Ponzi Tracker Reports: Live Coverage Of The TelexFree Ruling

Ponzitracker will be providing live coverage at 1:30 P.M. EST of the rulings handed down today in the pending TelexFree bankruptcy proceedings in Las Vegas, Nevada.  The ruling is the culmination of an eight-hour hearing held last Friday, May 2, 2014, on various motions brought by the Securities and Exchange Commission, the United States Trustee, and counsel for TelexFree.  A detailed summary of the hearing on May 2, 2014 is here, with the potential outcomes of today’s hearing discussed here.  If you would like to donate to help defray the cost of covering the hearing, please click the Donate button below.  Coverage will begin at 1:30 P.M. EST.

In the meantime, cast your vote in the Poll as to your predicted outcome:

1:29 PM: On silent hold until Judge takes the bench.

1:31 PM: Appearances being made – most by telephone.

1:34 PM: Court now in session.

1:35 PM: Purpose of today’s hearing is to simply recite ruling from May 2, 2014 hearing, and no argument will be entertained.

1:37 PM: Motion to transfer venue to be addressed first.

1:37 PM: Court making findings of fact as to debtors TelexFree LLC (“LLC”), TelexFree Inc. (“Inc.”), and TelexFree Financial, Inc. (“Financial”).  Domicile, ownership structure, etc.  LLC and Inc. owned 50-50 by Merrill and Wanzeler, while Financial is a wholly-owned subsidiary.

1:41 PM: Only members of debtors’ boards prior to petition date were Merrill and Wanzeler.  Board composition changed on April 13, 2014.  Board composition changed against after filing (unsealing) of SEC Complaint when Merrill and Wanzeler asked to resign.

1:43 PM: Similarly, Merrill and Wanzeler were only officers clear from the record before April 13, 2014.

1:44 PM: Court notes discrepancy between board meeting minutes of April 13, 2014 indicating that Merrill remained President, while MacMillan signed agreement as President.

1:47 PM: As of May 2, 2014 hearing, Debtors’ stock and membership units owned by Wanzeler and Merrill, while only remaining officers were MacMillan and Runge.

1:48 PM: Addressing business model.  Evidence at hearing established that debtor used MLM Progam to distribute VoIP telephone services.  Prior to filing, Debtor had amassed over 700,000 promoters/associates worldwide.  Promoters signed contracts with LLC governed by Nevada law.  Prior to filing, promoters were compensated for recruiting other promoters and selling 99 TelexFree VoIP product.

1:49 PM: Record evidence and MacMillan testimony showed commissions paid were unsustainable.  After regulatory inquiries, revisions to compensation paid to members resulted in “disappointing” revenues that didn’t allow company to meet obligations.  Recognition that revised comp plan, while better suited to require promoters to sell VoIP product, will produce sufficient revenues to sustain company’s telecom business.

1:51 PM: Court is mindful that debtors have developed apps and hopeful that technology  could generate additional income going forward.

1:52 PM: During May 2, 2014 hearing, record developed concerning execution of search warrant and cashier’s checks.  Checks located in what Craft told authorities was a personal item.  Checks collected at direction of MacMillan and Runge prior to execution of search warrant.  Debtor stated intention was to collect checks to safeguard assets.  While evidence was conflicting, evidence uniform that debtors intended to deposit checks into safe deposit box – NOT properly collateralized account under bankruptcy rules.

1:59 PM: Discussing SEC case. In addition to complaint, SEC also filed motion for TRO.  TRO signed on April 16, 2014.

2:00 PM: On hearing on April 17, 2014, SEC’s TRO came to attention of court.  Bulk of first day motions were continued.

2:01 PM: Preparing to make ruling.

2:02 PM: Making conclusions of law re motion for change of venue.  Court must first ask whether original venue is proper.  Starting with LLC’s case.  No party has challenged that LLC’s venue in Nevada is proper.  Court concludes that venue is originally proper for LLC.  Because LLC owns more than 20% of Financial’s shares, Financial is an affiliate, and thus venue of Financial is proper.  Inc. is Massachusetts corporation, and is not domiciled or resident in Nevada.  Court concludes that venue of Inc. is not proper in Nevada.

