Ponzi Tracker Reports: Stephen Darr Appointed As TelexFree Trustee

An independent trustee has been appointed to manage the business operations of TelexFree Financial, LLC; TelexFree, LLC; and TelexFree, Inc. (collectively, “TelexFree”), the consortium of entities currently accused by state and federal regulators of operating a massive pyramid/Ponzi scheme that raised hundreds of millions of dollars from victims.  Stephen B. Darr’s appointment as Chapter 11 Trustee was made public in a filing by the Assistant U.S. Trustee in a Massachusetts bankruptcy where the TelexFree bankruptcy is currently pending.  In connection with his appointment, Darr’s bond was set at $1 million.

Darr is a principal of Mesirow Financial Consulting, LLC, an independent financial services firm that provides a wide array of corporate services, including restructuring, management, and consulting. Darr currently works out of Mesirow’s Boston office, where he serves as the Senior Managing Director. Darr has significant experience in providing financial advisory services to complex restructuring matters, including past engagements with well-known failed companies RefCo and WorldCom. 

Ponzi Tracker Reports: Court Appoints Independent Trustee For TelexFree

A Massachusetts federal Bankruptcy judge approved a request by the Department of Justice to appoint an independent trustee over TelexFree, LLC and related entities (“TelexFree”), after the U.S. Trustee argued that “compelling evidence of fraud…[and] criminal conduct” warranted such relief “forthwith.”  U.S. Bankruptcy Judge Melvin S. Hoffman entered the Order several days after a status hearing marking the first appearance of the parties in a Massachusetts bankruptcy court after the cases were transferred from a Nevada bankruptcy court.  With the appointment of the independent trustee (who has yet to be named), TelexFree’s vision of emerging from bankruptcy with new products and revenue streams appears dismal at best.

Several days after TelexFree’s late-night bankruptcy filing in a Nevada bankruptcy court, U.S. Trustee Tracy Hope Davis filed a motion seeking appointing of a Chapter 11 Trustee pursuant to §1104 (a) (the “Motion”).  In the Motion, Ms. Davis argued that appointment of a trustee was warranted based on the “compelling evidence of fraud,” as well as for the interests of investors and creditors seeking financial accountability.  While appointment of an independent trustee is common in bankruptcy filings under Chapters 7 and 13, an entity’s desire to reorganize under Chapter 11 and later emerge as a stronger entity often results in the entity’s original management continuing to oversee operations during the entity’s time in bankruptcy.  However, Section 1104(a) specifically contemplates appointment of an independent trustee in a Chapter 11 case in several situations, including

for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.

The Motion specifically cites Section 1104, noting that “the appointment of a Chapter 11 trustee would clearly be in the interests of the creditors of this estate” in light of the pending civil actions by the Securities and Exchange Commission and the Massachusetts Securities Division (“MSD”).  The Motion notes that “the pyramid has collapsed,” and also recounts the discovery of nearly $38 million in cashier’s checks in the possession of TelexFree’s interim CFO during a raid of the company’s Massachusetts headquarters.  The Motion also thoroughly summarizes the pertinent facts alleged in the complaints filed by the Commission and the MSD.

The Motion argues that cause for the appointment of a Chapter 11 trustee is clearly established by the “fraudulent and dishonest acts committed by the principals and the officers of [TelexFree].”  Fraud is also evident by the very nature of Ponzi schemes, which are “fraudulent by definition.” Donell v. Kowell, 533 F.3d 762, 767 n2 (9th Cir. 2008).  Under the definition of a Ponzi scheme as set forth by a recent Ohio Bankruptcy Court, the Motion concludes that:

Given the facts alleged in the SEC case, TelexFree appears to be engaged in a classic Ponzi scheme.

Now that an independent trustee will be appointed, he/she will follow Section 1106, which includes the filing of a statement of investigation, as soon as practicable, that includes “any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor…”  Additionally, the trustee may recommend the conversion of the case to another Chapter under the Bankruptcy Code, including a liquidation under Chapter 7.



