The CEO of VoIP telephone service TelexFree has confessed that his company was a front for a $1.8bn pyramid scam.
In a Massachusetts district court on Monday, James Merrill pled guilty [PDF] to nine charges of conspiracy and wire fraud for his role overseeing the US branch of TelexFree – a VoIP phone service that American authorities say was almost entirely backed by defrauded investors.
TelexFree had presented itself as the Stateside wing of a Brazilian VoIP calling service aimed largely at immigrant communities in the US looking for a low-cost way to make international calls.
The service had touted its operations as being based on a "direct sale" method that asked investors to deposit their cash and become sales affiliates, spreading word about TelexFree to increase sales and get a return on their investments.
In reality, the FBI found that by 2014 TelexFree was operating as a Ponzi scheme, with little to none of its revenues coming from the VoIP service (including the accounts investors themselves were forced to purchase).
Rather, authorities say that TelexFree was relying on cash from new investors for its revenues and, after pocketing money for itself, paying out the earlier investors with the money from the flow of new backers who were led to believe they were "buying in" to a successful tech company.
Even the "direct marketing" operation – where the investors were asked to cut and paste text for online ads, believing they were spreading word about the service – was a fraud, with few to none of the ads actually being run.
TelexFree has been shut down since 2014, when authorities seized its assets and executed search warrants. The company's operations were later determined to be a Ponzi scheme that took more than $1.8bn from investors.
Merrill and another defendant, TelexFree's cofounder Carlos N Wanzeler, were charged as the principal operators of the company. Wanzeler fled the US shortly after charges were filed, and returned to Brazil.
Merrill will face up to 10 years behind bars when sentenced early next year. ®