THE BIZOP NEWS: Due Diligence Archives

July 31, 2007

The Number 1 Tip for Due Diligence - from Taleb

There is a mystery associated with due diligence. Virtually all of the participants in a franchise fraud, business opportunity scam or some other scheme, did not do proper due diligence before the fact.

After they had discovered the fraud or scam, however, many of these individuals easily used the Internet to discover the relevant resources -which allowed them after the fact to perform the requisite investigations.

I have always puzzled over this mystery -until I read Nassim Nicholas Taleb's new book, The Black Raven.

The book is about confirmation bias, the tendency to tell confirming stories, or deciding what we want the evidence to be, and then finding it!

(The book should be read by many decision makers who have to make real decisions in the face of real uncertainty, but I suspect that this will not happen.)

Why should it be so hard to overcome the confirmation bias? Isn't it a mistake of thinking, easily corrected once we have labeled it a fallacy? After all, once we realize that 1 + 1 doesn't equal 3, we don't keep on making the same simple arithmetic error. So, this fallacy should be a surface error?

Nope. It is deeper than that.

Listen to Taleb's riff on this.

Assume that a legislator with courage, influence, intellect, vision, and perseverance manages to enact a law that goes into universal effect and employment on September 10, 2001; its imposes continuously locked bulletproof doors in every cockpit (at high costs to the struggling airlines) --just in case terrorists decided to use the planes to attack the World Trade Center in New York City. I know this is lunacy, but it is just a thought experiment. ...
This legislation is not a popular measure among the airline personnel, as it complicates their lives. But it would certainly have prevent 9/11.

[But] the person who imposed locks on cockpit doors gets no statues in public squares, not so much as a quick mention of his contribution in his obituary. 'Joe Smith, who helped avoid the disaster of 9/11 [which never happened] died of complications of liver disease.' Seeing how superfluous his measure was, and how it squandered resources, the public, with great help from airline pilots , might well boot him out office. ...

He will retire depressed, with a great sense of failure.

Preventing disaster by proper due diligence brings no rewards, no hero ceremonies --indeed some of the "heroes" of 9/11 earned their status simply by being there.

"Who gets reward, the central banker who avoids a recession or the one who comes to "correct" his predecessor's faults and happens to there during the economic recovery?
We human are not just a superficial race (this may be curable to some extent); we are a very unfair one."

So what should we make of this?

Simply this: when purchasing a franchise, business opportunity, or some other investment start your research in the world in which you have been defrauded. Imagine you found out that the whole scheme was a scam or fraud? What would you do in that world?

Chances are you would first search the internet for "scheme scam" or "scheme fraud". Then you might look up specialized lawyers, statutes or laws, that were there for your protection. You might try to find other victims -you would go to the police to find out that they had no interest. You might reconstruct why you fell for this piece of magical selling. But the key is: you would be highly motivated to uncover the fraud or scam.

So act as if you are in that world now, to prevent ending up there later.

Posted by michael webster at 7:25 PM | Permalink | Comments (0) | TrackBacks (0)

July 26, 2007

FTC Fights Deceptive Telemarketer

This is a a very important lawsuit, because it demonstrates the full range of the deceptive tools telemarketers resort to. Unfortunately, the advice about how to avoid telemarketing scams leaves much to be desired.

The Federal Trade Commission, with assistance from local police and the United States Postal Inspection Service, today halted the operations of a massive, Largo, Florida-based telemarketing scheme operated by Suntasia Marketing, Inc. The FTC alleges that over the last several years, Suntasia used at least fifteen different business names to defraud consumers across the United States out of tens, and perhaps hundreds, of millions of dollars. According to the FTC, when Suntasia’s telemarketers called consumers to offer supposedly “free” trial memberships in discount buyers and travel clubs, they deceived consumers into divulging their bank account information and later charged consumers without authorization for a series of negative option programs. With a negative option agreement, a company takes a consumer’s silence or failure to cancel as acceptance of the offer, and permission to bill them.
“The essence of this massive telemarketing scam was simple: trick people into giving out their checking account numbers, send them a brochure on a travel and buyers club, take money out of their bank accounts for as long as possible, and make it very difficult to cancel and get a refund,” said C. Steven Baker, Director of the FTC’s Midwest Region.

Consumers complained in near-record numbers about Suntasia’s practices. In total, the FTC collected and reviewed more than 5,000 formal consumer complaints against Suntasia that were submitted to various law enforcement agencies and the Better Business Bureau.

According to the FTC’s complaint, telemarketers typically began their sales pitch by indicating that they were calling in regard to the “banking account” of their “valued customers,” to make consumers believe that Suntasia was affiliated with their banks. The telemarketers explained that the consumers had been chosen to receive a series of “free gifts,” typically a combination of either “$100 in gas coupons,” “$400 in airlines savings vouchers,” or “two free nights of hotel accommodations.”

Consumers were told that they could keep these gifts even if they ultimately canceled Suntasia’s negative option program. These gifts turned out to be laden with undisclosed conditions and restrictions that rendered them effectively worthless. Also, the FTC alleges that the defendants honored the “gift” vouchers only if consumers maintained enrollment in their programs, despite the telemarketers’ promises.

After offering the “free gifts,” Suntasia telemarketers quickly attempted to obtain consumers’ account numbers. They indicated that they needed to “verify” this information to confirm consumers’ eligibility to receive the gifts. Having already pretended to be affiliated with consumers’ banks, the telemarketers now purported to already possess consumers’ bank account numbers. They read consumers their publicly available bank routing numbers, and then asked consumers to “verify” the remainder of the account number from the bottom of a check. According to the FTC, many consumers disclosed their account numbers because they believed they were simply verifying information that the telemarketers already had. The FTC also alleges that consumers frequently thought their account number was being “verified” solely to confirm their eligibility to receive the free gifts, not to authorize any future charges to their accounts.

According to the FTC’s court documents, after consumers divulged their bank account number, the telemarketers quickly began recording a “verification,” asking consumers to repeat the account number they had just “provided.” At the end of the recording, Suntasia telemarketers quickly offered consumers two additional negative option programs, commonly referred to as “upsells.” The FTC alleges, however, that these “upsell” offers were presented in such a way that consumers did not realize they were being asked to authorize the purchase of additional products and services.

The FTC maintains that Suntasia never disclosed key information about its negative option programs. For instance, the telemarketers did not tell consumers the date that Suntasia’s charges would be debited from their accounts, or the telephone numbers consumers must call to cancel to avoid being charged. Nor did Suntasia tell consumers that they would be required to call three separate telephone numbers to cancel the initial program and the two “upsells.”

If Suntasia telemarketers did discuss the length of the free trial period, they represented that this period would begin only once consumers received program materials in the mail. The FTC alleges that Suntasia actually started consumers’ free trial periods on the date of the sales call, however, meaning that consumers often had little, if any, time to cancel Suntasia’s programs without being charged. According to the FTC’s complaint, some consumers did not receive any program mailings from Suntasia and thus had no opportunity to cancel before they were charged. In many instances, these consumers received their first notice of the trial memberships when the defendants began charging them. In other instances, consumers received the program mailings only a day or two before their accounts were to be charged. Suntasia did not provide any consumers with the free trial period that was promised in their telemarketing calls.

The package consumers received in the mail also disclosed, for the first time, the telephone number that consumers must call to cancel. Prior to receiving this package, consumers had no way to contact Suntasia to cancel or to ask questions. The FTC alleges that in some instances, Suntasia proceeded to charge the accounts of even those consumers who canceled its programs. In addition, if consumers successfully canceled one program, they were not told that they still may be charged for two other programs, or that they must call different telephone numbers to cancel each of those programs.

The FTC alleges that the defendants misrepresented their affiliation with consumers’ banks or other third parties, that they already had consumers’ account numbers, the starting point and length of the free trial period, that they would honor consumers’ cancellation requests, that consumers may easily cancel their participation in a program, and that consumers are entitled to keep and to use the promised free gifts even if they ultimately cancel the negative option program. The FTC also alleges that the defendants failed to disclose, or to disclose adequately, the following: that the consumer’s account would be charged unless the consumer takes affirmative action to avoid the charge, that consumer’s checking account information would be used to debit their bank accounts, the cost of the programs, the dates the consumers’ account would be charged, the dates that the trial period begins and ends, the specific steps consumers must take in order to cancel, including that consumers must cancel each of the programs by calling a separate telephone number, and the conditions and restrictions on the “free gift” vouchers that severely limit their value and usefulness.

The FTC also alleges that the defendants debited funds from consumers’ accounts without their express verifiable authorization and express informed consent, and that they did not clearly and conspicuously disclose that the purpose of their call was to sell goods or services and the nature of those goods or services, as required by the Telemarketing Sales Rule. The defendants also allegedly illegally purchased leads containing consumers’ unencrypted bank account numbers for use in telemarketing.

This telemarketing fraud may end up in the hundreds of million of dollars.

What does the FTC say about how you should protect yourself from telemarketing fraud?

How Can You Protect Yourself?
* Don't be pressured to make an immediate decision.
* Don't give your credit card, checking account or Social Security number to unknown callers.
* Don't pay for something merely because you'll get a "free gift."
* Get all information in writing before you agree to buy.
* Check out a charity before you give. Ask how much of your donation actually goes to the charity. Ask that written information be sent to you so you can make an informed giving decision.
* Don't invest your money with an unknown caller who insists you make up your mind immediately.
* If the offer is an investment, check with your state securities regulator to see if it's properly registered.
* Don't send cash by messenger or overnight mail. If you use cash rather than a credit card in the transaction, you may lose your right to dispute fraudulent charges.
* Make sure you know the per minute charge for any 900 number call you make.
* Be cautious of statements that you've won a prize — particularly if the caller says you must send money to claim it.
* Don't agree to any offer where you have to pay a registration or shipping fee to receive a "prize."
* Check out unsolicited offers with the Better Business Bureau, local consumer protection agency, or state Attorney General's office before you agree to send money.
* Beware of offers to "help" you recover money you may have lost previously. Be wary of callers saying they are law enforcement officers who will help you get your money back "for a fee."

The Telemarketing Sales Rule The FTC's Telemarketing Sales Rule requires certain disclosures and prohibits misrepresentations. It gives you the power to stop unwanted telemarketing calls and gives state law enforcement officers the authority to prosecute fraudulent telemarketers who operate across state lines.

The Rule covers most types of telemarketing calls to consumers, including calls to pitch goods, services, "sweepstakes," and prize promotion or investment opportunities. It also applies to calls consumers make in response to materials received in the mail or offers made through the Internet.

FTC Stops Massive, Deceptive Telemarketer

We need a little reality check here -few of these suggestions make any sense, especially contacting the BBB.

Here is the best tip: don't answer the phone, use your answering machine. Tell your family, friends and others to expect reach the "machine".

The boiler plate boys and girls will move on to targets that are more easily reached.

Posted by michael webster at 12:08 AM | Permalink | Comments (0) | TrackBacks (0)

International Fiduciary Corp Prime Bank Fraud

Here is how the the International Fiduciary scam ended

International Fiduciary Corp Prime Bank Fraud

The Securities and Exchange Commission ("Commission") announced today that the Honorable Gerald Bruce Lee, United States District Judge for the Eastern District of Virginia, has entered Final Judgments as to Defendants International Fiduciary Corporation, S.A. ("IFC"), and its chairman and CEO, Preston David Pinkett, II ("Pinkett"), restraining and enjoining them from future violations of Sections 5 and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. (The judgment against IFC was entered on July 20, 2007 and the judgment against Pinkett was entered on July 3, 2007.) Pinkett and IFC consented to the entry of the judgments without admitting or denying any of the allegations of the Commission's First Amended Complaint. The Court ordered disgorgement against Pinkett in the amount of $5,101,000, plus prejudgment interest of $153,061. Pinkett was also ordered to pay a civil penalty of $100,000. With respect to IFC, the Court ordered disgorgement against it in the amount of $24,037,362.95 plus prejudgment interest of $971,109.46. The Court, however, did not impose a payment obligation on IFC based on the fact that Roy M. Terry, Jr., the Court-Appointed Receiver for IFC, will instead prepare a plan (subject to the SEC's consent) to distribute all those funds — and all other funds paid by Defendants and Relief Defendants in this case — to investor victims in the United States, Canada, and any other locations.
The Commission filed its complaint against IFC, Pinkett, and two other defendants — Daniel Eric Byer ("Byer") and Malcolm Cameron Boyd Stevenson ("Stevenson") — on December 4, 2006, alleging that they defrauded investors through a fraudulent "asset growth program" purportedly involving risk-free participation in the trading of "1st tier medium-term bank notes." On that same date, the Court issued an order that, among other things, temporarily restrained IFC, Pinkett, Byer, and Stevenson from violating the antifraud provisions of the federal securities laws, and freezing investor funds wherever located and all assets of the defendants. On December 11, 2006, the Court entered a preliminary injunction which extended the temporary restraining order and asset freeze. On January 19, 2007, on the Commission's motion, the Court appointed Roy M. Terry, Jr., Esq. as Receiver over IFC. On April 19, 2007, the Commission filed an amended complaint that alleged, among other things, that the defendants raised at least $40 million from at least 140 investors, and added two individuals and four Washington State-based companies as relief defendants. On June 19, 2007, the Court entered default judgments against Byer and Stevenson.

