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

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

IN RE: TELEXFREE SECURITIES

LITIGATION
MDL No. 4:14-md-2566-TSH
__________________________________________
This Document Relates To:
ALL CASES
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

The proposed Third Consolidated Amended Complaint also deletes Plaintiff Celio Da Silva
from 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 she
did not receive any payments from TelexFree. See 38. The remaining inserted paragraphs
were denoted, for example, as 3a. and 3b to clearly identify them and to keep the
paragraph numbering between the SCAC and the proposed amended complaint consistent.
2

Because no changes have been made to the allegations and claims contained in the Second
Consolidated Amended Complaint, allowance of this time sensitive requested amendment will
not disrupt or impact the ongoing briefing or schedule of Defendants motions to dismiss.
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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
3

Plaintiffs Second Consolidated Amended Complaint asserts claims to recover the class
members damages incurred during this process.
4

Plaintiffs proposed Third Consolidated Amended Complaint adds defendant class allegations
and 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 et
al., 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 et
al., 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

It 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 (see TCAC
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 proper
subject 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 or
dilatory motive on the part of the movant, repeated failure to cure deficiencies by
amendments previously allowed, undue prejudice to the opposing party by virtue of
allowance of the amendment, futility of amendment, etc.the leave sought should, as the
rules require, be freely given.
See Foman v. Davis, 371 U.S. 178, 182 (1962) (quotation marks omitted); see also Rockingham
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), quoting Transwitch 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 also Henson 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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that remain pending before the Court will be unaffected by the amendment.6 The proposed
amendment is brought in good faith, without dilatory motive, and will not result in any undue
delay of these proceedings. In fact, Plaintiffs Executive Committee strongly advances the
position that the sooner the cause against the Net Winners is advanced, the better the interests of
the Putative Class of Net Losers will be served. In sum, Plaintiffs proposed amendment, which
includes the addition of a class of Defendant Net Winners to the unjust enrichment claim, are
important to Plaintiffs recovery in this matter, but will otherwise not affect existing claims or
the schedule of this Court. The addition of the putative class will serve to increase the efficiency
of this litigation and reduce the burden of this court and the parties while preserving the rights of
all parties involved. The Plaintiffs Motion should therefore be granted.
V.
CONCLUSION
For the foregoing reasons, Plaintiffs respectfully request that their Motion to Amend
Complaint and File a Third Consolidated Amended Complaint be Granted, and that the proposed
Third Consolidated Amended Complaint, attached herewith as Exhibit 1, be entered upon the
docket.
Dated: September 23, 2015
Respectfully submitted,
/s/ Robert J. Bonsignore
Robert J. Bonsignore Esq. (NH Bar No 21241)
Lisa Sleboda, Esq. (PA No. 71580)
Bonsignore Trial Lawyers, PLLC
3771 Meadowcrest Drive
Las Vegas, NV 89121
Telephone: 781-856-7650
Email: rbonsignore@classactions.us
Email: lsleboda@classactions.us
6

In resolving the pending motions to dismiss, this Court may simply refer to the SCAC in its
ruling.
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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. Dardeno
424 Broadway
Somerville, MA 02145
Telephone: 617-666-2600
Email: rdardeno@dardeno.com
Email: awall@dardeno.com
William Coulthard, Esq. (NV Bar No. 3927)
Kemp, Jones & Coulthard, LLP
Wells Fargo Tower
3800 Howard Hughes Parkway, 17th Floor
Las Vegas, NV 89169
Telephone: 702-385-6000
Email: w.coulthard@kempjones.com
William R. Baldiga, Esq.
(MA Bar No. 542125)
(NY Bar No. 4813846)
Kiersten Taylor, Esq.
(MA Bar No. 681906)
Brown Rudnick LLP
One Financial Center
Boston, MA 02110
Telephone: 617-856-8586
Email: wbaldiga@brownrudnick.com
Email: ktaylor@brownrudnick.com
D. Michael Noonan, Esq.
(NH Bar No. 8214)
(MA Bar No. 558247)
(VT Bar No. 4050)
(ME Bar No. 7240)
Shaheen and Gordon
140 Washington Street
P.O. Box 977
Dover, NH 03821
Telephone: 603-871-4144
Email: mnoonan@shaheengordon.com

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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 Street
San Francisco, CA 94111
Telephone: 415-217-6810
Email: rick@saveri.com
Email: carl@saveri.com
Bonsignore Trial Lawyers, PLLC
Francis Whitaker, Esq. (NH Bar No. 16509)
193 Plummer Hill Road
Belmont, NH 03220
Telephone: 781-350-0000
Email: fwhitaker@class-actions.us
Plaintiffs Interim Executive Committee

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CERTIFICATE OF SERVICE
I, Robert J. Bonsignore, hereby certify that on this 23rd day 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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