Unbeknown to me (and I imagine a fair for of you), the Plaintiff’s Interim Executive Committee (PIEC) and TelexFree Trustee have been at loggerheads over investment flow.
Following two rulings that sided with the Trustee on the matter, now a First Circuit appeal decision has also followed suit.At issue between the PIEC and Trustee is who will go after net-winners with respect to fund recovery.
The Trustee wants to pursue avoidance actions (payments within TelexFree were made to avoid the law), whereas PIEC is asserting unjust enrichment.
These adversarial positions are rooted in a disagreement pertaining to the flow of new investment within TelexFree.
When an existing participant recruited someone new into the scheme, TelexFree would send an invoice to the new participant for the membership fee.
One way the new participant could satisfy the invoice was by paying the company the membership fee directly, although only about twelve percent of membership fees were paid that way.
The much more common method used was that the new participant paid her membership fee directly to the participant who recruited her.
TelexFree then would remove from the recruiting participant’s account credits of equal value to the membership fee that this recruiting participant retained.
TelexFree then considered the new participant’s invoice satisfied and, once annually, issued an Internal Revenue Service Form 1099 to the recruiting participant for the value of the credits he redeemed.
Existing TelexFree participants could monetize their accumulated credits this fast and reliable way.
To summarise, the majority of new investment into TelexFree was collected by recruiting scammers (upline payments).
TelexFree deducted credits from their account and from this method of new investment, saw no actual revenue.
The Trustee classifies these upline payments as a single “triangular transaction”.
He argues that the payments made by the new participants to the recruiting participants were integral to the economics of the TelexFree scheme and are best understood as an indirect way for the new participants to pay TelexFree membership fees and TelexFree simultaneously to pay the recruiting participants for their accumulated credits.
PIEC takes the position that upline investment consisted of three separate transactions.
The “victims” PIEC represents who want to exercise their “personal rights” against recruiters who “pocketed their hard-earned savings” were the persons harmed, not TelexFree.
When the issue was first raised in the bankruptcy court, the court sided with the Trustee.
This position was adopted by a District Court, leading to PIEC filing a First Circuit appeal.
On October 31st the First Circuit ruled in favor of the Trustee.
Because we reject PIEC’s arguments, we affirm the district court’s order.
The legal weight behind the decision is heavy. But as best as I can tell, the decision basically means a significant clawback roadblock has been removed.
As a result of the First Circuit’s decision, PIEC will not be able to pursue any independent clawback action (PIEC initiated proceedings years ago).
If I’m wrong on this please correct me in the comments below, but I think part of the reason PIEC is against counting upline transactions for the purpose of clawback, is because it disqualifies a significant number of victims.
These victims don’t have any record of investment placed directly with those that recruited them.
Personally I have little sympathy for these claimants.
Everyone knew TelexFree was a Ponzi scheme and more often than not, these under the table transactions were made with the intention of avoiding traditional banking channels (on both the part of investor and scammers recruiting them).
While no doubt there are likely other roadblocks still to be dealt with, the First Circuit’s ruling means TelexFree victims are nonetheless one step closer to distribution.