Again, what this fraud demonstrates is the effectiveness of using the word "guarantee".

It is striking that the last survey on investment fraud showed that the victims were more intelligent than the ordinary investor about investment terms, but were completely lacking in understanding the risk reward formula: more reward means more risk, no guarantees about it.

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July 25, 2007

Why Envelope Stuffing Scams Continue To Exist

Why do such simple work at home scams continue to exist? They are one of the least clever con tricks around, and seemingly for very low stakes -the average pitch is for around $30. How do these cheesy scams continue?

Here is an interesting story which may shed some light on the problem, WNDU News on Premier Solutions

Premier Solutions is the most recent incarnation of a company that started out called Home Business System... in 2005, we filed a lawsuit...to enjoin that organization from taking part in these practices where they lied about how much money you could expect to earn," said Jim DePriest with the Arkansas Attorney General's Office.
But, despite the Arkansas Attorney General's lawsuit, the letters are still coming; and when Andrews called the number given on the letter he was greeted with:

"Hello, are you making this call because you would like the opportunity to make some money? If so, you've just come across an opportunity that could help you meet your needs…" said the woman’s voice on the recording for the envelope-stuffing scam.

The scammers still have everything up and running, and unfortunately, it huts people who need the money they lose.

"The victims tend to be elderly, because that's who stays at home. Or disabled in some fashion, and people who are looking to augment what might be a fixed income by working at home, so this a venerable part of the community," DePriest said.

What is the kicker on this?

"In April, the business was fined $1.3 million for more than 12,000 counts of deceptive practices in Arkansas. That money hasn't been paid."

No money paid, nobody in jail, and the scam continues.

Now you know all you need to know -scam criminals make money.

Posted by michael webster at 12:50 AM | Permalink | Comments (0) | TrackBacks (0)

Fraud News from Around the Blogs

Tracy Coenen has a good story about Barry Minkow and Pacific Wealth,

Barry Minkow Fraud Busting: Pacific Wealth Management

Is anyone surprised anymore when they learn about another fraud bust, courtesy of Barry Minkow and his Fraud Discovery Institute?
This time it’s Pacific Wealth Management. And it seems that the press has largely ignored this one. The SEC is alleging that Pacific Wealth Management was selling unregistered securities, with the investment offerings ranging from real estate to foreign currency. There were up to 800 investors who mortgaged their houses to invest with this company, and it is believed that they lost millions of dollars.

There is a nice frontloading story over at the Pink Truth,

Doing the Right Thing

I think many Mary Kay sales directors have convinced themselves that they are ‘working ethically.’ That they’ve made themselves believe that there is nothing wrong with the Mary Kay pyramid scheme and nothing wrong with the fact that almost all women will lose money in Mary Kay.

Here is an example of just such thinking. This Mary Kay sales director thinks she’s doing the right thing by ‘only’ having consultants purchase $1,800 or $2,400 of inventory when they start. Even though we all know that ‘part-time’ consultants don’t need that much.

At Entrepreneur, there is story about preventing inventor fraud

Protecting Yourself Against Scams and Crooks

It's a common story, yet it breaks my heart every time someone tells me their version: An aspiring inventor sends his or her product to an invention promotion company, pays a large fee (often their entire savings) and gets nothing in return. Not only have they been embarrassed, but they've also been depleted of the money they could've used to further develop their product.
Often these "firms" will charge thousands of dollars, promising to bring an inventor's product to market within a specified time period. They prey on the inventor's excitement and passion. These firms advertise on TV, radio, the internet, newspapers and in magazine classified sections. Their guarantee and promise of success is tempting.

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What is too good to be true? That frauds and scams self announce.

I am very critical of regulators who claim that if the victims of fraud had just realized that "if it sounds too good to be true, then it probably is." This "advice" makes the victim of a con criminal feel that there was some simple check by which they could have avoided the con criminal. This is false. But, now I have logical proof of the regulator fallacy, after my visit to a rather interesting place.

Recently, I was invited an amazing island, in the Raymond Smullyan archipelago. On this Island, there are two types of people: Rogues and Saints. Both the Rogues and Saints talk about earnings projections of franchises, business opportunities, and distributorships.

Now Rogues, unremarkably, always say things that are too good to be true. So if a Rogue says that vending opportunity B will make $3,000 a month, then it is too good to be true and it is false that vending opportunity B will make $3,000 a month. But the Saints, god bless their souls, never say anything that is too good to be true and generally have less to say than the Rogues.

Just before I arrived, the Saints had tired of the Rogues and the devastation they had caused on the Island. The Saints, knowing of my reputation, asked me to help design their due diligence scheme.

They had two proposals. First, they wanted every Rogue to wear a sign saying "I am too good to be true.", the belling of the Rogues. Second, if this was impractical, they wanted to set up a Rogue Registery, RR, which every Rogue would have to register with and have to produce on demand a card which said, "If I am registered with the RR, then what I say is too good to be true."

What advice do you think I gave them?

Well, upon reviewing Raymond Smullyan's many logical puzzle books, I realized two things.

First, a Saint could never say "I am too good to be true." And neither could a Rogue, since Rogues only say false things. So the Rogues could not be belled, without the logic of the Island collapsing.

Second, if a Saint said "If am registered with the RR, then what I say is too good to be true", then since the latter clause is false, and since Saints tell the truth, then the Saint is not registered with the RR. But can a Rogue said "If I am registered with the RR, then what I say is too good to be true."? No, since Rogues always lie and if both the clauses are true, the whole implication is true.

But surely, the Saints exclaimed, at least if we form the RR, the Rogues will be mercifully more silent. I thought this was too good to be true.

Upon reflection, I pointed out that the Rogues would simply say "If what I say is too good to be true, then you can check the RR." A Rogue not registered with the RR can say this because it is false -what he says is too good to be true and he is not registered with the RR. The establishment of the RR would cause Rogues to adopt aliases to avoid registering, and would use the authority of the RR to establish that they were not too good to be true.

The Saints did not pay my bill, and instead held public hearings on the matter.

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July 24, 2007

Fraud News from around the Blogs

Sam Antar has an interesting post about Overstock, Did Patrick Byrne, CEO of Overstock.com, Deliver a Trojan Horse to the Securities and Exchange Commission?

"In the Crazy Eddie fraud investigation they called it the Trojan horse diversion. My uncle Sam M. Antar (Eddie Antar's father) and his sons Mitchell and Allen, sent two former Crazy Eddie employees to lie to the Securities and Exchange Commission and cover-up their crimes in an attempt to make Eddie Antar and I take the fall. The Securities and Exchange Commission and later, the Justice Department, thought that they delivered the goods on the Crazy Eddie frauds on a silver platter. They thought the information was a gift. They were wrong. The Securities and Exchange Commission and the Justice Department quickly learned about witnesses bearing false gifts.
Is a similar attempt being made by Overstock CEO Patrick Byrne? Did Patrick Byrne send a Trojan horse to the Securities and Exchange Commission in an attempt to take them off his trail."

Read the entire article and decide for yourself how much of a diversion, if any, Patrick Pyrne creating.

The WSJ Law Blog also has a nice post on the NBA ongoing scandal.

Ref Betting Scandal Rattles Well-Lawyered NBA: "

referree

A Law Blog reader emailed us this morning surprised that we’ve yet to weigh in on the NBA referee betting investigation. ‘This is a catastrophe in the making,’ he wrote. ‘How many millions do Nike, Reebok, UnderArmour, etc., spend to market in the NBA? What are the league’s TV revenues and when is the renegotiation of the contract? When are we going to get the first civil suit filed by a Suns fan?’

Too bad the NHL had its own betting scandal with Ric Tocket, otherwise we could all hope in vain for the NHL to overtake the NBA in television ratings.

Finally, also from the WSJ Law Blog, just because we haven't shown them enough link love lately, we have the first class action lawsuit in the subprime mortgage debacle.

An Investor With the Moody’s Blues Sues: "

subprime

The Law Blog has felt a bit left out lately with so many of our WSJ colleagues reporting on one of the biggest business stories of the day — the subprime mortgage mess. But we’ve found a way in this morning, thanks to a lawsuit filed in Chicago late last week.

Raphael Nach, a Beverly Hills plastic surgeon, filed a good-ol fashion securities-fraud complaint against Moody’s, reports colleague Ianthe Jeanne Dugan. He bought stock last October in Moody’s Corp without knowing that Moody’s had given ‘excessively high ratings’ to bonds backed by subprime loans. He claims Moody’s stock price — which has steadily decreased in 2007 — was inflated because of the ratings. Here’s the complaint, filed by Joel Lipman of O’Rourke, Katten & Moody.

The wannabe class-action names Moody’s CFO Linda Huber as defendant because she had access to ‘adverse undisclosed information about the company’s business.’ A Moody’s spokesman told the WSJ, ‘There’s no basis whatsoever for the lawsuit and we are confident it will be dismissed expeditiously.’

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July 23, 2007

Strategic Thinking - What Trial Lawyers can Learn from Poker

Steve Lubet kindly sent me his new book entitled "Lawyers' Poker: 52 Lessons that Lawyers Can Learn from Card Players", after we had a lively exchange about the: a) the value of slow play at poker, and b) what trial advocacy lessons can be learned from a sophisticated analysis of poker play.

Since I have no pecuniary interest, not being an Amazon associate now, in promoting this new work, you can rely upon a fairly candid review of its merits.

I was more than pleasantly surprised with well how this book worked. My concern was that I would find two interesting books: a) one on trial advocacy, and b) another on poker analysis; and that the two parts would wear out each other like sandpaper and wood, contributing only a fine dust. Prior to reading the book, I thought it unlikely that an analysis of poker strategies would provide insightful analogies to trial advocacy skills, skills that could not be obtained direct inspection.

What do poker players have in common with trial lawyers, anyways? Succinctly, each has to solve the game theoretic question: "if he knows, that I know that he knows ...". The poker player has to solve this problem in connection with what the other players believe they know about his hand, what he believes they know about what he believes about their hands, and other various permutations. The trial lawyer has to solve this problem in connection with what the cross-examination witness believes what the lawyer knows about the facts, what the lawyer believes the cross-examination witness knows about the facts, and what the cross-examination witness believes about what the lawyer believes that the cross-examination witness knows about the facts, and other various permutations. The poker player is at advantage since there is a set of facts which will soon be revealed: at trial, there are no sets of facts to be revealed until the Judge determines what facts there were.

If analogical explanations work, as a opposed to direct explanations, then the analogy must provide a quicker access to the problem. One might complain, and this would be a superficial complaint, that the trial examples must be easier to understand than the poker examples because we are all potential jurors, but few of us are potential poker champions. For example, in the beginning of the chapter on "Controlling the Opposition", Lubet describes the Johnny Cochrane gambit at the O.J. trial and the infamous glove scene and compares it with an example of "slow play". After reading the two together, I was intially puzzled. I understood Cochrane's move, but I really had to work hard at understanding the poker gambit. How as a lawyer could I learn a trial advocacy point from a difficult poker problem, when I comprehended the trial example directly?

Well, after working through the poker example, I realized that I had only superficially understood the trial advocacy gambit, and not appreciated all of the elements and what Christopher Draden should have been wary of.

Let me first review the poker example on slow play on pages 86 to 87, hardcover version. Lubet recounts the story of Monty, a player who played hands only on their expected value, against a fellow named Solcum, a wealthy banker's son.

They were playing 5 card draw, one hidden card and four exposed cards, with four rounds of betting.

Round 1: M: Shows 7 S: Shows 7

M makes a $5 bet

Round 2: M: Shows 7 7 S: Shows 7 A

M bets $10, S raises $20, and M calls.

Round 3: M: Shows 7 7 5 S: Shows 7 A 10

M checks, S bets $50, and M calls.

Round 4: M: Shows 7 7 5 Q S: Shows 7 A 10 10

S bets $100, and M raises $1500.

What would you think that if you were S and your hidden or hole card was an A, giving you the highest possible two pair? How would you analyze what M's bet was telling you? Assume that M and S know that it is not possible for S's hole card to be a 10, since the two other tens had shown.

Well, I would react, and not think, that M had picked up his queen and had queens and sevens, which would lose to my aces and tens. M bet small and didn't raise because he feared but didn't know I had an Ace, but when M hit his big cards, he beat big. I would call the raise and rake in the pot.

I would lose, M had the last 7. I lost because I looked only at the last round of betting to see what "information" it revealed. I probably heavily discounted the possibility that M had the last 7, and so "knew" I had a lock. (In case it isn't obvious, I am dead poor average player in a good game.) What did the betting in round 2 show, given that M only plays on with hands that he has an advantage with? If S knew that M knew that S's hole card was an A, should S believe that M would fold? Yes. And M didn't fold or bark in the night. Therefore, M had a hand that beat a pair of Aces, in round 2. The only hand possible was three sevens.

But would you have been disciplined enough to fold your hidden pair of Aces? Not me.

