Thursday Night Open Thread
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As Regulators Closed In, TelexFree Execs Scrambled To Move Assets
It reads like a spy thriller you would expect out of Hollywood. As authorities closed in on a massive fraud, one of the company's top executives sought to elude a raid on the company's headquarters by walking out the front door with nearly $40 million in cashier's checks concealed in his briefcase. Except this series of events actually occurred - albeit not as successfully as a Hollywood story might pan out.
Earlier this week, both the Securities and Exchange Commission (the "Commission") and Massachusetts securities regulators filed civil fraud charges against TelexFree, LLC and several related entities, alleging the operation was a massive pyramid and Ponzi scheme that had raised at least several hundred million dollars from investors worldwide. The companies, which filed bankruptcy the beginning of the week, were also the subject of an asset freeze by the Commission in an effort to prevent the dissipation of investor funds.
On Tuesday morning, the same day civil charges were filed against TelexFree, federal authorities executed a search warrant on the company's Marlborough headquarters. In a sworn statement filed by a Commission attorney, the following events were detailed. During the course of the search, sheriff's deputies noticed that a man named Joseph H. Craft was attempting to remove a laptop and laptop bag from an office, claiming they were personal items. Craft claimed he was a "consultant" helping TelexFree file for bankruptcy.
However, deputies informed Craft that he would not be permitted to remove his "personal items" from the premises, and subsequently searched the bag. During the subsequent search, no "personal items" ere discovered. Instead, nearly $40 million in recently-issued cashier's checks were discovered. These included (i) multiple cashier's checks totaling over $25 million payable to TelexFree's current President; (ii) a $2 million cashier's check to a TelexFree principal's wife; and (iii) a $10.39 million cashier's check to a TelexFree subsidiary. With the checks bearing issue dates of April 11, 2014, just three days before TelexFree would declare bankruptcy, the checks likely served as a source of liquidity for insiders gearing up for possible civil and criminal charges.
After authorities discovered the cashier's checks, it also turned out that Craft was not being forthright about his occupation. Rather than a lowly "consultant" assisting with the company's bankruptcy, Craft was actually the Chief Financial Officer of TelexFree.
Meanwhile, recently-appointed Chief Executive Officer James M. Merrill, to whom more than half of the cashier's checks discovered in Craft's possession had been payable to, was also trying to ensure he had access to unfrozen funds. The SEC Declaration recounted a conversation with a representative of Waddell & Reed, where Merrill maintained a brokerage account, revealing that Merrill had placed an unsolicited order to sell $1.15 million of his mutual fund holdings on the same day of the TelexFree raid.
A copy of the SEC's Declaration is below:
Telex Free Declaration
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"'Kill switch' may be standard on U.S. phones in 2015"
From CNN.com: The "kill switch," a system for remotely disabling smartphones and wiping their data, will become standard in 2015, according to a pledge backed by most of the mobile world's major players. . . . Advocates say the feature...
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"Critical reflections on the Cantu commutation ... aka why some federal prosecutors perhaps deserve to be demonized"
It's hard not to agree with Doug Berman at Sentencing Law & Policy on this one. In part: The more I reflect on the typo-correction sentence commutation of federal prisoner Cesar Huerta Cantu (basics here), and especially after re-reading this...
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What's the Biggest Problem in the Criminal Justice System?
Is it that we've locked up to many criminals, or that we have too much crime?Congressional backers of slashing mandatory minimum sentences plainly believe the former. Their main slogan is "incarceration nation," and they claim there's a "bi-partisan consensus" to...
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Congrats to Chelsea Clinton and Husband Marc
Chelsea Clinton announced today she and husband Marc Mezvinsky are expecting a child.
Hillary and Bill are of course, excited. Hillary tweeted:
“My most exciting title yet: Grandmother-To-Be!”
The new addition to the family...
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CPL § 210.25
A Queens Criminal Lawyer said that, the issue relates to the remedy to be imposed for the improper joinder of counts in an indictment. Defendant moves to dismiss the indictment as a result of the misjoinder of certain counts, namely,...
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Memorandum in Support...cont
HIV related testing of the defendant is mandated. The criminal defendant has been convicted of a felony defined in Penal Law Article 130, and the person making the request fits the statutory definition of "victim". She is the person...
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Should Prez Obama create a "Presidential Commission on Mass Incarceration"? Who should be on it?
The questions in the title of this post are prompted by one of the executive actions suggested earlier this week the Brennan Center for Justice in this new report titled "15 Executive Actions to Overcome Government Dysfunction." Notably, as listed...
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Porsha Williams charged with battery after taping RHOA episode
A high profile criminal case from Fulton County is making the news across the country. A star of the television series “Real Housewives of Atlanta” has been charged with battery related to an alleged incident that occurred in March while...
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CPL 440 motion
On 24 May 2006 defendant JG, a lawful permanent resident of the United States since 2005, but a native citizen of the Dominican Republic was alleged to have been caught by detective R with cocaine possession and selling the same...
