Convicted Ponzi Schemer Faces Federal Charges For Violating SEC Asset Freeze

A Massachusetts man currently serving a 10-year sentence in state prison for operating a multi-million dollar Ponzi scheme was recently indicted on twenty-five federal charges of criminal contempt relating to allegations he willfully violated a court-ordered asset freeze during a Securities and Exchange Commission enforcement proceeding.  Steve Palladino, 57, was recently sentenced to serve 10 years in a Massachusetts state prison after he agreed to plead guilty to masterminding a $10 million Ponzi scheme along with his wife and son.  Palladino could face additional prison time if he is convicted of the new contempt charges.

According to the U.S. Attorney's Office, Palladino and his company, Viking Financial Group, were the subject of an emergency enforcement action brought by the Commission in April 2013.  The Massachusetts District Court granted the Commission's request for an asset freeze, and subsequently modified the asset freeze to require that all funds from Viking be deposited into an escrow account.  Palladino was repeatedly accused by the Commission of violating the asset freeze, which resulted in four motions to hold Palladino in civil contempt.  This included allegations that Palladino transferred vehicles to his wife who subsequently obtained loans on the vehicles, failed to deposit funds from the loans in an escrow account, obtained a loan from an investor, sold his truck for $9,500, and opened credit cards under false pretenses.  

While it is a rarity for criminal charges to result from alleged violations of a Commission asset freeze, the allegations here were particularly egregious - as well as verifiable.  For example, Palladino was able to obtain more than $200,000 in bank loans after his wife offered their 2012 Mercedes CLS 63 AMG, 2013 Audi A5 Quattro, and Range Rover Sport up as collateral.  

While the form of charging document is one typically used where a plea agreement is likely, there has been no indication that one is forthcoming.

A copy of the criminal information is below:

Palladino Information

Court Suspends TelexFree Bankruptcy, Grants Motion To Transfer Venue To Massachusetts

In a ruling earlier today, a Nevada Bankruptcy court dealt a severe blow to efforts by a consortium of companies accused of operating a massive Ponzi and pyramid scheme by ruling that the pending bankruptcy cases would be suspended and ultimately transferred to Massachusetts, where pending state and federal regulatory actions are pending.  U.S. Bankruptcy Judge August Landis ruled that he would grant the Securities and Exchange Commissions's request for abstention and suspend the current bankruptcy proceedings of TelexFree LLC, TelexFree, Inc., and TelexFree Financial Inc. (collectively, "TelexFree") Judge Landis indicated that, in the event the debtors planned to move forward with bankruptcy, the proceedings would be transferred to the District of Massachusetts, where the Commission's emergency enforcement action is pending against TelexFree.

The ruling is a severe setback to TelexFree, which filed bankruptcy on the eve of the filings by the Commission and the Massachusetts Securities Division.  TelexFree had strenuously argued against abstention or transfer, maintaining its position that the company had a viable product that it predicted could result in "significant" revenue once it emerged from bankruptcy.  However, the company also sought to "reject" debts of hundreds of millions of dollars to "promoters" that were compensated on selling TelexFree products and recruiting others as part of the process.  

The Motion to Transfer Venue

In evaluating the Motion to Transfer venue, the Court analyzed first whether transfer was in the "convenience of parties," which involved a weighing of six common factors:

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

Of the factors, the Court noted that the fifth was the most important while the sixth was the least important.  The Court found that all six factors weighed in favor of a transfer to Massachusetts.  Based on these findings, the Court concluded that transfer TelexFree, LLC and TelexFree Financial, Inc. bankruptcy proceedings to Massachusetts was warranted.  The Court also analyzed whether transfer of the TelexFree Inc. bankruptcy was warranted under an "interests of justice factor," which involves an analysis of the following six factors:

  • the promotion of economic and efficient administration of the estate;
  • the interests of judicial economy would be served;
  • the parties would receive a fair hearing in each venue;
  • either forum has an interest in having the controversy decided within its borders;
  • the enforcement of any judgment would be affected; and
  • whether the plaintiff's original choice of forum should be disturbed.

While noting that the third factor was a "push," the Court concluded the remaining factors warranted transfer of venue to Massachusetts.

Abstention

Following its ruling on the Motion to Transfer Venue, the Court also pondered whether abstention was appropriate - an issue that was initially raised by the Court immediately following the bankruptcy filings.  While noting that abstention is used sparingly and in unusual circumstances, the court concluded such a situation was present.  After weighing several factors, the Court concluded that abstention - in the form of suspending all proceedings - was warranted until and when venue could be transferred to Massachusetts.

