The bankruptcy trustee tasked with recovering funds to compensate hundreds of thouands investors worldwide who were duped in the massive TelexFree fraud appeared at a Bankruptcy court hearing today where he provided an update on the complexity of the scheme, the estimated losses, and the next steps moving forward. Stephen B. Darr, the court-appointed trustee, was in court today for a hearing on the approval of nearly $3 million in fees incurred by his financial and legal professionals. While the fees were ultimately approved, Darr also provided an update on the progress of the monumental task he has undertaken in attempting to understand and reconstruct the inner workings of what may be the largest and most complex financial fraud in history.
TelexFree raised billions of dollars from hundreds of thousands of investors through the sale of a voice over internet protocol (“VoIP”) program and a separate passive income program. The latter was TelexFree's primary business, offering annual returns exceeding 200% through the purchase of "advertisement kits" and "VoIP programs" for various investment amounts. Not surprisingly, these large returns attracted hundreds of thousands of investors worldwide, and participants were handsomely compensated for recruiting new investors – including as much as $100 per participant and eligibility for revenue sharing bonuses. Ultimately, while the sale of the VoIP program brought in negligible revenue, TelexFree's obligations to its "promoters" quickly skyrocketed to over $1 billion.
In April 2014, after multiple attempts to modify the passive income program both to rectify regulatory deficiencies and to curb increasing obligations, TelexFree quietly filed for bankruptcy in a Nevada bankruptcy court. While it appeared that TelexFree had hoped to use the bankruptcy proceeding to eliminate its obligations to its "promoters" and extinguish any ensuing liabilities, the filing immediately attracted scrutiny and was followed shortly by enforcement actions filed by the Securities and Exchange Commission (the "Commission") and Massachusetts regulators. The Commission then moved to transfer the bankruptcy proceeding to Massachusetts, where the company was headquartered and where the Commission had filed its enforcement proceeding. Despite vehement objections by TelexFree, that effort was ultimately successful, and the appointment of an independent trustee, Mr. Darr, shortly followed.
TelexFree's founders, James Merrill and Carlos Wanzeler, were later indicted on criminal fraud charges, with Wanzeler currently a fugitive and believed to be in Brazil.
In the bankruptcy hearing, Darr disclosed that he had identified over 900,000 unique email accounts that were registered with TelexFree's program - of which over 90% were determined to have suffered an average loss of nearly $2,000. The remaining approximately-68,000 email accounts were fortunate enough to profit from the scheme, although those profits were simply the redistribution of new investor funds as the VoIP business made little actual money. Those "net winners," as they are commonly known in Ponzi parlance, made an average profit of over $20,000 - meaning that there is the possibility of over $1 billion in potential future clawback/avoidance actions. To put that figure in context, the number of Ponzi schemes in which losses surpassed $1 billion can likely be counted on one hand.
Going forward, Darr indicated that he planned to schedule a meeting in the next few months to update TelexFree investors. A creditors meeting, known as a 341 Meeting in bankruptcy parlance in reference to the specific section of the U.S. Bankruptcy code, is mandatory in bankruptcies and allows creditors to obtain testimony from a debtor under oath.
To date, Darr disclosed that he had recovered approximately $16 million that would ultimately be returned to creditors. One of the largest sources of recoveries in similar fraud cases is often through the institution of "clawback" or "avoidance" actions filed to recover funds from net winners or those who received transfers on the eve of an entity's collapse. In this scenario, it is very likely that Darr will pursue those TelexFree net winners who profited most from the scheme, as well as the third-party entities that provided services to TelexFree or who may have facilitated or exacerbated the fraud. It is expected that further details will emerge in the coming months.
Further Ponzitracker coverage of TelexFree is here.