The TelexFREE Bankruptcy: Can “Clawback Suits” be far behind?

The April 2014 bankruptcy filing of TelexFREE, a Marlboro, Massachusetts based company that sold voice over internet protocol (“VOIP”) programs as well as income investment programs that promised massive returns for small initial investments has been transferred to the United States Bankruptcy Court for the District of Massachusetts from the Nevada Bankruptcy Court. The Court has appointed a Bankruptcy Trustee to oversee the case.

The Company also remains the subject of a Complaint by Massachusetts Secretary of State William Galvin’s Office alleging TelexFREE to be a massive Ponzi Scheme.

Mr. Galvin alleges that TelexFREE was “an elaborate internet-marketing machine” in which customers, called “associates” or “promoters,” paid the company in order to post ads and recruit other customers, for which they received guaranteed yearly returns as high as 250 %.

TelexFREE targeted investors in the Brazilian and Dominican communities throughout the United States. These investors now face massive losses as well as potential lawsuits by the Court appointed Bankruptcy Trustee of TelexFree.

Any investors who redeemed their initial investment or who made a profit could end up facing “Clawback Lawsuits” by the Court appointed Bankruptcy Trustee.

In a Clawback Lawsuit, a bankruptcy trustee sues to recover amounts paid to investors, including initial investments and any fictitious profits that were paid to investors in order to redistribute these funds to investors that lost the principal on their investment.

Clawback litigation involves several sections of the United Stated Bankruptcy Code. For example under Section 547 of the Bankruptcy Code, the trustee, may sue investors to recover preferences. A preference is the full amount of a transfer made within ninety (90) days preceding the filing of the bankruptcy petition, and if the transferee qualifies as an insider, within one year of the filing of the petition.

Under Section 548 of the Bankruptcy Code, a trustee may sue to recover fraudulent conveyances, whether actual or constructive fraud, made within two years of the bankruptcy filing. Because the very nature of a Ponzi Scheme is fraudulent, even an innocent investor can be sued to recover a fraudulent transfer

In addition, Section 544 of the Bankruptcy Code, authorizes a trustee to avoid fraudulent conveyances based upon applicable state law. In Massachusetts, the statute of limitation for fraudulent conveyances is four (4) years.

Nickless, Phillips and O’Connor has over 80 years of combined experience in the field of Bankruptcy law including prosecuting and defending Clawback Lawsuits. Investors who find themselves facing a Clawback Lawsuit may have defenses. Key issues include whether the payments received were received in good faith, statutes of limitations, burdens of proof, the amount susceptible to recovery, and what constitutes fictitious profits. Quick action is key. For an evaluation contact our professionals.