Bankruptcy Court Readies Claims System for TelexFree Investors

Victims of the alleged TelexFree pyramid scheme may soon be able to file bankruptcy-court claims seeking to have at least a portion of their original investments returned.

Stephen Darr, the trustee appointed to marshal TelexFree’s assets and redistribute them to investors, and others have made considerable progress in developing an elaborate system to handle the expected wave of claims, court papers show.

They hope to have an electronic, web-based system ready by the end of March. Then, those who lost money will have at least 90 days to submit their current contact information, their TelexFree account information and a description of what they’re owed using specially-developed claims forms.

A more specific claims deadline, also called a bar date, will be set by the bankruptcy court later this year, according to Harold Murphy, a lawyer for Mr. Darr.

As many as 1.9 million people around the world invested in TelexFree, which used a global network of so-called “promoters” to distribute its voice over Internet protocol, or VOIP, telephone service plans and, more often, to recruit new investors.

“Very rarely have there been cases with as many claimants,” Mr. Murphy told Bankruptcy Beat Thursday.

Because of the scale of the alleged scheme and the number of investors it ensnared, only claims submitted electronically will be considered.

“The cost of attempting to manually compare amounts asserted in potentially millions of physical proofs of claim against [TelexFree’s] records is incalculable,” Mr. Darr said in court papers.

Notices of the impending deadline will be provided in Spanish, Portuguese and English, court papers show, as many of the investors are immigrants from Brazil and the Dominican Republic. Lawyers plan to reach out to investors through some 1.5 million email addresses retrieved from TelexFree’s business records.

Those who fail to file their claims on time may still be able to recover a part of their investment, but only if they don’t receive notice of the deadline and ask the bankruptcy court for an exception.

Mr. Darr put the total value of transactions with TelexFree investors at about $3 billion. The total amount promised to investors, including returns, exceeds $5 billion. Those figures have grown since he was put in charge of TelexFree’s chapter 11 case and began unraveling its tangled history.

Exactly how much each claimant will recover has yet to be determined.  Assets worth an estimated $150 million to $175 million have already been seized by federal authorities and are likely to be included in the funds ultimately redistributed to investors.

Mr. Darr also recently launched a class-action lawsuit against nearly 80,000 so-called foreign investment “winners” seeking to force them to hand over their profits. Court papers show the trustee will soon file a separate suit targeting another 15,000 people residing within the U.S.

The proceeds from the lawsuits could one day trickle down to individual investors who lost money, though litigation and enforcement of judgments could take years.

“Unfortunately, I think it’s still in its infancy,” said Jordan Maglich, a lawyer with Wiand Guerra King who tracks Ponzi schemes, said of the case. “The tentacles are worldwide.”

Last fall, the TelexFree bankruptcy judge ruled that TelexFree was a Ponzi scheme. But criminal fraud charges against the company’s founders haven’t been resolved, and they have disputed the charges.

Write to Tom Corrigan at [email protected]