While TelexFree's chances for success were slim, their strategy was certainly noteworthy.  A continual theme present in TelexFree's papers before the bankruptcy court was the notion that the company, accused by U.S. and foreign interests of malfeasance, could simply do away with the past troubles in favor of starting anew.  This included cleaning house of the previous officers and directors (one agreed to resign while another refused and had to be terminated), as well as extolling the future revenue possibilities of a phone service that, on its face, was overpriced compared to competitors such as Skype and Vonage.  Such a strategy ignored the company's troubled history in favor of a unproven and theoretical future.  While certainly a novel attempt, the Court delivered a resounding rebuke to this strategy.  

According to attorney Timothy J. Durken, who is monitoring the case on behalf of TelexFree promoters, “It was clear under the factors considered by Bankruptcy Judge Landis that the TelexFree bankruptcy cases belong in Massachusetts. TelexFree was headquartered in Massachusetts and that is the where the investigations and SEC and MSD actions are ongoing."

A detailed recap of the hearing is available here.  There exists the possibility that TelexFree could appeal the ruling.  

Previous Ponzitracker coverage of TelexFree is here.

Live Coverage Of The TelexFree Ruling

Ponzitracker will be providing live coverage at 1:30 P.M. EST of the rulings handed down today in the pending TelexFree bankruptcy proceedings in Las Vegas, Nevada.  The ruling is the culmination of an eight-hour hearing held last Friday, May 2, 2014, on various motions brought by the Securities and Exchange Commission, the United States Trustee, and counsel for TelexFree.  A detailed summary of the hearing on May 2, 2014 is here, with the potential outcomes of today's hearing discussed here.  If you would like to donate to help defray the cost of covering the hearing, please click the Donate button below.  Coverage will begin at 1:30 P.M. EST.

In the meantime, cast your vote in the Poll as to your predicted outcome:

1:29 PM: On silent hold until Judge takes the bench.

1:31 PM: Appearances being made - most by telephone.

1:34 PM: Court now in session.

1:35 PM: Purpose of today's hearing is to simply recite ruling from May 2, 2014 hearing, and no argument will be entertained.

1:37 PM: Motion to transfer venue to be addressed first. 

1:37 PM: Court making findings of fact as to debtors TelexFree LLC ("LLC"), TelexFree Inc. ("Inc."), and TelexFree Financial, Inc. ("Financial").  Domicile, ownership structure, etc.  LLC and Inc. owned 50-50 by Merrill and Wanzeler, while Financial is a wholly-owned subsidiary.

1:41 PM: Only members of debtors' boards prior to petition date were Merrill and Wanzeler.  Board composition changed on April 13, 2014.  Board composition changed against after filing (unsealing) of SEC Complaint when Merrill and Wanzeler asked to resign.  

1:43 PM: Similarly, Merrill and Wanzeler were only officers clear from the record before April 13, 2014.

1:44 PM: Court notes discrepancy between board meeting minutes of April 13, 2014 indicating that Merrill remained President, while MacMillan signed agreement as President.

1:47 PM: As of May 2, 2014 hearing, Debtors' stock and membership units owned by Wanzeler and Merrill, while only remaining officers were MacMillan and Runge.

1:48 PM: Addressing business model.  Evidence at hearing established that debtor used MLM Progam to distribute VoIP telephone services.  Prior to filing, Debtor had amassed over 700,000 promoters/associates worldwide.  Promoters signed contracts with LLC governed by Nevada law.  Prior to filing, promoters were compensated for recruiting other promoters and selling 99 TelexFree VoIP product.

1:49 PM: Record evidence and MacMillan testimony showed commissions paid were unsustainable.  After regulatory inquiries, revisions to compensation paid to members resulted in "disappointing" revenues that didn't allow company to meet obligations.  Recognition that revised comp plan, while better suited to require promoters to sell VoIP product, will produce sufficient revenues to sustain company's telecom business.

1:51 PM: Court is mindful that debtors have developed apps and hopeful that technology  could generate additional income going forward.

1:52 PM: During May 2, 2014 hearing, record developed concerning execution of search warrant and cashier's checks.  Checks located in what Craft told authorities was a personal item.  Checks collected at direction of MacMillan and Runge prior to execution of search warrant.  Debtor stated intention was to collect checks to safeguard assets.  While evidence was conflicting, evidence uniform that debtors intended to deposit checks into safe deposit box - NOT properly collateralized account under bankruptcy rules. 

1:59 PM: Discussing SEC case. In addition to complaint, SEC also filed motion for TRO.  TRO signed on April 16, 2014.

2:00 PM: On hearing on April 17, 2014, SEC's TRO came to attention of court.  Bulk of first day motions were continued.

2:01 PM: Preparing to make ruling.  