Ponzi Tracker Reports: Zeek Receiver Seeks Approval For 40% Distribution

Nearly two years after his appointment, the court-appointed receiver for the $600 million Zeek Rewards Ponzi scheme has asked a North Carolina federal court for approval to make an initial 40% distribution to over 100,000 victims.  The Receiver, Kenneth D. Bell, filed his Motion to Authorize First Interim Distribution, Establish Record Dates, and Set First Interim Distribution Date (the “Distribution Motion”) yesterday.  In the Distribution Motion, the Receiver seeks to begin making distributions to victims as soon as September 30, 2014.

The Securities and Exchange Commission filed an emergency enforcement action against Zeek Rewards in August 2012, alleging that the wildly popular online penny-auction site was, in reality, a massive pyramid and Ponzi scheme that was on the verge of collapse.  After a claims process was initiated last year, Bell ultimately received approximately 175,000 claims asserting cumulative losses of over $650 million. 

Ponzi Tracker Reports: Court Dismisses SEC’s $300 Million Ponzi Case On Timeliness Grounds

A Florida federal judge ordered the dismissal of a lawsuit brought by the Securities and Exchange Commission accusing five former real estate executives of masterminding a $300 million Ponzi scheme on the basis that regulators waited too long to file the case.  U.S. District Judge James King granted a motion to dismiss brought by executives of the now-defunct Cay Clubs, agreeing that the SEC “failed to meet its serious duty to timely bring this enforcement action.”  The Commission filed the lawsuit in January 2013, alleging that Cay Clubs ultimately raised more than $300 million from nearly 1,400 investors worldwide.  

According to the Commission’s lawsuit, defendants Fred Davis Clark, David Schwarz, Cristal Coleman, Barry Graham and Ricky Lynn Stokes touted the above-average returns available by purchasing units at Cay Club resort locations, including a guaranteed 15% return and a future income stream from the rental of those units.  However, rather than use investor funds as promised, the Commission accused defendants of using investor deposits to pay returns to existing investors as well as diverting more than $30 million for the payment of salaries and bonuses and even the funding of a liquor distillery.  The scheme later collapsed and ceased operations.

In his ruling, King faulted the Commission for failing to timely bring claims against defendants pursuant to 28 U.S.C. 2462 (“Section 2462”).  Section 2462 requires that an action for enforcement of any civil fine or forfeiture must be brought within five years from the date the claim first accrued.  Here, because the Commission filed its action on January 30, 2013, the last act committed by each defendant had to have occurred on January 30, 2008 or later.  However, Judge King found that “rather than expeditiously, or even promptly, bringing an enforcement action against the alleged fraudsters and peddlers of unregistered securities, the SEC waited.”  

Despite beginning an investigation in late 2007, and alleging in its complaint that Cay Clubs’ business activities continued until at least July 2008, Judge King found that the Commission had failed to point to any evidence that any act of offering or sale of alleged securities occurred after January 30, 2008.  Indeed, at least two of the defendants testified that their relationship with Cay Cliubs ended in October 2007.  

While orders of dismissal are typically done “without prejudice,” meaning that the plaintiff is given another change to file an amended complaint seeking to rectify the deficiencies, Judge King entered his order “with prejudice” that will effectively end the case.  The Commission has not yet issued any comment, although it is likely an appeal will follow.  

The Order is below:

Final Order of Dismissal


Ponzi Tracker Reports: Extradition Of TelexFree Fugitive Could Be Difficult

credit: Don BayleyOn Friday, the U.S. Attorney for the District of Massachusetts announced the filing of criminal fraud charges against the co-owners of a telecommunications consortium, joining state and federal regulators in accusing the pair of operating a $1.1 billion Ponzi and pyramid scheme.  One of the accused, James Merrill, was arrested without incident and is currently in custody awaiting an upcoming hearing where a judge will decide whether bail will be granted.  However, the remaining co-owner, Carlos Wanzeler, is a fugitive and is believed by authorities to have fled to Brazil, where he holds dual citizenship.  While this typically would not present a problem to extraditing Wanzeler to face the charges, the particulars of Brazil’s extradition policies suggest that Wanzeler’s decision to flee may have been a calculated one.