Turn to the trial problem. Should have Christopher Draden known that Johnny Cochrane knew that glove wasn't going to fit?

Don't know - but the point of the poker example, having worked it through, is this: did Christopher Draden ever stop to question whether Johnny Cochrane could know that the glove wasn't going to fit? Not such a stretch, when you ask the question. What did Cochran know about the glove, given his daily interactions with accused? Darden should have stopped to think about the relative asymmetry in knowledge, made a few deductions, before forcing the play on.

I look forward to sharing with you more of my experiences with this neat little book.

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Business Opportunity Marketers Pay Three Cents To Consumers to Settle FTC Charges

Here is a way to calculate the cost of due diligence for business opportunities, distributorship of vending machines in particular. Remember the adage that crime doesn't pay, when reading through the press release. The FTC's Press Release states that

Business Opportunity Marketers Pay $122,000 to Consumers to Settle FTC Charges: "Federal Trade An operation that was charged with deceptively marketing candy vending machine business opportunities will give back $122,000 to consumers who invested in it. The Federal Trade Commission charged that the operation lured consumers by falsely promising big incomes and prime locations for the machines, and hiring shills to reinforce the earnings claims.
The operation advertised that consumers could make “$1,710 per week” after buying its candy vending machine business opportunities and promised “prime locations” that had already been secured. Prices ranged from $7,000 to $59,000, and were supposed to include everything needed to start a business: vending machines; a recommended, professional locator service; and support to launch the business. The FTC’s complaint charged the operation made false earnings claims and deceptive representations about available locations, provided phony references, and did not provide complete and accurate required disclosure documents.

The orders announced today settle the charges against all of the defendants: Harvey Frank Milner, Richard M. Norcross, and Richard D. Norcross, as well as the companies – Route Wizard, Inc.; Liberty Routes, Inc.; Ready Routes, Inc.; RouteCrafters, Inc.; Ca$h Route$, Inc.; NovaStar Vending, Inc.; and Alliance Locating Co., Inc.

The orders prohibit the defendants from misrepresenting any business venture and prohibit false earnings claims or misrepresentations about locations. The orders prohibit the use of shills and prohibit the defendants from violating the Franchise Rule or the Business Opportunity Rule, including failing to provide a complete and accurate disclosure document to consumers, and failing to have a reasonable basis for any earnings claims.

Harvey Frank Milner and his wife, Janice Wood-Milner, will give up $42,000 – the total amount of money that they received from the scheme. Richard M. Norcross and his wife, Summer L. Norcross, will pay $30,000, based on their financial disclosures. Richard D. Norcross and his wife, Sasikant L. Norcross, will pay $50,000, also based on their financial disclosures. The wives of the defendants are not accused of wrongdoing, but have allegedly received ill-gotten gains and do not have a legitimate claim to them.

The orders for Richard M. Norcross, Richard D. Norcross, and the corporate defendants entered a judgment of $3,382,070.61 – the total amount consumers paid – against them, which is suspended, based on sworn financial disclosure documents. The order for Sasikant L. Norcross enters a judgement of $113,445 – the total amount she received – against her, which is also suspended. The suspended judgment amounts will be due in full, minus any payments already made by other defendants, if a defendant lied about his or her financial status.

I see, the fraud took in $3.3 m and the scammers paid .11 m, or about 3 cents on the dollar. Crime doesn't pay? Maybe not, but it sure seems rewarding.

Why do these frauds continue to exist? People will not pay $300 - $400 to do the proper due diligence -they know that there is only bad news.

How much would you have paid to have avoided losing 97% of your investment?

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DVD Scammer Charged

In an update, the US Attorney announced that American Entertainment Distributor Salesman Charged with Fraud

R. Alexander Acosta, United States Attorney for the Southern District of Florida, and Henry Gutierrez, Inspector in Charge, Miami Division, United States Postal Inspection Service, announced today that criminal fraud charges were filed against two additional defendants in a scheme to sell DVD vending machines. The charges are part of a continuing crackdown by federal authorities on "business opportunity" fraud in South Florida that during the last several years has sent 60 people to prison.
A federal grand jury in Miami, Florida returned a Superseding Indictment that charged defendant Anthony Rocco Andreoni, 47, of Hollywood, Florida, with conspiracy, mail fraud, wire fraud, and money laundering in connection with his involvement in American Entertainment Distributors, Inc. ("AED").

The Superseding Indictment also charged defendant Russell G. MacArthur, Jr., with various fraud charges and with criminal contempt. MacArthur was originally indicted in 2005, fled to Costa Rica, and was recently extradited to the United States to stand trial. Andreoni had not previously been charged.

In addition, a criminal information was filed, charging defendant Neal Isanuk, 50, of Port St. Lucie, Florida, with conspiracy to commit mail fraud.

The Indictment states that MacArthur and Andreoni were the undisclosed founders of AED. Isanuk was a sales representative for AED. AED was based in Hollywood, Florida, and from 2003-2004, sold a business opportunity involving a DVD vending machine. More than 400 consumers throughout the United States lost $19 million in the scheme. According to the Indictment, AED exaggerated the business' potential profits, falsely promised to secure good locations for the machines, and referred prospective purchasers to phony "references" who were on AED's payroll. The purchasers paid AED $28,000 to $40,000 per machine.

Nine individuals connected to AED have already been convicted in connection with the scheme, including Russell MacArthur's brother, James MacArthur, the president of AED, who is serving a 10-year sentence.

Those charged in the Indictment face up to 20 years imprisonment per count on the fraud charges. The money laundering charges against Andreoni carry a 10-year maximum sentence. There is no statutory maximum penalty for criminal contempt. Isanuk faces a maximum of 5 years imprisonment.

Mr. Acosta commended the investigative efforts of the United States Postal Inspection Service. This case is being prosecuted by Patrick Jasperse and Douglas Stearn, Trial Attorneys, United States Department of Justice, Office of Consumer Litigation.

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Owner of Failed iSold It eBay Drop-off Franchise Leaves Apology

Sean Kelly has a fascinating story about franchise failure,

Owner of Failed iSold It eBay Drop-off Franchise Leaves Apology

According to a report at DailyProgress.com, all that’s left of the iSold It ebay-drop off store franchise in Charlottesville, VA is the iSold It sign, an empty storefront and, until recently, an apologetic note to customers from the store’s former owner.
“To all iSold It customers, thank you for patience on waiting on your checks,” read a recently removed note on the door of the deserted iSold It in Rio Hill Shopping Center, off U.S. 29 in Albemarle County.

“This was never my intent. I am so sorry all this came about. I have invested my lifesavings into this business and now I have to close it,” the typed note continued.

“I know many of you are upset; I do understand this. My goal is to send everyone a check, this is going to take longer then I had hoped for.”

The eBay member profile for the store indicates that the Charlottesville iSold It, which was opened in November, 2004 by a father & son team, was the franchise chain’s first franchise location and the 18th iSold It store overall. The store had earned a 99.6% positive comment rating on eBay, with 5505 positive comments made about the store’s service. In a bit of sad irony, the member profile still includes a cheery pitch for the iSold It franchise opportunity.

The iSold It franchise was a typical oversold concept.

The eBay business is a difficult auction to consistently win at. And the franchise concept for this business is at best curious.

There was a long discussion about this concept at franchise-chat last year. The general view was that there was no proven business model.

My own view, as a lawyer, was the the business model was competing with a number of businesses that were highly regulated - pawnbrokers, consignment shops, second hand shops, and the like.

All of these business are regulated to prevent fencing - what did iSoldit have to offer as business model?

Nothing, if a franchisee did become successful, they would have likely attracted the attention of the local police enforcing the local by-law aimed at eradicating fencing.

None of iSoldit's marketing materials or UFCO ever discussed this material risk.

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New School Network Marketing by Kim Klaver: "They don't want weasel words or fine print."

Kim Klaver has an interesting post about network marketing,

New School Network Marketing by Kim Klaver: "They don't want weasel words or fine print."

Hmm. Does that mean, when selling the business opportunity, that we should stop leading with the images of the guy in the Armani suit with the fancy sports car and big house?
And at the bottom of the page, in very small print, they get the weasel language (AKA disclaimer): Results not typical. Results depend entirely on your own efforts. Results not typical. Results not typical. Results not typical. Results not typical. Results not typical.Results not typical.Results not typical...

The proposed new FTC Business Opportunity Rule would take care of this problem in the following manner.

1. The picture of the "the guy in the Armani suit with the fancy sports car and big house" would be be an "earnings claims".

2. Since the income opportunity was making an earnings claim, no matter how much it cost to purchase the opportunity, would require the seller to give the purchaser a one or two page disclosure document.

3. Few sellers will realize this, and if there are sufficient complaints, the FTC will have the ability to shut down network marketing opportunities the same way that the close down business opportunity frauds.

Win/win.

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July 22, 2007

Franchising Is Not Regulated

Richard Solomon has very interesting opinion piece at Blue Mau Mau,

Franchising Is Not Regulated | Blue MauMau

I have lately come to the conclusion that the expectations of prospective franchise investors concerning the extent to which franchising is regulated – including sales practices regulation and relationship abuse regulation – are simply naïve in the extreme. FOR PURPOSES OF MAKING INVESTMENT DECISIONS, FRANCHISING IS NOT REGULATED AT ALL.
What people incorrectly regard as regulation is an information disclosure format that is honored more by abuse than by honest compliant disclosure.

There is no merit review of UFOC content. A few states pretend that they have merit review of UFOC information as part of the registration process in those states. What they deem to be merit review is not. It is cosmetic and superficial, and they would perform a better public service were they not to do it at all.

The same conclusion, if correct, should be made for the Canadian provinces who have franchise disclosure legislation, Alberta, Ontario, New Brunswick, and Prince Edward Island.

Is Richard Solomon correct? Here is the basic problem -there are very few qualified accountants and attorneys that can perform even the basic due diligence given a UFOC. Most accounts will say, well if you can believe these projections, then you will do okay. Most attorneys will tell you that you have a very one sided contract, not in your favour.

Why would you pay for advice like that? You wouldn't, and people don't, but then they lose their investment or worse are defrauded.

How can a prospective franchisee get good quality due diligence from an attorney? One way is to ask for a fairness opinion, how fair is this contract according to the AAFD's standards? The AFFD Fairness Standards are available online.

A complete fairness review is expensive, but the cost could be shared by two or three prospective franchisees.

A fairness review will highlight the possible ways in which that nice friendly franchisor may turn against you down the road. It is important to have a plan that will allow you to address these possible issues during the period that you still have important rights under the Franchise legislation in your state or province.

For more information specific to your own situation, the attorneys at the AAFD's LegaLine can be consulted.

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July 20, 2007

When Your Auditor Resigns, It is a Good Thing.

The story ripping around the internet is the AP story, picked up by Forbes, is USANA's auditor resigns for no reason

"The accounting firm for embattled Utah vitamin maker USANA Health Sciences Inc. has resigned, and the company insisted Tuesday that no disagreement led to the departure.
That would be unusual, corporate watchdogs say. A Securities and Exchange Commission filing hints at a dustup over publicized findings by an independent fraud investigator, but USANA maintains it patched that up with accountants Grant Thornton LLP before the firm's departure."

No disagreement, but we cannot continue as your auditors. Yes, I think that would be unusual.

Zack Bissonnette who has been blogging about this story is also skeptical about the motives behind the resignation, USANA's auditor resigns for no reason - BloggingStocks

Zack followed up with an even more amusing story, Is-baghdad-bob-working-for-usana-health-sciences?

CFO also picked up the storyCFO Article on USANA, which contained slightly different language.

" Usana said that during Grant Thornton's review of unaudited financial statements included in the March 2007 quarterly report there had been a disagreement between the company's audit committee and the auditor about the scope of the procedures to be performed by the auditors, about the extent to which the audit committee should engage new, independent consultants to respond to accusations leveled against the company "by a third-party detractor."
Usana did not identify the third party, but said that the company and its audit committee had deemed the third party's claims unfounded and unwarranted.

The disagreements between Grant Thornton and Usana had led to further discussions between the audit committee and the auditor, the company said, "which were resolved to the satisfaction of GT, the company, and the audit committee." The company also said that as a result of these discussions, the audit committee had engaged select advisers to provide advice on some of the allegations.

Usana said that Grant Thornton had completed its review of the first quarter 2007 financial statements, and that "the company has authorized GT to respond fully to any inquiries of a successor accountant." However, Grant Thornton did not provide a reason for resigning the account."

I read this as Usana admitting that Grant Thornton could only be satisfied by resigning the their retainer.

As part of their retainer, however, they could not comment on the reasons behind their resignation --except to respond to questions from the new accountants.

What do you think? Grant Thornton lost confidence in its client or not?

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July 19, 2007

New Brunswick Enacts Franchise Disclosure Act

New Brunswick Enacts Franchise Disclosure/Rela...: "

New Brunswick Enacts Franchise Disclosure/Relationship Law

This posting was written by Peter Reap, Editor of CCH Business Franchise Guide.

New Brunswick has become the fourth Canadian province to enact a generally applicable franchise law. The New Brunswick Franchises Act—a disclosure and relationship statute—became law upon receiving Royal Assent on June 26.

