A Massachusetts bankruptcy judge on Tuesday signaled he will move quickly to appoint a Chapter 11 trustee to take control of TelexFree LLC, which faces accusations of operating a $1 billion-plus pyramid scheme.
Judge Melvin Hoffman of the U.S. Bankruptcy Court in Worcester, Mass., said that once additional paperwork is on file, he would approve the appointment of the trustee, an independent outsider who will replace the company's current management.
"I want to get a trustee appointed as soon as possible," Judge Hoffman said at Tuesday's hearing, the first since TelexFree's bankruptcy case was transferred to Massachusetts from Nevada.
The judge's remarks followed discussions in which a federal bankruptcy watchdog, the Securities and Exchange Commission and the U.S. attorney's office for the District of Massachusetts agreed that the facts of the case warranted the appointment.
A lawyer for TelexFree said at the hearing that the company wouldn't object to the trustee's appointment.
"We agree that it makes sense to put in place a Chapter 11 trustee," said Joseph Davis, a lawyer for TelexFree. "I understand why control of the company should not remain in the hands of management that preceded the bankruptcy."
TelexFree filed for Chapter 11 bankruptcy protection on April 13 with the goal of reorganizing its business. Days later, the Securities and Exchange Commission filed civil charges against the company, its owners and several of its most senior promoters, accusing them of operating a massive pyramid scheme. The company disputed those allegations.
Earlier this month, the U.S. attorney's office in Massachusetts charged TelexFree co-owners James Merrill and Carlos Wanzeler with conspiracy to commit wire fraud related to the alleged pyramid scheme. If convicted, they could each face up to 20 years in prison.
Paul Kelly, an attorney representing Mr. Wanzeler, has said his client maintains his innocence. A lawyer for Mr. Merrill couldn't immediately be reached for comment.
TelexFree's bankruptcy case was transferred from Nevada earlier this month after Judge August Landis of the U.S. Bankruptcy Court in Las Vegas ruled that the location of TelexFree's offices, assets and creditors, as well as the convenience of access to the company's books and records, all justified the move. Most of the company's assets and operations are based in Massachusetts, which is also where the SEC's lawsuit is pending.
The SEC had questioned whether TelexFree's decision to file for bankruptcy protection in Nevada was a sincere effort to restructure its business or an attempt to evade further investigation and prosecution in Massachusetts.
TelexFree, based in Marlborough, Mass., used multilevel marketing to assist in the distribution of voice over Internet protocol, or VOIP, telephone-service plans. According to court documents, the company's plans allow for unlimited international calling to approximately 70 countries for a flat monthly rate of $49.90.
In March alone, 80,000 people used 14 million minutes through the company's VOIP service, Mr. Davis said at the hearing. "There's a significant amount of telecommunication activity in this business," he said.
According to a complaint filed by the SEC, the company had VOIP sales revenue of about $1.3 million from August 2012 through March 2014, compared with more than $1.1 billion needed to cover its promised payments to promoters.