#253 TelexFree Motion to Amend Complaint

7/23/2019 #253 TelexFree Motion to Amend Complaint

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UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

IN RE: TELEXFREE SECURITIESLITIGATION

__________________________________________This Document Relates To:

ALL CASES

MDL No. 4:14-md-2566-TSH

PLAINTIFFS MEMORANDUM IN SUPPORT OF MOTION TO

AMEND COMPLAINT AND FILE THIRD CONSOLIDATED AMENDED COMPLAINT

Plaintiffs respectfully submit this Memorandum in support of their Motion to Amend

Complaint and File a Third Consolidated Amended Complaint. The purpose of the proposed

amendment is to add a putative Defendant Class of Direct Victim Payment Recipients (the

Defendant Class) to the unjust enrichment cause of action. 1 The putative Defendant Class is

defined and discussed in detail below. Most generally, it is comprised of those who made a net

profit through the TelexFree Scheme, as opposed to the net losers who make up the putative

Plaintiff class. The proposed Third Consolidated Amended Complaint otherwise makes no

substantive changes to the current operative Complaint and will not impact any ongoing

proceedings including disposition of the pending motions to dismiss including the related

briefing schedule and the scheduled hearing.2

1The proposed Third Consolidated Amended Complaint also deletes Plaintiff Celio Da Silvafrom the action to conform to the pending request to withdraw him from the action. It substitutes

in place of that paragraph an allegation that the remaining named Plaintiff, Rita Dos Santos,invested approximately $350,000 into the TelexFree Program during the class period and that shedid not receive any payments from TelexFree. See 38. The remaining inserted paragraphswere denoted, for example, as 3a. and 3b to clearly identify them and to keep theparagraph numbering between the SCAC and the proposed amended complaint consistent.

2Because no changes have been made to the allegations and claims contained in the SecondConsolidated Amended Complaint, allowance of this time sensitive requested amendment willnot disrupt or impact the ongoing briefing or schedule of Defendants motions to dismiss.

Case 4:14-md-02566-TSH Document 253 Filed 09/23/15 Page 1 of 11


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I.

FACTUAL BACKGROUND

This civil action is the result of the creation, growth, and catastrophic collapse of the

intra-national and international pyramid scheme known as TelexFree. TelexFree evolved out of

a small Massachusetts-based telecommunications company, Common Cents Communications,

Inc., and an integrally related Brazilian pyramid scheme known as Ympactus. TelexFree held

itself out as a multi-level marketing company in the business of selling local and international

telephone service plans that used voice over internet (VoIP) technology. However, it rapidly

grew to become one of the largest pyramid schemes in United States history (the Pyramid

Scheme or the Scheme). TelexFree maintained its headquarters in Marlborough,

Massachusetts and was a massive operation with international reach.

TelexFree now ranks among the largest and longest running Pyramid Schemes in United

States history. TelexFree operated its international Pyramid Scheme from its Massachusetts

headquarters for approximately four years. In the parallel bankruptcy proceeding, the Chapter 11

Trustee has conceded that TelexFree was an unlawful Pyramid Scheme. Criminal actions have

also been lodged against TelexFrees principals, and investigations by the Federal Bureau of

Investigation, the Department of Justice, the Department of Homeland Security, and the Office

of the United States Attorneys Office, among others, are ongoing.

Over the course of its life, the Scheme promised to pay its promoters billions, despite not

generating anywhere near that in revenue. Sales of TelexFrees VoIP amounted to less than 2%

of its income. After Brazilian authorities shut down its sister company, Ympactus, the focus of

TelexFrees unlawful Pyramid Scheme was shifted to the United States. TelexFree recruited

high earners or management from previous pyramid and Ponzi schemes, ramped up its United

States-based marketing efforts, hired MLM lawyers, CPAs, tax consultants, and other



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professionals; and engaged sophisticated financial service providers to facilitate the hundreds of

millions of dollars in transactions necessarily processed. Notwithstanding the fact it was

shuttered and enjoined from conducting any further business in Brazil, Ympactus was a named

controlling party in the otherwise facially unlawful standard TelexFree membership contract, and

also was identified as playing an important role in TelexFrees United States business operations.

TelexFree openly carried on its unlawful operation in the United States for over two

years. During this period, victims made payments for TelexFree memberships (or AdCentral

packages) in two distinct fashions. As one option, a victim could pay TelexFree directly for an

AdCentral package via various payment processing companies that maintained a relationship

with TelexFree.3 In the alternative, and as particularly relevant to the Third Consolidated

Amended Complaint, a victim could pay for his or her new AdCentral package by making a cash

payment to the TelexFree member who recruited that victim into the scam (the Direct Victim

Payment Recipients). Since these AdCentral packages represented nothing more than

membership in a scam enterprise, they were essentially worthless. Upon information and belief,

in excess of 20,000 persons were net winners.4

In 2013, TelexFrees U.S. operation began to unravel. By February 5, 2014, the

Secretary of the Commonwealth of Massachusetts, Securities Division (SOC) served the

company with subpoenas. On March 9, 2014, to forestall an impending collapse and address

burgeoning legal concerns, the company unilaterally changed its member compensation plan,

making it more difficult for members to withdraw earned funds. On April 1, 2014, dozens of

TelexFree participants descended upon TelexFrees Marlborough headquarters to protest the

3Plaintiffs Second Consolidated Amended Complaint asserts claims to recover the classmembers damages incurred during this process.