The statute requires franchisors to make presale disclosures to prospective franchisees, imposes a duty of good faith and fair dealing on parties to franchise agreements, and guarantees franchisees the right of association.

Disclosure Requirements

Modeled on the Uniform Franchises Act (CCH Business Franchise Guide ¶7021), which was adopted by the Uniform Conference of Canada in 2005, the New Brunswick law requires a franchisor to provide a prospective franchisee with a disclosure document at least 14 days prior to the signing of an agreement or the payment of consideration. A disclosure document must contain a financial statement, copies of all agreements, and statements for the purpose of assisting the prospective franchisee make an informed investment decision.

Right to Rescind, Sue for Damages

The statute provides a franchisee with a right to rescind the franchise agreement (1) within 60 days after receiving the disclosure document if the franchisor did not provide the document within the required time or the document was deficient and (2) within two years of entering the franchise agreement if the franchisor never provided the document.

A franchisee shall have a right of action for damages caused by a misrepresentation or nondisclosure in the disclosure document.

Implementing Regulations

The Lieutenant-Governor is authorized to issue regulations prescribing the content of the financial statement and other information included in the disclosure documents and setting forth rules for informal dispute resolution and mediation.

The law is expected to be proclaimed into force upon the promulgation of implementing regulation. Text of the legislation (Bill 32) appears here on the website of the Legislative Assembly of New Brunswick.

The other Canadian Provinces with franchise laws are Alberta, Ontario, and Prince Edward Island. Manitoba is investigating potential legislation."

(Via Trade Regulation Talk.)

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Why the FTC Cannot Fight Biz Op Fraud

Here is the advice that the FTC routinely passes out about how to Recognize Business-Opportunity Fraud

"The Federal Trade Commission (FTC) says that fraudulent business opportunities consistently rank in the top 10 categories in its database of consumer fraud complaints.
"Some scam artists are really sophisticated," says Dan Salsburg, attorney for the FTC. "They know exactly how to keep consumers from guessing the true nature of their business by rounding up phony references or creating misleading documents."

Salsburg says savvy consumers can learn to spot the telltale signs of fraud. For example, many fraudulent promoters send spam email or post Internet ads involving vending machines for candy, soda, snacks or personal care items; display racks for greeting cards, CDs, perfume or similar items; or opportunities to buy into medical-billing or envelope-stuffing businesses or activities related to the Internet.

Other tip-offs include claims of high pay in weeks or months for little effort ("work only hours a week"), as well as claims about working conditions like the ability to "set your own hours," "be your own boss" or "work from home." The opportunities cost $5,000 on average, Salsburg says.

According to the FTC, many business opportunities offered through the classifieds or via spam email have little chance of success -- for example, a business with little or no demand in the market; cheap, low-quality or outdated merchandise; poor customer service; and few, if any, locations."

(my emphasis)

The problem with this advice is that it wrong. (Also, Salsburg is completely wrong about the average biz op loss -the average pitch is for around $20k)

People who are get conned or defrauded are not lacking in rationality or reason.

The people I have interviewed over the years all felt that there was something wrong with the scheme -but for some reason, they overrode their gut concerns.

Why?

There are a number of reasons, but the basic pyschological mechanism is cognitive dissonance. Individuals who get cheated have made a commitment, which is often unknown to them, to the business opportunity or franchise. When they uncover problems with the scheme, they have a choice: give up the commitment or rationalize away the gut concerns. The latter choice enables fraud.

Here is a simple example. One client of mine was defrauded over almost $100k in a vending scam -nothing was delivered.

This client is very bright, and had uncovered a number of real problems with the scheme. I was quite impressed with the resulst of his due diligence.

But for him, purchasing this vending route was going to provide much needed economic independence from his family business obligations.

Therefore, every flaw in the scheme was indirectly an attack on this important value.

He rationalized, therefore, the flaws he discovered with his due diligence as attacks on his work ethic -this was a vending opportunity, surely hard work could overcome all the problems.

Well, all the problems except for not getting working machines and have no locations.

We will not stop fraud by treating the victims as somehow deficient in reasoning or rationality.

To attack fraud, we need to be more aware of the automatic compliance techniques that con criminals use.

We need to develop automatic and unthinking defences to these techniques.

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Does NAMA Fight Fraud?

I am a big fan of Trade Associations, of all kinds.

Many people don't know that there iss a trade association for vending, National Automatic Merchandising Association, NAMA.

Here is a story from about vending fraud, from one of NAMA's website. Federal Judge Sentences Three In Vending Opportunity Scam @ Vending Market Watch News at AMonline.com

But what caught my attention was the editor's note.

"Editor's Insight: The Justice Department and law enforcement agencies are paying closer attention to business opportunity scams. Vending trade organizations should formally thank law enforcement agencies for these actions. Law enforcement professionals, like anyone, appreciate being appreciated.
The National Automatic Merchandising Association and many state organizations have supported efforts to warn consumers about these schemes, but there is no sure-fire way to protect people from their own poor judgment.

Because NAMA is involved in ongoing efforts to fight business opportunity scams, it is one more reason that operators should support their national trade association. 06-22-07 by Elliot Maras"

I have been involved in prosecuting, investigating, and warning about business opportunity frauds for over nine years. I have interviewed over a thousand people during that time. Over 95% of the victims were cheated by classic vending, payphone or ATM frauds. Not one of them knew about NAMA or the Canadian equivalent, CAMA.

Why is this? Well, NAMA's web page on business opportunity fraud is nothing more than a series of links to the FTC pages, without even any links to the 26 states who have business opportunity or seller assisted marketing plans. NAMA seems content to simply ignore the seamy side of their industry.

Business opportunity laws seem to be known only to regulators.

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Is iMergent a Biz Op?

David Phillips has an excellent due diligence article about iMergent Beware of iMergent's Sketchy Policies

Sales and marketing practices which are the subject of numerous State Attorney General investigations, a formal SEC investigation related to potential violation of securities laws (including the alleged disclosure of earnings forecasts to select investors, a Reg. FD ‘no-no’ ), and alleged accounting irregularities—all these price-busting concerns aside, the share price of iMergent, Inc. (IIG) has soared 95 percent in value during the last year.
Headquartered in Orem, Utah, the company sells its proprietary StoresOnline Pro software and training services, developed to help users build a successful Internet strategy to market products, accept online orders, analyze marketing performance, and manage pricing and customers. In connection with Internet software, iMergent also offers website development, website hosting, marketing and mentoring products and services.

iMergent typically reaches its target audience through concentrated direct marketing efforts to fill Preview Sessions, in which a StoresOnline expert reviews the product opportunities and costs. The sessions lead to a follow-up Workshop Conference, where experts train potential users on the software and services and encourage them to make purchases.

(my emphasis)

What potential distributors won't recognize is that the opportunity is subject to state and federal business opportunity laws or franchise laws.

Attending a workshop, paying $5,000 for the opportunity to do so, and then trying to sell services doesn't strike the average person as the purchase of a franchise. Or in the case of Utah, the buyer of a seller assisted marketing plan.

This is one of the biggest problems with the federal, state and provincial laws which are designed to protect individuals: the purchasers are completely unaware of the laws which are there for their protection -worse many of their advisors are also unaware of the requisite disclosure obligation.

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July 18, 2007

Five Due Diligence Tips for Massage Business Owners

Let's consider these due diligence tips

Massage Business Owner Sends Warning: "

When investigating a franchise business opportunity, Stabile also offers these key points to consider:

1. Cost: What is the total investment? Several different types of costs are involved, including the initial franchise fee paid in return for using the franchisor's business concept/system and name for a limited time, ongoing royalty payments for the services and support provided by the franchisor, space rental and leasehold improvements, equipment purchases, working capital required to operate, advertising fees, etc.

2. Training & Support: What is included in the training program offered by the franchisor and will it prepare you to run all aspects of your business efficiently and successfully? Do they offer an opportunity to meet other franchise owners? Also, what kind of field assistance, ongoing support, and marketing support can you expect from the franchisor?

3. Market Buzz: Are you familiar with the market you are entering? Consider what kind of need there is for your particular brand of services, and if it is growing or diminishing.

4. Location: Site-selection is critical. Does the franchisor offer population based exclusive territories? Does the franchisor help you decide on the location, and assist you in negotiating a favorable lease? Also, know the demographic of the market area in order to familiarize yourself with client potential.

5. Financing: Does the franchisor assist with financing? If not, you'll need to determine your credit rating, and possibly correct any erroneous information before you try to borrow.

These are some of the topics discussed in detail when working with any legitimate franchise business model. "elements therapeutic massage has a multiple interview process to ensure to the potential franchisee that he or she is making the right decision before a financial commitment is entered into," Stabile reported.

These are interesting questions, but where would you look to obtain information or answers to these questions?

Well fortunately, if you are buying a franchise, then you are entitled to a disclosure document in most jurisdictions.

The answer to 1 is found in item 8 of the UFOC, but beware that only 3 months of operating costs are typically provided for by the franchisor. You need to contact the all the other franchises, listed in item 20, to confirm the average length of the burn -the time it took to make enough money to cover expenses.

Training and support is harder to gauge. You can review the table of contents of the franchisor's training manual to get a sense of what they are going to give you for your franchise fee. Again this is provided in the UFOC or disclosure document.

Question 4 is critical, but most franchise contracts will put the entire legal responsibility for site selection on the franchisee, while at the same time the franchisor will purport to "get you the best deal because of their negotiating skill". This is a big trap - either the franchise agreement commits the franchisor to exercising reasonable skill in picking a franchise location or it doesn't. Don't be bluffed into accepting franchisor who picks your location, but disclaims all legal responsibility for the choice.

Question 3 cannot be answered by reference to the UFOC, but question 5 is answered in item 10 of the UFOC. UFOCs are online at Caleasi, or can be bought for $200.

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Fraud and Business Opportunities from around the Blog

Here is terrific story about China.

China Products: Forget Trust, Just Verify "National Public Radio's Marketplace did a great story today on 'customer service' in China, which goes a long way towards explaining what foreign companies must do if they are to get good product from their Chinese suppliers. This article nicely highlights some of the major differences one is likely to encounter in sourcing product from China as opposed to from North America or from Western Europe.

Shortest franchise in existence, from FranchisePick.

Auctioning4u Scraps Franchise Program, Closes eBay Drop-Off Stores The eBay Drop-Off Store franchise concept has received one more nomination for induction into the ‘Hot New Franchise’ wing of the Museum of Really Bad Ideas.

Ending what may have been one of the briefest forays into franchising ever, Christian Braun of UK-based Auctioning4u has announced that the company is going to focus solely on its home pick-up strategy. According to CEO Braun, Auctioning4u is closing its corporate and franchise stores, and is ceasing its efforts to franchise the Auctioning4U concept.

Also from FranchisePick, how would you like to do business with franchise development company whose CEO has been jailed for tax fraud? Only in the Mideast, you say. Pity.

Let’s Franchise the Middle East: "

Franchise consulting firm Francorp has had its share of unfavorable franchise press since its founder was jailed for tax fraud and then, according to Franchise Times, put into solitary confinement for conducting business out of Duluth Federal Prison Camp. According to this recent press release, Francorp is back in expansion mode… ready to franchise the Middle East.

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Unique Vending Failure - No fraud

Here is an unusual story, a vending opportunity failure, which did not involve fraud.

WATERLOO --- When Ryan Madison started his business, Arquel Vending, four years ago, he just knew the business would flourish.

Black-owned businesses would flock to him as clients, to support one of their own, he figured. Other businesses would follow suit, preferring to have a local vendor's vending machines in their workplaces. Within three years, his business would grow from his first, single bulk machine to 100,000 bulk and snack machines. He would move the business from the basement of his home to its own physical location, and hire employees.

"And after the vending machines, I was going to buy a game room, because there's not really anything for the kids to do," Madison said. "And then I was going to open a restaurant, and then I was going to buy a building ...."

That was the plan. The reality was different.

He hasn't been able to add a new client in eight months. The business has about 100 vending machines, many of which are kept in the basement of his home, where he still runs the business from. The business is making enough money to support itself, but that's all. Madison has started working a second shift job at Ferguson Enterprises, and has started contemplating closing down his vending business.

Well, what went wrong here? Here are some thoughts.

When start-up businesses fail, it's for any number of reasons, said Mike Hahn, senior program manager with the Regional Business Center. Citing a recent study published by US Bank, Hahn cited the most common reasons for failure:
--- Not having a well-developed business plan.

--- Overly optimistic about sales and money needed.

--- Entrepreneurs don't recognize or acknowledge their weaknesses, and don't seek help in those areas.

--- Inexperience.

--- Poor at handling or understanding cash flow.

--- Starting out with too little money.

--- Improperly pricing product or service.

--- Poorly marketing the business.

--- Not understanding or ignoring the competition.

--- Focusing or relying too much on one customer.

--- Hiring the wrong people.

--- Micromanaging, or not being able to successfully delegate tasks to employees.

I would also add the obvious: contact the appropriate trade association, in this case NAMA, for some information about how to build a vending business.

