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United States v. Merrill

United States District Court, D. Massachusetts

June 17, 2014

UNITED STATES OF AMERICA,
v.
JAMES MERRILL, Defendant.

MEMORANDUM OF DECISION ON DEFENDANT JAMES MERRILL'S MOTION TO REVOKE DETENTION ORDER AND FOR PRETRIAL RELEASE (Docket No. 33)

TIMOTHY S. HILLMAN, District Judge.

Introduction

On May 9, 2010, a Complaint issued charging James Matthew Merrill ("Merrill" or the "Defendant") with Conspiracy to Commit Wire Fraud in violation of 18 U.S.C. § 1349. The same day, Merrill appeared before Magistrate Judge David H. Hennessey for his initial appearance, and the government moved for detention pursuant to 18 U.S.C. § 3142(f)(2)(A) (Defendant is a risk of flight). A detention hearing was held before Magistrate Judge Hennessey on May 16, 2014.

On May 20, 2014 Magistrate Judge Hennessey orally entered an Order of Detention for Merrill after finding that the government had satisfied its burden of proof that no condition or combination of conditions would assure the Defendant's presence. Merrill filed a motion appealing that decision, asking this Court to revoke the detention order imposed by Magistrate Judge Hennessey and to grant Merrill pretrial release with whatever conditions the Court believes necessary. This Court conducted an evidentiary hearing on June 5, 2014 and has independently reviewed Magistrate Judge Hennessey's decision. As this Court finds that government has failed to meet its burden of proof that no condition or combination of conditions would assure the Defendant's presence, Merrill's motion is granted.

Facts

This case is part of an investigation by the Department of Homeland Security ("DHS") into a company called TelexFree, Incorporated ("TelexFree"), which started as Common Cents Communications in 2002. TelexFree was owned and run by Merrill and the co-defendant in this case, Carlos Wanzeler ("Wanzeler") (collectively, the "Defendants"). The government alleges that the Defendants operated TelexFree as a pyramid scheme from January 2012 through April 2014. TelexFree is a United States Corporation; it also operated in Brazil through a company called Ympactus which was owned by Merrill, Wanzeler, and another individual named Carlos Costa. TelexFree is also incorporated in Canada under the name TelexFree Canada. The directors of TelexFree Canada are Merrill, Wanzeler, and another individual named William Watson.

TelexFree provided "voice-over-internet-protocol" ("VOIP") telephone services, selling a product known as "99TelexFree" which allowed for unlimited international calling to at least 40 countries for the monthly flat rate of $49.90. The government does not deny that TelexFree is a real company that provided an actual service. Between January 2012 and March 2014, TelexFree marketed its VOIP service by recruiting thousands of "promoters" to sell the VOIP service and to post ads for the product on the internet. A retail customer could purchase the VOIP service either by using a credit card or bank information to purchase the service from a promoter via the TelexFree website or by paying the promoter directly. It is estimated that by March 2014 TelexFree had between 700, 000 to over one million promoters around the world, including in Brazil, South America, Europe, Asia, and Russia. One who wished to become a TelexFree promoter was required to pay a $50 membership. After paying this fee, the individual could buy one of two "AdCentral" packages, priced at $289 and $1, 375. At the $289 buy-in level, TelexFree gave the promoter access to ten VOIP products to sell a week. A retail customer could buy one of these VOIP products for $49.90 for the first month. A promoter would receive a 90% commission, or $44.90, out of each such sale, plus an additional 10% commissioner each time the retail customer renewed on a monthly basis.

If the promoter posted one ad a day for seven consecutive days, TelexFree would "buy back" any unsold products for $20. At the $289 buy-in level, a promoter could make $1, 040 a year ($20/week for 52 weeks) without selling a single VOIP product, as long as the promoter posted the required advertisements. The $1, 375 buy-in level was similarly structured; TelexFree gave the promoter a stock of 50 VOIP products a week and required the promoter to post five ads per day for seven consecutive days. If the promoter did so, TelexFree would "buy back" any unsold product for $100 a week, allowing a promoter to earn $5, 200 a year without selling any VOIP product.

TelexFree also compensated promoters for recruiting others to become promoters. To be eligible for such compensation, TelexFree required a promoter to make at least one retail sale of the VOIP product. For each recruit at the $289 buy-in level, TelexFree paid the recruiting promoter $20, and for each recruit at the $1, 375 buy-in level, TelexFree paid the recruiting promoter $100. Promoters could also profit from TelexFree "buying back" product from promoters they had recruited, and from VOIP sales made by promoters they had recruited going six levels deep.

The Brazilian government began investigating TelexFree on or about January 2013. The investigation resulted in a Brazilian civil enforcement action against TelexFree in June 2013, in which the Brazilian government won an injunction prohibiting TelexFree from recruiting new promoters and from taking in funds or paying money to existing TelexFree promoters. The Brazilian government froze about $350, 000, 000 in funds belonging to TelexFree. Records from the Brazilian Ministry of the Treasury show that since TelexFree began recruiting promoters in Brazil, TelexFree bank accounts in Brazil had received about $446, 000, 000 in U.S. dollars.

On October 15, 2013, as part of its investigation in this case, DHS sent an undercover Homeland Security Investigations ("HSI") task force officer ("UC") to meet with a TelexFree promoter ("A"). The next day, UC met with A again and successfully joined TelexFree as a promoter at the $1, 375 buy-in level. Beginning October 21, 2013, using the UC's access to the TelexFree system, an HSI Intelligence Research Specialist placed online advertisements as a promoter for TelexFree. The Specialist posted over 700 advertisements, none of which resulted in retail sales of the VOIP product. On November 2, 2013, A told UC that UC did not need to sell TelexFree's VOIP product in order to make money, but could just post ads. In meeting on December 2, 2013, A told UC that since July 2012 he had earned $1, 600, 000 as a TelexFree promoter without selling a TelexFree product.

