Federal Authorities Set Sights on Alleged Pyramid Schemes

This week federal authorities have revealed major developments in two cases involving pyramid scheme allegations. With the backing of anti-pyramid laws like the one recently established in Tennessee, regulators have announced a settlement in the case of Kentucky-based Fortune Hi-Tech Marketing (FHTM) and filed fraud charges against TelexFree of Massachusetts.

Officials at FHTM will surrender assets totaling $7.75 million in restitution to participants, according to a release from Kentucky Attorney General Jack Conway’s office. He joined the Federal Trade Commission (FTC) and attorneys general from Illinois and North Carolina in a January lawsuit filed against FHTM. An investigation begun in 2010 found FHTM to be a deceptive operation built upon collecting substantial start-up costs and monthly fees rather than selling product. More than 98 percent of the company’s participants lost more money than they ever made in what Conway calls a “classic pyramid scheme.”

“Unlike legitimate multi-level marketing programs, FHTM distributors had no incentive to sell products. For example, the distributors only received pennies for selling multi-year service contracts and received substantial payments for every new FHTM member they signed up,” said Conway. “FHTM’s promotional presentations and materials focused almost entirely on recruiting new members rather than selling products.”

The full amount of the settlement, $169 million, will be suspended when FHTM officials have surrendered their assets. The order also bans the defendants from any future participation in multi-level marketing programs.

After a raid on TelexFree’s Massachusetts headquarters in April, federal agents have found one of the business’s co-owners “may be elusive,” as a Boston Globe headline puts it. Carlos Wanzeler reportedly fled to Brazil after state and U.S. securities regulators filed civil charges against the company and its principals in April.

On Wednesday night the U.S. attorney’s office confirmed that Wanzeler’s wife, Katia, was arrested at JFK International Airport allegedly attempting to join her fugitive husband in Brazil. According to the Globe, an affidavit filed Thursday reveals that large sums of money have been transferred from TelexFree accounts into a Wells Fargo account under Katia Wanzeler’s name.

During the TelexFree raid one executive attempted to flee with a bag of cashier’s checks totaling $38 million. The Securities and Exchange Commission (SEC) subsequently froze the company’s assets, and last week authorities charged Wanzeler and co-owner James Merrill with conspiracy to commit wire fraud.

The civil charges claim TelexFree is a global pyramid scheme defrauding consumers with the promise of a quick profit. The company, which sold Internet phone-service plans, generated most of its money by incentivizing members to invest in online ads. The criminal wire fraud charges Wanzeler and Merrill face carry a sentence of up to 20 years in prison.

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