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July 17, 2007

The Anthem of the Nigerian 419 Spammer

Here is an interesting song, about the 419 con criminals from Nigeria,

ectoplasmosis » “I Go Chop Your Dollar”: Anthem of the Nigerian 419 Spammer

The music video for ‘I Go Chop Your Dollar’ by Nikem Owoh, an ‘extremely popular’ song in Africa that describes in verse after plaintive verse the trials and travails of the Nigerian 419 / Advance Fee fraudster, who sends spam after spam to ungrateful whites as his own personal attack on the White Hegemony that has kept the poor African spammer down in the gutter for so very long.
Lyrics after the jump. Everybody! Sing along!

I’ve been through hard times
Even though I’m very smart.
I’ve had a fair share of poverty.
But now, I’ve found the right business.
419 is not stealing,
It’s just a game
And everybody can play a part.
If anybody is so stupid, my brother,
I will scam him.
The national airport, I own it.
Even the nation stadium, I built it.
The president is my sister’s brother.

You are the big fool,
I am the master,
My dear white friend
I will eat your dollar,
I will take your money and disappear.
419 is just a game
You are the loser,
I am the winner.
The refinery is mine,
I will award you the contract.
Just give me some money for paperwork
You are the big fool,
I am the master…
It’s I that’s the master!

If a white man commits a crime
He’s hailed as being smart.
But when a black man does the same
People reach for his throat, want to kill him dead.
But white men are greedy.
They’re greedy,
I insist, they’re greedy!
They are greedy
And I know them too well!
That’s why when they fall into my trap
I love to show them fire!

This is song is more likely to resonate than my old saw about there isn't something for nothing. But note the typical con criminal justification -greedy individuals can be trapped liked wild animals and there is nothing wrong with that. Don't be a greedy animal, trust and then verify without a confirmation bias.

Update, thanks to a tag by Michael Davis Thomas,

Nigerian comedian and actor Nkem Owoh was one of the 111 suspected 419 scammers arrested in Amsterdam recently as part of a seven month investigation, dubbed Operation Apollo...
Owoh became internationally known for his song "I Go Chop Your Dollar", the anthem for 419 scammers ("Oyinbo man I go chop your dollar, I go take your money and disappear 419 is just a game, you are the loser I am the winner", full lyrics here), which was banned in Nigeria after many complaints.

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July 13, 2007

Monday Fraud News

Interesting story about how an idealist was corrupted. A Chinese Reformer Betrays His Cause, and Pays - New York Times It is a little hard to understand what the pressures of the job were; why not simply resign if you couldn't do the work?

The story of Conrad Black, viewed from Toronto Life subscribers, is a good read. One commentator endured a good deal of abuse for having the temerity to suggest that Mr. Black was a thief who ought to put in jail. Hmm.

Sam Antar is blogging a great deal about Patrick Byrne and Overstock, making the observation that Patrick Byrne's posts on various message boards appear to be concealed. What I cannot understand is why any CEO would post without using their full name and position. Herb Greenberg has more on this angle.

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USANA Downunder

The National Business Review (NBR) has a very interesting piece about Usana recruiting practices in New Zealand. The writer is describing a recruiting meeting held last year.

"One evening last May, about 450 people squeezed into a ballroom at Auckland's Crowne Plaza hotel where a young woman was explaining how to achieve "true health and true wealth" by selling products from Usana Health Sciences, a US-based vitamin company with thousands of distributors in New Zealand.

"Close your eyes and think about your childhood dreams," she said.

"Sing out your dreams."

There was an awkward moment, but then people started calling out visions of racecars, airplanes, fancy homes.

The woman, a Usana distributor, started flipping through a series of PowerPoint diagrams and talking about how Usana's unique compensation plan can help people achieve their dreams."

Sing out your dreams? What are the chances that a some of the members in the audiences were shills? Exactly how does this compliance technique work? There are obviously two principles at work here: social proof and association.

First, consider the nature of the individual who is likely to attend a "true health and wealth" meeting. Likely, they are seeking a simple solution to their complex health problems. Now, what on earth does your childhood dreams have to do with your current health problems? If you said "nothing", you lose the prize. Surround yourself with a room full of people insisting on a connection between current health and childhood dreams, and if you don't leave the room immediately, then the principle of cognitive dissonance predicts that you will likely change your views to match the current insanity in the room.

However, there is another less obvious compliance trick here. Consider what Usana says about its compensation scheme.

"Usana is a multilevel marketing company, or MLM, a rapidly expanding industry whose distributors work from home and make commissions based not only on their own sales but on sales by other distributors they recruit into the company.

Usana distributors follow a "binary compensation plan," in which one person recruits two others, those two recruit four others, those four recruit eight others, and so on.

According to several recruiting presentations NBR attended in New Zealand, each new Usana distributor must buy a minimum of about $445 worth of the company's business tools and health products, then continue to buy $290 worth of its health products every month thereafter in order to qualify for commissions.

Usana's critics say these monthly qualifying purchases are the reason so many of its distributors fail to make a return on their investments.

But Usana Executive Vice President of Operations Fred Cooper said most of the company's distributors don't think of themselves as failing -- they're happy to get $290 a month worth of Usana products for their own use, whether or not they sell anything.

In fact, Mr Cooper said Usana's research indicated that most of its distributors are "not interested in commissions." (my emphasis)

Much like our bad intuitions about induction which enable Ponzi operators, we have equally bad intuitions about our network of friends which enables Pyramid schemes. While it is likely that I know two other people to recruit, who may also individually know two other people, it is unlikely that all of these people are distinct. Too many of our friends' friends will know the same people.

Our network of friends is just not that big enough of a space for the recruitment to work. (Oddly, in other areas people do know this intuitively as the 6 Degrees of Separation.

It is no wonder that the "most of its distributors are not interested in commissions". This is a mathematical fact, given the size of most "distributors" network of friends. One has to wonder about what Usana means by the word "distributor", also. It appears that the correct term is "consumer". Then what Cooper says makes sense: most of our consumers are not interested in selling. I would certainly like to see the research that Cooper is referring to -it has a direct impact on their ability to recruit their sales staff.

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July 11, 2007

Franchise Due Diligence Tip from Richard Solomon

Richard Solomon has a great due diligence tip for prospective franchisees, in his paper Franchise Remedies: MAKE YOURSELF LITIGATION PROOF WITH BETTER DOCUMENTS

Here is my summary of Richard's idea.

Before making any decision about a franchise,

1. Keep all the promotional material from the franchisor. Yellow highlight the representations that you thought were important to your decision making.

2. Write down what attracted you to the franchise, from the sales person and others. Focus on what they said about the earning's potential of franchise.

3. Ask a franchisee attorney whether the information in 1 and 2 is consistent with the Earnings Claim Item 19 in the disclosure document, or UFOC.

Any competent franchisee attorney should be able to answer this question in a short period of time.

In my opinion, a the whole exercise shouldn't cost you more than $500, and will likely save you hundred's of thousands of dollars.

You can even try the trick at home.

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July 10, 2007

Texas Sues Mannatech- Blog Reactions

There was some interesting reactions to the The Wall Street Journal's piece, on July 6th, about Texas Suing Mannatech Over Claims

Kim Klaver picked up on the piece, observing that

"This is not about the quality of the products. Nor is it about what the products may have done for people. This is about people making promises. Claims. The curse of our industry.

Where is a company with good products, where reps do not make claims and promises to sell their products?"

I am assuming that what she means is that are there network marketing companies with honest representatives who don't exaggerate the value of the product. But read the comments at site.

Tracy Coenen also picked up on the WSJ piece, pointing out that

"Also contained in the suit is a mention of the site glycoscience.com, which supposedly provides information on glyconutrients and attempts to present “scientific studies” that would appear to legitimize Mannatech’s products. The suit says that most of the “studies” on the site are actually papers prepared by Mannatech employees or affiliates, and have not been published anywhere or peer reviewed."

But what was interesting to me was the quote from Caster, who said:

"Mr. Caster would not comment beyond the company's statement. Dr. McDaniel said customers were responsible for the health claims. The company, he said, doesn't "condone or promote. But… when people get results when everything else has failed, they think from everything they've seen that they've been treated and been cured. Over and over again."

Now at best this is self deception. The human body can and does cure itself, without any external help. We would have never made out of the dark ages otherwise -medical intervention being what is was then.
But for a doctor to claim that the "miracle" reporting from individuals constitutes grounds or justifications for purchasing the sugar pills is nonsense.
How many people purchased the pills and were not cured?
How many people didn't purchase the pills and were cured nonetheless?
What is the base rate of getting a relapse or cure?
Just some questions that the good doctor might want to answer, under oath.

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July 9, 2007

How Your Brain Makes Decisions

I have created a new sub-category, which will contain articles about research into brain behaviour and decision making.

Here are three interesting research developments.

At ScienceDaily: Dopamine-related Drugs Affect Reward-seeking Behavior, we learn that the brain processes rewards differently than losses.

""The results show dopamine drives us to get what we want, but not avoid what we fear," said study author Mathias Pessiglione, PhD, who now works at the Salpetriere Hospital in Paris, France."

This is an interesting research observation. Seekings gains is not automatically associated with avoiding losses. Expected utility theory, on the other hand, treats both of these processes as unitary.

From a due diligence aspect, you would do well to concentrate on eliminating that which you fear before getting too high on dopamine rewards.

The second paper has a different take on rewards versus losses, Scientific American: The Prospects for Homo economicus

"In “The Neural Basis of Loss Aversion in Decision-Making under Risk,” in the January 26 Science, Poldrack, Fox and their colleagues Sabrina M. Tom and Christopher Trepel presented the results of their fMRI study, in which they offered subjects a prospect of accepting or rejecting a gamble that offered a 50–50 chance of gaining or losing money. As the potential for gains rose, they found increased activity in the mesolimbic and mesocortical dopamine systems (dopamine is a neurotransmitter substance associated with motivation and reward). As the potential for losses increased, they found decreasing activity in these same reward-sensitive areas. Interestingly, it appears that losses and gains are coded by the same brain structures—the ventromedial prefrontal cortex, associated with decision making and learning in the context of reward and punishment, and the ventral striatum, associated with learning, motivation and reward. Individual differences in loss aversion were predicted by how much more the brain was turned off by losses than it was turned on by gains."

Finally, the last paper discusses what is happening in the brain when individuals play the ultimatum game. This game is fairly simple to describe. There are two players, A and B. A moves first and proposes a split of $100; B can either reject or accept A's proposal.

Generally, most economists believe that if A proposes a split of $99 for him and $1 for B, then B would be irrational not to accept the proposal.

Yet most offers are in the $45 to $50 range. The challenge is to explain B's power in extracting such offers.

According to this research, described in the Economist

"One explanation of the rejectionist strategy is that human psychology is adapted for repeated interactions rather than one-off trades. In this case, taking a tough, if self-sacrificial, line at the beginning pays dividends in future rounds of the game. Rejecting a stingy offer in a one-off game is thus just a single move in a larger strategy. And indeed, when one-off ultimatum games are played by trained economists, who know all this, they do tend to accept stingy offers more often than other people would. But even they have their limits. To throw some light on why those limits exist, Terence Burnham of Harvard University recently gathered a group of students of microeconomics and asked them to play the ultimatum game. All of the students he recruited were men.

Dr Burnham's research budget ran to a bunch of $40 games. When there are many rounds in the ultimatum game, players learn to split the money more or less equally. But Dr Burnham was interested in a game of only one round. In this game, which the players knew in advance was final and could thus not affect future outcomes, proposers could choose only between offering the other player $25 (ie, more than half the total) or $5. Responders could accept or reject the offer as usual. Those results recorded, Dr Burnham took saliva samples from all the students and compared the testosterone levels assessed from those samples with decisions made in the one-round game.

As he describes in the Proceedings of the Royal Society, the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer but only one of the 19 others made the same decision.

What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species."

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Is College a Scam? Should you buy a franchise instead?

Sean Kelly started an interesting post about the value of a college education as opposed to purchasing a franchise.

There are two neat points he makes. First, the correlation between higher income and a college degree is may be accidental -those who go to college may already be selected for a better income stream. Second, apparently there are a lot of individuals, 33%, listed on the Forbes 400 who don't have a college degree.

My own view is that college and university are largely wasted if you are not intellectually curious. And if you are intellectually curious, both college and university can be a complete nightmare as you try maintain the rigourous reading schedule.

Here is the entire article. Write Sean and leave him your thoughts.

My post Wise Up! Skip College. Buy a Franchise! provoked some strong reactions, most notably from those whose meager livelihood depends on the perpetuation of the myth of the college diploma as a good investment. Few scam victims are willing to come forward, so the myth goes on.

Benjamin Welch wrote an earnest, though misguided, response to my post called College Degrees: What’s Their Real Value? Since Ben ‘has been a college instructor in writing and composition for nearly six years,’ he knows the myth better than anyone. Ben, I was a ‘college instructor in writing and composition’ too. I was teaching 130 students during the week and playing drinking songs at an Irish pub Fridays & Saturday nights. Guess which job payed more?

