Trustee: TelexFree Was A "Ponzi/Pyramid Scheme"

The Chapter 11 bankruptcy trustee appointed over TelexFree, Inc., TelexFree, LLC, and TelexFree Financial, Inc. ("collectively, "TelexFree") has responded to the amended complaint filed against TelexFree by the Securities and Exchange Commission (the "Commission") by stating that his preliminary investigation demonstrates that TelexFree was operated as a Ponzi/Pyramid scheme.  Stephen Darr, the court-appointed bankruptcy trustee, filed his Answer to the Commission's amended complaint that was part of its emergency enforcement action filed the day after TelexFree filed voluntary petitions for bankruptcy under Chapter 11.  Darr's statements mark the first substantive statements concerning TelexFree since his appointment in early June.  

The Answer filed on behalf of TelexFree essentially consists of a thorough admission to the allegations contained in the Commission's Amended Complaint filed on May 27, 2014.  Indeed, Darr's response  to the Commission's first two paragraphs of its Preliminary Statement accusing TelexFree of being a "massive Ponzi and Pyramid scheme" is as follows:

1. On information and belief, the Trustee admits that the various individual debtors cited in paragraph 1 appear to have been engaged in a multi-level marketing enterprise, which,  while purporting to be in the business of selling telephone service plans using Voice-over Internet Protocol (“VoIP”) technology, they were in fact engaged in a Ponzi or pyramid scheme which, in part, involved promising to pay investors for placing ads on the Internet and recruiting other investors to do same. The Trustee admits so much of the allegations in paragraph 1 that assert that the Debtors were headquartered in Marlborough, Massachusetts and that at least from April 2012, the owners of the Debtors were James Merrill and Carlos Wanzeler. 

2. Based on information currently available to the Trustee, the Trustee admits that the individual defendants operated a Ponzi/pyramid scheme as evidenced by, among other things, the revenues from the retail sales of the VoIP were less than one (1%) percent of the amounts needed to satisfy the promises to the investors who had placed the Internet ads. Further, based upon the information available to the Trustee, it appears that the early investors were paid not from sales of the VoIP services but rather from the money received from the later investors, thus evidencing a classic Ponzi/pyramid scheme.
The remainder of the Response indicates that, while Darr has no personal knowledge as to the overwhelming majority of the allegations, Darr believes most allegations to be true based on "the information furnished to the Trustee and the Trustee's preliminary investigation."  This includes the allegations made by the Commission not only pertaining to TelexFree, but to the other individual defendants including principals and alleged top promoters.  Darr indicated that information avaialble to him suggested that substantial sums were transferred to TelexFree principals, and opined that the allegations that named promoters:
knew or was reckless with respect to his/her promoting of TelexFree and that his[/her] promotional activities aided and abetted the fraudulent and deceptive pyramid scheme are accurate
Darr also admitted that the information available to him supported the Commission's allegation that the majority of the $340 million raised by TelexFree is unknown.  
Interestingly, while the TelexFree bankruptcies continue to be pursuant to Chapter 11 of the Bankruptcy Code, meaning that the debtors intend to reorganize and at some point emerge from bankruptcy, the Trustee's Answer contains a Prayer for Relief stating that:
Since the Trustee has assumed control over the assets and estates of the Debtors, the
Debtors have ceased all operations and all other business activities other than to liquidate assets and to pay back creditors.
Thus, it appears that a conversion from a Chapter 11 to a Chapter 7, which liquidates the debtor, is likely.
Previous Ponzitracker coverage of TelexFree is here.

The Answer is below (special thanks to ASDUpdates):


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