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.

ADJOURNED.

 

 

http://www.ponzitracker.com/main/rss.xml

Ponzi Tracker Reports: Court Suspends TelexFree Bankruptcy, Grants Motion To Transfer Venue To Massachusetts

In a ruling earlier today, a Nevada Bankruptcy court dealt a severe blow to efforts by a consortium of companies accused of operating a massive Ponzi and pyramid scheme by ruling that the pending bankruptcy cases would be suspended and ultimately transferred to Massachusetts, where pending state and federal regulatory actions are pending.  U.S. Bankruptcy Judge August Landis ruled that he would grant the Securities and Exchange Commissions’s request for abstention and suspend the current bankruptcy proceedings of TelexFree LLC, TelexFree, Inc., and TelexFree Financial Inc. (collectively, “TelexFree”) Judge Landis indicated that, in the event the debtors planned to move forward with bankruptcy, the proceedings would be transferred to the District of Massachusetts, where the Commission’s emergency enforcement action is pending against TelexFree.

The ruling is a severe setback to TelexFree, which filed bankruptcy on the eve of the filings by the Commission and the Massachusetts Securities Division.  TelexFree had strenuously argued against abstention or transfer, maintaining its position that the company had a viable product that it predicted could result in “significant” revenue once it emerged from bankruptcy.  However, the company also sought to “reject” debts of hundreds of millions of dollars to “promoters” that were compensated on selling TelexFree products and recruiting others as part of the process.

The Motion to Transfer Venue

In evaluating the Motion to Transfer venue, the Court analyzed first whether transfer was in the “convenience of parties,” which involved a weighing of six common factors:

  • proximity of creditors;
  • proximity of the debtor;
  • proximity of witnesses;
  • location of assets;
  • economic administration of the estate; and
  • necessary for ancillary administration if liquidation should result.

Of the factors, the Court noted that the fifth was the most important while the sixth was the least important.  The Court found that all six factors weighed in favor of a transfer to Massachusetts.  Based on these findings, the Court concluded that transfer TelexFree, LLC and TelexFree Financial, Inc. bankruptcy proceedings to Massachusetts was warranted.  The Court also analyzed whether transfer of the TelexFree Inc. bankruptcy was warranted under an “interests of justice factor,” which involves an analysis of the following six factors:

  • the promotion of economic and efficient administration of the estate;
  • the interests of judicial economy would be served;
  • the parties would receive a fair hearing in each venue;
  • either forum has an interest in having the controversy decided within its borders;
  • the enforcement of any judgment would be affected; and
  • whether the plaintiff’s original choice of forum should be disturbed.

While noting that the third factor was a “push,” the Court concluded the remaining factors warranted transfer of venue to Massachusetts.

Abstention

Following its ruling on the Motion to Transfer Venue, the Court also pondered whether abstention was appropriate – an issue that was initially raised by the Court immediately following the bankruptcy filings.  While noting that abstention is used sparingly and in unusual circumstances, the court concluded such a situation was present.  After weighing several factors, the Court concluded that abstention – in the form of suspending all proceedings – was warranted until and when venue could be transferred to Massachusetts.

While TelexFree’s chances for success were slim, their strategy was certainly noteworthy.  A continual theme present in TelexFree’s papers before the bankruptcy court was the notion that the company, accused by U.S. and foreign interests of malfeasance, could simply do away with the past troubles in favor of starting anew.  This included cleaning house of the previous officers and directors (one agreed to resign while another refused and had to be terminated), as well as extolling the future revenue possibilities of a phone service that, on its face, was overpriced compared to competitors such as Skype and Vonage.  Such a strategy ignored the company’s troubled history in favor of a unproven and theoretical future.  While certainly a novel attempt, the Court delivered a resounding rebuke to this strategy.

According to attorney Timothy J. Durken, who is monitoring the case on behalf of TelexFree promoters, “It was clear under the factors considered by Bankruptcy Judge Landis that the TelexFree bankruptcy cases belong in Massachusetts. TelexFree was headquartered in Massachusetts and that is the where the investigations and SEC and MSD actions are ongoing.”

A detailed recap of the hearing is available here.  There exists the possibility that TelexFree could appeal the ruling.