Ben claims ‘any pundits who claim, sarcastically or not, that a college just isn’t worth the trouble or the money, are in error.’ He uses two common fallacies to support this contention: that ‘some people have succeeded without degrees, but they belong to a small minority,’ and that those with college degrees earn more than a million extra bucks because of their magic diplomas.

A small minority of successful people lack college degrees? Who’s been ‘smoking doobies down by the river’ Ben? In 2003, the percentage of Forbes 400 members without college degrees was 33%. That’s a small minority? The average net worth of a Forbes 400 member without college degree: $2.27 billion. With a degree: $2.13 billion.

But the real sleight-of-hand parlor trick is the statement that those with college diplomas earn ‘$30,000 more annually than someone with only a high school diploma. Over the course of a working lifetime, that’s more than million dollars.’

Hmmm… If the average income of Beluga caviar consumers is $500K annually, does that mean that if I eat whale eggs weekly I’ll earn $500K? Where’s proof of cause and effect? College-goers are more likely to be white, privileged, better-educated and probably (as a group) smarter than those who don’t go to college. They’d be no less white, privileged, better-educated and probably (as a group) smarter without their degrees. Can diploma apologists contend, with a straight face, that people like Warren Buffett, Ralph Lauren, Steven Spielberg, Donald Trump, Oprah, and Martha Stewart would not have achieved their success without their degrees?

To correct Mr. Welch’s well-crafted, but misguided, conclusion: ’In the final analysis, the grounds for [defending] the worth of a college degree are based either on poor math or logical fallacies — two errors, ironically, that a college education is supposed to correct.’

WHAT DO YOU THINK? IS A COLLEGE DEGREE NECESSARY FOR SUCCESS? ISN’T A FRANCHISE A BETTER INVESTMENT?

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July 6, 2007

Friday Fraud News

Friday news.

Consumerist reports that
Crime: 2.3 Million Customer Records Stolen, Sold To Direct Marketers: "
Fidelity National Information Services, a financial processing company, announced today that one of its employees had stolen 2.3 million customer records containing credit card, bank account and other personal information, and sold that information to an unidentified 'data broker' who then sold the information to various direct marketing companies.

The FTC has an interesting cross border scam.

Court Orders Centurion Defendants to Halt Illegal Cross-Border Telemarketing and Pay $10 Million in Consumer Redress
Court Orders Centurion Defendants to Halt Illegal Cross-Border Telemarketing and Pay $10 Million in Consumer Redress

Defendants Defrauded U.S. Consumers with Pitch for Nonexistent Credit Cards; Court Also Holds Two Individuals in Contempt

In the case against the cross-border advance-fee telemarketing scheme known as Centurion Financial Benefits, a federal district court – acting at the request of the Federal Trade Commission – has entered several additional orders against participants in the scam. The FTC today announced the court has entered final orders requiring the corporate defendants and Robert Houttuin to halt their illegal cross-border activities

This is an nifty comparison of the products sold by Arbonne and what you can get retail.

Arbonne International is a direct-sales line many of my readers have an intense curiosity about. There must be lots of assertive Arbonne salespeople out there, because no other line with this type of business structure has generated the amount of email I receive, all asking if Arbonne products are worth it and whether or not many of the company's outlandish claims are true. More than many other lines, Arbonne is big on playing up the alleged evil of many benign cosmetic ingredients. Topping this list is mineral oil, which the company maintains interferes with skin functions and delivery systems. Cosmetics-grade mineral oil is not a problem for skin and is in fact one of the mildest and most effective ingredients for making dry skin look and feel better. It doesn't have the best texture or finish, but its effectiveness is indisputable.

Read more at
Paula Begoun's Beauty Bulletin

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July 3, 2007

What are the the Top 7 iPhone Scams?

Here is an interesting post.
iPhone Scams: ScamBusters.org Predicts the Top 7 iPhone Scams:

1. iPhone eBay scams:
As we write the first version of this article on Wednesday evening, two full days before the launch of the iPhone, there are already 1,796 products listed when you do an eBay search for "iPhone."

Most of these listings are for cases, screen protectors, cables and other accessories. (Although most of these products are likely not scams, we personally would not buy an iPhone accessory from a company that has never actually seen or touched an iPhone.)

There are some auctions for brand new Apple iPhones (2 days before they go on sale, and sometimes with incorrect information).

We found that eBay was very good about removing these iPhone listings during the pre-launch. However,
after the iPhone starts shipping, it will be MUCH more difficult to know which auctions are real and which are bogus
.

There are also auctions for email addresses, some with bids around $50, like "apple.iphone.outlet@gmail.com." Although you will probably actually get these email addresses if you win the auction, they typically are worthless.

Our recommendation: Think hard before you buy an iPhone on eBay. Instead, if you want to buy online, order directly from the Apple store online. Ground shipping is free and you aren't ordering from an unknown person.

Since no one will be discounting iPhones to start (and they are only available from Apple online, Apple retail stores and AT&T stores), it's hard to think of a compelling reason to buy on eBay or other online auction sites.

The other six are: iPhone standing in line scams, iPhone scalper scams, Free iPhones, iPhone spam, Fake iPhone websites and phishing scams, and finally iPhone viruses, Trojans and spyware.

The bogus eBay auction for iPhones is interesting. It combines a couple of compliance techniques. First, there is the reliance on the secular version of Pascal's wager: even though the chances of buying a low cost iPhone is low, the "winning event" is so desirable as to mask the first low probability. Ironically, this type of naive skepticism is even worse than no skepticism.

Second, the auction mechanism always appeals to low-cost shoppers, despite the fact the auction mechanism will tend to attract people who over pay.

Finally, there appears to be a general trend amongst consumers to "reward" brand names by buying knock-offs or counterfeits, a topic I will return to.

All three of these compliance techniques are sufficient to ensure that the iPhone auction scam will have a decent run.

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June 30, 2007

How The DS-MAX MLM Scam Operates

The Consumerist has a nice post on DS-MAX
Features: How The DS-MAX MLM Scam Operates

You've heard all the stories about Midtown Promotions and my experiences investigating their IDT campaign. You probably noticed a lot of references to their shady Dark Overlords, DS-Max, now apparently known as Innovage, probably in an effort to hide their crooked past from prospective employees smart enough to look up their prospective bosses on the internet. Now, for a clearer picture of the dreaded DS-Max, the Consumerist takes you through a typical 'career' at one of their winning affiliates:
DS-Max grew out of our redhead stepchild to the north, specifically in Toronto, where a dude named Murray Reinhardt lived out of his car on the hard road to bringing joy and a set of steak knives to poor souls on every continent. This was in the 1970s, where everything was possible; blond teenagers danced naked in the streets and an ounce of weed was two bits. Murray called his organization of clearance item reselling 'DS-Max,' after his own mantra, 'Direct Sales to the Maximum!' Murray's start-up became a sales force in period of a few short years, eventually expanding into thousands of affiliates. What was once a street and door-to-door sales operation, selling goods directly to the (unsuspecting) public, 'later expanded,' according to the holy Wikipedia, 'to include sales of discount coupons, telecommunications contracts like AT&T, credit card processing services and other sales packages on behalf of more service based industries.'
Except they no longer do that because they are no longer DS-Max. At least, that's what ol' Richard Shapero wants you to believe. The DS-Max website is no longer. Lawyers snipe at us with each mention of the 'D' word. No matter what they call it, if the affiliates are affiliated or if they are 'independent,' as 'Eric' at Midtown claimed, whether they are either kicking up to the real top of the pyramid or they've stolen Murray's ideas and gone into business for themselves, the ads for prospective suckers are still the same.

One frequently asked question: 'Is DS-Max a pyramid scheme?' Most commissions break down something like this: Five bucks for the salesman, five bucks for the owner, and three bucks for DS-Max. One D.C. Advertising owner defended himself half-assedly on Ripoffreport, saying, 'Am I a part of a pyramid scheme? Well yes, but its no different than corporate America. The people at the top make money off the people below them. Everyone is expendable just like in any company.'

Read the entire article.

Note the claim that corporate America is a pyramid because the people at the top make money off the people beloww them.

This is a common justification among pyramid scammers. Its emotional appeal is that what we are doing is no different than how an ordinary business operates. (The logic of the statement is clearly false: people at bottom of the corporate ladder are paid a wage, the people at the bottom of the pyramid are simply losing money.)

The emotional appeal works because what the speaker said is true and the levels of CEO compensation are out of whack with the talent delivered. Finally, the phrase "everyone is expendable just like in any company" will resonate with a job seeker who has recently lost his or her job. These true and emotionally powerful statements may mask the false analogy between a pyramid scheme and an ordinary sales position.

Remember the essence of a believable fraud is to mimic ordinary economic life as closely as possible. Throw in an unbelievable upside, the economic miracle, and swirl in a nothing to lose guarantee and you have a ready made fraud.

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June 29, 2007

Due Diligence for Franchisees

Franchise Pick has a nice post on franchise due diligence.
Before Buying a Franchise, Don’t Trust, But Verify (Part 2): "
(FranchisePick.Com)' Way back in Don’t Trust But Verify (Part 1), I posted the comment of a franchisee-to-be of a certain fitness franchise chain who made the ominous comment that the concept was ‘too good to fail.’' Several others provided some good insights that prospective franchisees of any concept - especially fitness chains - would do well to heed.' The most important thing to know ahead of time is how you’re going to attract customers, how you’re going to retain them, and what it’s going to cost to do so.

'

Roger of GymBuzz.com said:

…The fitness business is not a casual investment. The business will not just come to you because you are open.

All of the women’s fitness companies teach their franchisees that ‘beat the streets’ social marketing is what is absolutely necessary. However, it seems like the franchisees that are less than happy with their franchise purchase are those who are placing a great deal of expectation on their franchiser to drive business into their gyms via some form of advertising. No matter whether you invest $100,000 or $500,000 the reports from the successful gym owners all focus on the owner’s level of physical activity and not what kind of ad support they get from their corporate office.

Read the rest of the Franchise Pick article

Most prospective franchisees don't read the UFCO carefully enough to find out how much real support they can obtain from the franchisor.

They also fail to review with other franchisees the appropriate information regarding startup expenses. Franchisors only "budget" for 3 to 6 months of expenses, and reveal what they believe it will cost to run the franchise for that period -but typically, a startup could go 18 to 24 months before earning income.

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June 26, 2007

Fraud News from the Web

Truston's identity theft blog has another reason to purchase a cheap answering machine.
Don't Trust Your Caller ID: "
Here’s a great blog by Susan Brenner that gives a lot of information about caller ID spoofing that'can be'used to steal identities or even worse.

The spoofing is being used to commit identity theft and other types of fraud, though, as I note below, it’s also been used for some other undesirable purposes. For fraud and identity theft, the would-be perpetrator spoofs the caller ID so the person taking the call believes they are talking to their bank, credit card company or some other source with which they would feel free to share personal information, such as their Social Security number. The caller persuades the person to give up as much information as seems useful, hangs up and identity theft or some other kind of fraud is set in motion, with the person duped by the caller ID spoofing as the victim.

'
"

(Via Identity Theft Blog by Truston.)
Pinktruth has an interesting story about earnings claims made by Mary Kay"
Dearest Friends,
As you know I resigned from Mary Kay earlier this year. I am sharing this out of concern for others. I realize some may be angry at me, but I truly have nothing to gain or lose by telling you the following.

In October of 2006, I discovered some very disturbing things about this company that I was unaware of previously. I want to say I never meant to mislead anyone in anyway. Please accept my deepest and heart felt apologies if you have felt ‘injured’ in any way through this Mary Kay ‘Opportunity’.

I received some information about Mary Kay Corp that was not from Mary Kay.
"

Sam Antar, on whitecollarblog, has a fascinating and hard hitting discussion about he and his cousin's white collar fraud.

Crazy Eddie Speaks Cousin Sam E. Antar Responds: "
The daring of Wall Street
In his hey day, Eddie Antar was the darling of Wall Street. Until our frauds imploded, our manufactured financial statements produced a constant fiction of Crazy Eddie's superior financial success and Eddie's Antar's supposed business acumen. We were sought after by Wall Street investment bankers hungry to feed Crazy Eddie with capital to expand its business and let their investors get in on a piece of the action. We had four public offerings. We sold investors on hope as the family cashed out almost $100 million in stock.

A consumer's hero

Eddie Antar was legend in his time as he a became a folk hero to consumers by thumbing his nose at 'fair trade' laws that stifled competition. However, it was our intention to bait and switch our customers to more profitable merchandise. In the early days before the company went public, if we could not switch a customer who paid cash, we simply pocketed the sales tax.

Upcoming Eddie Antar and Sam E. Antar interview on CNBC Business Nation by Herb Greenberg on Wednesday, June 27, 2007 at 10:00 PM and 1:00 AM

Security Fix has a nice article on an update to an old style con.

