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In re Telexfree Securities Litigation

United States District Court, D. Massachusetts

January 29, 2019

In re TELEXFREE SECURITIES LITIGATION

          MEMORANDUM AND ORDER ON MOTION TO DISMISS BY DEFENDANTS BASE COMMERCE, LLC., D/B/A, PHOENIX PAYMENTS, LLC., AND JOHN HUGHES (DOCUMENT # 164).

          TIMOTHY HILLMAN DISTRICT JUDGE

         Introduction

         Base Commerce, LLC., D/B/A Phoenix Payments, LLC (“BASE”), and John Hughes (“Hughes”), two defendants in the TelexFree multidistrict securities litigation, move to dismiss all counts against them in the Second Consolidated Amended Complaint (“SCAC”) pursuant to Fed.R.Civ.P. 12(b)(1), 12(b)(2), 12(b)(6) and (9)(b). TelexFree, Inc. (“TelexFree”) was a pyramid scheme that operated from February 2012 to April 2014, and involved approximately two million participants worldwide, nearly a 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 financial service providers, payment processing companies, (such as Base and Hughes) and the principles of the fraudulent scheme. As the actions involved common questions of fact, the Judicial Panel on Multidistrict Litigation joined the actions into a multi-district litigation, and ordered transfer of all actions to the District of Massachusetts for coordinated or consolidated pretrial proceedings.

         Background

         Base provided payment processing services to TelexFree from April 2013 until December 31, 2013. During this time the Defendant Hughes was Base Commerce's President, and principal contact with TelexFree. Hughes advised TelexFree on its financial operations, worked with overseas banks and processors in an effort to establish TelexFrees' business off-shore, and linked TelexFree with other domestic payment processors in order to keep TelexFree operational during a period of time when fears of governmental regulatory action was imminent. In addition, Base Commerce and Hughes intervened in a dispute between TelexFree and GPG, another Defendant and payment processor, in order to insure a continued cash flow to TelexFree. Base Commerce was compensated for these services in excess of two and half million dollars.

         The SCAC alleges that these services were provided with full knowledge that TelexFree was a pyramid scheme. The SCAC also alleges that Hughes was aware that TelexFree's predecessor corporation (Common Cents Communication, Inc.) had been accused of being a Ponzi scheme (SCAC ¶ 899). In August of 2013 Hughes wrote the following email to Defendant Merrill, Wanzeler, Craft, and GPF that:

“[we] have an MLM with a huge amount of negative news and serious accusations, hence banks and processors are running away based on what the FTC, Treasury Department, FDIC, and Justice Department have done to them lately to include suing them (sic) fining them and freezing those settlement funds.” (SCAC¶ 907).

         In September of 2013 Hughes wrote, “if, God forbid, TelexFree came under a publicized FTC investigation, there would be an indeterminate wave of charge backs (sic)” (SCAC ¶ 915). In August 2013 when it appeared that no United States bank or payment processor would accept TelexFree's business Hughes linked up TelexFree with Advantage Payments and IPS to keep TelexFree afloat. Advantage Payments and IPS are also payment processing companies and are Defendants in this lawsuit.

         The SCAC seeks recovery against Base and Hughes for aiding and abetting in violation of M.G.L. Ch 93 § 12 and 69 and M.G.L. Ch 93A § 2A and 11 (Third Claim for Relief), Unjust Enrichment (Fourth Claim for Relief), Conspiracy (Fifth Claim for Relief), Tortious Aiding and Abetting (Tenth Claim for Relief).

         The Defendants have moved to dismiss the counts against them alleging that this Court lacks subject matter jurisdiction because the Plaintiffs have not alleged sufficient injury-in-fact, to confer Article III standing. Specifically, they argue that the Plaintiffs have not alleged how much money they invested, withdrew, or when they invested. The Defendants also claim that this Court lacks personal jurisdiction over Base and Hughes because both are Arizona residents and neither has had sufficient contacts with Massachusetts to satisfy the Massachusetts Long Arm Statute and the Due Process Cause of the Constitution. Finally, the Defendants allege that the SCAC fails to state a claim for relief under Fed.R.Civ.P. 12(b)(6).

         Discussion

         Subject Matter Jurisdiction

         The Defendants claim that this Court lacks subject matter jurisdiction because they have not alleged an injury in fact sufficient to confer Article III standing. The SCAC establishes that the Plaintiffs are seeking to represent the class of person who purchased TelexFree packages and suffered a “net loss”. The complaint does not state how much money was invested, how much was withdrawn or when the money was invested.

         The SCAC sufficiently alleges that Plaintiffs Rita D. Dos Santos and Celio Da Silva invested funds in TelexFree and were swindled when TelexFree converted those funds which went to various Defendants. The Plaintiffs allege that the financial services providers such as Base and Hughes aided and abetted TelexFree and the so called “Operational Defendants” by knowingly providing substantial assistance in accepting, processing, and ...


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