Authorities Went Undercover In TelexFree Investigation

Earlier today, federal authorities filed criminal charges against the owners of TelexFree, Inc. and related entities, alleging the companies were a massive Ponzi and pyramid scheme that may have taken in more than $1 billion from victims worldwide.  Co-owner James Merrill was taken into custody, while the remaining co-owner, Carlos Wanzeler, is now a fugitive as he is believed to be in Brazil.  The criminal charges were announced approximately four weeks after state and federal regulators filed emergency actions seeking to halt TelexFree.

A criminal complaint filed today contained a 27-page sworn statement by Special Agent John S. Soares of the Department of Homeland Security ("DHS") outlining the allegations against Merrill and Wanzeler.  The complaint contains a significant amount of previously-nonpublic information, including the disclosure that authorities utilized undercover operations as part of their investigation of TelexFree.  According to Soares, an undercover law enforcement officer (the "Undercover Officer") arranged to have himself recruited as an TelexFree promoter by an existing promoter referred to as Person A.  Person A told the Undercover Officer that they could make $100 per week using an "AdCentral Family Package" by simply posting online ads for TelexFree, and that they could earn additional money from recruiting new promoters to TelexFree.

The next day, the Undercover Officer joined TelexFree as a new promoter by purchasing an AdCentral Plan for $1,425 using a check made payable to Person A.  After setting up a "back office" account, Undercover Officer began placing online advertisements as a promoter for TelexFree - a process that took about 25 minutes per day.  For the next seven months, the Undercover Officer posted more than 700 advertisements, which were simply included among hundreds of identical ads posted on certain websites.  According to Person A, Undercover Officer did not need to sell the VOIP product advertised by TelexFree to make money, and Person A bragged that "he had earned $1,600,000 as a TelexFree promoter, without selling a TelexFree product."

In early January 2014, Undercover Officer linked an undercover bank account to his "back office," and was able to successfully obtain payments for posting the advertisements.

The undercover activity continued in March 2014 when Homeland Security agents, some undercover, attended a conference presented by TelexFree at a Boston hotel relating to the new compensation plan.  Both Merrill and Wanzeler made remarks at the presentation which were included in the criminal complaint, including statements alleged to be false and misleading about TelexFree's customer base and revenue stream.  Finally, on April 9, 2014, days before TelexFree's bankruptcy filing in Nevada, another undercover agent purchased a TelexFree VoIP package from a promoter via the TelexFree website.  

A copy of the affidavit is below (special thanks to ASDUpdates):

 

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TelexFree Co-Owner Arrested, Warrant Issued For Other Co-Owner (UPDATED)

“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.  

 

 

 

 

A copy of the affidavit is below (special thanks to ASDUpdates):

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Rothstein Divorce Stalls Due To Secrecy Of Whereabouts

Just before Kim Rothstein was due to learn her sentence for hiding more than $1 million in jewelry from authorities investigating the $1.2 billion Ponzi scheme masterminded by her husband, Scott Rothstein, she filed divorce papers with a Broward county court.  A Florida federal judge later sentenced her to an 18-month prison term, where she currently remains incarcerated at a medium-security prison in central Florida.  This week, a Florida bankruptcy judge entered a $2 million judgment against her resulting from the missing jewelry.

In comments made by Kim Rothstein's attorney, it was revealed that divorce papers have still not yet been served on Scott Rothstein.  According to attorney David Tucker, it has been difficult to serve Rothstein because his whereabouts are not publicly disclosed due to his rumored participation in the federal witness protection program resulting from his extensive cooperation with federal authorities.  Indeed, a search for Scott Rothstein on the Bureau of Prison's Inmate Locator yields no results.  As Tucker remarked to the Wall Street Journal, 

“How do you serve someone who’s in a secret location?” Mr. Tucker says. “It’s been very instructive for me.”

