A federal bankruptcy judge formally ruled that TelexFree LLC ran a vast pyramid scheme that ensnared investors around the world, a finding that has been widely anticipated since the company collapsed into chapter 11 protection last year.

In an order handed down Wednesday, Judge Melvin Hoffman of the U.S. Bankruptcy Court in Worcester, Mass., said TelexFree "operated a Ponzi and pyramid scheme" and that the company is liable for claims made by as many as one million investors.

The judge's ruling is a major step forward for efforts to return money to people who say they were defrauded and opens the door to potential lawsuits against investors at the top of the pyramid, who profited from the scheme.

Stephen Darr, the independent trustee overseeing TelexFree LLC's chapter 11 case, requested the court's pronouncement after investigating the company. He has also asked Judge Hoffman to suspend all other litigation that seeks to recover money from the company and its founders, though the judge hasn't yet ruled on this.

Mr. Darr is responsible for the task of marshaling the company's assets and returning them to investors. Mr. Darr says he has uncovered about $175 million in assets that could one day be redistributed to those who lost money in the scheme.

In court papers, Mr. Darr says the Ponzi scheme could affect more than 1 million people, which experts agree makes TelexFree one of the larger such frauds.

"It's unparalleled," said Jordan Maglich, a lawyer with Wiand Guerra King who tracks Ponzi schemes.

Massachusetts-based TelexFree used its network of investors, which it called "promoters," to help it distribute voice over Internet protocol, or VOIP, telephone service plans and to recruit new investors. According to a Securities and Exchange Commission complaint, the company promised annual returns of 200% or more for those who recruited members and placed TelexFree advertisements on free ad sites.

TelexFree took in about $360 million in cash from its investors, bankruptcy court papers show, though only about $6.6 million came from actual sales of the phone services, bankruptcy court papers show.

TelexFree, which disputes allegations that its business was a pyramid scheme, sought chapter 11 protection last year with the goal of reorganizing, but its offices were soon raided by federal agents, and federal prosecutors issued warrants seizing all known assets.

Judge Hoffman's ruling applies to the TelexFree's bankruptcy proceeding and doesn't necessarily implicate the company's principals in wrongdoing.

James Merrill and Carlos Wanzeler, the company's co-owners, have both been indicted on criminal fraud charges. Mr. Merrill has pleaded not guilty and has been placed under house arrest. Mr. Wanzeler flew to Brazil before he could be arrested and is considered a fugitive by prosecutors. Mr. Wanzeler's attorney couldn't be reached for comment but has previously said his client maintains his innocence.

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(END) Dow Jones Newswires

November 27, 2015 16:15 ET (21:15 GMT)