2:02 PM: Making conclusions of law re motion for change of venue.  Court must first ask whether original venue is proper.  Starting with LLC's case.  No party has challenged that LLC's venue in Nevada is proper.  Court concludes that venue is originally proper for LLC.  Because LLC owns more than 20% of Financial's shares, Financial is an affiliate, and thus venue of Financial is proper.  Inc. is Massachusetts corporation, and is not domiciled or resident in Nevada.  Court concludes that venue of Inc. is not proper in Nevada.  

2:07 PM: Question becomes what to do with cases: do they stay or are they transferred. Reviewing grounds for transferring venue.  Analyzing "convenience of parties" ground, which includes six factors.  Also analyzing "interest of justice" ground.  Movant seeking transfer carries burden by preponderance of evidence.

2:13 PM: Application of "convenience of parties" factor to LLC and Financial.  Neither schedules nor statements of affairs have been filed.  Evidence developed at hearing that there are no known secured creditors of debtor, bulk of creditors are promoters owed money due to original failed comp plan, approximately 90% of debtor's creditors reside outside of Nevada and Massachusetts, approx. 75% of customers and promoters reside outside U.S.  While less than 5% live in MA, there are fewer customers and promoters in Nevada and Massachusetts, and 10 of largest unsecured creditors reside in MA.  Court concludes proximity of creditors weighs in favor of transfer.

2:14 PM: Next, proximity of debtors.  LLC shares headquarters with Inc. in MA.  Chief restructuring officer stated he would have performed restructuring duties in MA headquarters before search warrant execution; thereafter, he would perform his duties from Georgia.  Neither Financial nor LLC has office presence or employees in Nevada.  Proximity of debtors weighs in favor of transfer to Massachusetts.

2:16 PM: While credentials of MacMillan and Runge not subject to question, court finds they have little knowledge related to business administration of LLC and Financial - couldn't identify competitors.  Proximity of witnesses weighs in favor of transfer.

2:18 PM: Proximity of assets.  Substantially all of IT and office equipment located in MA.  Weigh in favor of transfer to MA.

2:19 PM: Access to books and records most readily available in Massachusetts. Judicial economy weighs in favor of conducting both proceedings in Massachusetts.  Economical administration weighs in favor of transfer to Massachusetts.

2:20 PM: Necessity of ancillary administration in case of liquidation.  Typically not given much weight, favors transfer to Massachusetts.

2:20 PM: Venue must be transferred to Massachusetts for LLC and Financial.  If Inc. case is to continue, must be transferred to district or division where it could have been brought.  Court considering whether transfer is in interest of justice.

2:22 PM: Access to books and records in MA, no business presence or employees in Nevada.  Judicial economy would also be better served.  Debtors have national law firm.  Nothing in record to suggest that any party would be divided fair trial in either Nevada or Massachusetts - neutral factor.  Fewer customers and promoters in Nevada than Massachusetts.

2:25 PM: Transfer to Massachusetts would also aid in enforcement of judgments.  Enforceability of judgment in SEC's enforcement action would be aided by transfer.  As to original choice of forum, court exercises its discretion to conclude venue is properly in Massachusetts.  

2:27 PM: In summary, careful review and analysis of applicable factors demonstrates that venue for all cases must be transferred to Massachusetts.

2:27 PM: Next is the question of abstention.  Court asked parties to weigh in on propriety of abstention given proceedings and TRO already transpiring in Massachusetts.  

2:28 PM: Court may dismiss or suspend proceedings based upon satisfaction of factors.  Court is mindful that abstention is used sparingly and in unusual circumstances.  Court thinks that is the case here.

2:31 PM: First, suspension would avoid potential for confusion and delay.  Second, another forum is available to protect interests of parties.  Third, federal proceedings are necessary.  Next, there is no equitable procedure available.  Next, debtors and creditors will not be able to reach out-of-court agreement.  No non-federal bankruptcy proceeding pending.  Bankruptcy filed commensurate with SEC's commencement of civil action in Massachusetts.  

2:33 PM: Debtors made point that their intent was to reorganize sale of VoIP packages to customers and to develop app and technology.

2:34 PM: On balance, Court finds that abstention in form of suspension of all proceedings is warranted until such time as transfer to District of Massachusetts is completed.  Court will enter order of absention suspending all proceedings, including motion to determine portions of SEC's TRO are invalid and U.S. Trustee's motion for appointment of trustee.

ADJOURNED.

 

  

TelexFree Ruling Scheduled For Today

A Nevada bankruptcy judge plans to deliver a ruling this afternoon as to the fate of a fledgling bankruptcy filed by a consortium of companies known as TelexFree that stand accused of operating a massive Ponzi and pyramid scheme by state and federal regulators.  U.S. Bankruptcy Judge August B. Landis plans to issue an oral ruling at 10:30 A.M.PST/1:30 P.M. EST on several motions brought by the Securities and Exchange Commission and United States Trustee, according to the case docket.  Perhaps tellingly, while the docket contains a "minute entry" for each of the fourteen motions heard at last week's hearing, only a handful of those entries - including the Commission's Motion to Transfer Venue and the U.S. Trustee's Motion for Appointment of Chapter 11 Trustee - indicate that an oral ruling is scheduled for today.  Ponzitracker will be covering the hearing at 1:30 PST.