In 2013, the Massachusetts Securities Division ("MSD") began investigating TelexFree, including serving TelexFree with demands for various kinds of information about its operations. On April 14, 2014, facing liabilities to its promoters, TelexFree and its related entities filed for voluntary Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Nevada. The next day, April 15, 2014, federal agents executed three search warrants, including at TelexFree's headquarters in Marlborough, Massachusetts.

As part of its investigation, the government has reviewed financial information for TelexFree which TelexFree provided to the MSD and other state regulatory agencies. The government found several inconsistencies among these submissions, including substantial differences in profit and loss statements. The government has also made an effort to determine the volume of sales of the VOIP product, and has reviewed bank account, credit card merchant, and other third party records as part of this effort. The government found that the vast majority of deposits to TelexFree accounts were buy-in fees from TelexFree promoters. Based on its investigation thus far, the government estimates only about 1% of the hundreds of millions of dollars in revenue TelexFree accumulated over its two years in operation came from revenue sales of the VOIP service, with the rest coming from investment by new promoters. With such an unsustainable structure, TelexFree could not meet its payment obligations to existing promoters without equally large infusions of cash from new promoters. However, Agent Paul Melican, one of the leading HSI agents in this case, testified that the government has not yet been able to determine how much additional revenue came from sales of the VOIP product where retail customers paid recruiters directly, that is, not through banks or credit cards.

TelexFree held conferences to promote the company. It held one such conference in Boston, Massachusetts on March 9, 2014. Members of HSI, some undercover, attended. During this and other conferences, and YouTube video appearances, Merrill, Wanzeler and the other speakers gave the impression that the VOIP product was groundbreaking, selling well, and that those sales were the primary mission of the company. None of the speakers mentioned that the majority of revenue came from new promoters rather than actual product sales. Merrill and Wanzeler traveled to TelexFree events in other countries as well, including events in Brazil, Spain, and the Dominican Republic. Agent Melican, who reviewed videos of some of these conferences and spoke with HSI undercover agents who were present at conferences in Boston and Orlando, Florida, testified that Merrill was greeted with wild cheering from thousands of people. Hundreds of letters in support of Merrill and Wanzeler were submitted by promoters in connection with a civil enforcement action against TelexFree.

An analysis of financial records shows that by the end of 2013, Merrill had transferred over $3, 000, 000 from TelexFree accounts to his personal accounts, and that by that point Wanzeler had received over $7, 000, 000, including a transfer of $3, 500, 000 in December 2013. The $3, 000, 000 that Merrill received in December 2013 has been frozen by the government. Agent Melican testified that he did not believe the $3, 500, 000 Wanzeler received has been frozen. During its investigation, the government identified dozens of bank accounts belonging or related to TelexFree both in the United States and overseas. The United States government executed seizure warrants for 37 accounts related to TelexFree on April 25, 2014. They have identified and frozen a TelexFree account in the United Kingdom which contains roughly $30, 000, 000. The government has also identified TelexFree accounts in Singapore, St. Vincent, Grenadine, and the Caymans, but does not know how much money is in these accounts and has not frozen these accounts. Agent Melican conceded at the evidentiary hearing held before this court that he does not know with certainty of any international accounts that Merrill has access to, only that TelexFree has international accounts containing unknown sums of money. He testified that the government does not know if Merrill is a signatory to these overseas accounts. Merrill has provided this Court with an affidavit submitted by Stuart MacMillan, who had been hired by TelexFree to serve as interim CEO in December 2013, asserting that Merrill no longer has access to TelexFree facilities or signatory authority over any TelexFree accounts.

On April 15, 2014, the date the search warrants were executed at the TelexFree company office, Wanzeler fled the United States, driving by car into Canada. Phone records show three phone calls between Merrill and Wanzeler on that date, one of which connected. Two days later, he flew from Canada to Brazil. Wanzeler, who is not a United States citizen, is currently in Brazil. Merrill and Wanzeler have known each other for over twenty years; it was Merrill who supported Wanzeler's application for his green card. In May 2014, the government detained Wanzeler's wife as a material witness when it learned she was attempting to leave the United States on a one-way ticket to Brazil purchased in Brazil. Agent Melican could not point to any behavior by Merrill that suggested he was considering trying or had attempted to flee at any point.

The Applicable Standards

"In reviewing the magistrate judge's detention orders, the court must undertake an independent review, giving her decision such deference as the care and consideration manifested by the magistrate judge warrant." United States v. Simone, 317 F.Supp.2d 38, 42 (D. Mass. 2004) (internal citations omitted). In this case, that deference to Magistrate Judge Hennessey's thoughtful and well reasoned decision is limited because additional evidence was presented to the Court during its own evidentiary hearing by Merrill's new defense counsel. I also note that the original detention hearing was abbreviated with then defense counsel choosing to seriously restrict her cross examination of the government witness.

When asserting the risk of flight as a basis for detention under, "the government must prove by a preponderance of the evidence that no combination of conditions will reasonably assure each defendant's appearance at future court proceedings." United States v. Digiacomo, 746 F.Supp. 1176, 1180-81 (D. Mass. 1990) (citing United States v. Vortis, 785 F.2d 327, 328-29 (D.C.Cir. 1986), cert. denied, 479 U.S. 841 , 107 S.Ct. 148, 93 L.Ed.2d 89 (1986)). The Court may then detain a person pending trial only if it determines that "no condition or combination of conditions [set forth under 18 U.S.C. § 3142 (b) or (c)] will reasonably assure the appearance of the person as required and the safety of any other person and the community." 18 U.S.C. § 3142(e).

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 ...


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