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.
The company has reportedly denied the allegations in press releases. Mark Berthiaume, a white-collar criminal defense lawyer that reportedly represents TelexFree, did not respond to an emailed request for comment on the Massachusetts and SEC complaints.
TelexFree has set off a wave of alarm around the world. A judge in Brazil last year ruled the company was a fraud. News reports say the operation is under investigation for money laundering in Brazil and the Dominican Republic, and the firm is said to be under investigation in places as far away as Uganda and Rwanda, according to the Boston Globe.
“This is one of several pyramid-scheme cases that the SEC has filed recently where parties claim that investors can earn profits by recruiting other members or investors instead of doing any real work,” said Paul G. Levenson, director of the SEC’s Boston Regional Office, in a statement. “Even after the SEC and other regulators have alleged that such programs are a fraud, the promoters of TelexFree continued selling the false promise of easy money.”
Since at least November 2012, TelexFree and its principals have raised at least $300 million, largely from Brazilian and Dominican communities in Massachusetts and 20 other states through the fraudulent and unregistered securities offering, according to the SEC’s complaint. The agency said there was no public documentation for the company’s claim that it has raised $1 billion.
The SEC said tens of millions of dollars in investor funds are unaccounted for and the company has transferred approximately $30 million to accounts individually controlled by TelexFree or the individual defendants, who reside in Massachusetts, Indiana, Florida, Illinois and Georgia.
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