TelexFree: Faith Sloan Files A Response and Amended Response

Today, Faith R. Sloan, through her attorney C. Peter R. Gossels, filed her response to the Plaintiff’s Opposition to her Motion to Dismiss.  It starts off with this:

“the Plaintiff argues that “the Court must accept all factual allegations in the Amended Complaint as true and must draw all reasonable inference in the Commission’s favor.”

What the Commission ignores is that its Amended Complaint must plead sufficient facts to render its entitlement to relief plausible, and not merely possible.”

A bit farther down the filing:

“Ms. Sloan submits that the Plaintiff has not pleaded sufficient facts to render its entitlement to relief plausible, because it has not pleaded sufficient facts to prove cogently that Ms. Sloan made any material misrepresentations in connection with the sale of a security or that she consciously intended to defraud anyone or acted with a high degree of recklessness in selling a security.”

Then, we have a few references to the Amended Complaint (AC):

¶ 103 alleges that Ms. Sloan was a “prominent promoter of TelexFree”, a “great leader”, that she operated websites touting TelexFree and appeared in promotional videos posted on YouTube. Although Ms. Sloan operated TelexFreepowerprogram.com and was called a “great leader” by the Defendant, Steve Labriola, during a corporate phone call, Plaintiff’s allegations in ¶ 103 do not constitute a violation of Section 10(b) of the Exchange Act in the light of ¶ 81 of Plaintiff’s Amended Complaint, because promoters like Ms. Sloan were “not permitted to use marketing materials that … had not been approved by the (TelexFree and its owners)”.

This filing concludes with this:

As we have pointed out above, the Plaintiff has failed to plead sufficient plausible facts to render it entitled to the relief it seeks against Ms. Sloan.

What utter nonsense.

I put the “Amended” response next to the one filed first; I can see no material difference, unless their sole point was to show the same thing happened with the SEC’s Complaint, namely,  their Amended Complaint has nothing materially different than the original Complaint?  Who knows with these clowns?

BehindMLM: Brazil’s SEC says TelexFree is “undoubtably a pyramid scheme”

Brazilian SEC: “No doubt TelexFree is a pyramid scheme”

telexfree-logoAfter a flurry of action these past three months as US regulators took action against TelexFree, things have finally settled into a lull.

One owner, James Merrill, is currently out on bail and awaiting trial. The other, Carlos Wanzeler is on the run in Brazil. Regulators boned his wife’s attempts to flee to the US to join him, and Wanzeler remains cut off from his family.

The US Trustee is currently investigating TelexFree, with the results expected to lay the foundation for possible bankruptcy fraud charges against the company at a later date.

One could argue that in the grand scheme of things, US regulators should have acted much sooner. Despite there being signs well in advance, I will say that these cases take time to build.

With the speed with which US regulators shutdown TelexFree, raided their offices, threw one owner in jail boned the other owner’s wife’s plans to leave the US, ongoing concerns over the pace of regulatory action in Brazil remain.

James Merrill, recently released on bail, has been left holding the bag after his partner-in-crime fled to Brazil. And at least one top promoter, who earned millions and sees himself as a victim, is also hiding out there.

Earlier this year it was hinted that the criminal case against TelexFree might be “resolved by mid-2014“.

With auditors Ernst & Young recently granted an extension to file their report though (due to the “complexity” of TelexFree’s business operations (read: fraud)), and then time granted for both TelexFree and the Acre Public Prosecutor’s Office to file replies, all of which then must be considered by a Judge before a ruling is made, that the case will be resolved anytime soon seems unlikely.

The end of 2014 might be more realistic, but with the ongoing fluidity of regulatory action against TelexFree in the US, even that might be a stretch.

Not helping the existing impression that regulatory justice in Brazil moves slower than a quadriplegic turtle, comes the revelation that the Brazilian SEC concluded TelexFree was “undoubtedly a pyramid scheme”.

Wait for it… all the way back in January 2013.

[Continue reading…]

Zeek Rewards: Receiver Replies to PCI

Today, the Receiver filed his reply to to nonparty Plastic Cash International, LLC’s (“PCI”) Response to the Receiver’s Motion to Authorize First Interim Distribution, Establish Record Dates, and Set First Interim Distribution [Doc. 210] (the “Motion”).

In the filing, the receiver says:

PCI has asserted a Claim in the amount of $14.9 million (the “PCI Claim”)—the second largest pending Claim of any type filed in this case 2—on account of its alleged damages arising from the ZeekRewards Ponzi Scheme.

