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In re TelexFree Securities Litigation

United States District Court, D. Massachusetts

January 29, 2019





         Pricewaterhouse Cooper's LLP (“PWC”), is a Defendant in the TelexFree multi-district securities litigation. They move to dismiss the First, Second, Third, Fourth, Fifth, Sixth, Seventh, and Ninth, Claims for Relief against them in the Plaintiff's Second Consolidated Amended Complaint (SCAC) pursuant to Fed.R.Civ.P. 12(b)(6).

         TelexFree, Inc., (“TelexFree”) was a pyramid scheme that operated from February 2012, to April 2014, and involved approximately two million participants world-wide, nearly one million of whom suffered a net financial loss. Several Plaintiffs filed actions in federal district courts across the United States seeking to recover their losses against dozens of defendants, ranging from banks, payment processing companies, the principals of the fraudulent scheme, attorneys and accountants, such as PWC. Because the actions involved common questions of fact, the Judicial Panel on Multi-District Litigation joined the actions into a Multi-District Litigation and ordered a transfer of actions to the District of Massachusetts for coordinated or consolidated pre-trial proceedings.


         In January of 2014 TelexFree hired PWC to perform accounting services for them. The complaint is silent about exactly which services PWC performed other than “negligently” providing advice relative to TelexFree's 1099 forms, and in responding to an inquiry by the Massachusetts Securities Division. The complaint is also spare in its references to PWC, assigning only 17 paragraphs to discussing PWC's role in the events that have given rise to the lawsuit. Specifically, the Plaintiffs allege that in January of 2014 TelexFree retained PWC to “provide tax and financial consultation, including assistance with the development of International tax structures, ” and that PWC allegedly provided “accounting and consulting services”. (SCAC ¶577 and 578)

         The complaint alleges that PWC “advised TelexFree to prepare and issue IRS Form 1099.” (SCAC ¶579). Noteably there are no allegations about what advice PWC gave TelexFree, whether that advice was erroneous, or whether the Plaintiffs relied on PWC's advice about these forms. The complaint further alleges that PWC assisted TelexFree “in responding the Massachusetts Securities Division's information requests” (SCAC ¶584).


         To withstand a Rule 12(b)(6) motion to dismiss, a complaint must allege a claim that plausibly entitles the plaintiff to relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Plausibility does not require probability but “it asks for more than a sheer possibility the defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955). “If the factual allegations in the complaint are too meager, vague, or conclusory to remove the possibility of relief from the realm of mere conjecture, the complaint is open to dismissal.” Rodriguez-Reyes v. Molina-Rodriguez, 711 F.3d 49, 53 (1st Cir. 2013) (quoting SEC v. Tambone, 597 F.3d 436, 442 (1st Cir. 2010) (en banc)). “[A] conclusory allegation …does not supply facts adequate to show illegality [whereas] [a]n allegation …much like a naked assertion … gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of entitlement to relief.” Twombly, 550 U.S. at 557. Rule 9(b) imposes a heightened pleading standard for claims based on fraud. When an aiding and abetting claim sounds in fraud, it must be plead with particularity as set forth in Rule 9(b). (In re State Street Cases, 2013 WL 550815 @ 16.

         First Claim for Relief: General Laws Chapter 93, §12 and 69

         The Plaintiff has included PWC in the SCAC as a group that they have styled as “Operational Defendants.” The Operational Defendants are defined in the SCAC as founders and principals, executive officers, top level promoters, and associated individuals. Those associated individuals include among others the so called “Licensed Professionals”, which includes attorneys, and accountants, including PWC. These “Operational Defendants” are alleged to have violated G.L. C. 93 §12 and 69, but there are no allegations in the SCAC identifying any conduct of PWC which is violative of these statutes.

         PWC argues that §69 of C.93 does not create liability for such a broad class of what are secondary actors because §69(d) states, “no multi-level distribution company or participant in its marketing program shall . . .” The Defendants claim that there is no evidence that they “participated” in the multi-level marketing program. Section 69A of C.93 describes the activities that “participants may perform, such as participating in the distribution chain for goods or services offered by the company, recruiting new participants, paying or receiving commissions, bonuses, or finder's fee.” There are no allegations in the SCAC that PWC did any of these things. Accordingly, the Defendant's Motion is granted as to the First Claim for Relief.

         Second Claim for Relief: General Laws Chapter 93A §2 and 11.

         The Plaintiffs allege that PWC violated M.G.L. C.93A by providing TelexFree with negligent tax advice relating to the forms 1099 and by negligently assisting TelexFree in responding to the Commonwealth's Security Division's information request (SCAC ¶ 577, 579, 584). However, the allegations are made without any qualifying or backup factual allegations. Further, the Defendant argues that §11 of G.L. C. 93A applies only between parties having a transactional business relationship, and that there are no allegations that such a relationship between PWC and the Plaintiffs existed. I agree (see Cash ...

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