The United States Trustee program, a Department of Justice component, has filed the first major opposition to TelexFree's bankruptcy proceeding. The DoJ's motion seeks the appointment of a Chapter 11 trustee to address serious allegations made against the company by the SEC and the Massachusetts Securities Division. Both agencies have filed complaints, alleging TelexFree operated as a pyramid scheme and a Ponzi scheme.
The DoJ aims to install an individual trustee to administer the bankrupt company. DoJ officials stated that TelexFree management lost the confidence of its creditors and investors. Appointing a Chapter 11 trustee would serve the creditors' interests.
The DoJ's motion also mentions impending promoter class actions for monetary damages. This could allow TelexFree affiliates to sue the company directly. Evidence supporting the DoJ's motion largely aligns with prior SEC and Massachusetts Securities Division complaints, but it also brings forward new details.
Investigators found compelling evidence of fraud, dishonesty, and gross mismanagement within TelexFree, LLC, TelexFree, Inc., and TelexFree Financial, Inc. There are reasonable grounds to suspect that members of the governing board, who chose the debtors' new executives, participated in actual fraud, dishonesty, and criminal conduct in TelexFree's management.
A key revelation points to the new TelexFree compensation plan. This plan was enacted in direct response to subpoenas issued by the Massachusetts Securities Division in January and February 2014. The company changed its compensation structure, requiring promoters to sell its VoIP product to qualify for payments previously promised.
The rule change sparked widespread protests from promoters who could no longer recover their investments. This shift also caused a sharp decline in investor revenue, pushing TelexFree into bankruptcy. Such events led to affiliates storming TelexFree's offices, while management reportedly hid.