Ponzi Tracker Live-Blogging The TelexFree Bankruptcy Hearing

Ponzitracker will be providing a live recap of today’s scheduled hearing on the 10+ motions brought in the TelexFree Bankruptcy case in the Nevada Bankruptcy Court.  The hearing starts at 12:30 EST.  Updates will follow.  For previous Ponzitracker coverage of TelexFree, click here.  For an explanation of what’s at stake in today’s hearing, click here.

Please refresh for updates.

12:20 P.M.: U.S. Trustee just filed amended declaration of Sheriff’s Deputy present at TelexFree’s Massachusetts office when search warrant was executed.  Declaration has color copies of checks seized from former CFO Joe Craft.  Declaration is here.

12:25 P.M.: More motions appear on docket.  One is request for admittance to practice in Nevada Bankruptcy court by an attorney representing two “creditors.”  Docket may be quite crowded if all creditors’ counsel follow suit.  Motion is here.

12:32 P.M.: Background music still playing.

12:35 P.M.: Hearing appears to be close to starting.

12;44 P.M.: Participants asked to turn off cell phones.  Hearing beginning.

12:47 P.M.: Court in session. 14 Matters before the Court.

12:50 P.M.: Attorney introductions starting.

12:51 P.M.: Gordon Silver and Greenberg Traurig for TelexFree.  One GT lawyer is out in hall working on “late developments.”

12:52 P.M.: SEC wants to approach bench to discuss “late developments” and provide Court with documents.  SEC will consent to District Court entering final orders and judgments for motions except to First Day Motions (if it gets that far).

12:54 P.M.:  Late development appears to be related to SEC’s belief that this case should not be Chapter 11 case.  Reading between the lines, could be Chapter 7 case (liquidation).

12:54 P.M.: Attorneys for at least two sets of victims making appearances.

12:55 P.M.: “Late-breaking developments” have emerged.  Attorneys to brief court.

12:55 P.M.: Debtor’s attorney handed civil forfeiture action appearing to be commenced by U.S. Attorney’s Office.  His attorney’s belief is that not appropriate to talk about at the moment.  Party that sought civil forfeiture action does not appear to be before court, so TelexFree attorney says is not appropriate to discuss.

12:57 P.M.: TelexFree counsel says papers appear to be subpoenas and warrants in connection with civil forfeiture action commenced by U.S. Attorneys Office.  Concern is over evidentiary nature of papers.  Counsel doesn’t believe it impacts today’s proceedings.  Thinks it is “unfair” to have SEC say this impacts motions before the Court.  Or “this collective effort by the Government to shut us down will kill us.”

12:59 P.M.: SEC counsel says Court can take judicial notice.  Says there was civil and criminal forfeiture action.  26 warrants in support of forfeiture acts, have all been filed.

1:00 P.M.: SEC says they are asset forfeiture actions, do not violate automatic stay under Chapman (cited by TelexFree).  These actions seized all known assets for debtors, including cashier’s checks.

1:01 P.M.: Anything subject to debtor’s estate has been seized by U.S. Attorney’s Office.

1:02 P.M.: Court will not consider papers in connection with rulings on pending matters, and not inclined to take papers into evidence.  Judge now reviewing papers.

1:03 P.M.: Warrants were apparently under seal.  Court says record will not include this, and won’t be considered as evidence.  Reviewed simply to be mindful of actions going on in Massachusetts court.

1:04 P.M.: Court will take short break – about 15 minutes – to review documents.  Court will hear SEC’s Motion for Change of Venue first.  Notice of Hearing regarding abstention second.  Debtors’ motion for scope of TRO next.  Then U.S. Trustee’s Motion for Appointment of Trustee will be heard.  If there is time, First-Day Motions will be heard.  Court doubtful to be able to rule today.  But will rule on all matters that will be appropriate to resolve by Monday at the latest.  Debtor needs to know, as well as other people.  Court will not delay in resolving issues.  Resolution thus likely at beginning of next week.

1:06 P.M.: Massachusetts sheriff’s deputy is present by phone,  Court says he does not need to appear unless there are plans to cross-examine deputy.  Court will adjourn and reconvene at 1:25 P.M. EST.

1:25 P.M.: Looks to be getting underway shortly.

1:27 P.M.: Court in session.  Court reviewed documents, issued in Massachusetts District Court on April 24, 2014 and unsealed recently (today?).  Copies are not certified or authenticated.  Court does not take judicial notice, and won’t consider as evidence today.

1:30 P.M.: TelexFree counsel says that, if you transfer this case, stay motion has to be heard to decide whether debtor lives or dies.

1:31 P.M.: Court will proceed first with motion to transfer venue.

