William F. Galvin, secretary of the commonwealth of Massachusetts, said Monday that Fidelity Co-operative Bank of Fitchburg must establish a $3.5-million relief fund for individuals defrauded through the $1.1 billion-TelexFree Ponzi investment scheme.
(Fidelity Co-op Bank of Fitchburg, Mass., is not affiliated with Fidelity Investments of Boston.)
The Massachusetts Securities Division charged the heads of TelexFree with running an illegal pyramid operation in April. In July, TelexFree principals James Merrill and Carlos Wanzeler were indicted on federal charges of wire fraud and conspiracy.
“This settlement will help repair, at least in part, the damage done to Massachusetts investors by this pervasive pyramid scheme, one that caused substantial losses to Massachusetts residents, many in the Commonwealth Brazilian community,” Galvin said, in a press release.
(The scheme also targeted Dominicans, according to the SEC.)
Regulators say those running the pyramid operation claimed the business was an alternative to landline phone services that used voice over Internet protocol (VoIP). They asked investors for either $289 or $1,375 as an initial investment (along with a $50 administrative fee) for a sales kit.
Investors who put in $289 were told that they could make an annual profit of at least $681. Those investing $1,375 could earn $3,675.
Co-op Bank Issues
In August 2013, those running TelexFree opened accounts at Fidelity Co-operative Bank. The bank’s president is John Merrill, the brother of TelexFree’s former CEO, James Merrill. TelexFree made three deposits totaling $10.1 million.
Massachusetts securities regulators say the bank’s process for opening accounts was inadequate in terms of training, experience and oversight in the handling of large deposits.
“According to the Division’s investigation, TelexFree deposited funds in Fidelity [Co-operative] Bank accounts between Aug. 8, 2013, and Dec. 26, 2013 – proceeds received from victims of the TelexFree fraud,” the order states.
Fidelity Co-operative Bank also opened personal accounts for James Merrill and Carlos Wanzeler.
“As identified by the United States Attorney’s Office, Jim Merrill and Wanzeler transferred $10,454,000 out of Fidelity Bank, in multiple transactions using personal accounts, to various other financial institutions after Nov. 27, 2013,” according to the consent order.
Wanzeler, for instance, moved $3.5 million from his personal bank account to an overseas bank account held in Singapore.
“While this fund will not make the victims whole, it is a first step to provide them with some economic relief, and I appreciate the bank’s cooperation with the division’s investigation,” Galvin said in a statement.