SEC and Homeland Security Squash TelexFree Pyramid Scheme

Embattled Massachusetts Telecommunications and Marketing Firm Tapped Immigrants

By some accounts, the history of TelexFree, LLC is a bit of a Cinderella story gone awry. When Brazilian immigrant, Carlos Wenzeler, came to the United States in 1988, he was just looking for a job so he took whatever low-paying employment he was able to find. Eleven years later he found his future business partner, James Merrill, while leafing through a phonebook in search of a cleaning job for himself and his family. This chance meeting ended up turning the fairy tale into a multimillion dollar pyramid scheme that laid to waste the hopeful dreams of many other immigrants who became the target of the scam.

Although TelexFree’s beginnings seem innocuous enough; its genesis came about from Wenzeler complaining about the high cost of making phone calls to Brazil so, he and Merrill then hatched a plan to start selling long-distance calling service by using “voice over Internet” (VoIP) . Part of their strategy was to develop a multi-level marketing approach which eventually recruited thousands of people on the premise that these investors only had to, “…place your ads every day and everyone gets paid,” according to Sanderly Rodrigues de Vasconcelos in a TelexFree promotional video on YouTube. He continues his enticement by also stating, “I am not the first USA millionaire. I am the first multimillionaire – $3 millions.”

A recent Securities and Exchange Commission investigation focuses on the information that TelexFree failed to provide to their investors. The SEC charges TelexFree, Inc. and TelexFree, LLC with operating a multi-layered marketing scam under the guise of selling the VoIP telephone service. Not only were TelexFree’s co-owners James Merrill and Carlos Wenzeler named in the SEC complaint, but so were several others. These include CFO, Joseph H. Craft, and international sales director, Steve Labriola. Additionally, four promoters of the program, Sanderley Rodrigues de Vasconcelos, Santiago De La Rosa, Randy N. Crosby, and Faith R. Sloan were also charged. Other entities were implicated by the SEC as relief defendants as they were also in receipt of investor funds.

The SEC complaint filed in federal court in Massachusetts purports that the defendants peddled securities labeled as “memberships” in TelexFree. They assured investors that they would yield returns of more than 200% annually if these investors recruited additional members and placed TelexFree ads on free Internet sites. The complaint goes on to state that from August 2012 until March 2014, the VoIP revenues only totaled roughly $1.3 million. This is barely 1% of the $1.1 billion required to offset the payments owed to TelexFree’s promoters. This created a pyramid scheme environment as it forced TelexFree to meet this debt through the use of funds garnered from new investors.

Even as concerns about the company began to surface on websites, investors continued to sink funds into the scheme. The allure of the touted astronomical returns was just too great a temptation for many investors to resist. As the number of investors continued to expand, more government agencies including the FBI and Homeland Security, as well as authorities in several other countries, began conducting investigations against TelexFree. Money laundering is just one in a long list of allegations of wrongdoing by the company. Secretary of State, William F. Galvin, stated that just in Massachusetts alone, the alleged victims of TelexFree had lost $90 million, and the SEC estimates that the company garnered $300 million from victims in 21 states. In light of the charges by the SEC and other regulators, TelexFree is still enlisting new investors, but now requires them to actually sell the VoIP products in order to receive compensation.

Furthermore, the complaint alleges that over the last few months, the company has transferred approximately $30 million in investor funds from their operating accounts to those of affiliates or individual defendants. In fact, an article in the Boston Globe reported that the company’s chief financial officer, Joseph Craft, also a defendant in this case, was trying to abscond with $38 million worth of cashier’s checks during a raid by the Department of Homeland Security. He was, however, detained by the local sheriff’s department. The article continues on to state that by the time the FBI and Homeland Security executed a search warrant on the Massachusetts office, it is thought that the company owed more than $1 billion to its investors.

On Wednesday, April 16, a U.S. District Court judge in Boston approved the SEC’s request to freeze TelexFree’s assets, as well as those of the company owner’s and others implicated in the scheme.

The SEC complaint seeks injunctions against the primary defendants from committing further infractions of the laws of which they have been accused. Additionally, it seeks disgorgement of ill-gotten gains, pre-judgment interest, and civil monetary penalties. The SEC also requests disgorgement of funds and pre-judgment interest from the three entities named as relief defendants.

If you feel that you have suffered financial losses due to the pyramid scheme perpetrated by TelexFree or its affiliates, please call us at the Blum Law Group for a free consultation at 1-877-STOCK-LAW.