Fidelity to pay $3.5M in TelexFREE case

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By Sam Bonacci And Rick Saia

Fidelity Bank of Fitchburg has agreed to pay $3.5 million toward a relief fund for Massachusetts investors who were defrauded by an alleged pyramid scheme involving TelexFREE of Marlborough, the secretary of state’s office announced Monday.

State officials had accused Fidelity of having an inadequate process surrounding the opening of accounts. As part of the agreement with the state, the bank neither admitted to nor denied the allegations, according to Karen Schwartzman, a spokeswoman for Fidelity.

“The settlement will help repair, at least in part, the damage done to Massachusetts investors by this pervasive pyramid scheme, one that has caused substantial losses to Massachusetts residents many in the Commonwealth Brazilian community,” Secretary of State William Galvin said in a statement.

TelexFREE, which had been headquartered in Marlborough and had offices in Brazil, was charged in April with running an illegal telecommunications pyramid scheme. The company’s principals, James Merrill and Carlos Wanzeler, have been indicted on federal charges of wire fraud and conspiracy, according to Galvin’s office. TelexFREE filed for Chapter 11 bankruptcy protection in April.

Fidelity Bank President John F. Merrill, brother of James Merrill, was subpoenaed in May in connection with the alleged pyramid scheme. Fidelity’s involvement with the company began in August 2013 when TelexFREE opened accounts at the bank, according to Galvin’s office.

The first three deposits totaled nearly $10.1 million in proceeds from TelexFREE’s alleged fraud, said Galvin. The securities division has charged that there was inadequate training and oversight, training and experience in handling such large deposits at the bank. An outside consultant advised Fidelity that “TelexFREE was a high-risk customer due to the account balance and large volume of wires,” according to settlement documents.

When Fidelity began to review TelexFREE’s account activity, it discovered that Brazilian authorities had shut down a TelexFREE company on pyramid scheme allegations, Galvin’s office said. At that time, the bank determined to close the TelexFREE accounts, but allowed continued limited banking for the company, according to the settlement.

The bank allegedly allowed Jim Merrill and Wanzeler to continue to make personal transfers through personal accounts with Fidelity, some of which were opened after the audit of the internal review of the TelexFREE accounts, according to the settlement. A total of $10,454,000 was transferred out of Fidelity, according to Galvin’s office, including $3.5 million from Wanzeler’s personal Fidelity account to an overseas bank account in Singapore last Dec. 30.

Schwartzman said Fidelity followed standard banking procedures, and flagged the accounts when “we saw that the level of the account activity and the size of the account balances would require more extensive monitoring.”

Schwartzman said Fidelity agreed to the settlement because of the otherwise costly and time-consuming prospect of litigation and investigation. She said the bank believed it better to use those resources to help victims of the alleged scheme.

Galvin’s office alleges that TelexFREE operated a $1 billion scheme that preyed on Brazilian immigrants, promising them a 200-percent return on investments of $289 or $1,375 by recruiting new members and placing advertisements on free Internet ad sites. James Merrill is being held pending trial after being ruled a flight risk. Wanzeler fled the country.

Fidelity, with eight branches in Central Massachusetts, had more than $425 million in deposits and more than $550 million in assets as of June 30. Schwartzman indicated the settlement would have little impact on its financial performance; she said the bank will end the year profitable.

(Image credit Freedigitalphotos.net)