The Chapter 11 bankruptcy trustee has submitted a Motion by Chapter 11 Trustee for Entry of Order Finding That Debtors Engaged in Ponzi and Pyramid Scheme and Related Relief
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MOTION BY CHAPTER 11 TRUSTEE FOR ENTRY OF ORDER FINDING THAT
DEBTORS ENGAGED IN PONZI AND PYRAMID SCHEME AND RELATED RELIEF
To the Honorable Melvin S. Hoffman, Chief United States Bankruptcy Judge: Stephen B. Darr, the duly appointed Chapter 11 trustee (the "Trustee") of the bankruptcy estates of TelexFree, LLC, TelexFree, Inc., and TelexFree Financial, Inc. (collectively, the “Debtors”), respectfully requests entry of an order finding that the Debtors were engaged in a Ponzi/pyramid scheme and that such finding be applicable to all matters in these proceedings.
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The Debtors ostensibly operated a multi-level marketing company engaged in the sale of voice over internet service but, as detailed herein, the Debtors’ operations actually were a massive Ponzi/pyramid scheme that ensnared as many as a million or more participants from multiple countries (hereinafter, parties who became members of the Debtors’ scheme shall be referred to as “Participants”). Participants opened approximately 11,000,000 User Accounts (as hereafter defined) and purchased membership plans and/or Voice over Internet Protocol (“VoIP”) service with a transaction value of approximately $3,070,000,000 during the approximately two years of the Debtors’ operation of their scheme. An affiliate of the Debtors, Ympactus Comercial Ltda. (“Ympactus”), reportedly operated a substantially similar scheme in Brazil which was seized and shut down by the Brazilian authorities in June 2013.
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5. On or about April 15, 2014, the MSD commenced an administrative proceeding against the Debtors. Also on April 15, 2014, the Securities and Exchange Commission (the “SEC”) commenced an action against the Debtors and others in the United States District Court for the District of Massachusetts. The foregoing actions alleged, among other things, that the Debtors were engaged in an illegal Ponzi/pyramid scheme and the fraudulent unregistered offering of securities. Substantially contemporaneously with the commencement of the SEC action, Homeland Securities Investigation (“HSI”) seized the Debtors’ assets, books, and records. In connection therewith, the federal government seized more than $107,000,000 in cash, including funds on deposit and checks payable to the Debtors, their principals, or their affiliates. Federal authorities have also made forfeiture claims against approximately forty (40) other items of real and personal property standing in the name of the Debtors’ principals and their affiliates, including automobiles, real properties, and notes secured by mortgages on real properties.
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13. Prior to the Trustee’s appointment, the Federal Authorities shut down, disconnected, and seized the Debtors’ computer system, which consisted of forty-six (46) computers and servers containing more than twenty (20) terabytes of data.
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25. As set forth above, there are approximately 11,000,000 User Accounts associated with the Debtors’ MLMP. A new User Account was generally established each time that a membership plan was purchased, with either cash or accumulated credits.
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26. Although some versions of Participant contracts contained prohibitions against Participants opening multiple User Accounts for themselves, other plan descriptions did not. In any case, any such restriction was not enforced and could not be enforced since the Debtors did not verify the Participants’ identities. The Debtors’ MLMP structure created incentives for Participants to open multiple User Accounts to generate credits for themselves.
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28. In fact, it was a regular practice of the Debtors’ scheme that membership fees were paid by the use of accumulated credits rather than by cash. While invoices associated with the sale of membership plans or VoIP Packages had a face value of approximately $3,070,000,000, only $360,000,000, or approximately twelve percent (12%) of that amount, was paid in cash to the Debtors. The balance of these invoices was satisfied by the use of Participants’ credits.
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36. The Debtors’ database was developed by programmers in Brazil and all field references are in Portuguese. The developers apparently lacked the expertise to create and manage a system of this magnitude. As a result, system modifications appear to have been done in a haphazard and disorganized fashion. In addition, the Debtors’ system is permeated with unreliable data because of limited efforts at data validation of information provided by Participants in establishing User Accounts.
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39. Each User Account with the Debtors was registered with an electronic mail address (an “Email Address”). There are approximately 900,000 unique Email Addresses in SIG associated with approximately 11,000,000 Debtor User Accounts. The number of User Accounts associated with an Email Address varies widely. A particular Email Address may be associated with only a single User Account or may be associated with hundreds or thousands of User Accounts. Because each User Account may represent a separate Participant and some Participants entered the scheme using the Email Address of another Participant, the number of Participants is unknown but is likely in excess of 1,000,000.
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43. On June 28, 2013, the Public Prosecutor’s Office of the State of Acre, Brazil filed claims against Ympactus, Carlos Wanzeler, Lyvia Mara Campista Wanzeler, and James Merrill, alleging that the VoIP Packages marketed in Brazil were violating consumer rights, since the MLMP constituted a Ponzi/pyramid scheme. The Brazilian authorities suspended the operations of Ympactus and froze its assets. Upon information and belief, the Brazilian authorities seized as much as $300,000,000 from Ympactus in connection with the shutdown, and civil and criminal proceedings are pending in Brazil.
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44. Upon information and belief, on or about September 21, 2015, the Brazilian court entered a decision finding that Ympactus operated a pyramid scheme.
45. Following the shutdown of Ympactus, the Debtors’ cash receipts increased dramatically. The Debtors’ cash receipts totaled approximately $200,000,000 in the last three full months of operation, with more than $96,000,000 in cash receipts in February 2014 alone.
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50. Utilizing the currency designation, it appears that approximately 11,000,000 User Accounts are associated with the Debtors’ operations and approximately 4,000,000 User Accounts are associated with Ympactus operations and the remaining 2,000,000 User Accounts
had no activity.