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19-year-old Columbus Man Denied Appeal of Conviction and Sentencing
A 19-year-old Columbus, OH man who was convicted in July of this year on charges of felonious assault, aggravated robbery, aggravated trafficking in drugs, and other charges has had his conviction and sentencing appeal denied by the Court of Appeals of Ohio Fourth Appellate District, according to an article at Logan Daily. Warren Love, the […]
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Detroit Firefighter Charged with Second-Degree Murder Headed to Trial
In February we wrote about the case of Terrill Hardaway, a 35-year-old Detroit Firefighter charged with second-degree murder in the 2012 shooting death of Tony Jackson. Now, Hardaway is headed to trial and is scheduled for a Circuit Court arraignment on April 29, according to news reports at Mlive.com. Hardaway allegedly went to a bar […]
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Southeast Queens DUI Crash Results in Death of Passenger, Arrest of Roosevelt Woman
On Monday April 14, 28-year-old Sharlene Numa of Roosevelt, NY was arrested after causing a crash that resulted in the death of her passenger, 29-year-old Kendall Heard of Freeport. Numa was allegedly intoxicated at the time of the crash, and charged with DWI, manslaughter, and vehicular manslaughter according to CBS New York. The accident occurred […]
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Men with ties to Armenian Power gang convicted of fraud and extortion
Central California -- On Thursday three men associated with the Armenian Power street gang were convicted in a massive racketeering and extortion case, which included charges related to debit card skimming at 99 Cents Only stores in Southern California. Mher...
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TelexFree Asks Bankruptcy Court To Eliminate Promoter Obligations
On the date it filed bankruptcy in a Nevada federal court, and just days before Massachusetts regulators and the Securities and Exchange Commission accused the company of being a massive pyramid and Ponzi scheme that had raised at least hundreds of millions of dollars from investors worldwide, TelexFree LLC filed a rather innocuous-sounding motion to "Authorize the Debtors to Reject Certain Executory Contracts Nunc Pro Tunc As Of The Petition Date." Cloaked in bankruptcy parlance, the title of the motion holds little meaning to the estimated hundreds of thousands of "promoters" that, until recently, were promised lucrative returns for placing daily advertisements and recruiting new investors.
However, a casual read of the Motion makes clear that the company accused by regulators of being an "egregious" pyramid scheme seeks now to use the Bankruptcy Court's power to eliminate the obligation to pay accrued compensation likely totaling hundreds of millions of dollars to "promoters" - under the theory that elimination of these obligations will allow the company to "ultimately prove successful and profitable." Ironically, one of the chief concerns cited by TelexFree related to questions "raised as to whether the Original Comp Plan is compliant with law, which jeopardized the Debtors' business."
Background
The Motion was filed on April 13, 2014 - the same day that TelexFree and two of its affiliates filed for bankruptcy in the Nevada bankruptcy court. While TelexFree's main business centered on the sale of its voice over internet protocol (“VoIP”) program, 99TelexFREE, the company also operated a passive investment program. By the terms of the previous compensation plan, an investor making an initial investment of either $289 or $1,375 would be required to so spend several minutes per day in an "effortless" path to astronomical gains - at least 200% per year. These massive returns quickly resulted in a scenario where obligations to promoters drastically outpaced company revenues - indeed, according to the Commission, this compensation program racked up more than $1.1 billion in obligations to promoters.
As the Commission recognized, the $1.1 billion in promoter obligations was 100x larger than the $1.1 million realized in revenue from the sale of 99TelexFREE. In March 2014, TelexFree announced a drastic revamp to its compensation plan. Rather than simply place a daily advertisement and earn $20 per week on a $289 investment, the new compensation plan effectively required the purchase or sale of five $49.90 VOIP packages in order to be eligible for a return. As BehindMLM recognized, the compensation plan suddenly shifted from previously allowing the passive investment program to function independently of the VoIP product to now integrating the two programs and counting on the viability of the VoIP product as a standalone product.
The Motion
The Motion positions TelexFree as a "telecommunications business that uses multi-level marketing to assist in the distribution of voice over internet protocol telephone services." Touting 99TelexFree, the Motion claims that customer usage increased each month since its introduction in 2012. For the first time, the Motion disclosed that TelexFree has "over 700,000 promoters" worldwide, and referenced the recent discontinuation of its compensation plan in favor of a revised compensation plan. However, the "discretionary" payments owing to promoters under the original compensation plan soon allegedly "became a substantial drain on the Company's liquidity," and the company soon ceased making those payments prior to filing bankruptcy.
Despite experiencing "exponential" growth in revenue (which it claimed was over $1 billion), TelexFree claimed that it filed Chapter 11 bankruptcy due to "substantial asserted liabilities" against the company due to previous compensation arrangements. Citing its belief that the soon-to-be released TelexFree mobile app and other products would propel the company to profitability, the Motion sought court approval to reject "all agreements between the debtors and the promoters under both the Original Comp Plan and the Revised Comp Plan." According to the Commission, this included at least $174 million in requests for payment by promoters submitted after the change in the compensation plan.
