20,000 In Worcester Swindled; Former Telexfree Pres. Sentenced for Billion Dollar Pyramid Scheme

WORCESTER, MA — It started in 2012, and spread rapidly. By April of 2014, well more more than a million people, 20,000 in Worcester alone, had signed up for Telexfree, a global pyramid schemed disguised as an internet telecom company.

The former president of Telexfree, Inc. James Merrill, 55, of Ashland, was sentenced by U.S. District Court Judge Timothy S. Hillman to six years in prison and three years of supervised release. In October 2016, Merrill pleaded guilty to one count of wire fraud conspiracy and eight counts of wire fraud. He also agreed to forfeit approximately $140 million and other assets.

“Despite knowing that Telexfree was a pyramid scheme, Mr. Merrill profited for years at the expense of the hard-working individuals who invested in the fraudulent company,” said Acting U.S. Attorney William D. Weinreb in a statement. “For the hundreds of thousands of investors, here and around the world, who were taken in by the lies promoted by Mr. Merrill and Telexfree, today’s sentence provides a measure of justice. Mr. Merrill’s greed damaged the livelihoods of thousands of people who were simply struggling to make ends meet.”

“While the harm and damage James Merrill caused by stealing more than $3 billion from innocent investors can never be repaired, his victims in more than 240 countries around the world can take some small measure of satisfaction that he is now looking at six years in federal prison and a substantial forfeiture as repayment for his crimes.” said Matthew Etre, special agent in charge of homeland security investigations in Boston, in a statement. “HSI special agents will continue to aggressively investigate those who seek to profit by taking advantage of others.”

According to the U.S. Department of Justice, between February 2012 and April 2014, Merrill was the president of TelexFree, 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. TelexFree, however, was a pyramid scheme; all of the money TelexFree paid out came, not from sales of its product, but from new participants paying TelexFree to sign up as “promoters” for the company.

Merrill was featured as the company's leader, an experienced businessman in the telecom field. The "deal" was advertised on websites, with participants paying $1,425 or $339 to sign up with TelexFree, after which they would be paid $100 per week or $20 per 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 reality was that participants were guaranteed an annual return of more 200 percent on their money without having to sell anything, said the press release.

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 percent 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 a tiny number of legitimate customers, an even smaller number of which had actually paid money to TelexFree for the service, continues the release. Overall, the nearly 2 million who participated in TelexFree made 96 percent of their compensation, not from selling the company’s VOIP service, but from ad-posting and recruiting others to join.

In addition to 20,000 in Worcester who were affected by the scheme, thousands more were also hit in Boston, Framingham and Chelsea. Starting in 2013, Merrill was increasingly given warnings that the company was a pyramid scheme, and he began to take steps to change the company's business practice. He never, however, alerted the public.

In December 2013, Merrill wired himself and two co-conspirators a total of $10 million from TelexFree accounts, said the U.S. Department of Justice. On April 14, 2014, Telexfree filed for bankruptcy, at which point it owed approximately $6 billion to its participants, while having only about $120 million on hand (about 2 percent of what it owed). At that point, approximately 1,855,000 participants worldwide lost money in the scheme, with total losses of about $3,045,000,000. 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.

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