MLM / Chain Money
The Direct Selling Association on Pyramid Schemes: Truth and Truthiness
Dr Vander Nat and Dr Keep set the record straight & discuss how recent DSA report mainly appeals to truthiness, takes novel stand on key diagnostic for a pyramid scheme and runs contrary to recent case law
This is a guest blog by Peter Vander Nat, Ph D, and William Keep, Ph D. Dr Vander Nat is a former senior economist with the FTC who has testified in numerous federal pyramid scheme cases. Dr Keep is the Dean of the School of Business at The College of New Jersey (TCNJ) and an expert on pyramid schemes. Together Drs Vander Nat and Keep authored two seminal works analyzing the MLM industry
Public statements presented as true, though without supporting logic or evidence, if repeated frequently and with enough gravitas may eventually be accepted as true. To capture this type of phenomenon, a new word has been added to our lexicon, “truthiness.” Truthiness does not necessarily indicate a false statement, though a false statement authoritatively asserted as though it were true does qualify.
Below we test our understanding of truthiness with regard to a recent report commissioned by the Direct Selling Association (DSA) and other assorted DSA public statements. Curiously, the authors of the DSA report are antitrust experts, who have neither published any scholarly works concerning multilevel marketing companies (MLMs), nor acted as pyramid scheme experts in a court of law. Perhaps it is due to this lack of expertise and experience that their report mainly appeals to truthiness.
As for truth, it is certainly true that much effort, time and many words went into criticizing a paper* that we wrote thirteen years ago. But it must be pointed out at the start that the model we developed as a scholarly work has never been used in a court of law to determine whether or not a company is operating a pyramid scheme, and it was never proposed that it could function in that way. This is so because each pyramid case presents a unique set of available data, and the analysis in each case must address how the company functions in practice. Unfortunately, the authors of the DSA report did not appreciate these relevant points. If they had, their report could have been cut in half, and perhaps more.
The DSA report grants at the start that we are recognized experts in the field of distinguishing a legitimate business enterprise from a pyramid scheme. But it omits the recognition that, in the 15 pyramid scheme cases in which Dr. Vander Nat was appointed the government’s expert – each time submitting an economic analysis to the court — no court has ever rejected his conclusion that the organization is/was a pyramid scheme. That is to say, the vast majority of arguments made in the DSA report are old news, having been considered and either rejected or ignored in numerous courts of law.
Unencumbered by this precedent, the DSA report takes a novel stand and boldly declares (literally puts in bold), “[t]he key diagnostic for a pyramid scheme is whether the transactions defining the commercial enterprise yield incremental value to society,” — a claim that is firmly rejected by eminent scholarship in law and economics (see Posner below). Here is a respectful word of advice to DSA members: although you might like what this report has to say, if ever an MLM company is in court defending itself against pyramid scheme allegations, waxing poetic about the firm’s value to society won’t help; far better to focus on retail sales.
We further highlight that the 2014 BurnLounge decision, which is used as the basis for the DSA’s critique of our work, does not invalidate our emphasis on retail sales, whether in the 2002 paper or in specific court testimony (below). By presenting a few selective portions of the BurnLounge ruling and ignoring the fully articulated basis for the ruling that BurnLounge was a pyramid scheme, the DSA report dismisses our emphasis on retail sales as “a premise that cannot be sustained.” Actually, we show the opposite. Not only can it be sustained, an emphasis on retail sales is being sustained by the appellate decision itself (2014) and in a recent federal court injunction against Vemma (2015).
A Sampling of Truthiness in the DSA Report and Public DSA Statements
As to the report’s purported “key diagnostic:”
  1. This assertion (quoted earlier), conveying a concomitant need for cost/benefit analysis regarding a pyramid scheme, is a striking example of ignorance for known principles in economics and law. A pyramid scheme is inherently fraudulent (every court has said so), and is properly analyzed under the established maxim that deception/fraud carries no social benefit. As explained by Judge Posner in his Economic Analysis of Law (2nd ed. P.81), “The question of affirmative misrepresentations in consumer transactions is straightforward: the costs of making and of unmasking the misrepresentation represent a deadweight social loss,” and later continues with “Misrepresentation involves costs to both sellers and buyers that yield no social gain.” 
  2. The FTC follows the same principle and never offers extrinsic evidence by way of cost/benefit analysis in prosecuting deception. Ironically, based on the DSA report, the FTC must be missing the “key diagnostic for a pyramid scheme.” 
  3. Instead, the agency affirms (FTC Policy Statement on Deception; 1983) that extrinsic evidence in cases of deception “can consist of expert opinion, consumer testimony (particularly in cases involving oral representations), copy tests, surveys, or any other reliable evidence of consumer interpretation.”
In sympathy with the DSA report, Mr. Mariano, President of the DSA declared: “The legal analysis should be: is the product being used by real consumers?” Whether the consumer is a distributor is immaterial, he says.
  1. What about the following? Courts have ruled that whether product purchasers are primarily business participants versus consumers is an important part of pyramid determination, with numerous courts finding MLM companies to be pyramid schemes with negligible sales beyond what their distributor-recruits purchase, and with documented harm to tens of thousands of victims. MLM companies continue to face pyramid scheme charges.
“Even if one were to accept the faulty premise that case law trumps economics when it comes to performing economic analysis, recent developments have… Continue Reading…


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Watchdog Accuses Pentagon of Evading Questions on $800 Million Afghanistan Program

Despite lacking access to key documents and personnel, the inspector general determined that nearly $43 million had been spent on a natural gas station that should have cost closer to $300,000


This story has been updated.