However, the inability to locate Rothstein does not completely stop the divorce in its tracks; rather, Florida law allows a divorce to continue even in the absence of a spouse upon the satisfaction of several requirements, including the filing of an affidavit detailing these efforts and the publication of the divorce in a newspaper.  These efforts are certainly not aided by the fact that both spouses are currently incarcerated.  Additionally, it also remains possible that the divorce filing could simply have been an attempt to distance Rothstein from her husband on the eve of her sentencing.  

Guilty Pleas For Fired Cops Tied To Rothstein

"I think his exact words were 'Make sure you arrest that bitch..."

- Lt. Jeff Poole

Two terminated Broward County sheriff's deputies have agreed to plead guilty to charges they abandoned their responsibilities in favor of carrying out favors for convicted Ponzi schemer Scott Rothstein - including the illegal arrest of the ex-wife of one of Rothstein's colleagues on trumped up drug charges. Former detective Jeff Poole, 47, entered a guilty plea today to a charge of conspiracy to violate civil rights.  And former Lt. David Benjamin, 48, is scheduled to enter a guilty plea on May 13, 2014 to a single charge of a conspiracy to violate civil rights and commit extortion as a law enforcement officer.  Poole and Benjamin face maximum jail terms of 10 years and 5 years, respectively.

Before his $1.2 billion Ponzi scheme collapsed, Rothstein regularly hired Broward county police officers for personal protection, including round-the-clock patrols at his residence.  Indeed, as the scheme unraveled in mid-October 2009, Rothstein solicited Benjamin to provide a police escort to a waiting plane bound for Morocco.  Before boarding the plane, Rothstein allegedly gave Benjamin a luxury watch from his extensive collection.  Benjamin ultimately returned the watch, along with $30,000 in compensation from Rothstein, to the court-appointed bankruptcy trustee.

According to authorities, the charges emanated from the June 2009 arrest of the ex-wife of Rothstein's legal acquaintance, Douglas Bates.  According to reports, Poole received a telephone call from Benjamin ordering him to arrest Bates' ex-wife on fictitious drug charges in an attempt to deal Bates the upper hand in child custody proceedings.  Investigators alleged that Benjamin was paid $1,000 by Rothstein for his assistance.   In addition, the deputies were accused of using force and threats of force against the boyfriend of an escort threatening to disclose a relationship between the escort and Rothstein's law partner.  In total, Benjamin allegedly received $153,500 in cash and $30,000 in jewelry and tickets to sporting events.  Benjamin and Poole were suspended without pay in January 2013.

Both men were arrested several weeks ago.  Guilty pleas were expected given that each was charged via a criminal information.

Four Indicted In $70 Million "Virtual Concierge" Ponzi Scheme

A grand jury indicted four Florida citizens - including a husband and wife - on multiple fraud counts in what authorities allege was a $70 million Ponzi scheme that peddled "virtual concierge" machines to unsuspecting investors.  Joseph Signore, his wife Laura Signore, Paul Schumack, and Craig Allen Hipp were indicted today - approximately one month after civil and criminal authorities alleged that JCS Enterprises was a massive Ponzi scheme.  Joseph Signore and Paul Schumack, accused by the Securities and Exchange Commission of being the masterminds behind the scheme, face the majority of criminal charges, with Signore facing 31 counts of bank fraud, conspiracy to commit mail and wire fraud, mail fraud, wire fraud, and money laundering charges.  Laura Signore was indicted on eight fraud charges, while Hipp is facing one count each of conspiracy to commit mail and wire fraud, mail fraud and wire fraud.

According to authorities, Signore and Paul Schumack solicited potential investors to participate in JCS Enterprises' ("JCS") 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. 

While the SEC named Joseph Signore and Paul Schumack in their civil enforcement action filed in early April, some had questioned why Laura Signore had not been named.  The indictment alleges that Laura Signore served as executive vice president of JCS Enterprises, where she signed checks to investors and vendors as well as investor contracts with JCS.  It appears that the decision to sign investor contracts on behalf of JCS may have factored into the charging decisions, as Hipp also signed investor contracts.  

In addition to the criminal charges, the indictment also seeks forfeiture of the Signores' and Schumack's real and personal property - including their homes.  Each of the defendants potentially faces decades in federal prison.