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TelexFree case brings warning on pyramid schemes

“Operators of pyramid schemes promise large payouts with minimal effort, often combined with the glamor of new technologies, but the money comes from getting others to buy the sales package, not from any product itself,” Secretary of State William Galvin said in a statement.

Jessica Rinaldi/Globe Staff/File

“Operators of pyramid schemes promise large payouts with minimal effort, often combined with the glamor of new technologies, but the money comes from getting others to buy the sales package, not from any product itself,” Secretary of State William Galvin said in a statement.

In the wake of a fraud allegations against a Marlborough-based phone-service company called TelexFree Inc., Massachusetts Secretary of State William F. Galvin issued a warning to investors Friday about pyramid schemes that disguise themselves as multilevel marketing operations.

The Massachusetts Securities, which Galvin oversees, has issued a brochure explaining how these schemes operate and offering tips on what to look for before investing in any multilevel marketing business.

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“Operators of pyramid schemes promise large payouts with minimal effort, often combined with the glamor of new technologies, but the money comes from getting others to buy the sales package, not from any product itself,” Galvin said in a statement. “The case brought by the Securities Division just this month against a Marlborough firm is a classic example of a multilevel marketing scam.”

Galvin has filed civil fraud charges against the company for running an alleged pyramid scheme. The Securities and Exchange Commission has filed similar charges, freezing the assets of the company and eight key people.

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.

According to a story in Friday’s Globe, federal securities regulators say TelexFree 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.

Chris Reidy can be reached at reidy@globe.com.
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