TelexFree co-owner arrested in Worcester

By Priyanka Dayal McCluskey

| GLOBE STAFF MAY 09, 2014

James Merrill, co-owner of TelexFree Inc., the Marlborough company accused of bilking investors in an elaborate pyramid scheme, has been arrested, U.S. Attorney Carmen Ortiz’s office confirmed today.

Authorities also have issued a warrant for the arrest of co-owner Carlos Wanzeler, who is now a fugitive, thought to have fled to Brazil amid a criminal grand jury investigation of the company

Merrill was arrested by Homeland Security agents this afternoon on Route 9 in Worcester. Charges against him will be filed in U.S. District Court in Worcester.

An attorney for Wanzeler said at a hearing Wednesday that he didn’t know the whereabouts of his client, but it “wouldn’t terribly surprise anybody” if the TelexFree principal had traveled to Brazil recently. He said Wanzeler had dual citizenship in Brazil and the United States.

Regulators sued TelexFree and froze the company’s assets last month, alleging the business and its principals were operating an illegal pyramid scheme that may have raised more than $1 billion from people around the world.

The company allegedly recruited thousands of people to buy its Internet long-distance phone service and to open accounts that would pay them returns for helping post online ads for TelexFree. The apparent scheme may have cost Massachusetts investors $90 million.

Merrill and Wanzeler met in the 1990s, when Wanzeler and his family of Brazilian immigrants went to work for Merrill’s Ashland cleaning company, according to court records. In time the two became business partners and expanded into telecommunications.

Merrill, 52, lives in Ashland and still has his cleaning business, though it’s much smaller, he told state regulators.

During an interview, regulators grilled Merrill on various aspects of TelexFree’s website, including photos of him standing in front of their Marlborough building and one in Rio de Janeiro. In particular, they asked him about the claim on the site that he was an economics graduate from Westfield State University in Massachusetts.

Merrill told the investigators that was not true, that he had not finished school. He had tried to get his colleagues to correct the site, he said, “to no avail.”

Many of the alleged victims of TelexFree are immigrants from Brazil or the Dominican Republic, drawn into TelexFree’s marketing pitch by other members of their community who boasted of the huge sums they were making for the simple job of promoting an Internet telephone service that made calling overseas cheaper.

TelexFree filed for Chapter 11 bankruptcy protection in Nevada last month. But a federal judge in Las Vegas sent the case to Massachusetts this week at the request of federal regulators.

Lawyers representing the company have argued in court that the company’s owners have a legitimate business selling Internet-based telephone service for long-distance calls and a mobile phone application to accompany it. They said TelexFree filed for

federal bankruptcy protection in Nevada last month so it can reorganize the business and generate more revenue for its participants.

But the SEC said in court this week that there is no meaningful business to speak of at TelexFree. “We believe there’s nothing to reorganize here,’’ said Frank Huntington, an SEC lawyer.

Huntington said that, by TelexFree’s accounting, the company has about $100 million in assets that could be available to creditors, most of whom are the company’s participants and promoters.

That figure includes $38 million in cashier’s checks the company’s acting chief financial officer allegedly carried with him last month as he attempted to leave TelexFree’s offices while federal agents were there seizing computers and records.

5/8: TelexFree owner appears to have left US