Evidence And Exhibits

1:34 P.M.: TelexFree wants to have evidence heard first, Court agrees as does SEC.  SEC wants to call TelexFree officers first,  U.S. Trustee wants to have sheriff’s deputy heard first.

1:38 P.M.: TelexFree counsel complaining of non-compliance with local rules regarding witnesses and evidence by SEC.

1:42 P.M.: Appears that sheriff’s deputy will not testify, and his declaration and amended declaration will be admitted into evidence.  Links are here and here. Witness excused.

1:48 P.M.: More evidentiary housekeeping.  Counsel for TelexFree opposes admission of SEC affidavit because affiant is not available to testify.

1:52 P.M.: Argument continuing over admission of evidence and submission of witness/exhibit lists.

1:53 P.M.: Court recognizes flexibility of local rules when matters on shortened time, will not admit one of the declarations as hearsay, other will be allowed to testify as he is available.

1:57 P.M.: Going over admission of exhibits by debtors, SEC, and U.S. Trustee.

2:02 P.M.: U.S. Trustee objects to exhibit 21, which is exchange of emails contained in MacMillan declaration regarding $38 million in cashier’s checks seized.  Exhibits 1-20 will come in.  Debtors’ witness list is here.  Exhibit 21 will be subject to developing testimony, will remain out.

2:07 P.M.: Witness testimony is up next.

2:10 P.M.: Now to order of witness testimony.  Witnesses remaining to be called are William Runge, Stuart McMillan, and Timothy Meighan on rebuttal.

William Runge Testimony

2:10 P.M.: First witness will be William Runge.  Runge is Chief Restructuring Office of TelexFree.  Works with Alvarez & Marshal.

2:13 P.M.: Covering Runge’s background and C.V.  Runge has been doing this for 22 years.

2:15 P.M.: Initially contacted by TelexFree attorneys on April 9, 2014 to interview for position. Interviewed the next day with Wanzeler, Merrill, and McMillan.  Was engaged later that afternoon on the 10th.  Understood role was to assist through bankruptcy and guide company through Chapter 11 process.

2:17 P.M.: Meighan is also A&M employee, working with Runge to understand business, locate assets, and develop business plan.

2:19 P.M.: Debtor had 6 bank accounts, 5 brokerages, and 6 or more merchant accounts.  Wells Fargo had informed TelexFree it was closing account and asked it to come pick up Cashiers Check in amount of $26 million.

2:20 P.M.: Understood additional 9-10 checks existed.  Said debtor had difficulties maintaining relationships with banks.

2:21 P.M.: Made arrangements for Craft to pick up cashier’s checks and deposit into newly-established escrow account.  Meighan was arranging to go with Craft to deposit checks.

2:24 P.M.: Attempting to provide foundation for entry of Exhibit 21 (emails regarding cashier’s checks).  Says federal government seized Meighan’s email, imaged hard drive, and returned.

2:25 P.M.: Checks were collected from Merrill and Wanzeler Monday morning with intention of placing in safe deposit box.

2:26 P.M.: Checks never placed into safe deposit box.  Says Craft was tied up and delayed in depositing checks that Monday.

2:28 P.M.: Runge got called by Meighan and told they were preparing to leave office, but were stopped by federal agent and belongings were seized.

2:31 P.M.: U.S. Trustee objects to admission of Exhibit 21, says Meighan is there to testify and can be put on.

2:34 P.M.: Court sustains objection to introduction of Exhibit 21 based on hearsay, Runge can still testify as to personal knowledge.

2:36 P.M.: No reason to believe Mr. Craft was trying to steal checks.  Exhibit 21 offered in its entirety into evidence.  Court still sustains objection to entering Exhibit 21 into evidence, but Mr. Meighan will be allowed to testify to remove hearsay issues.

2:39 P.M.: Runge says there is a business here to reorganize, a VoIP business where bundled minutes are sold.  Phone service is “partially” working.  When TRO was filed and assets (servers) were seized, service stopped.  Company was eventually able to get partial service working.

2:41 P.M.: Have had discussions with U.S. Attorney’s Office over retrieving servers.

2:43 P.M.: Some customers have been able to make long distance calls.  TelexFree not able to accept credit cards or any funds, nor in position to sell phone service.  Website is partially running.  Sole function of website is to provide information to 700,000 promoters.

2:45 P.M.: Runge thinks it would take matter of weeks to come up with new business plan.  Asked about whether bankruptcy is better or worse than marshaling assets for benefit of creditors.  Multiple objections.

2:47 P.M.: New compensation consultant retained, has been working with MacMillan on compensation.  No further questions.  SEC to cross-examine.

SEC Cross of Runge

2:49 P.M.: Runge says not aware why banks shut down TelexFree.  Runge hasn’t encountered such a situation before.