4Plaintiffs proposed Third Consolidated Amended Complaint adds defendant class allegationsand an unjust enrichment claim against that defendant class.



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changes to the compensation plan and demanded access to their money. On April 14, 2014,

TelexFree declared bankruptcy in Nevada. Federal authorities raided their headquarters and

seized everything they could. Within the months following TelexFrees collapse, victims in at

least five states filed at least six federal civil actions. These actions include the following:

Martins et al, on behalf of herself and all others similarly situated v. TelexFree etal., Case No. BK-S-14-12524-ABL (Bankr. Ct. D. Nev.)

Reverend Jeremiah Githere, et al., v. TelexElectric, LLP., et al., Civil Action No.14-12825 (D. Mass.)

Ferguson et al. v. Telexelectric, LLLP et al., Civil Action 5:14-cv-00316-D(E.D.N.C.)

Guevara v. Merrill, et al., Civil Action 1:14-cv-22405 (S.D. Fla.)

Cook, on behalf of himself and all other similarly situated v. TelexElecrtric,LLLP, et al., Civil Action No. 2:14-cv-00134 (N.D. Ga.)

Martins et al, on behalf of herself and all others similarly situated v. TelexFree etal., Civil Action No. 1:14-04044 (D. Mass.)

Cellucci, on behalf of himself and all others similarly situated v. TelexFree et al.,Civil Action No. 14-ap-04057 (D. Mass.)

On or about October 21, 2014, by Order of the Judicial Panel on Multidistrict Litigation,

all pending actions were collectively transferred to the United States District Court for the

District of Massachusetts for coordinated or consolidated pretrial proceedings. On April 30,

2015, Plaintiffs filed the Second Amended Consolidated Complaint, their current operative

pleading in this matter. By Order of this Court in Case Management Order No. 4, dated March

10, 2015, the SCAC currently also serves as the operative pleading with respect to the following

civil actions:

Ferrari v. TelexFree, Inc., et al., 14-40144-TSH (D. Mass.)



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Abdelgadir, et al. v. TelexElectric, LLLP et al., 14-cv-09857 (S.D.N.Y.)5

II.

SUMMARY OF PROPOSED CHANGES TO COMPLAINT

The proposed Third Consolidated Amended Complaint (hereinafter TCAC) is attached

herewith as Exhibit 1. The proposed Amended Complaint:

defines a putative Defendant Class of Direct Victim Payment Recipients, sets forth

questions of law and fact common to the putative class, and proposes that Defendant

Daniil Shoyfer be appointed, without costs to the class, as class representative of said

putative Defendant Class (TCAC 1012-1021);

defines the putative Defendant Class of Direct Victim Payment Recipients as Net

Winners;

names the putative Defendant Class of Direct Victim Payment Recipients as a separate

and distinct category of Defendants in this civil action;

sets forth facts establishing the nature of Direct Victim Payments and Direct Victim

Payment Recipients and Plaintiffs claim of unjust enrichment against the Direct Victim

Payment Recipients (TCAC 4-5, 37-38);

sets forth facts establishing Defendant Daniil Shoyfers membership in the putative Class

of Direct Victim Payment Recipients and Shoyfers adequacy and appropriateness as

class representative of the putative Defendant Class (TCAC 108, 1014-17);

sets forth allegations that establish that the putative class satisfies the requirements of

Fed. R. Civ. P. 23; and

5It is anticipated that another action will soon be transferred into M.D.L. 2566.



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includes the putative Defendant Class of Direct Victim Payment Recipients as

Defendants to Plaintiffs Fourth Claim for Relief, Unjust Enrichment (seeTCAC

1055-1061).

III.

LEGAL STANDARD

Federal Rule of Civil Procedure 15(a)(2) requires that a court freely give leave [to

amend] when justice so requires. See Fed. R. Civ. P. 15(a)(2). As the Supreme Court has

stated,

If the underlying facts or circumstances relied upon by the Plaintiff may be a propersubject for relief, he ought to be afforded an opportunity to test his claim on the merits.In the absence of any apparent or declared reasonsuch as undue delay, bad faith ordilatory motive on the part of the movant, repeated failure to cure deficiencies byamendments previously allowed, undue prejudice to the opposing party by virtue ofallowance of the amendment, futility of amendment, etc.the leave sought should, as therules require, be freely given.

See Foman v. Davis, 371 U.S. 178, 182 (1962) (quotation marks omitted);see alsoRockingham

County Nursing Home v. Harnois, 2014 WL 176580,2014 U.S. Dist. LEXIS 3042 at *19 (D.

