedures and Certain Other Related Relief ("Motion").  The Motion sought court approval for distribution procedures that included, among other things, a provision that payments would be made directly to victims.  Of the nearly-200,000 individuals that submitted claims for the Receiver's determination, an objection was filed by a small subset of approximately 740 victims which had previously entered into a contingency agreement with a Louisiana law firm (the "Louisiana Firm") for the purpose of filing a class action lawsuit - a lawsuit that was later halted by a federal court and deemed "ill-timed."  In his response to that objection, the Receiver observed that

whether or not the fee agreement would permit Movants’ counsel to claim a large contingent fee (as much as 25%) for simply providing administrative assistance in filing a claim through the Receiver’s claim portal is uncertain.

There are substantial potential fees at stake.  Considering that the average claim amount was approximately $3,100, and the fact that the Louisiana Firm claimed 740 clients, this would represent an average per-claim fee of $775, and a cumulative total fee of over half a million dollars for simply assisting victims in filling out a claim form.  (Obviously, the number could fluctuate based on the actual dollar amounts of the claims of the 740 victims.)

On April 1, 2014, the Court approved the Receiver's Motion in all aspects.  Several days later, the Louisiana Firm filed a Motion for Clarification and/or Reconsideration, which, in the Receiver's words, "again challeng[es] the Court’s decision by seeking to change the approved distribution process to require the Receiver to aid the Movants’ attorneys in collecting their attorneys’ fees from the Movants."  Characterizing the reason for the motion as the Louisiana Law Firm's inability "to let go of their pecuniary interests," the Receiver explained that he sought to make payments directly to victims to prevent duplicative payments, to ensure aggregate net winners do not receive distributions by using multiple addresses, and even ensuring that the Receiver does not unwittingly violate the Department of Treasury’s Office of Foreign Assets Control’s (OFAC) regulations.  While observing that his plan "may not assist Movants’ attorneys’ efforts to collect their fees," he argued that no clarification of the Order was necessary.  

A copy of the Receiver's Reply is below (h/t ASDUpdates):

Zeek Doc 202