TelexFree Owners, James M. Merrill and Carlos N. Wanzeler, Charged in $1 Billion Pyramid Scheme

James M. Merrill and Carlos N. Wanzeler, principals of TelexFree Incorporated and related entities, were charged in a federal criminal complaint, charging them with conspiracy to commit wire fraud.

Merrill, 53, of Ashland, Massachusetts, and Wanzeler, 45, of Northborough, Massachusetts, were charged in a one count criminal complaint filed in U.S. District Court in Worcester, Massachusetts. If convicted, each face up to 20 years in prison. Merrill was arrested by federal authorities and made an initial appearance in U.S. District Court in Worcester. A federal arrest warrant was issued for Wanzeler who is a fugitive.

United States Attorney Carmen Ortiz said, “The scope of this alleged fraud is breathtaking. As alleged, these defendants devised a scheme, which reaped hundreds of millions of dollars from hard working people around the globe.”

“I am very proud of the tireless efforts of my special agents. Investigating the flow of illicit money across U.S. borders and the criminal enterprises behind that money is one of our top priorities,” said Bruce Foucart, Special Agent in Charge of Homeland Security Investigations. “While pyramid schemes are nothing new, the potential scope of this case will hopefully serve as an educational lesson for all. The main point is clear—if it sounds too good to be true, it probably is.”

According to the complaint affidavit, TelexFree Inc. and TelexFree LLC (collectively, TelexFree) provided voice-over Internet protocol (“VoIP”) telephone services, for which customers can sign up via a website maintained by TelexFree. It is alleged that TelexFree was actually a pyramid scheme and that between January 2012 and March 2014, TelexFree purported to aggressively market its VoIP service by recruiting thousands of “promoters” to post ads for the product on the Internet. Each promoter was required to “buy in” to TelexFree at a certain price, after which they were compensated by TelexFree, under a complex compensation structure, on a weekly basis so long as they posted ads for TelexFree’s VoIP service on the Internet.

It is alleged that the ad-posting requirements were a meaningless exercise in which promoters cut and pasted ads into various classified ad sites provided by TelexFree that were already saturated with ads posted by earlier participants. According to the affidavit, TelexFree derived only a fraction of its revenue from sales of VoIP service—less than one percent of TelexFree’s hundreds of millions of dollars in revenue over the last two years. The overwhelming majority of its revenue—the other roughly 99 percent—came from new people buying into the scheme. TelexFree was allegedly only able to pay the returns it had promised to its existing promoters by bringing in money from newly recruited promoters.

On or about March 8, 2014, TelexFree announced changes to its compensation system. On April 14, 2014, Telexfree filed for bankruptcy. In its filings with the bankruptcy court, Telexfree stated, among other things, that it changed its compensation plan “because questions were raised” about the prior plan and that, after changing the plan, the “discretionary payments...quickly became a substantial drain on the company’s liquidity.”

On April 16, 2014, the Securities and Exchange Commission obtained a restraining order to freeze assets of Telexfree and eight related individuals. Since then, the U.S. Attorney’s Office has executed 37 seizure warrants for assets in the tens of millions of dollars.

It is further alleged that in 2013, TelexFree reported sales of $1.016 billion, while known sales of the TelexFree VoIP product represented less than 0.1 percent of TelexFree’s total revenues.

United States Attorney Ortiz, SAC Foucart and Vincent B. Lisi, Special Agent in Charge of the Federal Bureau of Investigation, Boston Field Division, made the announcement today. The case is being prosecuted by Assistant U.S. Attorneys Cory Flashner and Andrew Lelling of Ortiz’s Worcester Branch Office and Economic Crimes Unit, respectively.

If you believe that you are a victim of the alleged TelexFree Inc. scheme, please send your contact information to the following address: USAMA.VictimAssistance@usdoj.gov.