Filed on the 23rd of July, a grand jury has indicted James Merrill
and Carlos Wanzeler on eight counts of wire fraud and one count of
conspiracy to commit wire fraud.
Reading like a BehindMLM review, the grand jury described TelexFree as a pyramid/Ponzi hybrid:
Pyramid schemes typically feature a marketing or sales
program in which, among other things, participants pay into the program
for the opportunity to be compensated for recruiting other people as
well.
Pyramid schemes typically involve a seemingly legitimate business
that may in fact sell a legitimate product, but they derive the bulk of
their revenue, not from bona fide sales of that product, but from new
participants buying into the program.
These schemes typically promosie substantial returns for doing little
beyond paying into the organization and convincing others to do the
same.
The sales programs underlying pyramid schemes are often layered with
jargon, procdural complexities, a formalized heierachy of participation,
and other trappings, all of which create the appearance of a legitimate
company pursuing a legal marketing program.
But, as in “Ponzi”-type schemes, the otganizers simply take
in money from newly-invested participants and use those funds to pay the
returns promised to earlier participants.
These schemes are ultimately unsustainable because the
returns promised to an ever-growing pool of participants must be paid
using funds deposited by a necessarily finite pool of new participants.
At some point the scheme must become too big, that is, it must
eventually lack enough incoming funds to cover its financial commitments
and, because underlying product sales cannot sustain the company, the scheme collapses.
(Ozedit: This is typically where I’d add a “kaboom!”)
As for how Merrill and Wanzeler (right), the owners of TelexFree, fit into the above, the grand jury nailed them for having devised, and intended to devise, a scheme to defraud, the
purpose of which was to obtain money and property by means of
materially false and fraudulent pretenses, representations, promises and
omissions by, among other things, recruiting, and inducing
existing promoters to recruit, an every expanding group of new promoters
for TelexFree, all of whom paid significant sums to join the company, which sums the defendants used to pay promised returns to existing promoters and to enrich themselves.
Not withstanding the true nature and status of TelexFree’s business
operations, Merrill and Wanzeler misled TelexFree promoters about the
viability of the company; and encouraged new promoters to recruit
others.
Moreoever, in public representations to current and potential
promoters, Merrill and Wanzeler omitted, and caused others to omit,
material information about the condition of the company and
investigations of the company by carious civil regulatory authorities in
the United States and Brazil.
Perhaps the most notorious example of this occurring was the response disgraced Ponzi lawyer Gerry Nehra gave when asked about the regulatory shutdown of TelexFree in Brazil.
Speaking at an official TelexFree corporate event, when asked about the Brazilian shutdown, Nehra replied
I am the MLM specialist and attorney for TelexFree in the United States only. So I gotta duck the question.
TelexFree used the same Ponzi business model globally, so Nehra’s
response at the time made little sense. During the same presentation, he
would later go on to give TelexFree his “legal blessing”.
Merrill and Wanzeler similarly deceived regulatory
authorities about various aspects of TelexFree’s business operations,
including the fact that, at its core, TelexFree operated as a pyramid scheme.
Other examples cited by the grand jury include
- the advertising of the TelexFree Ponzi scheme on the TelexFree website
- a presentation by James Merrill used to market the scheme, that told viewers they could ‘make money without being required to sell anything‘
- the use of YouTube videos (Carlos Costa) ‘to communicate with TelexFree’s thousands of promoters’
- the electronic distribution of recordings of TelexFree corporate events
- ensuring US affiliates that “there was nothing to worry about” in
the wake of the Brazilian regulatory shutdown, despite “TelexFree’s
compensation system in Brazil” being “nearly identical to the US system”
and sharing “the same website”
- ensuring US affiliates that “there was nothing to worry about”,
despite the Massachusetts Securities Division opening up a pyramid
scheme investigation on the company in April of 2013
- providing the Massachusetts Securities Division with “false and misleading information about the company”
- having a TelexFree executive, “in response to rumors reported on
Internet blog about investigations of TelexFree”, declare that “there
was no pending investigations of TelexFree in any way, shape or form” (Steve Labriola)
Getting back to the grand jury indictment, TelexFree’s Ponzi
compensation plan in particular is called out and held against Merrill
and Wanzeler:
All new promoters were required to first pay a $50 membership fee to TelexFree.
After paying the fee, TelexFree set up a new “back office” page for that user on the TelexFree website.
