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Massachusetts securities regulators have initiated civil proceedings accusing a Massachusetts and Nevada company of operating a massive pyramid and Ponzi scheme targeting Brazilian-Americans that, through the promises of guaranteed annual returns exceeding 200%, raised more than $90 million from Massachusetts residents alone and nearly $1 billion worldwide. TelexFREE, Inc., a Massachusetts corporation, and TelexFREE, LLC, a Nevada limited liability company (collectively, "TelexFREE"), were accused of violations of the Massachusetts Uniform Securities Act by engaging in the fraudulent offering and sale of unregistered securities. The Massachusetts Enforcement Section of the Massachusetts Securities Division is seeking, in relevant part, a permanent cease-and-desist order, an accounting, restitution to victims, and disgorgement of profits and ill-gotten gains.
The complaint likens TelexFREE's operations to the "once common phone card frauds of the mid 2000s while supercharging its reach through an elaborate internet marketing machine." Its business purportedly centers on the sale of its voice over internet protocol ("VoIP") program, 99TelexFREE, which advertises itself as a substitute to the use of traditional landline phone services. However, that business is offered along with a passive income program that allows the purchase of either a $289 or $1,375 investment. The $289 program offers one advertisement kit and ten VoIP Programs, while the $1,375 option allows the purchaser to receive five advertisement kits and fifty VoIP Programs. By using the so-called advertisement kits, which is an "effortless" process consisting of several minutes of work per advertisement, participants are purportedly able to generate extensive returns without the need for any VoIP Program sales. In addition, participants received an additional VoIP Program for posting a daily advertisement, which they were then able to sell to TelexFREE for $20.
Through these efforts, participants in either program were promised astronomical returns. For example, a participant investing $289 that simply placed one advertisement per day could receive an annual profit of at least $681 - a return exceeding 200%. Similarly, a participant investing $1,375 and placing five advertisements daily could receive profit of $3,675 - a return over 250%. Not surprisingly, these large returns spurred the participation by many thousands of investors worldwide. Additionally, participants were handsomely compensated for recruiting new investors - including as much as $100 per participant and eligibility for revenue sharing bonuses.
In addition to the incentives for participants to recruit new investors, TelexFREE solicited potential investors by hosting wild parties with a "rock concert atmosphere" and raucous cheering that included the "wave." Potential investors were told that the investment was the "opportunity of a lifetime," and, like many other schemes, were enticed by stories of wealth realized by top participants.
According to the Enforcement Section, however, TelexFREE was a veiled pyramid and Ponzi scheme whose revenues were significant dwarfed by the rapidly-growing obligations to investors. For example, in 2012 and 2013, TelexFREE identified approximately 4.4 million VoIP Program transactions totaling over $238 million. Resulting net revenue was significantly less due to commission payments. However, over the same period, nearly 800,000 investments were made that totaled nearly $900 million. Even assuming that each investor participated in the $289 program and satisfied the minimal requirements, this meant that TelexFREE would owe those participants a total of nearly $800 million. Additionally, as the percentage of investments skewed towards participation in the $1,375 investment, this further increased investor obligations - to nearly $4 billion if all investors participated in the more expensive plan. Indeed, according to TelexFREE, nearly 90% of Massachusetts-based investors opted for the $1,375 investment. Regardless of the breakdown, these figures were significantly higher than the corresponding revenues derived during the period.
Recently, TelexFREE has attracted increasing scrutiny from local, state, and foreign regulators. This culminated in the recent petition for bankruptcy filed by TelexFREE, LLC in a Nevada bankruptcy court, which is described in further detail here. The Complaint indicates that TelexFREE has been under investigation for at least a year , as evidenced by an April 4, 2013 request by the Enforcement Section for profit and loss statements. Oddly enough, two profit-and-loss statements furnished on two different occasions for the same time period showed significant discrepancies in income, expenses, and net income.
If the allegations are proven to be true, TelexFREE would rank not only as the largest scheme uncovered in the past few years, but one of the largest Ponzi schemes in history. A previous article chronicling the harm inflicted by Ponzi schemes over the past five years is available here for reference.
A copy of the Complaint is here.
Jordan Maglich is a securities law attorney in Tampa, Florida. Follow Jordan on Twitter at@Ponzitracker or visit Ponzitracker.