Previous Ponzitracker coverage of TelexFree is here.

http://www.ponzitracker.com/main/rss.xml

Patrick Pretty BULLETIN: Cash, Weapons, Electronics Reportedly Seized In TelexFree-Related Raid In Dominican Republic; Alleged Promoter Labeled Fugitive

BULLETIN: (Updated 12:27 p.m. EDT U.S.A.) A TelexFree-related police raid coordinated by prosecutors in the Dominican Republic has resulted in the seizure cash, at least two weapons and computer (tablets) and phone equipment (smart phones), the Public Ministry says in a statement in Spanish. The weapons were identified as a pistol and a shotgun. Alleged […]

http://feeds.feedburner.com/PatrickPrettyBlog

Patric Pretty URGENT BULLETIN MOVING: TelexFree, Gerald Nehra MLM Law, Banks Firm Sued In Prospective Class Action

URGENT >> BULLETIN >> MOVING: (9th update 2:13 P.M. EDT U.S.A.) TelexFree, MLM attorney Gerald Nehra, “Doe” insiders and several banks have been sued in a prospective class-action. “Certain Defendants share joint and severable liability, including the Doe Inside Promoters, the licensed professionals such as the RLP Defendants, including certified public accountants and lawyers that […]

http://feeds.feedburner.com/PatrickPrettyBlog

Ponzi Tracker Reports: Pivotal TelexFree Bankruptcy Hearing Set For Friday

 

Lawyers for a telecommunications consortium accused of operating a $1.1 billion pyramid and Ponzi scheme are set to square off against government lawyers in a Nevada bankruptcy courtroom on Friday morning over the future of the three-week old bankruptcy case. TelexFree, LLC, which declared bankruptcy along with two related entities on April 13, 2014, is seeking to forge ahead with a bankruptcy proceeding to strengthen a legitimate voice-over-internet-protocol (VoIP) business that was hampered by overwhelming payment obligations to “promoters” that marketed its business. The Securities and Exchange Commission and other agencies dispute this characterization, instead alleging that the bankruptcy proceeding is a sham and that, in reality, TelexFree was a massive fraudulent scheme that may have raised over $1 billion from victims based on the guise of a nearly non-existent VoIP business. A pivotal hearing scheduled for tomorrow will likely set the tone for proceedings going forward and offer a glimpse into how well-received TelexFree’s efforts will be.

Background

Late in the evening on April 13, 2014, a trio of nearly identical bankruptcy petitions were filed in the Nevada bankruptcy court. Blaming the company’s financial woes on an ill-fated change in compensation plan to promoters, TelexFree vowed to use bankruptcy to restructure company debts and emerge as a stronger company. However, 36 hours later, both the Massachusetts Securities Division (“MSD”) and the Securities and Exchange Commission (“SEC”) filed actions in Massachusetts accusing the company of operating as a massive Ponzi and pyramid scheme. While the MSD filed an administrative proceeding, the SEC’s civil enforcement action sought and was granted a temporary asset freeze against TelexFree’s assets. During a raid on TelexFree’s Massachusetts headquarters that same day, federal agents discovered more than $38 million in the possession of TelexFree’s acting CFO, Joe Craft.

In the ensuing two weeks, a flurry of activity took place on the Nevada bankruptcy court docket. The first significant filings were by TelexFree. In a flurry of “first day” motions, TelexFree asked the court for authority to, among other things, reject the compensation obligations it had incurred to what it estimated were over 700,000 “promoters” involved in the multilevel marketing aspect of its business. Several days later, TelexFree sought a six-week delay to file financial disclosures that were customarily required within two weeks of a bankruptcy filing, citing in support the significant resources devoted to addressing the MSD and SEC actions as well as the fact that the search warrant executed on its Massachusetts headquarters had deprived it of access to its files.

While TelexFree had perhaps envisioned a subdued response to their bankruptcy filing, the ensuing MSD and SEC actions brought intense scrutiny to the Nevada proceedings. A week after the filings, the U.S. Trustee made waves when she petitioned the court for the appointment of an independent bankruptcy trustee, arguing that “compelling evidence of fraud…[and] reasonable grounds to suspect…criminal conduct” warranted the immediate appointment of an independent fiduciary. This motion was followed by the SEC’s Motion to Change Venue, which argued that the bankruptcy proceeding was nothing more than a “coordinated effort to avoid the Massachusetts courts” and that a weighing of pertinent factors warranted a transfer of the bankruptcy proceedings to a Massachusetts bankruptcy court where they could proceed alongside the SEC’s civil enforcement proceedings in Massachusetts district court. Unsurprisingly, TelexFree has filed objections to each of these motions, and has sought to void certain parts of the SEC’s temporary restraining order based on conflicts with the bankruptcy court’s authority.

