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Securities and Exchange Commission v. Telexfree, Inc.

United States District Court, D. Massachusetts

March 16, 2018



          Nathaniel M. Gorton United States District Judge

         In this civil enforcement action, the Securities and Exchange Commission (“SEC” or “the Commission”) alleges that TelexFree, Inc. and TelexFree, LLC (collectively, “TelexFree”) and eight individual defendants operated and promoted an illegal pyramid and Ponzi scheme, raising more than $300 million through a fraudulent and unregistered offering of securities since at least November, 2012. TelexFree allegedly received more than $340 million from hundreds of thousands of investors and promised to pay those investors more than $1.1 billion, even though the company's retail product generated only $1.3 million in sales.

         The SEC alleges that Faith R. Sloan (“Sloan”) and Santiago De La Rosa (“De La Rosa”) violated federal securities laws by acting as “promoters” for TelexFree and that they 1) violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; 2) violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); and 3) violated Section 5(a) of the Securities Act of 1933, 15 U.S.C. § 77e(a).

         Pending before the Court are separate motions to dismiss of both defendants. For the following reasons, those motions will be denied.

         I. Background

         The SEC alleges that the entire TelexFree enterprise was an elaborate “Ponzi/pyramid scheme”. According to the SEC, the scheme worked as follows: TelexFree promised investors in its “AdCentral” program that it would make weekly payments to investors generating an annual return of over 200%. Investors were required to post ads for TelexFree's voice over internet (“VoIP”) service but those ads “were essentially meaningless”.

         Investors were encouraged to recruit new investors and TelexFree offered commissions for sales of its VoIP service. When an investor purchased the VoIP service, TelexFree debited the balance in that investor's internal account. Accordingly, such sales generated no revenue for the company. TelexFree received over $340 million from investors and “effectively promised to pay more than $1.1 billion to [them].” Because sales of the VoIP service generated only $1.3 million in retail sales revenue, however, that promise was illusory. Instead, TelexFree paid early investors with the moneys contributed by later investors. In April, 2014, TelexFree filed for bankruptcy, claiming $600 million in liabilities and approximately $100 million in assets.

         In April, 2014, the SEC filed a sealed complaint in the instant case. The following month, the SEC amended the complaint to include significantly more factual allegations relating to the alleged Ponzi scheme. Alongside TelexFree, the SEC named four TelexFree “principals” in this suit as individual defendants. Among them were James M. Merrill, the co-owner of both TelexFree entities and the president of TelexFree, Inc. and Carlos N. Wanzeler, co-owner of both TelexFree entities and the treasurer of TelexFree, Inc.

         The SEC also named four “promoters” of the TelexFree business model in the suit, including Sloan and De La Rosa. The Commission alleges that Sloan “was a prominent promoter of TelexFree, ” who operated websites touting TelexFree and appeared in promotional videos that were posted on YouTube. De La Rosa is also described as a “prominent promoter of TelexFree” who provided the voiceover for multiple videos posted on YouTube and appeared onstage at a TelexFree event in Boston.

         II. Legal Standard

         To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In considering the merits of a motion to dismiss, the Court may look only to the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the complaint and matters of which judicial notice can be taken. Nollet v. Justices of Trial Court of Mass., 83 F.Supp.2d 204, 208 (D. Mass. 2000), aff'd, 248 F.3d 1127 (1st Cir. 2000). Furthermore, the Court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. Langadinos v. Am. Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000). If the facts in the complaint are sufficient to state a cause of action, a motion to dismiss the complaint must be denied. See Nollet, 83 F.Supp.2d at 208.

         Although a court must accept as true all of the factual allegations contained in a complaint, that doctrine is not applicable to legal conclusions. Ashcroft v. Iqbal, 556 U.S. 662 (2009). Threadbare recitals of the legal elements which are supported by mere conclusory statements do not suffice to state a cause of action. Id. Accordingly, a complaint does not state a claim for relief where the well-pled facts fail to warrant an inference of any more than the mere possibility of misconduct. Id. at 1950.

         III. ...

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