Mass. 2014) (under the liberal amendment policy underlying Rule 15, leave to amend is freely

given when justice so requires absent an adequate basis to deny amendment such as futility, bad

faith, undue delay or a dilatory motive), quotingTranswitch Corp. v. Galazar Networks, Inc.,

377 F. Supp. 2d 284, 290 (D. Mass. 2005).

IV.

ARGUMENT

The formation of a defendant class is specifically authorized by Fed. R. Civ. P. 23(a),

which provides that [o]ne or more members of a class may sue or be sued[]. Fed. R. Civ. P.

23(a) (emphasis added);see alsoHenson v. E. Lincoln Twp., 814 F.2d 410, 412 (7th Cir. 1987)



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(It is apparent from the words of Rule 23(a) (sue or be sued as representative parties) that suits

against a defendant class are permitted). Defendant class actions are appropriate when there is a

need for a procedural device that allows one who has a common grievance against a multitude

of persons to resolve . . . the dispute by using only a few members of the class. Broadhollow

Funding Corp. v. Fitzmaurice(In re Broadhollow Funding Corp.), 66 B.R. 1005, 1007 (Bankr.

E.D.N.Y. 1986). The use of a defendant class avoids costly multiple litigation and the danger

of inconsistent adjudication of the same issue. Id. Such defendant class actions are a common

mechanism in so-called clawback suits designed to obtain recover net winners in pyramid

schemes. See, e.g., Bell v. Disner et al., No. 3:14-CV-91, Doc. No. 101 (W.D.N.C. Feb. 10,

2015) (granting certification of defendant net winner class in pyramid scheme lawsuit).

At bar, the number of TelexFree net winners i.e., those who made a net profit through

the TelexFree Scheme, as opposed to the net losers who make up the putative Plaintiff class

easily satisfies Fed. R. Civ. P. 23 as the number of such net winners who are believed to also

be Direct Victim Payment Recipients is believed to exceed 20,000. Since these Direct Payment

Recipients profited purely through their participation in an unlawful Scheme, and since they

provided nothing of real and lawful value to the Schemes victims in exchange for the Direct

Victim Payments they received, their gains constitute unjust enrichment. Given the sheer

number of these Direct Victim Payment Recipients, the formation of a defendant class under

Rule 23(a) is the only mechanism that will provide a fair and efficient means of recovery for

Plaintiffs. At the very least, Plaintiffs are entitled to amend their Complaint to test these claims.

Furthermore, allowance of the requested amendment will not prejudice the existing

Defendants in this matter, as the proposed changes to the Complaint do not impact even slightly

any other aspects of the Complaint or claims currently being litigated. The motions to dismiss



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Plaintiffs Interim Lead Counsel

Ronald A. Dardeno, Esq.(BBO No. 548278)Alexander D. Wall, Esq.

(BBO No. 688881)Law Offices of Frank N. Dardeno424 BroadwaySomerville, MA 02145Telephone: 617-666-2600Email: [email protected]: [email protected]

William Coulthard, Esq. (NV Bar No. 3927)Kemp, Jones & Coulthard, LLPWells Fargo Tower

3800 Howard Hughes Parkway, 17

th

FloorLas Vegas, NV 89169Telephone: 702-385-6000Email: [email protected]

William R. Baldiga, Esq.(MA Bar No. 542125)(NY Bar No. 4813846)Kiersten Taylor, Esq.(MA Bar No. 681906)Brown Rudnick LLPOne Financial CenterBoston, MA 02110Telephone: 617-856-8586Email: [email protected]: [email protected]

D. Michael Noonan, Esq.(NH Bar No. 8214)(MA Bar No. 558247)(VT Bar No. 4050)(ME Bar No. 7240)Shaheen and Gordon140 Washington StreetP.O. Box 977Dover, NH 03821Telephone: 603-871-4144Email: [email protected]



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R. Alexander Saveri, Esq.(CA Bar No. 173102)Carl N. Hammarskjold, Esq.

(CA Bar No. 280961)Saveri & Saveri, Inc.706 Sansome StreetSan Francisco, CA 94111Telephone: 415-217-6810Email: [email protected]: [email protected]

Bonsignore Trial Lawyers, PLLCFrancis Whitaker, Esq. (NH Bar No. 16509)

193 Plummer Hill RoadBelmont, NH 03220Telephone: 781-350-0000Email: [email protected]

Plaintiffs Interim Executive Committee



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CERTIFICATE OF SERVICE

I, Robert J. Bonsignore, hereby certify that on this 23 rdday of September 2015, I caused

the foregoing to be electronically filed with the Clerk of the Court by using the Case

Management/Electronic Case Filing (CM/ECF) system, which will send a notice of electronic

filing to all parties registered with the CM/ECF system in the above-captioned matter. A copy

will be forwarded via first class mail, postage prepaid, to those parties not electronically

registered.

/s/ Robert J. Bonsignore

Robert J. Bonsignore


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#253 TelexFree Motion to Amend Complaint