The user then had the option of buying an “AdCentral” package, for $289, or an “AdCentral Family” package, for $1375.
With both packages, TelexFree purported to give the promoter a “stock” of VOIP packages to sell. No actual product was conveyed to the promoter.
The promoter could then copy small “classified”-type advertisements
from the TelexFree website and post them on one of several classified ad
sites.
As Merrill and Wanzeler knew, most of these sites hosted page after
page of dozens of nearly identical TelexFree advertisements, as numerous
promoters copy and pasted their ads to the same sites.
If a promoter posted ads for seven consecutive days, TelexFree would
“buy back” the unsold VOIP stock from the promoter for $20 (under the
AdCentral plan) or $100 (under the AdCentral Family plan), and would do
so every week for the length of the year-long agreement.
As Merrill and Wanzeler knew, and as they advertised on the TelexFree website, this
system provided every TelexFree promoter a return of over 200% on his
or her initial investment without being required to sell a singe unit of
TelexFree’s VOIP product.
As Merrill and Wanzeler also knew, many promoters bought multiple positions with TelexFree, that is, they
signed up multiple times as a promoter in order to multiple their
weekly and annual returns without having to sell any TelexFree product
To qualify for various additional recruitment-related income streams
that TelexFree made available, TelexFree purported to require each
promoter to make one retail sale of the VOIP product.
But as Merrill and Wanzeler knew, numerous promoters met this
requirement by simply buying the VOIP product themselves, using a
different user name, and paying the $49.90 monthly cost of the service
with “credits” the promoter had accumulated in TelexFree’s virtual “back
office” system.
Many of these promoters did not use the TelexFree product.
Moreover, under TelexFree’s compensation system, promoters received a
90% commission on the first month of usage by a VOIP customer they
recruited.
That is, after buying the VOIP product themselves with virtual
credits, promoters were then reimbursed for 90% of the up-front cost.
Moreover, there was no obligation to pay for subsequent months.
Promoters were paid to recruit other people, and further
compensated when those people recruited additional people, and so on,
without any one level of participants being required to make genuine
retail sales of TelexFree’s VOIP product.
For example, promoters were rewarded for direct recruitment of new promoters.
For each direct recruit who bought into TelexFree at the AdCentral
level (a total of $339), the recruiting promoter received a $20 “fast
start” bonus.
For each direct recruit who bought into TelexFree at the AdCentral
Family level (A total of $1,425), the recruiting promoter received $100.
As above, and as Merrill and Wanzeler knew, excluding the purported “retail” sale of one VOIP product, promoters received these bonuses without any genuine retail product sales.
Also used against the duo are the financials of TelexFree, which the
grand jury reasoned blatantly illustrated the Ponzi scheme Wanzeler and
Merrill were running.
Merrill was the signatory on most of TelexFree’s bank and
payment processing accounts, and Merrill and Wanzeler together were the
signatories on others.
As Merrill and Wanzeler knew, these accounts showed TelexFree
bringing in only small amounts of money – about 1% – from people paying
$49.90 a month to use its VOIP product, while the vast majority of the income cash to these account came from people paying in $339 or $1425 to sign up as promoters.
Moreover, as both men knew, during the course of the scheme several
banks closed TelexFree’s accounts because of concerns about TelexFree’s
activities.
And here’s where things get really murky, with revelations that
Merrill and Wanzeler tampered with statistical data to perpetuate the
myth that retail activity was taking place within TelexFree (remember
those silly press-releases TelexFree put out about VOIP minutes being
used?):
The back office system was generally managed by TelexFree
employees in Brazil, but Merrill and Wanzeler had Internet-based access
to the system and could request data from the Brazilian employees.
The back off system enabled Merrill and Wanzeler to manipulate how TelexFree’s revenue figures were presented, including by overstating TelexFree’s revenue from the sale of VOIP packages.
For example, as noted above, to qualify for certain bonuses promoters
purportedly had to make at least one retail VOIP sale, and many
promoters met that requirement by simply “buying” the VOIP product
themselves with back office credits.
Every time a promoter “bought” a VOIP package in this manner,
the purported sale was recorded in the back office system as a retail
sale of TelexFree’s VOIP product, even though, in reality, no one had sold the product to a real customer.
The issue of actual retail sales is of significant importance, as
there are many who would have you believe that retail sales in the MLM
industry do not matter.
Here’s what happens when you run around telling porky pies about your actual retail revenue:
Merrill and Wanzeler repeatedly made public statements to
TelexFree’s promoters at TelexFree’s corporate events, often called
“extravaganzas”.
