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TelexFree trustee says alleged fraud swells to $3 billion

The trustee in the TelexFree Inc. bankruptcy case said the scope of the alleged fraud is even wider than previously reported, with millions of customer accounts and more than $3 billion invested across virtually every country in the world.

In filings at federal court in Boston made late Wednesday, trustee Stephen B. Darr said at least 1 million participants opened 11 million accounts in two years through TelexFree’s Marlborough office. Darr also stated his finding that the operation was a “massive Ponzi/pyramid scheme,” a determination that will have an impact on who gets money back.

In a Ponzi scheme, new investors’ money is used to pay off earlier investors. Darr’s finding means that, as in the Bernard Madoff scandal, only people who can show they lost money will receive payments.

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“Net winners,” or people who reaped profits but believed they were owed more, will not receive money, according to Darr’s filings.

TelexFree allegedly attracted participants with the sale of cheap Internet phone service. In Massachusetts, the company allegedly targeted large numbers of Brazilian and Dominican immigrants. But in reality, the company made the vast portion of its money by encouraging members to open accounts with an investment of $1,425, with promises of large returns if they got other people to sign up and posted Internet ads, prosecutors say.

Prosecutors previously estimated the fraud at $1 billion. The number of participants could be as high as 1.7 million, Darr has said.

TelexFree was shut down in Brazil in 2013. Its Massachusetts office was raided by federal authorities in April 2014, and its two US principals have been charged with civil and criminal fraud. James Merrill of Ashland and Carlos Wanzeler, currently a fugitive in Brazil, each face up to 20 years in prison if found guilty.

Both men have denied any wrongdoing. Their business partner in Brazil, Carlos Costa, continues to post videos defending the company.

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Prosecutors say TelexFree is the largest pyramid scheme of all time, in terms of the number of participants. Darr has found 249 telephone country codes associated with customer records — more countries than actually exist. The Boston Globe has been contacted by alleged victims in countries from Brazil and South Africa to Ghana.

On Wednesday night, Darr met with a few hundred alleged TelexFree victims at a meeting hosted by the Chelsea Collaborative, Greater Boston Legal Services, and the Brazilian Women’s Group. It was the second of such meetings in recent months.

“It was a very good meeting,’’ Darr said. “These are not high rollers. Some of the tales that you hear are really heartbreaking.”

People who lost money with TelexFree will soon be able to file electronic claims with the trustee’s office. The trustee in his filings asked the judge to approve plans for developing such a system.

But even then, participants will have to wait well into next year, at least, for any repayment.

The $175 million or so that federal authorities have seized from TelexFree and its principals is not available to the trustee until a guilty verdict is reached in the criminal case. The trial is scheduled for spring.

About 14,000 victims in Massachusetts have been reimbursed for some of their losses through a $3.5 million settlement state regulators reached with a Fitchburg bank connected to the case.

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The trustee’s latest findings were the result of an analysis of reams of data.

He found 2 million customer e-mail addresses and, excluding those from people living in Brazil, believes 900,000 of those belong to users or promoters of the US system.

Brazil is separately prosecuting the company and its owners and has seized assets there.

The trustee also filed a motion Wednesday to object to an expansion of a separate class-action suit filed on behalf of alleged victims. Darr said the assets are more properly divvied up in US Bankruptcy Court.


Beth Healy can be reached
at beth.healy@globe.com. Follow
her on Twitter @HealyBeth.