VoIP Company Accused of Being $1 Billion Pyramid Scheme

By Josh Long Comments
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A bankrupt company that claims to have raised approximately $1 billion and marketed itself as a provider of Internet-based phone service was nothing but a pyramid scheme that defrauded investors who were banking on extravagant returns, according to state and federal authorities.

Federal authorities have frozen the assets of TelexFree Inc. and TelexFree LLC, after the Securities and Exchange Commission brought charges against the Massachusetts-based companies.

With modest revenues of $1.3 million from August 2012 through March 2014, TelexFree's sales comprised just 1 percent of the more than $1.1 billion the company needed to cover payments that it promised, according to the SEC. TelexFree mostly targeted Brazilian and Dominican immigrants in the United States, the agency said.

The company purported to be in the business of offering a monthly VoIP service that cost $49.90, the SEC said.

Massachusetts securities regulators described a scheme in which TelexFree participants who invested $289 and placed one advertisement each day could yield a return exceeding 200 percent ($681), while those who invested $1,375 and placed five ads each day could reap a profit of $3,675.

"We actually pay our representatives weekly if they follow our system and advertise our service on the Internet," TelexFree co-owner James Merrill of Ashland, Mass., stated on March 1, 2013 .

But investors' returns were not contingent on actual sales of TelexFree's VoIP program, according to an administrative complaint filed by the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth. Carlos Wanzeler, the founder of TelexFree, could not identify the number of individuals who purchased a VoIP program outside the network of participants, the state agency said.

According to the SEC's complaint, TelexFree recently changed its method of paying its promoters, requiring them to sell the VoIP product in order to qualify for payments that were previously promised to them.

On April 14, Marlborough, Mass.-based TelexFree filed for Chapter 11 bankruptcy protection in Nevada.

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