Extradition is the official process utilized when a country seeks the transfer of a suspected or convicted criminal from another country to face charges.  This procedure is typically governed by treaties, but is also governed by other conditions including the dual criminality of the offense or the penalties for the alleged crime.  The process is not automatic, nor is it typically quick.

The United States and Brazil signed a treaty in 1964 that provides for the extradition of anyone accused of a crime with a maximum sentence of one year or more (the equivalent of a felony).  However, Brazil amended its constitution in 1988 to prohibit the extradition of Brazilian citizens to any country, leaving the possibility of extradition available only for those with proven involvement in the narcotics trade.

 Nearly 30 years later, Brazil’s official policy remains to prohibit the extradition of its citizens.  This may present a problem to U.S. authorities seeking the extradition of Wanzeler, who is believed to hold dual citizenship with both the U.S. and Brazil.  Brazil has seen its policy challenged by U.S. authorities in recent high-profile cases, but with no success.  For example, in August 2010, a south Florida police officer accused of drug trafficking somehow removed his court-ordered electronic monitoring bracelet and hopped on a flight to his native Brazil.  Despite efforts by Florida authorities, Britto remains a fugitive in Brazil and unlikely to face the charges unless on his own free will.  

Authorities have not commented on any anticipated problems with Wanzeler, only labeling him a fugitive due to beliefs that he is already in Brazil.  While the truth of this assumption should be easily verifiable using flight manifests, Wanzeler’s lawyer has not offered any comment.  However, even if Wanzeler is able to at least indefinitely escape U.S. prosecution, the possibility still remains that he could be charged by Brazilian authorities, who have been investigating TelexFree since mid-2013.

Ponzi Tracker Reports: TelexFree Co-Owner Arrested, Warrant Issued For Other Co-Owner (UPDATED)

“The scope of this alleged fraud is breathtaking. As alleged, these defendants devised a scheme which reaped hundreds of millions of dollars from hard working people around the globe.”

U.S. Attorney Carmen Ortiz

Federal authorities have arrested one of the co-owners of a suspected $1.1 billion Ponzi and pyramid scheme, and a warrant has been issued for the remaining co-owner thought to have fled to Brazil.  James Merrill, who owns a 50% stake in the consortium of companies known as TelexFree that is currently the subject of state and federal regulatory actions on charges it was a massive pyramid and Ponzi scheme, was arrested by Homeland Security Agents in Worcester, Massachusetts, as reported by the Boston Globe.  Additionally, authorities have also issued an arrest warrant for co-owner Carlos Wanzeler, who is believed to be in Brazil and is now a fugitive.  Each are charged with a single count of conspiracy to commit wire fraud, which carries a maximum 20-year prison term.  It is anticipated that further charges are likely.

The filing of criminal charges comes nearly four weeks after Massachusetts regulators and the Securities and Exchange Commission each accused TelexFree of perpetrating a worldwide scheme that is believed to have taken in $300 million from the United States alone.  Authorities alleged the company took in over $1 billion from hundreds of thousands of “promoters,” who were promised astronomical returns for placing advertisements and recruiting new investors.  Yet, the VOIP service allegedly sold by TelexFree constituted less than 1% of the revenue that flowed to the company over a two-year period.  After the company revised its compensation plan in March 2014, investors sought to withdraw nearly $200 million, and the company declared bankruptcy on April 13, 2014, maintaining that reorganizing through a Chapter 11 bankruptcy would allow the company to emerge as a legitimate company with a revenue-generating voice-over-internet-protocol product.

Both the Commission and the U.S. Trustee opposed these efforts, claiming that there was clear evidence of fraud and criminal conduct, and a Nevada bankruptcy judge recently granted a request to transfer the bankruptcy proceedings to Massachusetts where the Commission’s civil enforcement action is currently pending.  During a hearing last Friday in the Nevada Bankruptcy Court, the first hint that criminal authorities might be prepared to get involved came when it was disclosed that asset forfeiture actions had been initiated by the U.S. Attorney.

At a hearing earlier this week in the Commission’s enforcement action, Wanzeler’s lawyer suggested he that while he was unaware of the whereabouts of his client, he would not be surprised if Wanzeler had traveled to Brazil recently, where he is a citizen.