2  A $30 million Claim has been asserted by an Affiliate that the Receivership Team believes invested a total of $10.00 in the ZeekRewards Ponzi Scheme. A Claim Determination that denied the $30 Million Claim is currently pending.

TelexFree: Another Motion to Dismiss; Labriola Answers Amended Complaint; Motion to Modify Merrill’s May 9th Order;Trustee’s Motion for Extension of Time

Another flurry of activity on the 14-cv-11858 Civil docket today.  Here’s the rundown:

Doc 182 and 183 – Defendant Randy Crosby moves to dismiss the causes of action brought against him with prejudice for the reasons set forth in his accompanying memorandum of law.

The Memorandum in Support (Doc 183) postulates this:

There is no apparent rationale for why these four promoters were singled out from the thousands of promoters of TelexFree who believed it to be a thriving and legitimate business enterprise.

Neither is it evident why Mr. Crosby would be named in the Amended Complaint rather than treated as a victim himself, which more aptly describes his status.

The motion goes on to detail all of the other things they say the government cannot prove that Crosby knew or did.

Doc 186 – Steven Labriola answers the Amended Complaint, using much the same arguments as previous answers. I will not post all of his arguments here, you may check them on the Files website.

Doc 187 – This Motion seeks to Modify the May 9th order for James Merrill. The Motion is asking for an Order for the following:

The Securities and Exchange Commission (“Commission”) hereby moves, and defendant James M. Merrill hereby assents, to allow Kristen Merrill to remove the passports of James M. Merrill, Kristen Merrill, Curran Merrill, Caroline Merrill, and Jack Merrill from a safe deposit box at the Middlesex Savings Bank branch in Southborough, Massachusetts, for the sole purpose of Kristen Merrill immediately turning over such passports to agents of the Department of Homeland Security.

Doc 188 – This Motion is from the Chapter 11 Trustee, Stephen B. Darr, asking for an Extension of time (to July 2nd) in which to respond to the Amended Complaint.

I have uploaded these onto the Files Website, case 14-cv-11858-NMG

TelexFree: Carlos Wanzeler Answers Amended Complaint; Santiago De La Rose Files Motion to Dismiss Amended Complaint; James Merrill’s Bail Hearing is Tomorrow

Carlos Wanzeler Answers the SEC’s Amended Complaint

Today we have a response to the Amended Complaint by none other than international fugitive from justice, Carlos Wanzeler, who fled to Brazil to avoid responsibility for his actions. Why he decided to answer the Civil Complaint raises more questions, in some respects.

This response is pointed at each paragraph listed in the Amended Complaint and without looking at that amended complaint, this response has little meaning. For example, we have this:

Defendant Carlos N. Wanzeler (“Wanzeler”) hereby responds to the numbered paragraphs of Plaintiff’s Amended Complaint as follows:

PRELIMINARY STATEMENT

1. Wanzeler admits that TelexFree is a multi-level marketing company that sells telephone service plans that use “voice over internet” (“VoIP”) technology and that the company has an office in Marlborough, Massachusetts. Wanzeler denies the remaining allegations contained in this paragraph.
2. Wanzeler denies the allegations contained in this paragraph.
3. Wanzeler denies the allegations contained in this paragraph.
4. Wanzeler admits that TelexFree filed for bankruptcy protection on April 13, that the Massachusetts Securities Division filed an enforcement action on April 14, that this federal enforcement action was filed on April 15, that a search warrant was executed at the TelexFree offices in Marlborough, Massachusetts on April 15, and that a federal criminal complaint was filed on or before May 9. Wanzeler denies the remaining allegations contained in this paragraph.
5. Wanzeler denies the allegations contained in this paragraph.
6. Wanzeler states that the Plaintiff will be unable to prove any violations of the federal securities laws as alleged and is not entitled to the relief requested.

The majority of Wanzeler’s responses are this:  Wanzeler denies the allegations contained in this paragraph.

Farther down the “answer”,  Wanzeler states that the Plaintiff is not entitled to any relief since its claims are unfounded and legally unsupportable.

The filing ends with this:

ADDITIONAL AND/OR AFFIRMATIVE DEFENSES

First Defense
The Amended Complaint fails to state a claim upon which relief may be granted.
Second Defense
The allegations of the Amended Complaint do not state legally supportable claims under
the federal securities laws.
Third Defense
Plaintiff’s claims are barred, in whole or in part, by the applicable statute of limitations.
Fourth Defense
The Amended Complaint is subject to dismissal for lack of personal jurisdiction and
insufficient service of process.
Fifth Defense
Plaintiff’s claims are barred, in whole or in part, by the doctrines of laches, waiver, estoppel and/or unclean hands.
Sixth Defense
Defendant hereby reserves the right to file such additional defenses as may become apparent during the course of discovery.