The Court presided over an eight-hour hearing last Friday in the first substantive hearing since TelexFree's late night bankruptcy filing on April 13, 2014.  The hearing began with a "late development" that revealed that the U.S. Attorney's Office had filed and unsealed twenty-six criminal forfeiture actions related to TelexFree bank accounts and property.  The Court later took testimony from several TelexFree executives, including acting CEO Stuart MacMillan and current Chief Restructuring Officer William Runge.  After hearing argument on several of the motions, the Court announced it intended to issue a ruling early this week.  A detailed recap of that hearing is here, and an audio recording of the hearing is here.

The main issue to be decided today is whether TelexFree's bankruptcy moves forward at all, let alone in Nevada.  The Commission has asked the Court to abstain from hearing the proceedings - essentially asking the Court to indefinitely suspend the bankruptcy.  In the alternative, the Commission seeks to transfer the case to a Massachusetts bankruptcy court to better coordinate the case with pending state and federal actions pending against TelexFree in Massachusetts.  If both of those motions are denied, which does not appear likely, then the bankruptcy will remain in Nevada.  

The next issue would be the U.S. Trustee's Motion for Appointment of Chapter 11 Trustee, which seeks the appointment of an independent trustee to oversee TelexFree's operations rather than allowing oversight to remain with TelexFree's current management.  The U.S. Trustee alleged that "compelling evidence of fraud...[and] criminal conduct" warranted this outcome.  TelexFree also opposes this motion, seeking to avoid interference with its operations by a third-party.  If the Court grants that motion, the newly-appointed trustee would conduct an investigation of TelexFree's operations and file a report with the court with recommendations - including the possibility of converting the bankruptcy from a reorganization to a liquidation.  

Join Ponzitracker at 10:30 A.M. PST/1:30 P.M. EST for live coverage of the hearing.

Listen To The TelexFree Bankruptcy Hearing Here

Yesterday, a Nevada bankruptcy court conducted an eight-hour hearing that will decide the short-term future of a trio of bankruptcy petitions filed by TelexFree, Inc., TelexFree, LLC, and TelexFree Financial, LLC (collectively, "TelexFree").  There, lawyers for TelexFree, the Securities and Exchange Commission, and the U.S. Trustee squared off before U.S. Bankruptcy Judge August Landis to determine whether the bankruptcy would proceed at all, or, in the alternative, be transferred to Massachusetts or whether the allegations  of fraud and criminal conduct warranted the appointment of an independent fiduciary as trustee.  Additionally, testimony was taken from interim chief executive officer Stuart MacMillan, as well as interim chief restructuring officer William Runge and his associate Tim Meighan.  While the government lawyers seek to halt the bankruptcy in its tracks while a civil enforcement action initiated by the SEC proceeds in Massachusetts, TelexFree lawyers have steadfastly maintained that, despite any malfeasance in its past, the company intends to reorganize and emerge a legitimate business.  Ponzitracker covered the hearings in detail yesterday here.

The court has just released the audio from the hearings, and it is presented below.  Please note that there are six parts (all times are in PST):

  • Part 1 covers the time period of 9:47 A.M. to 10:08 A.M.
  • Part 2 covers the time period of 10:27 A.M. to 11:55 A.M.
  • Part 3 covers the time period of 1:19 P.M. to 1:25 P.M.
  • Part 4 covers the time period of 1:25 P.M. to 1:26 P.M.
  • Part 5 covers the time period of 1:28 P.M. to 4:00 P.M.
  • Part 6 covers the time period of 4:00 to the close of the hearing (approximately 6:47 P.M.) 

While the Court has provided the audio files, it is doubtful that a corresponding transcript will be released free of charge.  Yesterday, Ponzitracker provided a live blog of the hearings until 4:00 P.M. PST.  A quick review of the final minutes of the hearing reveals that the Judge plans to make a ruling on the motions by early next week.  Interestingly, the TelexFree lawyer promised that, if the bankruptcy is left intact, "there is no question in my mind that there will be an aggressive pursuit of avoidance actions if necessary."

BehindMLM has put together a summary of the hearing.

The audio files are below:

Music Hosting - Download Audio - Part 1

Embed Music Files - Free Audio - Part 2

Play Music - Share Audio - Part 3

Play Music - Upload Audio - Part 4

Listen Music Files - Upload Audio - Part 5

Embed Music - Upload Audio - Part 6