Business & Tech

CEO of TelexFree pleads guilty, faces up to 10 years in prison

WORCESTER — A somber James Merrill stood in a dark suit in a windowless courtroom Monday and repeated the word “guilty” nine times for his role in the alleged multibillion-dollar TelexFree fraud.

Merrill, 55, pleaded guilty in a case brought by federal prosecutors for an alleged global pyramid scheme that ensnared 2 million participants from virtually every corner of the world. In Massachusetts, many of the victims are Brazilian and Dominican immigrants.

His business partner remains a fugitive in Brazil, but Merrill agreed to a guilty plea to spare himself a worst-case scenario: 180 years in prison if he had been found guilty at trial. In his deal with the government, he will serve no more than 10 years.

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His sentencing hearing is scheduled for February in federal court in Worcester before US District Judge Timothy S. Hillman.

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Merrill was chief executive at TelexFree, running the company’s daily operations from Marlborough from February 2012 to April 2014, Assistant US Attorney Andrew Lelling said in court. He said about half the participants, or nearly 1 million, lost close to $1.8 billion in the scheme, which started as an Internet phone service business.

Merrill admitted to “reckless disregard for the truth” in the case, his lawyer, Robert Goldstein, said in court, because he was aware of the growing fraud but did not take steps soon enough to stop the scheme or disclose it.

“Jim accepts responsibility for his role,” Goldstein said in an interview after the hearing. “He’s sorry — extremely sorry — for the role he played.”

Goldstein said Merrill never intended for TelexFree to become a fraud. “Jim feels incredible sorrow that anyone would’ve lost even a penny,” he said.

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Yet the prosecution said Merrill failed to heed warnings the company was hurtling toward disaster as the business morphed into a Ponzi scheme. At large and raucous conferences known as “extravaganzas,” Lelling said, videos show Merrill thanking investors for believing in the company.

TelexFree originated in Brazil and sold Internet phone service plans, prosecutors said. But the bulk of the money came in as participants opened accounts for $1,425 each and then agreed to post purported Internet ads for TelexFree — ads no one ever actually saw.

“It was essentially busywork,” Lelling said. But for this supposed work, members could earn $100 a week, or $5,200 a year, effectively reaping a 200 percent return on their money.

The company issued members credits to their accounts for hundreds of millions of dollars for the ad postings, and bonuses for recruiting new participants. Early investors were able to cash in their credits, helping to fuel the frenzy over TelexFree with their easy gains.

But by April 2014, prosecutors said, TelexFree owed $5 billion in credits to participants and had just $120 million on its books. As it was running short of money, members tried to cash out, causing a “run on the bank,” Lelling said.

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The company filed for bankruptcy protection and federal authorities raided its offices that month. To date, 119,000 people around the globe have filed claims with the bankruptcy trustee. The conclusion of Merrill’s case will allow the trustee to begin releasing more than $100 million in seized TelexFree assets to victims.

Merrill’s business partner, Carlos Wanzeler, remains in Brazil. His US lawyer, Paul Kelly, said Wanzeler’s passport was seized and he cannot leave Brazil amid a TelexFree investigation there. Federal authorities have tried to get Wanzeler to return to the United States to face charges but have been thwarted by Brazilian law, which does not compel his extradition.

Wanzeler “really felt terrible about leaving Mr. Merrill to deal with this situation by himself,” Kelly said.

As for Merrill’s decision to plead guilty, Wanzeler “knows [Merrill] was placed in a difficult situation and had to do what was right for him and his family,” Kelly said.

Merrill’s wife sat in the front row Monday, at a hearing attended by a few dozen people, including numerous lawyers. In addition to serving prison time, Merrill will be ordered to pay restitution in an amount not yet determined and will have to forfeit some assets.

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