On May 2nd, federal prosecutors filed a civil forfeiture action against TelexFree, surprising its legal team during what was scheduled as a routine bankruptcy hearing. The unexpected move instantly changed the tone of the proceedings.
The U.S. Trustee initiated proceedings by filing an amended declaration. This document included color copies of checks seized from former CFO Joe Craft. Fourteen matters were on the judge's agenda, and creditors' attorneys quickly requested admission to practice in Nevada bankruptcy court.
TelexFree's legal representation included Gordon Silver and lawyers from Greenberg Traurig. One attorney was still on the phone in the hallway, handling what court documents later called "late developments." At 12:44 p.m., the bailiff ordered cell phones off, and the hearing began.
The SEC then presented papers from the U.S. Attorney's Office. These documents contained subpoenas and warrants related to the civil forfeiture action. The SEC also requested the court convert TelexFree's case from Chapter 11 reorganization into Chapter 7 liquidation. This meant the company's assets would be sold off, rather than restructured.
TelexFree's counsel countered. He argued the papers were evidentiary and should not be discussed that day. The U.S. Attorney's Office was not present in court to defend the action. He accused the SEC of unfair tactics, stating the government's "collective effort to shut us down will kill us."
SEC lawyers maintained their position. They told the judge the court could take judicial notice of both civil and criminal forfeiture actions already underway. This indicated the government had been pursuing the company through multiple legal channels.
Attorneys representing at least two groups of victims sat in the gallery. Their interests, and those of the creditors, clashed with the government's criminal investigation. For many, the difference between Chapter 11 and Chapter 7 was critical: reorganization offered a chance at recovery, while liquidation promised only scraps.
The hearing shifted from a procedural bankruptcy matter into a conflict between a company fighting to survive, federal prosecutors seeking to seize its assets, and the SEC demanding liquidation. The judge must decide if TelexFree continues its Chapter 11 fight or if it will be liquidated under Chapter 7.