Nearly $3 million was distributed this week to over 14,000 victims of the massive alleged TelexFree Ponzi/pyramid scheme as a result of a Massachusetts securities regulator's settlement with a Massachusetts bank that provided banking services in the alleged fraud. The settlement, distributed by way of more than 14,000 checks each for an amount of $205.52, came after a settlement between the Massachusetts Securities Division ("MSD") and Fidelity Co-operative Bank ("Fidelity") stemming from Fidelity's provision of banking services to TelexFree and its principals. Notably, Fidelity's president, John Merrill, is the brother of former TelexFree principal James Merrill who is currently awaiting trial on criminal fraud charges related to TelexFree. Fidelity neither admitted nor denied wrongdoing in its settlement with the MSD.
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, and potential investors were solicited with the promise of 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.
TelexFree filed for bankruptcy in April 2014 after multiple failed attempts to modify the passive income program both to rectify regulatory deficiencies and to curb increasing obligations. While TelexFree had intended to use the bankruptcy proceeding to quietly eliminate outstanding liabilities and reemerge as a legitimate entity, the filing immediately attracted scrutiny and was followed shortly by enforcement actions filed by the Securities and Exchange Commission (the "Commission") and Massachusetts regulators. At the Commission's request, the bankruptcy proceeding was subsequently transferred to Massachusetts, where multiple enforcement proceedings brought by the Commission and the MSD were pending. An independent trustee was subsequently appointed, and TelexFree's founders, James Merrill and Carlos Wanzeler, were later indicted on criminal fraud charges. Mr. Wanzeler remains a fugitive in Brazil, where extradition is difficult due to Mr. Wanzeler's Brazilian citizenship.
Fidelity Bank Relationship With TelexFree
Shortly after TelexFree's bankruptcy filing, the MSD began looking into Fidelity based on its past banking relationship with TelexFree. TelexFree opened several accounts at Fidelity in August 2013 through an account opening process that the MSD would later describe as "inadequate" and "insufficient." In the ensuing months, TelexFree made significant deposits of investor funds - funds that authorities alleged were the result of a massive worldwide fraud. In late November 2013, Fidelity's president, John Merrill, instructed the bank's compliance officer and Bank Secrecy Act ("BSA") officer to review the TelexFree account relationship.
The resulting investigation revealed that Brazilian authorities had recently shut down a scheme also known as TelexFree based on suspicions the company had been a pyramid scheme. John Merrill was notified of these and other alarming facts, as well as an outside consultant used by Fidelity to deal with BSA issues and compliance. That outside consultant concluded that TelexFree should be treated as a high risk customer based on its banking activity, and advised Fidelity and John Merrill that the account relationship required an "appropriate monitoring level for a high risk customer."
Based on those recommendations, Fidelity notified TelexFree on December 3, 2013 that it should close all of its accounts at the bank before December 31, 2013. Despite these warnings, Fidelity continued to provide banking and deposit services to TelexFree during that period and even following the December 31, 2013 deadline imposed by Fidelity. During this period, TelexFree principals Wanzeler and James Merrill transferred nearly $10.5 million out of Fidelity to outside accounts - including a $3.5 million wire transfer by Wanzeler to an overseas account held in Singapore at the Oversea-Chinese Banking Corporation.
Following the MSD's investigation, Fidelity agreed to enter into a consent order in which it agreed to settle any potential actions brought by the MSD while neither admitting nor denying to any allegations. By the terms of the consent order, Fidelity agreed to establish a $3.5 million escrow account at Fidelity Bank for eventual distribution to Massachusetts TelexFree victims. The distribution this week represented a distribution of approximately $2.9 million from that account, with the approximately-14,000 TelexFree victims residing in Massachusetts each receiving a $205.52 check representing their portion of that settlement.
Fidelity's entry into the consent order hardly resolves its legal exposure to the TelexFree fraud. While approximately 14,000 TelexFree victims reside in Massachusetts, the consent order only resolved any allegations that the MSD could bring against Fidelity. Thus, each of the victims retains any potential claims he or she might have against Fidelity - and the court-appointed trustee has estimated that as many as 1 million TelexFree victims might exist. Additionally, the bankruptcy trustee may also bring claims, including avoidance actions, against the bank for its role. While Fidelity neither admitted nor denied the conduct described in the consent order, the allegations, if true, suggest that the bank could have significant liability under the Bank Secrecy Act for, among other things, the failure to maintain an adequate anti-money laundering program and whether appropriate suspicious activity reports ("SARs") were filed. The Department of Justice made similar allegations against a North Carolina bank for its relationship with another massive Ponzi/pyramid scheme, ZeekRewards, in early 2014.
A copy of the Consent Order is below: