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Sentencing is set for Thursday for the first of three defendants who pleaded guilty to federal fraud charges for taking almost $13 million out of a multi-level marketing company they started.
Craig Jerabeck, Jeb Tyler and Jason Guck, the founders of 5LINX Enterprises Inc., are facing a potential maximum sentence of five years and three months in prison.
Jerabeck pleaded guilty under an agreement that the government will ask asked U.S. District Court Judge David G. Larimer for a two-level reduction under the federal sentencing guidelines.
Jerabeck, the former president and CEO of 5LINX, is scheduled to be sentenced Thursday. Former 5LINX vice president Tyler is scheduled to be sentenced Dec. 12, while former 5LINX vice president and secretary Guck is scheduled to be sentenced Dec. 19.
All three men are currently free on $100,000 bond. Through their attorneys, Jerabeck and Tyler have asked Larimer for a sentence of probation. Guck’s attorney, Joseph S. Damelio, said he planned to file a sentencing statement on Tuesday.
In January, Larimer issued a gag order preventing the attorneys and defendants from publicly discussing the case.
In 2001, the trio started 5LINX as a telecommunications services company and later added utility services, health insurance, coffee, nutritional supplements and business services.
The company’s products were sold by independent representatives who were not company employees. They sold products directly to retail customers and to other “downline” distributors who were newly recruited representatives.
At its peak, 5LINX had more than 235 employees in Monroe County and more than 10,000 independent representatives worldwide, according to court documents.
In June 2006, 5LINX received a $3.5 million investment from Trillium Lakefront Partners and Shalam Investment Co. LLC. Those investors injected another $2 million into the company in July 2006.
The investors owned about 23 percent of the company and the founders always owned at least 70 percent of the company, according to court documents.
According to a sentencing statement submitted by Tyler’s attorney, Matthew Parrinello, 5LINX “suffered a massive collapse, not because the founders received compensation as independent representatives, but because of the death of telephone land lines and the polar vortex.”
When 5LINX started most people used landline phone service, which 5LINX sold. But within a few years, less than half of homes had a landline.
The company tried to make up for the loss by adding new products and services, including energy. 5LINX acquired a deregulated electricity marketing company in 2013, just in time for an unprecedented cold spell in January 2014.
“For the first time in over half a century, a weather phenomenon known as a polar vortex hit the northeastern United States and the electricity portion of the business suffered an enormous financial loss: approximately $7 million cash loss in three months,” according to the statement submitted by Parrinello.
The unexpected expenses related to the unusually cold winter could not be passed on to customers. 5LINX was able to sell the energy company for a loss of $1 million, but it saved 5LINX from bankruptcy, according to a sentencing statement submitted for Jerabeck by his attorney, James Nobles.
The company again tried to make up for the loss by adding new products, such as coffee and nutritional supplements. But the effort was futile.
In 2014, the founders agreed to pay the investors $22 million to buy back their shares and regain total control of the company and rebuild it.
The investors, who originally contributed $5.5 million, got $11.2 million in cash, plus a promissory note for $10 million. The founders were supposed to make monthly payments of $250,000, but they could only manage four payments.
In total, the investors made a profit of about $7 million on their investment.
Subsequently, Bank of America called in a $6 million line of credit, so Globalinx, the telecom portion of the business, was sold for $7 million, allowing them to pay off the $6 million line of credit.
Less than a year before, 5LINX was offered $25 million for Globalinx, according to court documents.
According to Nobles’ filing: “The case against 5LINX came to light when a disgruntled representative demanded ownership in the company and was denied.”
That representative, Andre Maronian, “who was earning $55,000 per month while at 5LINX, wanted more,” Nobles wrote.
After losing several lawsuits against 5 LINX, “Maronian ultimately went to the FBI,” Nobles wrote.
The three men were charged in March 2017. Jerabeck pleaded guilty in May. Tyler pleaded guilty in June. And Guck pleaded guilty in July.
The three founders were accused of diverting almost $13 million in company revenue to themselves acting as independent representative at the same time they were the majority owners of the company.
Although the defendants claimed it was totally appropriate, they received the money only by changing the company’s computer system “to pay them in a completely different manner than the manner in which the company paid its actual independent representatives,” according to a court filing by Assistant U.S. Attorney Richard Resnick.
And they were paid through companies that had no obvious connection to the three defendants. They also used multiple accounts to transfer the money to themselves, prosecutors said.
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