A Commission attorney stated that, according to TelexFree’s books and records, there are approximately $100 million in assets that could eventually be distributed to victims.  “Clawback” proceedings to recover transfers to insiders and investors that received profits from their investment are also possible.  However, a claims proceeding is likely months, if not years, away, and will require authorities to determine the net loss of each victim by accounting for any “interest” payments received. 

Individuals who believe they are a victim of TelexFree are urged to send their contact information to USAMA.VictimAssistance@usdoj.gov.

Previous Ponzitracker coverage of TelexFree is here.

UPDATE (6:24 P.M. EST): According to @SteveFoskettTG, Merrill has made his first appearance in Federal Court, where government lawyers argued that he is considered a flight risk and should remain jailed until a bail hearing can be scheduled.  The Court agreed, and Merrill was ordered remanded into custody until a bail hearing next Friday.  





A copy of the affidavit is below (special thanks to ASDUpdates):



Ponzi Tracker Reports: Four Indicted In $70 Million Virtual Concierge Ponzi Scheme

A grand jury indicted four Florida citizens – including a husband and wife – on multiple fraud counts in what authorities allege was a $70 million Ponzi scheme that peddled “virtual concierge” machines to unsuspecting investors.  Joseph Signore, his wife Laura Signore, Paul Schumack, and Craig Allen Hipp were indicted today – approximately one month after civil and criminal authorities alleged that JCS Enterprises was a massive Ponzi scheme.  Joseph Signore and Paul Schumack, accused by the Securities and Exchange Commission of being the masterminds behind the scheme, face the majority of criminal charges, with Signore facing 31 counts of bank fraud, conspiracy to commit mail and wire fraud, mail fraud, wire fraud, and money laundering charges.  Laura Signore was indicted on eight fraud charges, while Hipp is facing one count each of conspiracy to commit mail and wire fraud, mail fraud and wire fraud.

According to authorities, Signore and Paul Schumack solicited potential investors to participate in JCS Enterprises’ (“JCS”) Virtual Concierge program, which involved the purchase of a virtual concierge machines (“VCM”) through a one-time fee ranging from $2,600 to $4,500 per VCM.  The VCM, which resembles an ATM, is a free-standing or wall-mounted machine placed in various businesses that purportedly allowed the advertisement of products or services and even the ability to print tickets or coupons.  Potential investors were told that the VCMs generated substantial returns, which in turn would allow the payment of annual returns to investors ranging from 80% to 120%. In addition, investors were provided with the location of the VCMs they had purportedly purchased, and even given the ability to track the VCM activity online.

Investors were solicited in several ways, including several websites controlled by the entities and through videos posted on popular video-sharing website Youtube.  The videos promised that the VCM would “generate income for years,” and promised that a $3,500 investment could produce “huge returns.”  Potential investors also received emails from Schumack, who touted his graduation from West Point Military Academy in 1979 and whose email signature also featured a Bible passage intended to create a false sense of security for investors.  

However, authorities allege that the outsized returns touted by the defendants were the result of a Ponzi scheme.  According to the SEC, the production of VCMs was not close to the amount of VCMs purportedly sold to investors, and the guaranteed returns were “a farce.”  Instead, investor funds were commingled and used for a variety of unauthorized purposes, including the unauthorized transfer of more than $2 million to Signore and his family.  An additional $56,000 in investor funds were used for expenses including restaurants, stores, and a tanning salon.  Finally, approximately $4 million in investor funds were transferred to an unrelated account from which Schumack and others allegedly made more than 100 cash withdrawals of nearly $5 million. 

While the SEC named Joseph Signore and Paul Schumack in their civil enforcement action filed in early April, some had questioned why Laura Signore had not been named.  The indictment alleges that Laura Signore served as executive vice president of JCS Enterprises, where she signed checks to investors and vendors as well as investor contracts with JCS.  It appears that the decision to sign investor contracts on behalf of JCS may have factored into the charging decisions, as Hipp also signed investor contracts.  

In addition to the criminal charges, the indictment also seeks forfeiture of the Signores’ and Schumack’s real and personal property – including their homes.  Each of the defendants potentially faces decades in federal prison.