2:52 P.M.: Runge didn’t authorize Craft to tell agents he was consultant, or for Craft to put checks in briefcase and walk out.

2:54 P.M.: Court preparing to break for lunch.  Looking for input from parties as to likelihood of completion of hearing in afternoon session.  Parties believe so.  Court will reconvene at 4:15 EST.

4:18 P.M.: Instructions given to turn off cell phones.  Proceedings to begin soon.  Before they do, please feel free to click the donate button at the bottom of the screen, and any donations are much appreciated.  The cost to connect to the hearing is $30/hr.

4:27 P.M.: Technical difficulties interrupt Runge’s testimony.

4:30 P.M.: Runge expecting chargebacks from creditcard processors as result of bankruptcy.

4:32 P.M.: Cross-examining Runge about his declaration.  He admits that, of the debtors, only one had direct employees.

4:33 P.M.: Merrill and Wanzeler hired MacMillan, who hired Runge.  Neither Merrill nor Wanzeler currently employed by Debtors, but remain sole shareholders.

4:36 P.M.: As of bankruptcy filing, Runge estimates balance in Debtors’ accounts: $31 million in bank accounts, $28 million in brokerage accounts, and close to $30 million with payment processors.  None of these accounts located in bank located in Nevada.

4:38 P.M.: Runge was working at company headquarters until raid, and then moved back to Georgia.  No duties performed in Nevada.

4:39 P.M.: Runge being questioned about company’s questions to Nevada.  As far as Runge knows, only connection is papers on file with Nevada government and a mailbox.

4:42 P.M.: SEC lawyer grilling Runge methodically to prove lack of ties to Nevada, as well as offices of professionals employed by TelexFree.

4:44 P.M.: Runge being questioned about TelexFree’s business and compensation plan.  Learned state of Massachusetts was investigating around April 10, 2014 – 5 days before charges were filed.

4:45 P.M.: Asked whether TelexFree could have upgraded its computer systems due to revenues received from purported significant growth, without entering bankruptcy.

4:47 P.M.: Point made that company had already changed its compensation plan once without filing for bankruptcy.

4:49 P.M.: Company had computer system that managed payment information referred to as back office that was hard to get information out of.

4:51 P.M.: Books Runge reviewed showed that $1 billion in revenue came in the door in 2013.

4:53 P.M.: Runge’s firm was in the process of imaging TelexFree’s systems as the company’s headquarters were raided on April 15, 2014.

4:54 P.M.: Discussing TelexFree’s issues with Brazil.  Understood Brazilian government shut it down.  Runge thinks Brazilian government thought it was some kind of scheme.  Doesn’t recall whether it was accused of being a pyramid scheme.

4:55 P.M.: Runge understands revenues from second compensation plan showed that new plan had payouts of 50-85%.  Generally, need payout of 38-40%.  Payout was too high.  Runge disclosed this rule of thumb was from MacMillan and various consultants.

4:59 P.M.: Runge never reviewed marketing materials and what TelexFree was promoting.  Runge is not aware of specific differences between first and second compensation plan. 

5:00 P.M.: Promoters tried to withdraw $174 million in payments after rule change, which was much higher than normal.  Company did not majority of payment requests.

5:01 P.M.: Company became aware some individuals had multiple accounts, sometimes hundreds, which was forbidden under the contract.  Runge doesn’t recall who told him that, and doesn’t have personal knowledge.

5:06 P.M.: Actual sales of VoIP product since March rule change are unknown.  $100,000 to $300,000 per day in revenue coming in, according to Runge, after rule change.

5:08 P.M.: Runge reluctant to speculate about future of contracts with Promoters ir whether all or specific amount will be deemed valid.

5:10 P.M.: Prior to April 13th, Runge was not provided with estimation of total amount of contracts at stake that would seek to be rejected.  SEC asks if he had heard figure of $5 billion.  Runge said he had heard someone say $5 billion, but cannot remember.  Says possibly from company’s prior management, but cannot recall.

5:13 P.M.: Runge not aware of any secured creditors, or of any potential fraudulent transfer or conveyance actions.

5:14 P.M.: Speaking about whether Runge agrees with fact that Debtors offer competitive product priced advantageously to competitors.  Runge doesn’t know who direct competitors are to company.  Seems to be trying to draw Runge into debate about price.

5:16 P.M.: All promoter products held in name of TelexFree, LLC.  Not sure why other two debtors list same top creditors.

5:18 P.M.: Names of top 30 creditors were discussed among Runge and company management to confirm there were no insiders.  End of SEC questioning.

U.S. Trustee Cross-Examination

5:19 P.M.: MacMillan hired as consultant several weeks before company filed bankruptcy.

