A Ponzi scheme uses money from new investors to pay earlier investors. In a pyramid scheme, the earlier participants recruit newer ones. The pyramid collapses when the supply of new recruits runs out, as it invariably does. Those at the top of the pyramid make money, leaving those near the bottom without their money.
Charismatic co-founder Carlos Wanzeler, who moved to Brazil the day federal agents raided TelexFree's offices, faces a 17-count federal indictment alleging conspiracy and fraud. His business partner, James Merrill, is serving a six-year federal prison sentence after pleading guilty in 2016 to 10 felony counts.
While TelexFree was ostensibly in the business of selling an internet phone service allowing free calls to Brazil and Latin America, participants were not expected to sell the product itself. Instead, they would spend their own money to buy ads for the service. They would be paid for cutting and pasting the ads online, and for recruiting other people to do the same.
When U.S. and Brazilian authorities began investigating TelexFree for what appeared to be an illegal pyramid scheme, the company declared bankruptcy and froze members' accounts, leaving millions of people around the world in the cold.
"They took money from people that (were) not rich. They are greedy," TelexFree member Eloites Euriques said, referring to Wanzeler and Merrill. "They wanted more money, but they have to think what they did for poor people and sick people like me."
Euriques, who suffers from multiple ailments, lost her life's savings of more than $20,000. She had hoped to use her TelexFree earnings to pay for heart surgery.