A community bank in Fitchburg with ties to TelexFree Inc.’s former chief executive, James Merrill, has agreed to a $3.5 million settlement with Secretary of State William F. Galvin’s office, for allegedly allowing the company to open accounts without vetting its business.
Fidelity Bank neither admitted to nor denied the allegations.
Galvin’s office began an investigation of the bank and its president, John F. Merrill — the brother of the TelexFree executive — in April. That was shortly after TelexFree had filed for bankruptcy protection and federal and state authorities had filed fraud charges against the Marlborough company and its principals, alleging they were conducting a $1 billion global pyramid scheme.
TelexFree had been shut down in Brazil in June 2013, but it maintained a US office in Marlborough. TelexFree opened two accounts with Fidelity Bank in August 2013 and a third in September of that year, according to the settlement agreement, which was obtained by the Globe. The company proceeded to send millions of dollars and a high volume of transactions through the bank, according to the document, including $10.5 million for the banker’s brother and his business partner, Carlos Wanzeler, a fugitive who has returned to his native Brazil.
It took until November 2013 for John Merrill, the bank president, to have his compliance department review the TelexFree account activity, Galvin alleged. An Internet search by his staff turned up TelexFree’s legal problems in Brazil, and the bank in December told TelexFree to close its accounts by the end of the year.
But the bank allegedly continued to allow James Merrill, of Ashland, and Wanzeler, who was then living in Northborough, to make personal transfers through December.
In one such transaction, Wanzeler allegedly moved $3.5 million from his personal account at Fidelity Bank to an account in Singapore.
Galvin’s office alleged the bank did not do enough due diligence when it opened the account and did not have sufficient oversight in place to handle TelexFree’s large deposit accounts.
Karen Schwartzman, a spokeswoman for the bank, said Fidelity Bank and its principals did not know TelexFree was running an alleged fraud. She said the bank agreed to settle with Galvin’s office rather than engage in prolonged and costly litigation.
“We believe it makes more sense to use those resources to help those members of our community who have been hurt by the TelexFree situation, and to maintain our focus on the businesses, families, and individuals we serve,’’ Schwartzman said.
Galvin said the funds would go to help victims in Massachusetts, who believe they may have lost as much as $90 million. “This is a small start, but nevertheless a start,’’ he said.
TelexFree was purportedly a telecommunications company, selling low-cost, long-distance phone plans. But prosecutors say the company preyed on Brazilian and Dominican immigrants, enticing them to set up “accounts” for about $1,400 each, and then getting their friends and family to sign up, as well. They were asked to help market the company by approving online advertisements and would receive $100 a week if they did so.
But it took a constant flow of new investors to pay off the earlier ones, prosecutors have alleged.
Merrill and Wanzeler are facing criminal fraud charges. Merrill is at home on bail awaiting trial, and wearing a location-monitoring ankle bracelet. Wanzeler has fled to Brazil; it is unclear if he will return to the United States. Lawyers for both men deny they are guilty of the charges against them.
Fidelity Bank is a 126-year-old community institution with $565 million in assets. Schwartzman, the spokeswoman, said the bank will be profitable this year despite the $3.5 million settlement and has ample capital to cover the payout.
Beth Healy can be reached at email@example.com. Follow her on Twitter @HealyBeth.