A federal bankruptcy judge formally ruled that TelexFree "operated a Ponzi and pyramid scheme" and that the company is liable for claims made by investors. Stephen Darr, the trustee overseeing TelexFree's Chapter 11 case, requested the court's ruling and asked Judge Melvin Hoffman to suspend all other litigation seeking restitution from the company and its founders. Mr. Darr is responsible for uncovering TelexFree's assets and returning funds to investors. In court papers, he said this could amount to more than 1 million people.

TelexFree, which offered VOIP service plans, took in about $360 million in cash from its members, though only about $6.6 million was from the actual sale of services. The company sought Chapter 11 protection last year, but its offices were raided by federal agents, and federal prosecutors issued warrants seizing all known assets.

Judge Hoffman's ruling applies only to TelexFree's bankruptcy proceedings and does not necessarily implicate the company's principals, James Merrill and Carlos Wanzeler, in wrongdoing. Merrill and Wanzeler have already been indicted on criminal fraud charges. Merrill pleaded not guilty and is under house arrest pending trial. Wanzeler traveled to his native Brazil before he could be arrested.