The watchdog charged with overseeing U.S. spending in Afghanistan says the Pentagon is dodging his inquiries about an $800 million program that was supposed to energize the Afghan economy.


John Sopko, the Special Inspector General for Afghanistan Reconstruction, said the military is restricting access to some documents in violation of law and has claimed there are no Defense Department personnel who can answer questions about the Task Force for Business Stability Operations, or TFBSO, which operated for five years.


"Frankly, I find it both shocking and incredible that DOD asserts that it no longer has any knowledge about TFBSO, an $800 million program that reported directly to the Office of the Secretary of Defense and only shut down a little over six months ago," Sopko wrote in a letter to Secretary of Defense Ash Carter released today.


The Pentagon's claims are particularly surprising since Joseph Catalino, the former acting director of the task force who was with the program for two years, is still employed by the Pentagon as Senior Advisor for Special Operations and Combating Terrorism.


In June, the DOD wrote in an official response to Sopko that it "no longer possess[es] the personnel expertise to address these questions," a point the Pentagon reiterated in October. However, in response to questions from ProPublica Friday, a Pentagon spokesman said in an email that Catalino will be made available for questions. SIGAR had previously spoken to him before the task force shut down in March.


The Pentagon has also refused to allow SIGAR to freely review all the task force documents. Normally the inspector general is simply given the documents it requests, but the Pentagon is insisting that anything related to the task force be read in a DOD-controlled room on DOD computers, and any documents SIGAR wishes to take must first be reviewed and redacted by the Pentagon.


"We have established a reading room at the task force document storage facility specifically for SIGAR use," said Army Lt. Col. Joe Sowers, a Department of Defense spokesman, in his email.

These "appropriate security safeguards," as Principal Deputy Under Secretary Brian McKeon called them in a letter to Sopko, "are necessary due to SIGAR's actions that revealed Personally Identifiable Information [PII] in an unrelated incident."


The incident McKeon referenced involved information requested by ProPublica under a Freedom of Information Act request last November. ProPublica sought the Commander's Emergency Response Program database from Afghanistan, which documents how commanders spent money on local projects. SIGAR provided the database, but did not redact names of military personnel, which the Pentagon said should have been done. ProPublica used the database to create an interactive that allows readers to search and sort how the troops spent $2 billion in petty cash.


ProPublica has been analyzing how the Pentagon spent money in Afghanistan, closely tracking waste, such as this $25-million headquarters that no one needed and was never used.


In SIGAR's report, Sopko said he didn't buy the Pentagon's reasoning for not cooperating. SIGAR has refused to abide by the Pentagon's terms because it believes the law does not allow for them.

"SIGAR believes this vague accusation is a red herring intended to divert attention from DOD's continued refusal to answer any questions related to TFBSO activities," the report says. "For example, in response to SIGAR audits and investigations of other matters, DOD has continued to provide unrestricted information and unfettered access requested by SIGAR auditors and investigators."


But in a follow-up email, Sowers said that the Defense Department's general counsel said that it "would expect same ground rules for future requests for unclassified docs containing [personally identifiable information] or other sensitive FOIA exempt info." A SIGAR spokesman said today that the inspector general would wait to comment until officially informed of the broader change in policy.


Despite the Pentagon's restrictions, SIGAR has documented serious problems with at least one chunk of the $800 million tab. The task force spent nearly $43 million to build a compressed natural gas station in Afghanistan with the hopes of helping the country develop its natural resources and become less dependent on foreign fuel imports. The single station was intended as a model that would be replicated in other areas of the country.


The project, SIGAR found, was ill-conceived from start to finish. Were a similar station built in neighboring Pakistan, SIGAR noted, it would cost about $300,000. The task force spent 140 times that. Even factoring in the extra security costs to build in Afghanistan, "this level of expenditure appears gratuitous and extreme," SIGAR wrote.


Cost aside, military planners also failed to account for Afghanistan's lack of a viable local infrastructure to move the natural gas and for the hundreds of millions it would take to build one, SIGAR said.


On an even more prosaic level, the task force forgot to account for one more key item: customers. Besides the 120 cars the United States paid to convert to natural gas, most Afghans have no use for the station. That's because it costs at least $700 in Afghanistan to convert a car from gasoline to natural gas — more than an average Afghan makes in a year.


SIGAR's report has generated outrage among some members of Congress who are unhappy not only about the $43-million gas station, but the Pentagon's lack of cooperation.


"This is shocking in multiple ways. The cost of an unnecessary gas station in Afghanistan skyrocketed to a ridiculous height. Now, the Department of Defense is blocking access to documents and personnel that would shed light on how the money was spent" said Sen. Chuck Grassley, R-Iowa, in a statement. "The lack of accountability and transparency is disgraceful."


Update, Nov. 2, 2015: This story was updated to include additional information provided by a Pentagon spokesman in an email Sunday afternoon. The email was not released by ProPublica's spam filter until after publication.


ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for their newsletter.


Courtesy: ProPublica
















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