2:07 PM: Question becomes what to do with cases: do they stay or are they transferred. Reviewing grounds for transferring venue.  Analyzing “convenience of parties” ground, which includes six factors.  Also analyzing “interest of justice” ground.  Movant seeking transfer carries burden by preponderance of evidence.

2:13 PM: Application of “convenience of parties” factor to LLC and Financial.  Neither schedules nor statements of affairs have been filed.  Evidence developed at hearing that there are no known secured creditors of debtor, bulk of creditors are promoters owed money due to original failed comp plan, approximately 90% of debtor’s creditors reside outside of Nevada and Massachusetts, approx. 75% of customers and promoters reside outside U.S.  While less than 5% live in MA, there are fewer customers and promoters in Nevada and Massachusetts, and 10 of largest unsecured creditors reside in MA.  Court concludes proximity of creditors weighs in favor of transfer.

2:14 PM: Next, proximity of debtors.  LLC shares headquarters with Inc. in MA.  Chief restructuring officer stated he would have performed restructuring duties in MA headquarters before search warrant execution; thereafter, he would perform his duties from Georgia.  Neither Financial nor LLC has office presence or employees in Nevada.  Proximity of debtors weighs in favor of transfer to Massachusetts.

2:16 PM: While credentials of MacMillan and Runge not subject to question, court finds they have little knowledge related to business administration of LLC and Financial – couldn’t identify competitors.  Proximity of witnesses weighs in favor of transfer.

2:18 PM: Proximity of assets.  Substantially all of IT and office equipment located in MA.  Weigh in favor of transfer to MA.

2:19 PM: Access to books and records most readily available in Massachusetts. Judicial economy weighs in favor of conducting both proceedings in Massachusetts.  Economical administration weighs in favor of transfer to Massachusetts.

2:20 PM: Necessity of ancillary administration in case of liquidation.  Typically not given much weight, favors transfer to Massachusetts.

2:20 PM: Venue must be transferred to Massachusetts for LLC and Financial.  If Inc. case is to continue, must be transferred to district or division where it could have been brought.  Court considering whether transfer is in interest of justice.

2:22 PM: Access to books and records in MA, no business presence or employees in Nevada.  Judicial economy would also be better served.  Debtors have national law firm.  Nothing in record to suggest that any party would be divided fair trial in either Nevada or Massachusetts – neutral factor.  Fewer customers and promoters in Nevada than Massachusetts.

2:25 PM: Transfer to Massachusetts would also aid in enforcement of judgments.  Enforceability of judgment in SEC’s enforcement action would be aided by transfer.  As to original choice of forum, court exercises its discretion to conclude venue is properly in Massachusetts.

2:27 PM: In summary, careful review and analysis of applicable factors demonstrates that venue for all cases must be transferred to Massachusetts.

2:27 PM: Next is the question of abstention.  Court asked parties to weigh in on propriety of abstention given proceedings and TRO already transpiring in Massachusetts.

2:28 PM: Court may dismiss or suspend proceedings based upon satisfaction of factors.  Court is mindful that abstention is used sparingly and in unusual circumstances.  Court thinks that is the case here.

2:31 PM: First, suspension would avoid potential for confusion and delay.  Second, another forum is available to protect interests of parties.  Third, federal proceedings are necessary.  Next, there is no equitable procedure available.  Next, debtors and creditors will not be able to reach out-of-court agreement.  No non-federal bankruptcy proceeding pending.  Bankruptcy filed commensurate with SEC’s commencement of civil action in Massachusetts.

2:33 PM: Debtors made point that their intent was to reorganize sale of VoIP packages to customers and to develop app and technology.

2:34 PM: On balance, Court finds that abstention in form of suspension of all proceedings is warranted until such time as transfer to District of Massachusetts is completed.  Court will enter order of absention suspending all proceedings, including motion to determine portions of SEC’s TRO are invalid and U.S. Trustee’s motion for appointment of trustee.




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