TelexFree: SEC Files Opposition to Faith Sloan’s Blathering

Below are some points made in today’s SEC Opposition filing.  I have uploaded the full document onto the Files website.

PLAINTIFF’S OPPOSITION TO DEFENDANT SLOAN’S MOTION TO DISMISS

Plaintiff Securities and Exchange Commission (“the Commission”) hereby opposes the motion filed by defendant Faith R. Sloan [Docket #154] to dismiss the Amended Complaint.

SUMMARY

For purposes of this motion, the Court must accept all factual allegations in the Amended Complaint as true and must draw all reasonable inferences in the Commission’s favor.  Failing to recognize the applicable legal standard, Sloan’s brief [Docket #155] blithely ignores most of the Commission’s allegations against her, while offering self-serving denials of the rest. She also claims, without any legal support, that she cannot be held accountable for statements on her own websites. When measured by the correct legal standard, the Commission’s allegations are more than sufficient to state a claim for securities fraud against Sloan. Accordingly, the Court should deny Sloan’s motion to dismiss.

Below are a few more of the arguments the SEC makes in this filing:

II. The Commission Has Stated a. Claim that Sloan Committed Securities Fraud by Promoting the TelexFree Investment Program

First, Sloan argues (on p.2) that the Commission has not identified her fraudulent conduct
with sufficient particularity for purposes of Rule 9{b) of the Federal Rules of Civil Procedure.
However, she ignores the Commission’s identification of specific public statements about the
TelexFree investment program on her websites and in her promotional videos. [A.C., ¶~104-
105.] She also complains (on p.2) that the Commission has not alleged that she personally
“composed the comments attributed to her” on her websites. However, it is well established that
allegations about statements on a website are sufficient under Rule 9(b) to support a fraud claim
against the operator of the website, unless the statements are specifically attributed to someone
else.

Second, Sloan asserts (on pp.2-3) that her statements about the TelexFree investment
program were accurate. However, she ignores the Commission’s allegations —which must be
taken as true —that her statements were materially misleading, and that her promotional activities on behalf of TelexFree were fraudulent and deceptive, because she failed to disclose that the TelexFree investment program was a Ponzi and pyramid scheme that was destined to collapse.

Third, Sloan argues (on p.3) that the Commission has not alleged that she “participated in
their [the other defendants] ill-gotten gains.” However, she ignores the Commission’s allegation
—which must be taken as true —that she received more than $160,400 from TelexFree investors
and $51,000 from TelexFree itself. [A.C. ¶120.]

Fourth, Sloan argues (on p.3) that the Commission has not alleged that she “knew” (original emphasis) that the activities of the other defendants were unlawful. However, the Commission need not prove actual knowledge in order to prevail against Sloan. Proof of scienter is required to establish violations of Section 10(b) of the Exchange Act and Rule l Ob-5 and ‘Section 17(a)(1) of the Securities Act, and in this Circuit, scienter includes recklessness. SEC v. Ficken, 546 Fad 45, 47-48 (ls` Cir. 2008). Negligence is sufficient to establish liability under Sections 17(a)(2} or 17(a)(3) of the Securities Act. Id. at 47. Further, Sloan ignores the Commission’s allegations —which must be taken as true —that: (1) she knew investors were strongly encouraged to recruit new investors and were not required to sell the VoIP service; (2) she had access to information about the AdCentral investments and VoIP service purchases by members of her network; and (3) TelexFree’s revenues from VoIP sales were barely 0.1% of the amount needed to satisfy its obligations to AdCentral investors. [A.C., ¶¶106, 120.] Given these allegations, the Commission is entitled to the reasonable inference that Sloan knew, was reckless in not knowing, or was negligent about the facts that: (1) virtually all of TelexFree’s revenue consisted of funds received from AdCentral investors; (2) the revenue from retail VoIP sales was a tiny fraction of the amount needed to pay investors; (3) the company was using funds from later AdCentral investors to pay earlier investors; and thus (4) TelexFree was a Ponzi and pyramid scheme.

Fifth, Sloan offers (on pp.4-5) the “truth” about her relationship with TelexFree. Once again, she misunderstands the legal standard for a motion to dismiss. The Court must take the Commission’s allegations as true and must ignore matters outside the Amended Complaint.
McGrath, 2004 WL 2047891 at *3; Bank ofAmerica, 769 F.Supp.2d at 39. Sloan’s self-serving
assertions are simply irrelevant for purposes of her motion.

III. The Court Should Maintain the Preliminary Injunction and Asset Freeze as to Sloan

Sloan argues (on 5-6) that the asset freeze should be dissolved as to her or else she will suffer “irreparable harm”. However, as noted in the Commission’s opposition to her motion to release funds (Docket #162), she has not yet complied with the Court’s order to identify her assets. If Sloan has a legitimate source of income, it would be appropriate to exclude that income, going forward, from the asset freeze. The Commission has assented to similar arrangements with several of the other defendants. Absent such a showing, however, the Court must presume that the funds in Sloan’s possession are proceeds from the TelexFree fraud and should be preserved for distribution to investors after a decision on the merits.