On May 6, 2014, a Federal bankruptcy judge based in Las Vegas, Nevada, ordered TelexFree Inc.’s bankruptcy to be moved from Nevada to Massachusetts.  The judge agreed to do so after government regulators argued that the company had no operations in Nevada so it was improper for the bankruptcy case to be tried in Nevada over its home state of Massachusetts.

What is TelexFree?

TelexFree, Inc., is a phone service company that also sponsored investment accounts for customers.  It operated principally in Massachusetts in the U.S., in South America (particularly in Brazil), as well as in the Dominican Republic.

However, the phone service apparently made up less than one percent of the company’s revenue.  TelexFree began to grow in earnest about two years ago.  The company grew dramatically as more and more customers utilized the phone service, many of whom also invested money in the company’s so-called investment program.  Early investors promoted the company as a great way to make money and encouraged friends and neighbors, principally Brazilian and Dominican immigrants in the Boston community, to invest.  However, the good times were short-lived.

A Pyramid Scheme?

The Secretary of State for Massachusetts and the U.S. Securities and Exchange Commission (SEC) have opened investigations into the business starting in spring 2014.  Federal agents even raided the offices in Marlborough two days after the company filed for bankruptcy.  Regulators soon thereafter froze the company’s assets.

Regulators believe that this company that offered investors an opportunity to make lots of money quickly off of small investments of a few thousand dollars each was a pyramid scheme.  In a pyramid scheme, a small group of initial “investors” create a phony investment plan that they then offer to unknowing and honest investors.  The new investors must pay in a certain amount of money to join the investment plan, but instead of putting the money into an investment, the crooked investors keep most of the money and give some of it back to the new investors to keep them hooked on the plan and to encourage them to seek out more investors.  It is called a pyramid scheme because the small group of initial, crooked investors (the top of the pyramid) receive huge payouts, and each successive group of investors receives a smaller and smaller payout.  The last investors (the bottom of the pyramid) usually lose all of the money them put in.  Pyramid schemes can last for years, but inevitably fail when the scheme either becomes too complex to manage or simply runs out of money.

In the case of TelexFree, Inc., regulators claim that the company may have taken $300 million from unknowing investors across the United States, with $90 million taken in Massachusetts alone.  A Brazilian court shut down the company’s Brazilian operations in 2013, ruling that it was in fact a pyramid scheme.

Regulators are now moving to coordinate the bankruptcy case, civil case, and criminal case against TelexFree, Inc., in Massachusetts to settle claims brought by duped investors and by the government.

Bankruptcy Questions?

Bankruptcy law is very complex and the outcomes of each case are extremely important to the debtor and creditors involved in each case. To answer more questions about bankruptcy law in Massachusetts, please contact the Law Office of Brian R. Lewis. We can help you understand the bankruptcy process, and advise you on the best course of action based on your specific circumstances.