"Red Cross Scam Targets Military Families: "Low-life scam artists have sunk to new depths by posing as American Red Cross workers in an effort to steal personal information from military families with loved ones in Iraq. The caller, who sounds like a young American, calls a military spouse and identifies herself as a Red Cross representative, according to an alert posted by the Red Cross. The caller says the spouse's husband, who is not identified by name, was hurt while on duty in Iraq and taken to a hospital in Germany. 'The caller stated they couldn't start treatment until paperwork was accomplished, and that in order to start the paperwork they needed the spouse to verify her husband's Social Security number and date of birth. In this case, the spouse was quick to catch on and she did not provide any information to the caller,' according to the alert."
(Via Security Fix.)
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June 25, 2007

Rhode Island Enacts Dealership Law

Rhode Island Enacts Generally Applicable Deale...: "

Rhode Island Enacts Generally Applicable Dealership Law

This posting was written by Pete Reap, editor of CCH Business Franchise Guide.

The Rhode Island Fair Dealership Act, a generally applicable relationship/termination statute, became law without the Governor’s signature on June 14.

Notice Requirement

The statue, which was effective immediately, requires the grantor of a dealership (1) to provide at least 90 days’ prior written notice of termination, cancellation, nonrenewal, or substantial change in the competitive circumstances of a dealership and (2) to provide a dealer with at least 60 days in which to rectify a claimed deficiency.

The notice requirement does not apply to some situations—including terminations based on the dealer’s insolvency. A shortened 10-day notice period applies to cases of payment defaults.

‘Good Cause’

Although the measure (House Bill No. 5275) does not explicitly require ‘good cause’ for termination, it defines ‘good cause’ as a failure to comply with essential and reasonable requirements imposed by the grantor or bad faith in carrying out the terms of the dealership.

‘Dealership’

The new law defines ‘dealership’ to mean a contract or agreement, either expressed or implied, oral or written, by which a person is granted the right to sell or distribute goods or services or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement, or otherwise.

Civil Action

The law requires the repurchase of dealership inventories under certain circumstances and provides a private civil action for injunctive relief, damages, and attorneys’ fees.

It specifically excludes its application to certain classes of dealerships, including liquor, fuel, and motor vehicle dealerships; insurance agency relationships; and door-to-door sales dealerships.

Full text of Chapter 07-036 will appear in the CCH Business Franchise Guide."

(Via Trade Regulation Talk.)

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June 21, 2007

How to Avoid ATM Distributorship Fraud

ATM Scrip machines are similar to ordinary ATM's, but instead of dispensing cash they dispense scrip or dollars that can only be used in the merchant's particular location. For Canadians, this would be like an ATM machine which only dispensed Canadian Tire dollars. I can imagine that one use for such machines for a large retail environment which wished to sell its own coupons at a discounted rate, for example.

But what is terrific about their website is this copyscaped page on why most business opportunities fail. It is great, not just because ATM Scrip is agrees with what I have written about due diligence and location services, but the article puts the correct emphasis on selling. If you cannot sell a merchant on locating one of these machines, you should not be in the business. There is, outside of investing a public company, no such thing as passive investment in the ATM distributorship business. Nobody who can sell, needs to borrow money from you at 20 or 25%. This is hard for most people to understand, as they only focus on their supposed return from investing in a ATM distributorship. But think about it from the sellers point of view: he claims to have locations, but needs money to purchase the ATM's. He will pay you 20 to 25% on your investment, or loan to him. The obvious flaw here is that he should be able to obtain credit from a bank at significantly lower than 20 or 25 points, if there is a real business. But he cannot because there is no real business.

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The Acquisition of Money

The acquisition of money by direct selling, which mostly means the taking it away from those who have less information, or are a little bit more trusting, is not a pretty thing when you look into too much.

What redeems direct selling is the Idea.

An Idea at the back of it, not a sentimental pretence, but an Idea, and an unselfish belief in the Idea.

Something that you can set up, bow down to, and offer a sacrifice to. An Idea you can preach.

An Idea like God, Family and then Mary Kay.

But what happens when you find the Idea has feet of clay? Like Joseph Conrad's mythical Kurtz - an Idea turned into a Monster.

Read about it in Finding about Mary Kay

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Winner of the Hubbard Award from ACFE

Congratulations to Tracy Coenen, for becoming the
Winner of the Hubbard Award from ACFE: "

I was just notified by the Association of Certified Fraud Examiners that I won the 2007 Hubbard Award, which will be presented to me at the 18th Annual Fraud Conference next month. The award honors the late Regent Emeritus Thomas Hubbard, Ph.D., CFE, former chair of the Association’s Continuing Education Committee, and professor emeritus and former head of the accounting department at the University of Nebraska.

The Association’s nearly 40,000 worldwide members vote for the best Fraud Magazine article from the prior year’s issues. My winning article was entitled Financial Statement Fraud in the Katrina Aftermath: A Whirlwind of Opportunities, and was featured in the January/February 2006 issue.

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June 20, 2007

Who Needs Spam When You Can Advertise?

I was very impressed with Davis Freeberg's latest piece on advertising, Who Needs Spam When You Can Advertise?: Davis writes:

"After doing my research on GrowthStockGuru's most recent hot stock tip, I contacted the business press and asked for comments on why they would run an ad for a microcap company, whose former Director is married to a convicted stock promoter? I emailed Business Week twice and Smart Money once, but neither of them seemed to feel it was important enough to reply to. Forbes and Investor's Business Daily did reply though and unfortunately Forbes said that the print ads had gone out, but that future ads were being discontinued.

'Thanks for your note- we obviously take this very seriously given our
reputation in the industry. Just so you know Forbes.com and Forbes
magazine are separate organizations with separate sales teams. I had
some people here at Forbes.com run a check and it appears that we've
never shown those ads online. I can confirm that there had been ads run
in the print mag in the past but from what I'm told those are going to
be discontinued.'

While, it's unfortunate that Forbes ran the ad to begin with, I can understand how they could miss some of the details behind GrowthStockGuru's tip. Digging through the SEC files was like peeling an onion, the more I read, the more I wanted to cry. Forbes willingness to re-evaluate the history of the company and their decision to discontinue future ads, demonstrates that, while careless, they do care enough about their readers trust, to understand that the easy money, isn't worth the hit to their credibility.

Investors Business Daily on the other hand, did not seem to think that there was anything wrong with advertising a penny stock, in order to increase 'awareness' of the company.

'Thank you for your email regarding the advertising from GrowthStockGuru. Investor's Business Daily does have a policy in of rejecting display advertising that promotes penny stocks. Display advertising refers to the ads that are placed throughout the newspaper.

The ad you referred to ran in our Corporate News section. This is classified advertising section designed as a forum for public companies to increase awareness of their stock. Most of the ads that run in Corporate News are penny stocks. Many of our readers regularly read this advertising feature searching for new and interesting investment opportunities. The section is labeled as advertising and in no way is an endorsement by Investor's Business Daily. We also run a small disclaimer in the section stating that we can not guarantee the accuracy of the information in the ads.

Thank you for taking the time to share your concerns with us. We value your input and take all suggestions and comments very seriously.'

Read the entire article, because it is insightful. Davis is making an excellent point about how scam criminals are willing to pay the heavy advertising rates for Forbes, IBD and others, if they believe it can confer respectability and authority upon their enterprises. All the con criminal needs is to deflect the investors natural skepticism -even just for a minute.

The famous con criminal, the Yellow Kid, knew this. He would use a real brokerage's office, but at night, or palatial office, which was rented, or any prop which would add authenticity or authority, to complete his swindles.

The newspapers can arguably claim that they are unwitting enablers of this fraud, because they have no general duty to their readership to investigate the bone fides of the investment opportunities in their classifieds.

But do you think that IBD can maintain this pose, now that Davis has alerted them to the possibility that they are enabling fraud. Is this agreement between IBD and the grifters an actionable conspiracy? What do you think? Puffery or negligent misrepresentation?

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June 19, 2007

20 Secrets about Corporate Crime that You Must Know About.

Over at the THE DAILY CAVEAT, Michael Thomas posted an interesting link about

"Mr. Mokhiber as the editor of the long-running Corporate Crime Reporter. He's been on the white collar crime beat for at leas 20 years and knows a thing or two about its perpetrators.

This list of 20 Things You Should Know About Corporate Crime is derived from the text of a speech he gave a few days ago at a conference on corporate accountability in Washington, Dc." (Unfortunately, Thomas's link didn't work, but I found a link that does.)
Here is a partial list, but do read the entire report.
Number 20
Corporate crime inflicts far more damage on society than all street crime combined.
Whether in bodies or injuries or dollars lost, corporate crime and violence wins by a landslide.
The FBI estimates, for example, that burglary and robbery - street crimes - costs the nation $3.8 billion a year.
The losses from a handful of major corporate frauds - Tyco, Adelphia, Worldcom, Enron - swamp the losses from all street robberies and burglaries combined.
Health care fraud alone costs Americans $100 billion to $400 billion a year.
The savings and loan fraud - which former Attorney General Dick Thornburgh called "the biggest white collar swindle in history" - cost us anywhere from $300 billion to $500 billion.

And generally, our collective response to corporate crime is to move on, pass it by, and forget about it -categorize it as some deviant behaviour, which doesn't really happen that often.
Number 16
Beware of consumer groups or other public interest groups who make nice with corporations.
There are now probably more fake public interest groups than actual ones in America today. And many formerly legitimate public interest groups have been taken over or compromised by big corporations. Our favorite example is the National Consumer League. It's the oldest consumer group in the country. It was created to eradicate child labor.
But in the last ten years or so, it has been taken over by large corporations. It now gets the majority of its budget from big corporations such as Pfizer, Bank of America, Pharmacia & Upjohn, Kaiser Permanente, Wyeth-Ayerst, and Verizon.

This is an interesting observation, which highlights why you have to be skeptical of even the professional skeptics -they may be paid to look the other way.

Number 8

There are very few career prosecutors of corporate crime.
Patrick Fitzgerald is one that comes to mind. He's the U.S. Attorney in Chicago. He put away Scooter Libby. And he's now prosecuting the Canadian media baron Conrad Black.

And in Canada, there are no career prosecutors of corporate crime. None, nada, zip. Now you know why Conrad Black wanted to be tried in Canada.
Number 4
The Justice Department needs to start publishing an annual Corporate Crime in the United States report.
Every year, the Justice Department puts out an annual report titled "Crime in the United States."
But by "Crime in the United States," the Justice Department means "street crime in the United States."
In the "Crime in the United States" annual report, you can read about burglary, robbery and theft.
There is little or nothing about price-fixing, corporate fraud, pollution, or public corruption.
A yearly Justice Department report on Corporate Crime in the United States is long overdue.

Do read the entire report.

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EASI Distributorships and the BBB

Here is yet another reason to be wary of the BBB. Better Business Bureau of Middle Tennessee reports that EASI has a satisfactory rating, and then goes to report

"On March 21, 2007, the Connecticut Department of Banking announced that it had entered into a Consent Order (CO-2007-829-B) with Energy Automation Systems, Inc. (EASI). Without admitting or denying any allegations, EASI agrees to Cease & Desist from violating the Connecticut Business Opportunity Act; pay an administrative fine in the amount of $25,000.00; extend a written rescission offer to each Connecticut purchaser / investor who purchased the business opportunity from 2000 forward; the amount of restitution to be paid to each investor electing rescission will be determined via binding arbitration conducted in Connecticut under the auspices of the American Arbitration for a period of 3 years, EASI shall retain counsel familiar with the regulation of business opportunities to evaluate Energy Automation Systems, Inc compliance with the Connecticut Business Opportunity Act at least twice a year.

On June 28, 2006, the Florida Department of Agriculture & Consumer Services entered into a Settlement Agreement with Energy Automation Systems, Inc. for failing to be registered in the State of Florida as a Business Opportunity and was ordered to pay a fine of $2,000.00.
On June 6, 2007 the Better Business Bureau spoke with Energy Automation Systems, Inc. regarding the Connecticut and Florida actions and requested the company's written position on these matters. The company's response stated that neither of the actions involved any civil litigation and were basically administrative oversights by their former law firm. The Florida fine was imposed because the previous law firm failed to renew the FL Business Opportunity registration. The Connecticut Consent Order was brought about because the law firm failed to register the company in Connecticut even though instructed to do so. Energy Automation Systems, Inc. is currently registered correctly in Florida and Connecticut."

EASI has to give back the money it took from all who purchased its business opportunities from 2000 forward in Connecticut -but it maintains a satisfactory rating from the BBB? That is absurd.

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June 18, 2007

The Real Story of Crazy Eddie's "Lowest Price" Guarantee

This is a fascinating discussion about low price guarantees - the sort of conversation between professional economists and criminals that you would have never seen before the internet, or at least not published.

