The US Securities and Exchange Commission has asked a federal bankruptcy judge in Nevada to move the case of a Marlborough company accused of running a Ponzi scheme to a Massachusetts court.
TelexFree Inc. filed for Chapter 11 bankruptcy protection last week in Las Vegas, the day before regulators raided its Marlborough headquarters office. At the time, state and federal securities regulators were preparing civil fraud charges against the company and its principals for running an alleged pyramid scheme.
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In a court filing Wednesday, the SEC said the company’s bankruptcy petition in Nevada “appears to be a coordinated effort to avoid the Massachusetts courts.’’ TelexFree’s owners -- James Merrill and Carlos Wanzeler -- and employees live in Massachusetts, the SEC said in its memorandum. One third of the 30 largest creditors are located in the state as well, the SEC said; none reside in Nevada.
The company has no operations in Nevada, the SEC said, just “rent-a-space office in Las Vegas.’’
For the first time, the regulators also laid out publicly how they hope to proceed with the case on behalf of victims. The SEC said that if the company’s bankruptcy petition is ultimately allowed, regulators expect a liquidation of the business to be necessary. TelexFree is seeking a financial reorganization of the company.
The SEC said it may seek to establish a “distribution fund to recompense victims.’’ Those victims would “likely make up the large majority of the creditors, both in numbers and dollars,’’ the SEC said.
Securities regulators have alleged that TelexFree lured tens of thousands of people in the U.S. to put an estimated $300 million into the company. In Massachusetts alone, participants may have invested $90 million, according to Secretary of State William F. Galvin’s complaint against the company last week.
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Globally, participants may have been promised as much as $1 billion, Galvin said. The alleged scheme worked by attracting people to buy the company’s long-distance internet phone service, and then promising them large returns for promoting the service with friends, family and business associates.
People would open an account with $1,375, and earn $100 weekly payouts so long as they went to the company’s web site and clicked on boxes to approve five online ads per day. The company allegedly told them the purported ads would appear on consumer web sites, although dozens of alleged victims said they’ve never actually seen the ads.
Since the company was temporarily shut down by regulators last week, rumors have been circulating around the globe in e-mails, Youtube videos and Facebook postings about the TelexFree’s future. Thousands of alleged victims have been in the dark about how they might claim their losses.
In its court filing, the SEC said a potential distribution fund would come under the auspices of the US District Court in Boston, which is hearing the regulator’s civil fraud case against TelexFree and its principals. In a typical liquidation, TelexFree would be shut down and its assets disbursed to creditors, including victims. If a liquidation is ordered, the SEC argued, it should take place in Massachusetts, where the district court can coordinate with the bankruptcy court.
A spokeswoman for TelexFree did not immediately respond to a request for comment. Last week, the company said a Chapter 11 reorganization would let the company “protect TelexFree assets, quantify legitimate claims, restructure our operations, and establish a firm foundation for the future.’’
The company also said it believes the Chapter 11 process is “the most effective vehicle available to address the concerns of all constituencies, including the purported concerns of the state and federal agencies.’’ TelexFree said its “outstanding entrepreneurial opportunities’’ and benefits to customers “ultimately will be recognized and misunderstandings about our business model will be resolved.”
TelexFree is under investigation by the FBI and the US Department of Homeland Securities, as well as state and federal securities regulators.
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