Massachusetts Secretary of State William Galvin's office opened an investigation earlier this month into a Marlborough-based telephone marketing company. The company, TelexFree, had already faced a ban in Brazil for operating a pyramid scheme. This inquiry stemmed from a broader investigation into WCM777, a similar firm that the SEC recently shut down as a $65 million Ponzi scheme.
The SEC filed a 24-page complaint against WCM777 in a Californian District Court. This complaint detailed an ongoing pyramid scheme, Ponzi scheme, and misappropriation of investor funds. It described an unregistered securities offering that targeted members of the Asian-American and Hispanic-American communities, as well as foreign investors.
TelexFree has actively targeted Hispanic-American communities. eReleases, in a paid advertisement for TelexFree, noted that over one million Portuguese-speaking residents of Massachusetts knew of the company. These residents, it claimed, previously paid high international rates or struggled to teach elderly parents how to use Skype to call home to Brazil or Portugal.
Randy Crosby, identified as a TelexFree leader, recently announced an "office in Hong Kong" during an affiliate investor call. This move suggests TelexFree may adopt a proactive approach to securing Asian-American investor funds.
The SEC found WCM777 generated no appreciable revenue beyond selling "packages" of cloud services to investors. The company did not offer a legitimate product or service to retail customers. Instead, the SEC alleged WCM777’s business model relied on new investor money to pay earlier investors. TelexFree's compensation plan, prior to recent changes, operated in a similar fashion, with affiliates earning commissions primarily through recruiting new members and selling "AdCentral" positions. These positions required daily ad postings that generated little to no actual retail revenue.
The SEC complaint against WCM777 highlighted the company's "World Capital Market" brand, which claimed to offer "cloud computing" and "cloud storage" services. Investors bought "affiliate packages" ranging from $300 to $3,000. These packages promised daily returns of 10-100% per month, with investors able to "reinvest" their earnings to buy more packages.
TelexFree similarly offered voice-over-internet-protocol (VOIP) telephone services. Its "AdCentral" packages, however, functioned more like investment contracts. Affiliates bought these packages for $289 or $1,375. They then "earned" weekly payments by posting pre-written ads on free classified websites. The company also paid recruitment commissions for bringing in new affiliates who purchased these packages. Brazil's Ministry of Justice banned TelexFree in July 2013, freezing its assets, after finding it operated a pyramid scheme.