Massachusetts fraudster pleads guilty to billion dollar pyramid scheme

BOSTON — The head a Massachusetts-based pyramid scheme that was disguised as an internet telecom company, pleaded guilty in federal court Monday to multiple counts of wire fraud and conspiracy.

This guilty plea resulted from an investigation by U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI), with the assistance of the FBI, the Brazilian Federal Police based in Vitoria, Brazil, the Securities & Exchange Commission, and the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts.

James Merrill, 55, of Ashland, Massachusetts, pleaded guilty to one count of wire fraud conspiracy and eight counts of wire fraud.  U.S. District Court Judge Timothy S. Hillman scheduled sentencing for Feb. 2, 2017.  Merrill’s trial was scheduled to begin Monday.

“The pyramid scheme Mr. Merrill operated defrauded thousands of victims throughout Massachusetts, and in fact, around the world,” said United States Attorney Carmen M. Ortiz.  “Mr. Merrill lined his pockets on the backs of hard working individuals who, in some cases, invested their entire savings.  We hope today’s guilty plea brings some degree of justice to the many victims in this case.”

Between February 2012 and April 2014, Merrill was the President of TelexFree, Inc., which sold a “voice-over-internet-protocol” (VOIP) telephone service, similar to Skype, for which customers could sign up on a website maintained by TelexFree.  However, the company was a pyramid scheme whereby all of the money TelexFree paid out came, not from sales of its product, but from new participants continuously paying TelexFree to sign up as “promoters” for the company.

TelexFree derived only a fraction of its total revenue in a two-year period from sales of VOIP service – approximately 2%.  The remaining 98% came from new people buying into the scheme. TelexFree could only pay the returns it had promised to its existing promoters by bringing in money from newly-recruited promoters.

TelexFree’s website prominently featured Merrill as the leader of the company and as an experienced businessman in the telecom field.  As the website advertised at various times that participants who paid between $300- $1500 to sign up with TelexFree, would in return be paid $20-$100 a week to post classified ads every day on the internet.  The company couched those payments in terms of “buying back” unused VOIP packages the participants were unable to sell, but the practical reality was that participants were guaranteed an annual return of over 200% on their money without having to sell anything. 

Among other things, emails showed Merrill’s awareness that the ad-posting was intended only to ensure that people visited TelexFree’s web site as opposed to generating actual retail sale of the VOIP product.  Participants spent minutes a day cutting and pasting ads into various classified ad sites provided by TelexFree, which were already saturated with thousands of ads posted by earlier participants. Participants were also given substantial financial incentives to recruit others to join the scheme. 

To receive bonuses for recruiting others, in theory each participant needed to have one VOIP customer.  But in reality, participants met this requirement simply by buying the product themselves and, in 97% of instances, never using it.  In this way, TelexFree created the illusion that it had hundreds of thousands of legitimate VOIP customers.  On paper the company sold about 12.4 million VOIP plans, but in reality it had an extremely small number of legitimate customers, an even smaller number of which had actually paid money to TelexFree for the service. 

Overall, the nearly two million people who participated in TelexFree made 96% of their compensation, not from selling the company’s VOIP service, but from ad-posting and recruiting others to join.

Beginning in late 2012, involvement in TelexFree spread rapidly, and by April 2014, well over a million people worldwide had signed up with the company.  This included over 20,000 people in Worcester, Massachusetts alone, and thousands more throughout the state.  Meanwhile, beginning in 2013, Merrill received increasingly frequent warnings that the company was a pyramid scheme.  Beginning in August 2013, Merrill began to take steps to change how the company did business, but Merrill never alerted the public, even though more than a million people signed up for TelexFree between that month and TelexFree’s collapse in 2014.

In December 2013, Merrill wired himself and two co-conspirators a total of $10 million from TelexFree accounts.  On April 14, 2014, Telexfree filed for bankruptcy, at which point it owed approximately $5 billion to its participants, while having only about $120 million on hand (about 2% of what it owed).  At that point, nearly one million participants lost money in the scheme, with total losses of about $1.8 billion.  Overall, these victims came primarily from the United States (all 50 states), Brazil, China, Portugal, Peru, other Central and South American nations, Italy, and Russia, with smaller victim populations in dozens of other countries.

According to the terms of the plea agreement, Merrill will be sentenced to no more than 10 years in prison.  Merrill also agreed to forfeit approximately $140 million, numerous real estate properties, luxury vehicles and boats.  Actual sentences for federal crimes are typically less than the maximum penalties.  Sentences are imposed by a federal district court judge based upon the U.S. Sentencing Guidelines and other statutory factors.

If you believe that you are a victim of the alleged TelexFree, Inc. scheme, please enter a claim for reimbursement.