These events were staged in various locations around the world,
involving hundres or thousand of promoters and presentations by Merril,
Wanzeler, and other TelexFree personnel.
One such event, staged off the coast of Brazil in or about December 2013, was hosted on a cruise ship leased by TelexFree.
During the events, Merrill and Wanzeler promoted an exciting, upbeat image of the company and its prospects.
Merrill spoke of how excited he was about the company, his confidence
in Wanzeler and other “leaders”, and how TelexFree was “fighting for”
its promoters.
During a TelexFree event in or about March 2014, presenters,
including Merrill and Wanzeler, touted the quality of TelexFree’sVOIP
product and the opportunity to “market” it.
Merrill told the crowd, among other things, “You’re gonna get paid”,
and, “We are here to help you make money”. Wanzeler announced that, in
the preceding month, “Over 600,000 customers paid $49.90 to
TelexFree99″.
During these events, neither Merrill nor Wanzeler indicated that
TelexFree generated the bulk of its cash – the money it needed to pay
commissions and bonuses – not from the sale of its VOIP product, but
rather from the sale of TelexFree memberships to new promoters.
Moreover, and as Merrill and Wanzeler knew, TelexFree did not have 600,000 retail VOIP customers, but only a small fraction of that number.
You get called out on your lies. There’s no backtracking bullshit
about end-users or whether or not the accounts were resold… either you
have significant actual retail activity taking place within your MLM
business or you don’t.
TelexFree didn’t and so here we are.
For their efforts to promote and operate the billion dollar TelexFree
Ponzi scheme, Merrill and Wanzeler were indicted on nine counts of wire
fraud and conspiracy to commit wire fraud.
The single count of conspiracy to commit wire fraud holds Merrill and Wanzeler responsible for having knowing devised, and intending to devise, a scheme
and artifice to defraud and to obtain money and property by means of
materially false and fraudulent pretenses, representations and promises,
transmitted and caused to be transmitted, by means of wire
communications in interstate and foreign commerce, writings, signs,
signals, pictures and sounds, for the purpose of executing the scheme
and artifice to defraud.
The eight counts of wire fraud cover
- a transfer of $136,200 on December 26th 2013 from a Fidelity
Co-operative account held in the name of TelexFree, to a Middlesex
Savings account held in the name of James Merrill
- a transfer of $500,000 on December 26th 2013 from a Fidelity
Co-operative account held in the name of TelexFree, to a Fidelity
Co-operative account held in the name of Carlos Wanzeler
- a transfer of $136,200 on December 26th 2013 from a Fidelity
Co-operative account held in the name of TelexFree, to a Fidelity
Co-operative account held in the name of Carlos Wanzeler
- a transfer of $158,900 on December 26th 2013 from a Fidelity
Co-operative account held in the name of TelexFree, to a Fidelity
Co-operative account held in the name of Carlos Wanzeler
- a transfer of $22,700 on December 26th 2013 from a Fidelity
Co-operative account held in the name of TelexFree, to a Fidelity
Co-operative account held in the name of Carlos Wanzeler
- a transfer of $3,000,000 on December 27th 2013 from
a Fidelity Co-operative account held in the name of TelexFree, to a
Waddell & Reed Inc. account held in the name of James Merrill
- a transfer of $3,000,000 on December 27th 2013 from
a Fidelity Co-operative account held in the name of TelexFree, to a
Fidelity Co-operative account held in the name of Carlos Wanzeler
- a transfer of $3,500,000 on December 27th 2013 from
a Fidelity Co-operative account held in the name of TelexFree, to a
Fidelity Co-operative account held in the name of Carlos Wanzler
The grand jury has also made a forfeiture allegation, upon conviction
of Merrill and Wanzeler, that they forfeit “any property, real of
personal, that constitutes, or is derived from, proceeds traceable to
the commission of the offenses”.
