In a ruling earlier today, a Nevada Bankruptcy court dealt a severe blow to efforts by a consortium of companies accused of operating a massive Ponzi and pyramid scheme by ruling that the pending bankruptcy cases would be suspended and ultimately transferred to Massachusetts, where pending state and federal regulatory actions are pending. U.S. Bankruptcy Judge August Landis ruled that he would grant the Securities and Exchange Commissions's request for abstention and suspend the current bankruptcy proceedings of TelexFree LLC, TelexFree, Inc., and TelexFree Financial Inc. (collectively, "TelexFree") Judge Landis indicated that, in the event the debtors planned to move forward with bankruptcy, the proceedings would be transferred to the District of Massachusetts, where the Commission's emergency enforcement action is pending against TelexFree.
The ruling is a severe setback to TelexFree, which filed bankruptcy on the eve of the filings by the Commission and the Massachusetts Securities Division. TelexFree had strenuously argued against abstention or transfer, maintaining its position that the company had a viable product that it predicted could result in "significant" revenue once it emerged from bankruptcy. However, the company also sought to "reject" debts of hundreds of millions of dollars to "promoters" that were compensated on selling TelexFree products and recruiting others as part of the process.
The Motion to Transfer Venue
In evaluating the Motion to Transfer venue, the Court analyzed first whether transfer was in the "convenience of parties," which involved a weighing of six common factors:
Of the factors, the Court noted that the fifth was the most important while the sixth was the least important. The Court found that all six factors weighed in favor of a transfer to Massachusetts. Based on these findings, the Court concluded that transfer TelexFree, LLC and TelexFree Financial, Inc. bankruptcy proceedings to Massachusetts was warranted. The Court also analyzed whether transfer of the TelexFree Inc. bankruptcy was warranted under an "interests of justice factor," which involves an analysis of the following six factors:
While noting that the third factor was a "push," the Court concluded the remaining factors warranted transfer of venue to Massachusetts.
Following its ruling on the Motion to Transfer Venue, the Court also pondered whether abstention was appropriate - an issue that was initially raised by the Court immediately following the bankruptcy filings. While noting that abstention is used sparingly and in unusual circumstances, the court concluded such a situation was present. After weighing several factors, the Court concluded that abstention - in the form of suspending all proceedings - was warranted until and when venue could be transferred to Massachusetts.
While TelexFree's chances for success were slim, their strategy was certainly noteworthy. A continual theme present in TelexFree's papers before the bankruptcy court was the notion that the company, accused by U.S. and foreign interests of malfeasance, could simply do away with the past troubles in favor of starting anew. This included cleaning house of the previous officers and directors (one agreed to resign while another refused and had to be terminated), as well as extolling the future revenue possibilities of a phone service that, on its face, was overpriced compared to competitors such as Skype and Vonage. Such a strategy ignored the company's troubled history in favor of a unproven and theoretical future. While certainly a novel attempt, the Court delivered a resounding rebuke to this strategy.
According to attorney Timothy J. Durken, who is monitoring the case on behalf of TelexFree promoters, “It was clear under the factors considered by Bankruptcy Judge Landis that the TelexFree bankruptcy cases belong in Massachusetts. TelexFree was headquartered in Massachusetts and that is the where the investigations and SEC and MSD actions are ongoing."
A detailed recap of the hearing is available here. There exists the possibility that TelexFree could appeal the ruling.
Previous Ponzitracker coverage of TelexFree is here.
For more news and analysis of Ponzi schemes, visit Ponzitracker, a blog by Jordan Maglich, an attorney at Wiand Guerra King P.L.
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