The multinational company, TelexFREE, recently shut down in Brazil is being investigated by the Secretary of the State in Massachusetts, triggered by TelexFree’s filing for federal bankruptcy protection. Securities regulators in Massachusetts accused TelexFree of a $90 million fraud in Massachusetts, and $1 billion around the world.
According to Brazil's Ministry of Justice and the Federal Public Ministry, Telexfree’s Brazilian operations has been labeled as one of the largest financial frauds in the history of Brazil. The company is currently under investigation by Brazilian authorities, where the Court to froze the company's and its owners' assets and has suspended of its operations in Brazil.
Security regulators have now accused the company, which purports to sell Internet telephone services, of enticing investors from immigrant communities, who in some cases have invested their life savings, into the scheme.
Federal agents from the FBI and Homeland Security acting on a search warrant raided the TelexFree office on Tuesday.
It appears that the filing for federal bankruptcy protection that sparked federal authorities to action.
TelexFree filed a Chapter 11 bankruptcy with the same goals as other companies that file for bankruptcy; to reorganizing its' business in order that it may generate sufficient money to pay its creditors, over a period of time, a reduced amount of debt. A Chapter 11 debtor generally remains in possession and control of his property throughout the bankruptcy. In the end the debtor expects to obtain a discharge from all debt in excess of an amount it can manage. This is normally obtained by the confirmation of a plan of reorganization that explains which creditors will get paid, how much they will get paid, and when payments will happen.
This goal will be a practical impossibility for TelexFREE to obtain, if the allegations of the Securities regulators in Massachusetts are established in a court of law. The reason is that no fraudulent debts can be discharged.
The Bankruptcy Code makes some debts “non-dischargeable” if the Category of claims arises from a debtor’s bad acts – namely a debtor’s liability for: (1) debts arising from fraud by the debtor as a fiduciary, embezzlement, or larceny; (2) debts obtained through false pretenses, false representations, or actual fraud; (3) consumer obligations – credit card debts and luxury goods – owed to a single creditor over a certain threshold; and (4) willful and malicious injury caused by debtor to another’s property.
In order for these debts to be declared “non-dischargeable” a creditor must file a complaint to obtain a bankruptcy judge’s determination that a particular debt is nondischargeable. This must be done within the first few months after the filing of the bankruptcy, otherwise, if the creditor fails to timely take action to protect its interests, a discharge awarded to the debtor will also discharge the potentially nondischargeable debt. The likeliness of such a happening in the TelexFREE case is highly unlikely as there has been enormous publicity throughout the world of the alleged misconduct of the debtor.
Over the next few months there will be much litigation on the issue of fraud and non-dischageability of any debt that falls into the categories mentioned above.