Extradition Of TelexFree Fugitive Could Be Difficult

credit: Don BayleyOn Friday, the U.S. Attorney for the District of Massachusetts announced the filing of criminal fraud charges against the co-owners of a telecommunications consortium, joining state and federal regulators in accusing the pair of operating a $1.1 billion Ponzi and pyramid scheme.  One of the accused, James Merrill, was arrested without incident and is currently in custody awaiting an upcoming hearing where a judge will decide whether bail will be granted.  However, the remaining co-owner, Carlos Wanzeler, is a fugitive and is believed by authorities to have fled to Brazil, where he holds dual citizenship.  While this typically would not present a problem to extraditing Wanzeler to face the charges, the particulars of Brazil's extradition policies suggest that Wanzeler's decision to flee may have been a calculated one.

Extradition is the official process utilized when a country seeks the transfer of a suspected or convicted criminal from another country to face charges.  This procedure is typically governed by treaties, but is also governed by other conditions including the dual criminality of the offense or the penalties for the alleged crime.  The process is not automatic, nor is it typically quick.

The United States and Brazil signed a treaty in 1964 that provides for the extradition of anyone accused of a crime with a maximum sentence of one year or more (the equivalent of a felony).  However, Brazil amended its constitution in 1988 to prohibit the extradition of Brazilian citizens to any country, leaving the possibility of extradition available only for those with proven involvement in the narcotics trade.

 Nearly 30 years later, Brazil's official policy remains to prohibit the extradition of its citizens.  This may present a problem to U.S. authorities seeking the extradition of Wanzeler, who is believed to hold dual citizenship with both the U.S. and Brazil.  Brazil has seen its policy challenged by U.S. authorities in recent high-profile cases, but with no success.  For example, in August 2010, a south Florida police officer accused of drug trafficking somehow removed his court-ordered electronic monitoring bracelet and hopped on a flight to his native Brazil.  Despite efforts by Florida authorities, Britto remains a fugitive in Brazil and unlikely to face the charges unless on his own free will.  

Authorities have not commented on any anticipated problems with Wanzeler, only labeling him a fugitive due to beliefs that he is already in Brazil.  While the truth of this assumption should be easily verifiable using flight manifests, Wanzeler's lawyer has not offered any comment.  However, even if Wanzeler is able to at least indefinitely escape U.S. prosecution, the possibility still remains that he could be charged by Brazilian authorities, who have been investigating TelexFree since mid-2013.

Michigan Man Convicted Of $46 Million Ponzi Scheme

After discovering that he was entrusting investor funds to a company operating a Ponzi scheme, a Michigan man did the opposite of what most might do next: he started his own Ponzi scheme by continuing to recruit investors based on promises of astronomical returns.  On Friday, a federal jury convicted David W. McQueen of fifteen charges based on the scheme, which caused losses of over $40 million to nearly 1,000 victims.  McQueen was convicted of six counts of mail fraud, six counts of money laundering, and three counts of tax evasion.  Each count of mail fraud and money laundering carries up to a 20-year prison sentence, meaning McQueen will likely face a substantial time in federal prison.

McQueen initially started out investing in a company called Maximum Return Transactions ("MRT"), a Florida company operated by James Clements and Zeina Smidi that purported to trade in foreign currencies.  MRT promised monthly returns ranging from 5% to 11%, and McQueen was one of these investors.  Beginning in 2006, McQueen began receiving 10% monthly returns from MRT.  After the passage of several months of receiving the promised returns from MRT, McQueen devised a plan to recruit other investors to invest in MRT through him, with those investors receiving 5% monthly payments and McQueen pocketing the remaining 5%.  McQueen's entity, Accelerated Income Group ("AIG"), also recruited insurance agents to sell the investment to their clients.  For a short period of time, this form of arbitrage was successful.

However, in mid-2007, MRT stopped making payouts to investors (and was later the target of a civil enforcement action by the Securities and Exchange Commission which alleged it was a Ponzi scheme).  However, rather than notifying AIG's investors of the failure of MRT, McQueen continued soliciting investors based on the promised returns.  In an attempt to reconstruct the returns from MRT, McQueen placed nearly 1/3 of investor funds in a variety of speculative investments that resulted in severe losses.  Despite these losses, investors continued to receive falsified account statements showing consistent account gains.  

In August 2009, federal authorities executed search warrants and seized approximately $430,000 from McQueen.  In a last-ditch attempt to rescue his scheme, McQueen took approximately $400,000 in hidden funds from a New Zealand bank account to make more speculative investments - which also failed.

Following the jury's verdict, McQueen was remanded into custody until his sentencing.

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):

 

2-1

 

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):

2-1

 

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.