At least ten motions are set to be heard tomorrow in a hearing scheduled for 9:30 A.M. MST. From the parties’ respective filings, the tone likely to be taken by each side is fairly evident. In each of its filings, TelexFree has included the same verbatim narrative touting the future of the company and paying little heed to the allegations that the company made numerous material misrepresentations to investors in raising at least hundreds of millions of dollars. The company’s filings have increasingly sought to focus on the present-day change in management and future business while distancing itself from the company’s tumultuous past.  In contrast, the SEC and the U.S. Trustee have consistently opposed TelexFree’s efforts to seemingly erase nearly two years of allegedly rampant fraud in favor of focusing on an aspect of its business that grossed approximately $1 million since November 2012.  As the SEC stated in a recent brief, TelexFree is “in reality, a fraudulent enterprise not capable of reoganization.”

The company seeks a “do-over” that totally excuses the alleged rampant violations of securities laws through the U.S. Bankruptcy Code under the guise that the company is now (and can be going forward) a legitimate business. Perhaps adding insult to injury, the many millions of dollars that will be – and have already been – paid to the professionals hired to assist the company’s path through bankruptcy will inevitably come from investor funds; the SEC has charged that the company took in only $1.2 million in revenue from November 2012 to March 2014 despite incurring $1.1 billion in obligations to “promoters.” The SEC and U.S. Trustee have come out strongly against TelexFree’s efforts, with the SEC urging the court to either transfer the case to a Massachusetts bankruptcy court or to abstain from further proceedings.

Possible Scenarios

There are several possible scenarios that could result from tomorrow’s hearing. Due to the numerous motions scheduled for hearing, it is possible that Judge August Landis could take many or all of the motions under advisement – that is, not make an immediate ruling. However, due to the time constraints involved in the Massachusetts proceedings, it stands to reason that some rulings may be made. The decisions will depend first on whether the court allows the bankruptcy to proceed. The SEC has urged the court to abstain from hearing the cases or suspend the proceedings while the SEC’s enforcement action proceeds in Massachusetts, arguing the bankruptcy is nothing more than a delay tactic. If the court grants that motion, then the remaining motions can likely be tabled until further notice as proceedings would halt while the Commission’s enforcement action proceeds. This would most likely be a death knell to TelexFree’s hopes of reorganization, and an appeal would likely ensue.

In the event the Court does not abstain from hearing or suspend the proceedings, the SEC has also asked for the transfer of the cases to Massachusetts. TelexFree has opposed this motion as well, as this would also serve to speed up the proceedings. Assuming the bankruptcy does move forward, it appears likely that the U.S. Trustee’s motion for appointment of an independent trustee would be granted in the face of the serious allegations made by the MSD and SEC. This, too, would likely be detrimental to Telexfree’s plans to control its destiny in bankruptcy.

Of note, the background of the presiding bankruptcy judge likely weighs against TelexFree’s efforts. Judge August Landis was appointed to the bankruptcy bench in November 2013, having served in the U.S. Trustee program since 2005 and most recently serving as the acting U.S. Trustee for the Nevada region since 2010. The current U.S. Trustee, Tracy Hope Davis, was the individual that likely replaced Judge Landis and who filed the motion for appointment of an independent trustee over TelexFree. Judge Landis’s history as a U.S. Trustee, including his understanding and grasp of bankruptcy law, leave him well-prepared for tomorrow’s hearing.

Previous Ponzitracker coverage of TelexFree is here.

 

http://www.ponzitracker.com/main/rss.xml

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.

 

 

 

Donations are welcome to cover the cost of accessing the hearing:

http://www.ponzitracker.com/main/rss.xml

Patrick Pretty Reports: Federal Judge To Accused TelexFree Promoter: Sell Your Bimmers And Land Rover

(UPDATED 8:05 A.M. EDT U.S.A.) Alleged TelexFree promoter and securities fraudster Santiago De La Rosa has been ordered by the federal judge presiding over the U.S. Securities and Exchange Commission’s Ponzi- and pyramid case to sell two BMWs and a Land Rover Range Rover “back to the dealership” and to “repatriate all funds located outside […]

http://feeds.feedburner.com/PatrickPrettyBlog