Wherefore, having fully answered Plaintiff’s Amended Complaint, Wanzeler requests that it be dismissed with prejudice; that judgment be entered for Wanzeler; and that Wanzeler be awarded his costs, expenses and attorneys’ fees herein. All allegations not specifically admitted are denied.

Yeah, let’s see how quickly the Judge dismisses the case with prejudice and orders all your fees paid.

 

Defendant Santiago De La Rosa’s Motion to Dismiss Amended Complaint

This nonsensical filing asks the Court to dismiss the two causes of action brought against him, also with prejudice, and requests Oral Arguments per Local Rule 7.1(D); also files is a Memorandum of Law in Support of this Motion, now available on the Files website.

 

James Merrill’s Bail Hearing

In the Criminal case, 14-mj-4172-DHH, we have this docket entry:

ELECTRONIC NOTICE OF HEARING as to James Matthew Merrill; Bond Hearing set for 6/19/2014 10:00 AM in Courtroom 1 – Worcester before Magistrate Judge David H. Hennessy.  (Entered: 06/18/2014)

I will keep an eye on the docket tomorrow to see if Merrill is released.

 

 

 

 

TelexFree: More On Merrill’s Pretrial Release

Below are a few of Judge Hillman’s reasons for releasing James Merrill from custody (something I would not have done, but I am not a Federal District Judge):

In making the determination as to whether “any condition or combination of conditions will reasonably assure the appearance of the [defendant] as required and the safety of any other person and of the community,” the Court must consider the following factors:

(1) the nature and circumstances of the offense charged, including whether the offense is a crime of violence or involves a narcotic drug
(2) the weight of the evidence against the person;
(3) the history and characteristics of the person, including:

(A) the person’s character, physical and mental condition, family ties, employment, financial resources, length of residence in the community, community ties, past conduct, history relating to drug or alcohol abuse, criminal history, and record concerning appearance at court proceedings; and
(B) whether, at the time of the current offense or arrest, he was on probation,
on parole, or other release pending trial, sentencing, appeal, or completion of sentence for an offense under Federal, State or local law; and

(4) the nature and seriousness of the danger to any other person or the community
that would be posed by the person’s release….    18 U.S.C. § 3142(g).

To cover the Bond requested in the amount of  $900,000:

Merrill and his wife have offered their home, which has equity of approximately $350,000, as security for his release. In addition, Merrill’s sister and her husband have offered to pledge their family home, valued at $330,000, and a family friend has offered to post his home on the Cape, valued at $264,000. Merrill has also offered to submit to any conditions set by the Court, including home detention, electronic monitoring, the surrender of his passport, the surrender of his wife’s passport, and daily telephone reports to Pretrial Services.

And here are the Conditions to which Merrill must adhere:

Conditions

In addition to the standard conditions of release, the release of the Defendant is subject to
the following conditions:

(1) The Defendant promises to appear at all proceedings as required and to surrender for
service of any sentence imposed.
(2) The Defendant is placed in custody of: Kristen Merrill of Ashland, Massachusetts, who
agrees (a) to supervise the Defendant in accordance with all conditions of release, (b) to
use every effort to assure the appearance of the Defendant at all scheduled court
proceedings, and (c) to notify the court immediately in the event the Defendant violates
any conditions of release or disappears.
(3) The Defendant shall:

(a) Report to Pretrial Services in person and/or by telephone (508-929-9940), as
directed.
(b) execute a bond in the amount of $900,000 secured by the following designated property:

(i) The Defendant’s home located in Ashland, Massachusetts
(ii) The home of the Defendant’s sister Julie Merrill Wisell and her husband
located in Sutton, Massachusetts
(iii) The property located at 60 Meredith Drive, East Falmouth, Massachusetts held in trust by Michael Mitchell

