Federal securities regulators say TelexFree Inc. hastily filed for bankruptcy protection in Las Vegas on a Sunday night in an act of “blatant forum shopping” by the Marlborough phone-service company, shortly before its owners were going to be hit with fraud charges.
In a court filing Wednesday, the Securities and Exchange Commission urged a Nevada bankruptcy judge not to “reward such behavior” and to move the case to Massachusetts. The SEC said the state “has a definite interest in having the controversy decided within its borders.”
TelexFree filed for Chapter 11 bankruptcy protection last week in Las Vegas, two days before regulators raided its Marlborough headquarters office. Secretary of State William F. Galvin filed civil fraud charges against the company for running an alleged pyramid scheme. The SEC filed similar charges, freezing the assets of the company and eight key people.
For the first time, regulators in their new filing sketched out publicly how they might proceed with the case on behalf of victims. The SEC said that if the company’s bankruptcy petition is ultimately allowed, regulators expect a liquidation of the business to be necessary. TelexFree is instead seeking a financial reorganization of the company.
The SEC said it may seek to establish a “distribution fund to recompense victims.’’ Those victims would probably make up the large majority of the creditors, “both in numbers and dollars,’’ the SEC said.
In its court filing, the SEC details many legal reasons why the case should be moved to Massachusetts. TelexFree has no operations in Nevada, the regulator said, just “rent-a-space office in Las Vegas.’’
The SEC also said TelexFree’s owners — James Merrill and Carlos Wanzeler — and employees live in Massachusetts. One third of the 30 largest creditors are located in the state as well, the SEC said; none reside in Nevada. The company’s filing of its bankruptcy petition 2,500 miles away, the SEC said, “appears to be a coordinated effort to avoid the Massachusetts courts.’’
A spokeswoman for TelexFree did not respond to a request for comment. In a separate filing with the bankruptcy court Wednesday, TelexFree denied the SEC’s allegations. The company also defended its decision to seek bankruptcy protection in Nevada, saying its Las Vegas entity “has over 700,000 associates or promoters worldwide.’’
TelexFree objected to the regulators placing a temporary stay on its operation, arguing that the SEC violated its protections under Chapter 11. The company argues that it should be able to use its assets in the ordinary course of business.
TelexFree says one reason it needs to reorganize is that money was coming in over the transom at such a brisk pace from 2012 to 2013 — “from de miniumus amounts to over $1 billion, which put tremendous pressure on the debtors’ financial, operational, and management systems.’’
Securities regulators have alleged that TelexFree lured tens of thousands of people in the United States to put an estimated $300 million into the company. In Massachusetts alone, participants may have invested $90 million, according to Galvin’s complaint against the company.
Globally, participants may have been promised as much as $1.1 billion, Galvin said. The alleged scheme worked by attracting people to buy the company’s long-distance Internet phone service, and promising them large returns for promoting the service with friends, family, and business associates.
People would open an account with $1,375, and earn $100 weekly payouts so long as they went to the company’s website and clicked on boxes to approve five online ads per day. The company told them the purported ads would appear on consumer websites, although dozens of alleged victims have told the Globe they never saw the ads.
Since the company was temporarily shut down by regulators last week, rumors have been circulating around the globe in e-mails, YouTube videos, and Facebook postings about the TelexFree’s future. Thousands of alleged victims have been in the dark about how they might claim their losses.
In its court filing, the SEC said a potential distribution fund would come under the auspices of the US District Court in Boston, which is hearing the regulator’s civil fraud case against TelexFree and its principals. In a typical liquidation, TelexFree would be shut down and its assets disbursed to creditors, including victims. If a liquidation is ordered, the SEC argued, it should take place in Massachusetts, where the district court can coordinate with the bankruptcy court.
TelexFree is under investigation by the FBI and the US Department of Homeland Securities, as well as state and federal securities regulators.
The company was shut down last year by a judge in Brazil, where a money laundering inquiry is underway, according to press reports. TelexFree said in its recent filing that it had trouble maintaining relationships with US banks after the investigation started in Brazil.