Of note, the Motion takes great pains to characterize the relationships between the promoters and the company as contractual, reciting a number of obligations that each owed one another. While the company's obligations primarily consisted of paying the promoters, the promoter's obligations were characterized as adhering to the rules, agreeing to receive messages in their inboxes, and providing true and accurate information - primarily passive obligations.
The likelihood of success for the Motion is unknown. Indeed, a case cited to in the Motion specifically cautions that such a "business decision" should not be granted if the decision was the product of "bad faith, whim, or caprice." In re Trans World Airlines, Inc., 261 B.R. 103, 121 (Bankr. D. Del. 2001). One bankruptcy authority recently recognized the difficulty the company would face in trying to discharge its obligations to creditors, noting the Bankruptcy Code's prohibition under 11 U.S.C. 523 against the discharge of debts arising from the debtor's bad acts:
1) debts arising from fraud by the debtor as a fiduciary, embezzlement, or larceny; (2) debts obtained through false pretenses, false representations, or actual fraud; (3) consumer obligations – credit card debts and luxury goods – owed to a single creditor over a certain threshold; and (4) willful and malicious injury caused by debtor to another’s property.
While in a vacuum the request might not appear as questionable, the recent allegations by Massachusetts regulators and the Commission paint a picture of widespread fraud - indeed, the recently-appointed Chief Financial Officer of TelexFree was caught trying to leave the company's headquarters with nearly $40 million in cashier's checks after federal authorities raided the office. Moreover, the Commission alleged that approximately $30 million has been transferred in the last 5 months to company principals and related entities.
There has been no ruling as of yet on the Motion.
Ponzitracker coverage of TelexFree to-date is here.
The Motion is below:
Motion to Reject Certain Exec Ks
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James Wilder Jr., Former Florida State Running Back, Arrested for Driving on Suspended License
On Sunday April 13, former Florida State running back James Wilder Jr. was arrested on a bench warrant in connection with a citation he received in March in Tampa for driving with a suspended driver’s license with knowledge. He was pulled over and arrested in Tampa just before 7:30 p.m. and released approximately five hours […]
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Kentwood Man Charged with Producing, Distributing Child Pornography via Skype
Earlier this month, a Kentwood man was arrested for allegedly producing child pornography and using Skype to distribute it on the Internet, according to a news article at Mlive.com. 28-year-old Clint Andrews Williamson is accused of sexually assaulting a 2-year-old relative. Williamson has been charged with one count of distributing child pornography over the Internet, […]
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67-year-old Taylor Man Charged with Multiple Sex Crimes
A Michigan man has been charged with 35 crimes connected to the alleged sexual assault of four teenage girls between the ages of 13 and 15, according to a news article at Mlive.com. 67-year-old Benny R. Grimes of Taylor has been charged with multiple counts of child sexual abusive activity, first- and second-degree sexual assault, […]
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What information should I collect from the other driver after a car accident?
The moments after a car accident are important to collect information from the other driver. Asking the right questions and following the right procedure can make a big difference in how your case is handled.Some questions you should ask the other driver at the scene of your accident are:Do you need medical help? Don’t assume that just because you see no injury that no injury exists. If the driver can’t speak or seems unstable, call 911 for an ambulance. If uncertain, call 911.Did you call the police? You must do so if there is property damage to a vehicle preventing it from being driven, if there are injuries, or if there is damage to other property like road signs, etc. You can obtain a copy of the police report later.Do you have insurance and if so, what is the insurance company and policy number?What is your contact information, meaning your address and phone number?What state issued your driver’s license?Is your car registered in that state?Who owns this car?Are you currently performing job duties? If so, the driver’s employer may be liable for damages. The above questions are inspired in part by state law, specifically Pennsylvania Motor Vehicle Code §3744, Duty to Give Information and Render Aid. The law requires those involved in an accident stop, exchange information and render aid, and that occupants of the car provide pertinent information if the driver can’t.Also be sure to jot down the license plate number as well as a general description of the vehicle, e.g., make, model, color, number of doors, and any other pertinent information.If there are witnesses, ask for their contact information so you, your attorney, or the police can contact them later to get a statement regarding the cause and circumstances of the accident.Other On-the-Scene TipsStay polite and calm to avoid confrontation. If the other driver threatens you or you feel uneasy, call the police and explain the situation even if you don’t have any injuries or damages.Avoid making any statements beyond the simple facts of the case. Insurance companies are notorious for turning the most seemingly unimportant utterances into proof of fault.Call the police if the other driver flees. Fleeing the scene violates Pennsylvania Motor Vehicle Code §3744. The other driver may be have an outstanding warrant or be in the process of committing a crime, or have no insurance. It’s important to inform police of a runaway driver.Avoid stepping into traffic. Only move your car if it presents a danger to other drivers and it is safe to do so. Use this time to take photos of the scene with your cell phone camara.Get Help from Saile & Saile after a North East Philly AccidentLearn more about your rights under Pennsylvania state law, including whether or not you can collect damages. Saile & Saile LLP can assist you with your car accident claim. Just call 215-717-8471 to set up your free consultation so you can get started on your case.
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