This includes
- $6,152,341.44 payable to TelexFree by way of a cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $27,855.57 payable to TelexFree by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $16,970,714.14 payable to TelexFree by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $1,968,777.06 payable to TelexFree by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $10,398,000 payable to TelexFree Dominicana SRL
(used by Wanzeler to launder money through the Dominican Republic), by
way of cashier’s check issued by Wells Fargo Bank on April 3rd 2014
- $2,000,634.76 payable to Katia B Wanzeler by was of cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $50.03 payable to JC Real Estate Management Co by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $728.44 payable to JC Real Estate Management Co by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $74.91 payable to JC Real Estate Management Co by way of cashier’s check issued by Wells Fargo Bank on April 11th 2014
- $3,798,629.63 payable to Carlos Wanzeler by way of cashier’s check issued by Wells Fargo Bank on April 3rd 2014
- $34,615,900 seized from i-Payout/International Payout
- $4,561,874.25 seized from Pro Pay, Inc.
- $10,536,667.55 seized from Base Commerce LLC
- $98,419.02 seized from a Bank of New England account held in the name of TelexFree
- $421,115.17 seized from Commerce Bank accounts held in the name of Brazilian Help Inc.
- $129,087.84 seized from a Digital Credit Union account held in the name of Above & Beyond the Limit LLC
- $10,643 seized from a Middlesex Savings Bank account held in the name of Cleaner Image Associates
- $104,988.64 seized from a Middlesex Savings Bank account held in the name of James and Kristin Merrill
- $2,487,204.68 seized from a PNC Bank account held in the name of TelexFree Financial
- $601,608.61 seized from a Wells Fargo Bank account held in the name of TelexFree Financial
- $71,450.82 seized from a Wells Fargo Bank account held in the name of TelexFree Financial
- all funds deposited into accounts with Infinex Financial Group,
Massachusetts Financial Services and Waddell & Reed held in the name
of TelexFree
- all funds deposited into accounts with Waddell & Reed held in the name of James and Kristin Merrill
- all funds deposited into accounts with Wells Fargo Advisors LLC held in the name of Katia H. Barbosa (aka Katia Wanzeler)
- approximately $1,159,847.52 payable to TelexFree by way of cashier’s
checks that were turned over to the United States around May 9th 2014
- $16,343 seized from TelexFree related properties on April 15th and April 18th
All in all, a whopping $96.1 million of specified funds appear on the
indictment, with the grand jury acknowledging that there are likely to
still be other funds and assets subject to forfeiture.
Speaking of assets, in addition to the $96.1 million, a total of 30
real estate properties, six luxury cars and two boats are subject to
forfeiture.
It is believed these properties, cars and boats all belong to Carlos Wanzeler. US regulators have previously referred to a “real-estate empire” Wanzeler built from funds he withdrew from TelexFree.
Wanzeler also used significant funds to build
a “real estate empire”, which he acquired through a multitude of money
laundering corporations in his name. All in all, Wanzeler pumped $6.3
million into 34 properties during July 2012 and February 2014.
Wanzeler also spent stolen funds on two
Ferrari F340 Spyders, a Porsche, three BMWs, a Toyota Highlander and
three boats (including a 40ft yacht).
An indictment, in the common law system, is a formal accusation that a person has committed a crime.
In jurisdictions that maintain the concept of
felonies, the most serious criminal offence is a felony; jurisdictions
that lack the concept of felonies often use that of an indictable
offence—an offence that requires an indictment.Historically, in most common law
jurisdictions, an indictment was handed up by a grand jury, which
returned a “true bill” if it found cause to make the charge, or “no
bill” if it did not find cause.Indictable offenses are normally tried by jury, unless the accused waives the right to a jury trial.Although the Sixth Amendment mandates the
right to a jury trial in any criminal prosecution, the vast majority of
criminal cases in the United States are resolved by the plea-bargaining
process.
I haven’t seen anything from Merrill indicating he’s waived the right
to a jury trial (Wanzeler is still hiding out in Brazil), so one would
assume a jury trial date being set is what happens next. When that might
be though I have no idea (lawyers?).
The possibility of a plea-bargain is interesting, especially when one
considers Merrill might be a little raw at having been ditched by his
partner in crime and each indictment count carries a maximum 20 year
jail penalty.
Once the whole “we’re innocent and TelexFree wasn’t a Ponzi scheme
facade” is dropped, who knows what might come out in the wash. And with
Wanzeler seemingly determined to live off whatever he’s laundered away,
nothing he says through his various proxies is likely to be taken
seriously.
That leaves the ball entirely in Merrill’s court. And if he’s truly
the family man his wife and friends portray him to be, he’s likely going
to want to minimize his jail time as much as possible.
Meanwhile in the immediate aftermath of his indictment, the Wall Street Journal report that prosecutors have issued a federal arrest warrant for Wanzeler.
Things could get very interesting indeed.
