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Authorities in talks to tackle online Ponzi schemes

The office of William F. Galvin, Massachusetts’ secretary of state, filed civil fraud charges in April against TelexFree, which sold long-distance phone plans but relied on a constant flow of new investors for most of its revenue, according to prosecutors.

Pat Greenhouse/Globe Staff

The office of William F. Galvin, Massachusetts’ secretary of state, filed civil fraud charges in April against TelexFree.

US regulatory and law-enforcement authorities are engaged in discussions about how to stop the worldwide spread of Internet pyramid schemes, following criminal indictments in Massachusetts against the owners of TelexFree Inc., who allegedly conducted a $1 billion global fraud.

The talks involve creating a coalition of federal and state securities regulators, as well as law-enforcement agencies, who would in turn reach out to their counterparts abroad, according to two US officials with knowledge of the effort. The Department of Justice is among the parties participating in the process.

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The discussions reflect a growing realization by regulators in the United States and overseas that greater collaboration is needed to fight a new breed of online financial scams that move seamlessly across borders and ensnare victims with unprecedented speed.

“They are beginning to multiply exponentially,’’ said Luis Guillermo Velez, superintendent of companies in Colombia, in a recent interview. In the past year, Velez said, he has shut down three large pyramid schemes in his country, including TelexFree and Emgoldex, outfits that also have thrived in the United States.

“It’s so difficult to identify the people responsible and to really capture them, that at some point there needs to be an international agreement on how to handle this situation,’’ he said.

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Officials say today’s online Ponzi schemes can expand so rapidly they make Bernard Madoff’s brand of financial fraud look quaint by comparison. No longer does it take years to attract assets through word-of-mouth referrals. Fraudulent startups barely need an office, never mind banks of telemarketers like those in the boiler rooms of corrupt brokers in the 1980s. Launching an online money scheme appears to require merely basic Web skills, a target audience, and a few slick YouTube videos.

“Obviously, the days of securities regulation being done by jurisdiction, based on a geographical area — it doesn’t work any more,’’ said William F. Galvin, Massachusetts’ secretary of state and head of its Securities Division. His office filed civil fraud charges in April against TelexFree, which sold long-distance phone plans but relied on a constant flow of new investors for most of its revenue, according to prosecutors.

In Massachusetts alone, hundreds of investors believe they are owed $90 million by the company, according to Galvin’s complaint. Globally, the figure may exceed $1 billion, authorities say.

TelexFree is an example of how quickly alleged pyramid schemes can spread. Even though it was shut down by a judge in Brazil in June 2013, the company was able to set up shop in Marlborough and flourish here for nearly a year, reeling in hundreds of Massachusetts residents, particularly in Brazilian and Dominican immigrant neighborhoods. Participants were promised large returns if they opened accounts for about $1,400 and helped promote the company by persuading friends and family to join, and approving online ads that touted TelexFree.

Galvin and the US Securities and Exchange Commission started investigating TelexFree once they learned about it. But the company, registered as a telecommunications provider, stayed under the radar by not seeking a license as an investment firm. Regulators say better communication with their foreign counterparts could help prevent such alleged schemes from operating undetected for so long.

Galvin’s office is now investigating Emgoldex Team USA Inc. and its principals for selling gold online in an apparent pyramid scheme. He said the company promises investors large returns if they get other people to buy gold as well.

No one from Emgoldex returned calls seeking comment.

“At the root of it is, they’re promising returns that are just ridiculous. That’s really the essence of what most securities fraud is,’’ Galvin said.

Velez, the Colombian official, shut down Emgoldex in his country in May. He said victims there may have lost $25 million to $50 million. But because Emgoldex is an online entity with locations purportedly in Munich and Dubai, his office so far has found no assets to recover or people to charge.

“Nobody has shown up — no attorneys, no representatives, nothing,’’ Velez said. Panama’s banking regulator is now investigating the company, he said.

Velez has had no contact with US authorities, he said. But he agrees that greater international cooperation could help put a halt to online schemes.

The SEC in March froze the assets of World Capital Market Inc., known as WCM777, in California, charging it with raising $65 million from investors through a Ponzi scheme. The same company also allegedly defrauded investors in Colombia, Velez said. Galvin shut the firm down in Massachusetts in 2013. The company is now in bankruptcy.

Often, these outfits gain traction by preying on particular groups of people.

Madoff, who is serving a 150-year prison term for a massive Ponzi scheme, targeted the Jewish community and nonprofits. TelexFree in the United States focused on Brazilian immigrants. WCM777 pursued Asian-Americans and Hispanic-Americans, according to the SEC’s complaint in Los Angeles.

Even after such firms are shut down, their principals and top promoters often move on to new schemes, with different names. Several people formerly involved with TelexFree, including family members of the principals, are now promoting similar ventures.

One of TelexFree’s American owners, James Merrill of Ashland, is home awaiting trial on criminal fraud charges in the case. His business partner, Carlos Wanzeler, has fled to Brazil, and is considered a fugitive. Both men face up to 20 years in prison if found guilty.

Merrill pleaded not guilty to the charges against him. Lawyers for both men deny any wrongdoing by their clients.

Galvin said achieving international cooperation will require coordination at the federal level.

“If it’s a scam in Columbia, it’s a scam here,’’ he said. “If it’s a scam in Brazil, it’s a scam here.”

Jose Esteban of the Globe staff contributed to this report. Beth Healy can be reached at beth.healy@globe.com.
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