5:21 P.M.: Runge was present at board meeting immediately before bankruptcy.  Wanzeler was terminated from company after it was apparent he was subject to restraining order.  Says they were asked to resign.

5:24 P.M.: Runge was informed that company was spending hundreds of millions of dollars to buyback VoIP products from promoters.

5:27 P.M.: Runge not aware how many VoIP packages were sold to general public.

5:27 P.M.: As a result of rolling out new comp plans, compant revenues declined from $3 million per day to $100,000 to $300,000 per day – a 90% decrease.  Was determined that new compensation plan was not sustainable.

5:32 P.M.: Craft had been working with Wanzeler and Merrill for two years as a consultant.

Redirect by TelexFree

5:34 P.M.: Runge has met with attorneys from Debtors’ counsel in Nevada. No more questions, witness excused.

Stuart MacMillan Testimony

5:37 P.M.: Court issues warning about cellphone use.

5:38 P.M.: Court says that .mp3 file of testimony will be available free at some point.  Ponzitracker will provide a link to that if/when it becomes available.

5:40 P.M.: Reviewing MacMillan C.V.

5:41 P.M.: Originally asked whether he wanted to be CEO, but decided he wanted to be consultant originally.  Became CEO in April 2014 just before filing.

5:43 P.M.: MacMillan lives in Florida, and office is in Florida.

5:43 P.M.: Craft was assisting with bankruptcy in compiling numbers needed.  Craft was then a signatory and able to open bank accounts.

5:44 P.M.:  MacMillan is only independent board member.

5:45 P.M.: MacMillan and Runge decided it would be best if people named in TRO would not be officers or directrs.  Craft and Merrill resigned, Wanzeler did not and was terminated.

5:46 P.M.: MacMillan working with another network marketing executive in compiling business plan.  Have also brought in telecom consultant, as well as application creators.  Trying to put together plan and looking at new products to develop strategy as well as compensation strategy.

5:48 P.M.: In his view, company is absolutely capable of being reorganized.  Describes an app that was released and quickly rose to top 5 of apps.

5:49 P.M.: Would appear that minutes over network were increasing 20% each month.  14 million minutes.   Last data he saw was that 80,000 to 100,000 people were using minutes.

5:51 P.M.: Working on short-term compensation plan.  Once servers are back, should take about a month to have new compensation plan.  75% of customers are outside of United States, and are in South America, Asia, Europe, etc.  Larger concertration in Western Europe, Asia, and Dominican Republic.

5:53 P.M.: Promoters and associates are similarly located due to pattern of selling to friends and family.  Does not know what percentage of customers in Massachusetts.  Has not made decision about location of headquarters going forward, but had thought about Florida.  Two places that make most sense are Nevada and Florida.

5:55 P.M.: Believe that, based on 80,000 people selling 14 million minutes a month, should be in $50 million range of revenue right away. Company has received tens of thousands of phone calls from customers.  Many can’t figure out why they can’t use products.

SEC Cross

5:59 P.M.: MacMillan loves network marketing.

6:00 P.M.: MacMillan doesn’t understanding advertising aspect, says it is inconsistent with what he understands network marketing to be. No idea of correlation between ads placed and revenue.

6:01 P.M.: Had no role in changing compensation plan or rolling it out.

6:01 P.M.:  This is not first case MacMillan has heard of with SEC enforcement action involved with allegations of pyramid scheme.  Understands there are things to be careful of, such as payment of commission dollars for product or service.

6:03 P.M.:  MacMillan only aware that Wells Fargo had told TelexFree to go elsewhere, and had heard that other banks and payment processors had told TelexFree to take their business elsewhere.  Happened fairly regularly with payment processors.

6:04 P.M.: As to $1 billion in revenue during 2013, MacMillan says he was told by Craft.  Number was not broken down any further.

6:08 P.M.: Company currently using AMazon cloud services to operate website.  Has been happening over last week.

6:10 P.M.: Understanding is that Mr. Craft didn’t try to walk out of office with checks.  Instead, his understanding is that checks were in briefcase and Mr. Craft was going to get the checks.

6:11 P.M.: Discussing promoter contracts.  Standard form contract.  Before execution of search warrant, MacMillan had never looked at the contract.  

6:16 P.M.: Talking about backup database – what A&M were able to image before search warrant executed.




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Troy Dooly is recognized internationally as an influencer in the areas of personal branding, leadership development, marketing campaigns, organizational expansion, and corporate launch strategies. Dooly is a speaker, results coach, and radio host. He is a founding member, show host (Beachside CEO) and News Director of the Home Business Radio Network. He is a founding member, and currently serves on the Board of the Association of Network Marketing Professionals