How does a business that was shut down as a fraud by a judge in Brazil manage to flourish in the United States for another 10 months, operating from a small office in Marlborough, of all places?
That business is TelexFree Inc., the Internet telephone-service company that state and federal regulators now say was a very big investment scheme before its accounts were frozen last week. They estimate it sucked in as much as $90 million from many thousands of Massachusetts residents and $300 million from across the country. The worldwide total may be more than $1 billion.
It’s worth accounting for those 10 months, because the kind of pyramid scheme described in lawsuits filed by regulators last week often grows rapidly until it blows up. So a big percentage of that $300 million from people in the United States probably came through TelexFree’s doors in the past year or so.
The TelexFree story, as told in court papers, is yet another version of a depressingly familiar scheme. People gave it money in return for the promise of big income they could take as cash or plow back into the business.
All pyramids need more and more participants to keep that kind of arrangement going. TelexFree allegedly found plenty of them, many from the Brazilian and Dominican immigrant communities. They were attracted by promoters and the seemingly profitable stories of others who came before them.
In fact, court documents portray a
small company swimming in cash during the months prior to last week’s raid on its headquarters — and even at the time of the raid itself.
Company founders James Merrill, a man who ran a commercial cleaning business out of his Ashland home, and Carlos Wanzeler,
a Brazilian immigrant who once worked double shifts washing dishes in Worcester-
area restaurants, were putting millions of dollars in their own pockets, according to Mark Albers, a forensic accountant who works for the Securities and Exchange Commission and traced the moving millions at TelexFree.
Albers said TelexFree transferred a total of $3.1 million to Merrill Dec. 26 and the following day. Over those same two days, the company moved $7.3 million to Wanzeler, who wired half that amount to a Chinese bank in Singapore a week later, Albers said in court documents.
There’s lots more: TelexFree sent more than $2 million to companies controlled by chief financial officer Joseph Craft between last November and March of this year. He was in the office when FBI agents raided the company, and he tried to walk out the door with $38 million in cashier’s checks. Among those checks: one made out to Wanzeler’s wife for another $2 million.
Meanwhile, TelexFree had generated just $1.3 million from its actual business — phone calls over the Internet — between the summer of 2012 and last month. That business certainly wasn’t covering all of the multimillion-dollar checks to TelexFree principals.
So who knew what and when here in America? Massachusetts Attorney General Martha Coakley heard about TelexFree. So did Secretary of State William Galvin and SEC officials.
Investigators appeared to take a serious interest in TelexFree sometime last fall. Coakley reports getting “a limited number of complaints” last year and more in recent months.
“We have been bringing those complaints to the attention of the FBI and SEC due to the international scope of the company involved,” said spokesman Brad Puffer.
Galvin’s office, which enforces state securities regulations, says it began looking at TelexFree as early as April 2013, based on a call from a Brazilian journalist. It eventually interviewed Merrill and Wanzeler at length last month.
SEC officials acknowledge investigating the company for some time. They say their methodical approach was needed to gather enough facts that would convince a judge to freeze a company’s financial accounts.
No doubt it takes time to make cases like these. But in the interim, a lot of people continued to send their money to TelexFree.
In some small countries, regulators instead issued earlier public fraud warnings about the company. That’s not the way things work here.
The deliberate approach of state and federal investigators may still pay off, but only if the government can recover millions of dollars and return them to investors. That outcome is far from a sure thing.
Steven Syre is a Globe columnist. He can be reached at firstname.lastname@example.org.