TelexFree. How We Got Here and Where We Are Going. October 14, Jonathan M. Horne Timothy J. Durken

Transcription

1 TelexFree How We Got Here and Where We Are Going October 14, 2014 Jonathan M. Horne Timothy J. Durken

2 What is a Ponzi scheme? Ponzi Scheme = Money from new investors used to pay old investors Requires continued recruitment of new investors Per Se Fraud eventually will run out of $$ from new investors to pay old investors Multi-Level Marketing = Payments made from sustainable commissions on actual sales Ponzi Scheme Characteristics 1) Unusually high or guaranteed returns 2) Paid to recruit new investors 3) No requirement to make actual sales 4) Complex terminology and structure to hide true nature of business 5) Focus on particular groups or communities 6) Same players, new schemes (i.e., Universo FoneClub, Wings Network, ifreex) 7) To good to be true, easy money 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 2

3 TelexFree James Merrill and Carlos Wanzeler WorldxChange/Common Cents Communication (Long-Distance/MLM) Disk-a-Vontade Telefonia (VoIP) Ympactus (Brazil/VoIP/MLM, Carlos Costa) TelexFree HQ: Marlborough, Massachusetts April 2012 to April 2014 $340 million- $1 billion from promoters $90 million in Massachusetts; focused on Brazilian and Dominican immigrant communities $1.3 million from sale of monthly VoIP contracts 700,000 1M Promoters; 190 Countries 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 3

4 AdCentral $339 for one-year contract 10 one-month VoIP packages 1 additional one-month VoIP package each week if Promoter places 1 internet ad per day If Promoter was unable to sell a VoIP package, TelexFree would repurchase the package for $20 As a result, Promoters promised $20 per week, or $1,040 for the year (a return of 207%) Membership Options AdCentral Family $1,425 for one-year contract 50 one-month VoIP packages 5 additional one-month VoIP packages each week if place 5 internet ads per day If Promoter was unable to sell the VoIP packages, TelexFree would repurchase the 5 packages for $100 As a result, Promoters promised $100 per week, or $5,200 for the year (a return of 265%) 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 4

5 TelexFree.com,Youtube, FaceBook Copy ad, paste it to external website, validate in back office Third-party services automated the posting and validating for fee Internet Ads 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 5

6 Original Compensation Plan Ad Buy Back - $20 per unsold VoIP package Recruitment Bonuses $20 for new AdCentral investor, $100 for new AdCentral Family investor $20 for each investor in your network who recruits two members (up to $440) 2% of all payments to each member in an investor s network with one VoIP customer (which could be the member themselves) down six levels 2% of TelexFree s net monthly billing (up to $39,600) for an AdCentral Family investor who recruited 10 new AdCentral Family members, each of whom sold 5 VoIP packages (to themselves or others) Commissions 90% (or $44.90) for the initial sale of a monthly VoIP package at $ % (or $4.99) per month for each direct member who renewed; 2% (or $.99) for each indirect member who renewed down six levels 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 6

7 New Compensation Plan March 9, 2014 new compensation plan announced Requires promoters to sell 5 VoIP monthly packages to earn any $$ April 1, 2014 Promoters protest at Marlborough headquarters VoIP service almost impossible to sell Revenues drop from $3 million per day to between $100,000 - $300,000 per day Promoters try to withdraw $174 million 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 7

8 Overview of Events April 2012: TelexFree implements AdCentral MLM program; revenues grow from de minimus level in 2012 to over $1B+ in MA Securities Division ( MSD ) initiates TelexFree investigation following tip from Brazilian journalist; issues subpoenas in Jan/Feb /13/14: Chapter 11 filing in Las Vegas, NV. 4/15/14: Federal agents raid Marlborough, MA HQ; SEC files civil enforcement action obtains TRO 5/6/14: NV Bankruptcy Court Transfers venue to MA. 5/9/14: Federal criminal complaint charging Merrill and Wanzeler with wire fraud and conspiracy. July 2013: Brazilian authorities shut down and freeze assets of TelexFree s Brazilian affiliate Ympactus. 3/9/14: TelexFree amends compensation plan, requiring promoters to actually sell VOIP product. 4/14/14: MSD files securities enforcement action alleging TelexFree is $1B+ worldwide Ponzi scheme, with $90M+ raised in MA. 6/6/14: Stephen Darr is appointed Chapter 11 Trustee 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 8

9 NV Bankruptcy Proceeding Chapter 11 Strategy Prior Management is Out Reject Promoter Contracts Sell or Reorganize VOIP Business Impact of SEC TRO Automatic Stay v. Police Powers Venue Motion Proximity of creditors Proximity of debtor Proximity of witnesses Location of assets Economic administration of the estate Necessity of ancillary administration Chapter 11 Trustee Motion 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 9

10 MA Bankruptcy Proceeding In re TelexFree, LLC, Case No (Bankr. D. Mass.) Bankruptcy Judge Melvin S. Hoffman, Worcester, MA UST Motion to Appoint Chapter 11 Trustee Supported by Securities and Exchange Commission Appointment of Stephen B. Darr as Chapter 11 Trustee (June 5, 2014) Applications to employ Mesirow Financial, Murphy & King 2004 Examination Motions (Professionals, Consultants, Banks, Payment Servicers) 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 10