(c) post with the court the following indicia of ownership of the above-described
property: documentation as set forth in “Recommended Procedure for the Posting of Real Property as Security for Defendant’s Appearance Bond in Criminal Cases”
(d) surrender passport to Pretrial Services.
(e) obtain no passport or international travel documents of any kind.
(f) not leave the Commonwealth of Massachusetts without the prior approval of the Pretrial Services Office.
(g) maintain residence in Ashland, Massachusetts.
(h) avoid all contact directly or indirectly, with any persons who are or who may
become a victim or potential witness in the subject investigation or prosecution and any co-conspirators.
(i) refrain from possessing a firearm, destructive device, or other dangerous weapons.
(j) refrain from the excessive use of alcohol
(k) refrain from the use or unlawful possession of a narcotic drug or other controlled substances defined in 21 U.S.C. § 802, unless prescribed by a licensed medical practitioner.
(l) submit to any method of testing required by the Pretrial Services Officer for
determining whether the defendant is using a prohibited substance. Such methods may be used with random frequency and include urine testing, the wearing of a sweat patch, a remote alcohol testing system, and/or any form of prohibited substance screening or testing.
(m)participate in a home confinement program and abide by all the  requirements of the program including wearing an electronic monitoring bracelet at all times: Defendant shall be restricted to his residence every day from 8:00 pm to 8:00 am.
(n) refrain from obstructing or attempting to obstruct/tamper in any fashion, with the efficiency and accuracy of any testing or electronic monitoring which is required as a condition of release.

(4) The Defendant’s wife and children must agree to surrender their passports and agree not to seek new passports or international travel documents without prior written approval of the Court.

Conclusion

For the foregoing reasons, Defendant’s Motion to Revoke the Detention Order and for
Pretrial Release is granted. This case is remanded to Magistrate Judge Hennessey to issue an order consistent with this opinion.

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.

BehindMLM: Trustee Investigation Begins…….

TelexFree Trustee investigation begins, subpoenas incoming

telexfree-logoFantasies about a restructuring and return to business by TelexFree grow dimmer by the day, with news now that the TelexFree Trustee is investigating the company in earnest.

Filed on June 12th, Stephen Barr has asked Massachusetts Bankruptcy Court for permission to issue subpoenas on

  • PriceWaterhouseCoopers, LLP (former advisors to TelexFree)
  • William H. Runge (TelexFree’s Chief Restructuring Advisor) and his company Alvarez & Marsal (sic) North America, LLC (financial advisors to TelexFree)
  • Kurtzman Carson Consultants, LLC (TelexFree’s claims and noticing agent)
  • the law firm Gordon Silver (co-counsel to TelexFree)
  • the law firm Greenberg Traurig, LLP (co-counsel to TelexFree)

In addition to the issuing of subpoenas, Barr seeks to “obtain” [Continue reading…]

TelexFree: Faith R. Sloan Responds to SEC’s Opposition to Release Funds

In a response filed today, Faith R. Sloan repeats that she didn’t know anything about a TRO when she violated it. Her attorney had this to say:

The Defendant, Faith R. Sloan (“Sloan”), hereby responds to Plaintiff’s Opposition to her Motion to Release Funds for the following reasons:

1. Although Sloan had notified the SEC that she would not comply with Paragraph VI of the  Preliminary Injunction, because she was asserting her right against (possible) self incrimination
under the Fifth Amendment, she is now considering compliance with Paragraph VI based on her lawyer’s research and opinion that she may not be incriminating herself by identifying her assets.

2. Sloan has not violated the asset freeze:
In his “Third Declaration of Scott Stanley, Esq.” (Document 48-5), Stanley declared that he spoke with Sloan on April 17, 2014 on the telephone and told her that she had been named as a defendant in a Complaint filed against her by the SEC. When Sloan asked where she could find the Complaint, Stanley “walked her through the SEC website and to the location of the press release and complaint.” Nowhere in his Declaration does Stanley say that he informed Sloan that Judge Casper had entered a temporary restraining order against her on April 16, 2014.

And Sloan hereby swears that Stanley did not tell her that a temporary restraining order had been entered against her during his telephone conversation with her on April 17, 2014, nor did he provide or refer her to a copy of the content of that order.

As Sloan stated in her Verified Motion for Leave to File a Response (Document 130), the aforesaid temporary restraining order was never served on her, although the Plaintiff did send a copy of the Preliminary Injunction entered by the Court on May 8, 2014 (Document 88) to Sloan’s attorney on May 27, 2014 (the day after Memorial Day). Accordingly, none of the transactions cited by the Plaintiff as evidence that Sloan “repeatedly violated the freeze order” prove that Sloan violated that order, because they occurred before Sloan had actual notice of the
temporary restraining order and the Preliminary Injunction that the Court had entered against
her.

WHEREFORE, the Defendant, Faith R. Sloan, moves that the Court exercise his discretion to allow her Verified Motion to Release Funds (Document 156) lest she be denied her Constitutional right to due process of law.

I wonder if they really believe what they just said, considering the Declaration made by Stanley. Time will tell…..