11 MA Bankruptcy Proceeding Motion to Vacate Establishment of Bar Date Set for 90 days after Meeting of Creditors (May 15 th / May 22 nd Mid-August) Bar Date Vacated (July 3, 2014) No New Bar Date Set Kurtzman Carson Consultants LLC Claims & Noticing Agent (July 31, 2014) Solicited bids, retained on more favorable terms (save $1M+ retroactive to Petition Date) Proof of Claims to be submitted directly to KCC 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 11

12 MA Bankruptcy Proceeding Modification of Consent Order in SEC Action (July 17th) Chapter 11 Trustee authorized to perform his duties under the Bankruptcy Code Allowed to maintain bank accounts With the exception of the Debtors assets seized now or in the future by the United States Attorneys, the Chapter 11 Trustee is permitted to pursue claims and recover all property of the Debtors bankruptcy estates In connection with his duties, the Trustee shall consult with the SEC and United States Attorneys 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 12

13 MA Bankruptcy Proceeding Debtors Prior Bankruptcy Professionals Greenberg Traurig, Gordon Silver, Alvarez & Marsal, Stuart MacMillan (Interim CEO) Fee Stipulations amongst the professionals, Chapter 11 Trustee, and SEC Paid between 33% and 70% of requested fees Ad Hoc Committee of TelexFree Promoters objected to any fee payments not necessary to benefit the estates Ad Hoc Committee advocates for formation of an official committee of unsecured creditors Chapter 11 Trustee recovered $4.5 million of unused retainers 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 13

14 MA Bankruptcy Proceeding Chapter 11 Trustee Motion to Waive Attorney-Client Privilege (Sept. 25 th ) Chapter 11 Trustee seeks to waive Debtors attorney client privilege with respect to the DOJ criminal proceedings and SEC civil proceedings. Waiver to assist government review Debtors servers (400 terabytes) and documents (38 boxes) w/o prior review of lawyer taint team Objections by Wanzeler and Merrill. Chapter 11 Trustee states that he is in cooperative discussions with the DOJ and SEC for a structure for claims processing and distribution of the assets seized by the government through the bankruptcy cases. Potential subordination of any monetary claims by the Government to the legitimate claims of creditors Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 14

15 MA Bankruptcy Proceeding TelexFree s Business TelexFree s business consisted of VoIP technologies, switches and contracts in various countries, a mobile app, and a mobile portal platform. Chapter 11 Trustee has stated that the estate will not continue to operate the business and reorganize. No action by the Chapter 11 Trustee to sell the VoIP and related technologies Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 15

16 SEC Civil Enforcement Action SEC v. TelexFree, Inc., et al., No NMG (D. Mass.) Filed under seal on April 15th, TRO issued. Defendants 4 principals 4 promoters Related entities Counts Section 10(b) of the Exchange act of 1933 (all defendants) Rule 10b-5 of the Securities Act of 1934 (all defendants) Section 5(a) of Securities Act (TelexFree, Merrill, Wanzeler) Control Person liability (Merrill, Wanzeler) DOJ intervenes; stay of proceeding until criminal case is resolved Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 16

17 Other Proceedings United States v. Merrill, et al., No (D. Mass.) Criminal prosecution against Wanzeler and Merrill for wire fraud and conspiracy to commit wire fraud. Wanzeler fled to Brazil. MSD Administrative Proceeding (In re TelexFree, Inc. et al., Docket No ) Separate state enforcement action by Secretary of State $3.5 million settlement with Fidelity Bank Bank s president John Merrill, brother of James. Set up TelexFree accounts after Brazil had shut company down. Numerous securities class action lawsuits by promoters Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 17

18 Claims Process Net Winners v. Net Losers Measure $ in to $ out; no claim for profits/commissions Rising Tide Method (same % distribution to all creditors) vs. Net Loss Method (% paid of net loss) Net Losers May be entitled to distributions Net Winners May be subject to claw back actions Limit to certain level claims (e.g., $1,000) Foreign jurisdictions Priority of Claims Promoters v. vendors Equitable subordination of bad promoters Promoter-to-Promoter Transactions Trustee v. Creditor Standing 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 18

19 Claims Process Practical Issues in Determining Claims 2,870 claims representing $26.7M filed as of 10/10/14 vs. estimates of 700,000 promoters owed over $1B+. Lack of Information No access to computers or servers. Identifying creditors ( addresses and incorrect social security #s). Transfers of credits in back office from promoter to promoter. Creditors in various foreign countries. Misinformation, language barriers, citizenship status, etc. No bar date has been set. Distributions Most likely several years away. Zeek Rewards SEC receiver appointed August 2012; first interim distribution made September 2014 (90k creditors totaling $134M) Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 19

20 Sources of Recovery Assets Seized by SEC Approximately $140M consisting of cash, real property, automobiles, etc. Professional Retainers Approximately $4.5M turned over to Trustee. Litigation Assets Insider Claims Claims Against 3 rd Party Accountants, Advisors, Banks, Payment Processors Aiding & abetting, etc. In pari delicto defense ( In equal fault ) Standing issues Clawback claims against net winners Practical Issues small amounts spread across thousands of promoters ($6,225 preference threshold under 11 U.S.C. 547(c)(9). Foreign Jurisdictions 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 20

21 Questions / Discussion 2014 Jager Smith P.C. All rights reserved. Unauthorized reproduction is prohibited. 21