The Real Story of Crazy Eddie's "Lowest Price" Guarantee: "
There has been much fanfare about Crazy Eddie’s legendary commercials and so-called ‘lowest price’ guarantee. A recent article in the New York Times by Hal R. Varian published on January 11, 2007 entitled ‘Rethinking Why Crazy Eddie Wouldn’t Be Undersold, and Other Mysteries’ discusses the issue of low price guarantees including Crazy Eddie’s.
His article was commented on the Economist’s View Blog in a commentary entitled ‘Van Harian: Crazy Eddie’s Low Price Guarantee’ by Mark Thoma.
I posted the following comment which was carried as a separate commentary by Mark Thoma on his Blog entitled ‘Crazy Eddie’s ‘Culture of Deceit.’
Professor Hal R. Varian:
My name is Sam E. Antar and as Eddie Antar’s cousin and CFO of Crazy Eddie I helped mastermind one of the largest securities frauds of the 1980’s. Much attention has been paid to Crazy Eddie’s famous price policy – ‘Shop around. Get the best prices you can find. Then go to Crazy Eddie's and he'll beat it!’ Even more attention has been paid to its legendary commercials featuring Jerry Carroll.
However, many people do not know the real story behind Crazy Eddie’s aggressive sales tactics. Yes, we ‘offered’ the best price and at times it was sometimes true. However, most customers never purchased the items that they initially came into Crazy Eddie to buy. We had an entire procedure built around Crazy Eddie lingo code words described below to maximize profits for the company.
We had in Crazy Eddie lingo called an ‘SW’ or ‘switch the customer’ policy which was to initially seek to sway the customer to purchase a more profitable item that offered ‘better value.’
If the initial sales person could not SW the customer he would ‘TO’ the customer to let another more experienced sales person ‘take over’ the sales pitch with the customer in order to ‘guide’ them to the more profitable purchase.
If the customer was still insistent on buying the items that they had originally come into Crazy Eddie to purchase rather than lose the sale we would sell them the merchandise but try to sell them high profit accessories and long term warranty contracts to make up for the low profit of the units purchased.
If the merchandise was not in stock we would sneak the display item off the shelf and ‘lunch it’ or repackage it and sell it as brand new.
Finally, if a customer decided not to purchase a product for any reason after going through various phases of this process Crazy Eddie has a ‘NAD’ or ‘nail at door’ policy where a sales person located at the exit would try to ‘kosher’ the customer.
The Crazy Eddie Empire was built on deceit. The massive financial fraud that followed was based on a culture of deceit the permeated from the Antar family that ruled Crazy Eddie.
There are many lessons to be learned from the Crazy Eddie frauds. Specifically as it relates to your commentary I would suggest something I learned in my first day in economics class, ‘There Ain't No Such Thing As A Free Lunch.’
Company’s have costs and must earn a profit. Yes, some companies can make money more efficiently than others. However, as a former criminal I can assert that old line, ‘If it looks too good to be true, it is probably is.’
Respectfully,
Sam E. Antar (former Crazy Eddie CFO & ex-felon)
In later comments to other reader questions on his blog I posted the following:
The point about ‘low price guarantees’ that people need to understand from the retailer’s point of view in that it is a game of averages no different than hoping people do not send in mail-in price rebates.
Most consumers who are complacent in knowing they have such a guaranty will not investigate further or be willing to accept the retailer’s ‘credibility.’
As a criminal I learned to use people’s humanity against them. For white collar criminals good traits that people have, such as trust, are weaknesses to be exploited.
While not all deceitful conduct rises to the level of criminality, it would be wise to assume that the basis of a deceitful person’s effectiveness is the trust of the person being misled.
I do not mean to say that ‘low price’ guarantees are inherently deceitful. However, if such guarantees are 100% exercised it is a complete impossibility to maintain such guarantees since prices would dwindle down to zero.
Sam E. Antar
Former Crazy Eddie CFO & Convicted Felon

Final Note:
I recommend reading both Professor Hal R. Varian's article and other writings found here. Professor Mark Thoma's blog 'Economist's View' is recommended reading.
Quoted From The New York Times Article:
...three economists, Maria Arbatskaya, Morten Hviid and Greg Shaffer, have recently published a paper in the International Journal of Industrial Organization called, ‘On the Use of Low-Price Guarantees to Discourage Price Cutting,’ that looks closely at some empirical evidence. (A prepublication version of the paper can be downloaded from www.simon.rochester.edu/fac/shaffer/Published/tires.pdf.)
"

(Via White Collar Fraud.)

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Why We Donate To Charity? Because It Feels Good!

The Chicago Tribune reports on a study, which scanned the brains of volunteers as they donated money to a food bank, showed that the pleasure centers of the brain were activated by the act of giving. Even more interesting, not all people responded in the same way. The study showed that people whose brain reacted more to being given money were less willing to make donations, from the Consumerist.

"In the study, female college students were given $100, then told either that a mandatory transfer would go from their account to a local food bank or that they could make a voluntary donation to the same charity. At the end of the study, the women were allowed to keep the remainder of the money.

Using MRI, the investigators found that both mandatory and voluntary transfers increased activity in brain areas called the nucleus accumbens and the caudate nucleus. These areas have previously been associated with the brain's response to rewarding stimuli, such as taking street drugs or viewing pictures of loved ones.
The reward reaction was more intense with the voluntary giving, which the authors argue supports the notion of a "warm glow" phenomenon."

Fraudulent distributorships often this effect, when pushing their scam. They will arranged to have a fake or dubious charity "attached" to the product, typically vending, kiosks or internet terminals. The purchaser is told to donate some of the earnings from the machine to the charity -this device deflects doubt about the seller's integrity. It is also a huge red warning flag. Don't let your warm glow stand in the way of due diligence.

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June 15, 2007

What is New in Party StartUps?

Entreprenuer has an interesting story called
It's Your Party: "

"When Tupperware parties first became popular decades ago, not many people could have predicted the longevity of the plastic containers--or the company itself, for that matter. Nor could anyone have predicted the groundswell of interest in today's breed of home parties, in virtually every industry imaginable--from power tools to beauty products to apparel. Home parties now account for about 29 percent of the more than $30 billion in U.S. direct sales, and there are 14.1 million direct-sellers in the U.S. Even big companies like The Body Shop and Crayola are getting in on the action and adding direct-selling arms to their existing operations.
The numbers are only expected to grow, according to Amy Robinson of the Direct Selling Association. "The majority of companies [joining the] DSA are party plan companies," says Robinson. "They are smaller, newer companies started by entrepreneurs from their basements in a lot of cases." These entrepreneurs are passing on their passion for entrepreneurship to people who want to start businesses of their own but don't want to start from scratch. The opportunities are there for the taking if you are prepared to research the one that's right for you--and if you're prepared for the hard work that accompanies any startup."

Unfortunately, the article gives individuals no due diligence ideas. It is worthwhile remembering why in the 1940's through to the 60's Tupperware was it.

First, after World War II, the only plastic products there were war issue and not consumer "ready". It was opaque, greasy looking, and had poor seals. Earl Tupper developed a new product plastic product - clear, with consumer appeal, and a with tight fitting top, based upon how paint cans were sealed. Such a product must have been an instant success, right?

No, the product fell stillborn and Earl Tupper's wonderful invention would have gone by the wayside, but for a meeting with Brownie Wise -the remarkable woman who was selling Tupper's product through home parties. People needed to see a demonsration of the product to over come their skepticism about plastic. It was critical for the acceptance of the product that the consumer be able to feel, touch and pick-up the product. Now does your home party product require a demonstration for acceptance by the consumer? If not, why isn't being sold through a catalogue? Things to think about before you start hawking vitamens, cosmetics, etc., to your friends and neighbours.

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What is AGLOCO? The MLM answer to Autosurfing.

Here is an explanation of the latest pyramid scheme, What is AGLOCO™?:

"It is a system that connects advertisers and online retailers with their potential customers - internet users.
How do I earn?

Become a member, download the Viewbar™ and browse as you normally would! No need to change your habits! Viewbar™ will observe your surfing and display relevant ads accordingly. You will be paid for each hour you have the Viewbar™ turned on while surfing (up to five hours per month).

But this is not the only way of making profit, because you will also get a percentage of surfing hours of your friends', whom you invited to AGLOCO™.

How do I invite my friends to AGLOCO™?

When joining AGLOCO™ you will receive your ID and your own link to the Join AGLOCO™ form. Your friends only need to follow the link and join. That's how you'll be earning more with each friend you refer. Even more, you will gather profit even for friends of your friends, down to five levels of referrals"

Hmm, this apppears to be a recruitment scheme with no product, exepct a toolbar design to help you recruit even more. At least one SEO think so, also.

"After months of waiting and promises, AGLOCO flagship software, the Viewbar, is released — emails have been sent out to all participants.

I do not participate in AGLOCO, so, I didn’t get one, and I had to get the news from Net Business blog. Some people are joyful and glorious. Some, like me, are quietly thinking about the consequences.

AGLOCO took the affiliate marketing on the new level. You didn’t have any product to sell, you didn’t have any money to earn. You just recruited, recruited and recruited, hoping that they will release the Viewbar, hoping that they will go public and hoping that they will share revenues with you."

Lame, very lame. Let's hope that this appeal to something for nothing dies a quick death.

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Commentary on Usana Health Sciences - From Yahoo

Tracy Coenen posts
an interesting commentary on Usana Health Sciences:

"
A poster on the Yahoo message board for Usana Health Sciences provided this interesting analysis early this morning. I am putting in bold the most interesting parts.

Here is why I hope the ‘insider’ is right that others are beginning to come forward: the company has been left with almost no assets after years of operations.

In many corporations, the stock of a company represents the value of the buildings, some patents, investments, etc. In Usana’s case, a lot of cash has come in the door. I’ll give them that. They know how to do this thing right, as Len would have the AG saying.

But what happened? The cash is gone because the officers cashed in a huge number of options at around 80 cents and sold for $50 to $60. The increased number of shares created would then dilute the earnings per share. So management (while selling their own shares) decided to use the company’s cash to buy those shares back.

How did this hurt associates? It was their money flowing in from required autoship in order to stay eligible for commission. If Usana would have deployed that cash to create unique products or make operations so efficient that the cost of the product decreased, then associates would have had an easier time building their business.

How did the stock buy back hurt other investors? Roughly 50% of the company’s owners didn’t receive stock options they could sell to take money out of the company. The profits of the company could have created unique products, made operations more efficient, OR paid a dividend to all holders of the stock or diversified the business."

The whole thread is interesting, but I want to focus on the allegations that USANA should be experiencing cash flow difficulties. If so, we should see a number of accounting devices used to increase reported earnings, to deflect the attention away from free cash flow.
I will have more on this in the coming weeks.

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June 11, 2007

Why You cannot Trust and then Verify

White Collar Fraud: White Collar Crime: How Criminals Exploit your Humanity is an interesting blog by Sam E. Antar "the former CFO of Crazy Eddie (and now a convicted felon) who helped mastermind one of the largest securities frauds uncovered in the 1980's."

"As a criminal, I considered your humanity as a weakness to be exploited in the commission of my crimes. I have often said that white collar crime is a crime of deceit and white collar criminals are artful liars.

A great President Ronald Regan once said "Trust, but verify" when dealing with Russia during the cold war. However, as a criminal I took advantage of your initial inclination to trust me. I did anything in my power from charming you to pointing out the good deeds I had done in an effort to corrode your objectivity, professional skepticism, and cynicism."
Can you "Trust, but Verify"? The problem is neatly dissected by Antar.
"As a criminal I followed Michael Corleone's philosophy all too well. We corrupted our auditor's professional skepticism by giving them extraordinarily rich consulting work in addition to their audit engagements. Today, at least under Sarbanes-Oxley accounting firms cannot engage in consulting work for the clients they audit.
Our auditors felt too comfortable with us as "good, respectable human beings with high integrity." We would socialize with our auditors by having so-called "three martini lunches" and we would invite them to attend Antar family functions. They believed we were pillars in our community as we gave large amounts of money to charity and were involved in a number of good community causes."

The basic human emotion to bond can be used by a sophisticated criminal like a hammer, knife or gun - a weapon that you never see coming until the damage is done.
Consider this bit of psychological trickery, from Antar.
"When the auditors finally came to our offices to conduct field work we were all too accommodating of their desires. We knew that most of them were relatively young kids who thought their field work was boring. We engaged in a campaign of "obstruction by distraction."
I instructed Crazy Eddie staff involved in the fraud to do anything to keep audit staff members from focusing on their work. They would talk about baseball, sex, or anything else in an effort to stop them from focusing on the work.
For example, if the auditors had ten weeks to complete an audit, they would be expected to complete about 10% of their field work each week. However, as a result of our "obstruction by distraction" campaign, for example, by the 8th of 10 weeks instead of having 80% of their field work completed they would have only about 25% of it done.
When people have to rush they make mistakes. They skimp over important issues such as red flags and they omit key important work in an effort to make up for lost time and complete their work. The auditors could not blame us for their lack of time. After all we were all too "accommodating" with them.
For the fiscal years 1986 and 1987 the auditors never completed key field work. For example, regarding fiscal year 1986 they failed to conduct proper sales cut-off testing and did not thoroughly review our cash balances."

Would you think that the staff at Crazy Eddie's were terrific people, or skillful obstructionists preventing an audit from taking place?

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June 4, 2007

Fascinating Threads

There are some interesting stories, today. At Pink Truth: Facts, there is a discussion about how the sales techniques taught to the consultants to use on their customers are being used against the consultants. The particular technique discussed is "overcoming an objection before it is verbalized". You might thought that the consultants were be more aware and resist -but apparently not.

Over at the ($) Wall Street Journal, Cynthia Crossen has a story called "Gossip: So Much Fun People Once Tried To Make It Illegal". "Some public officials went so far as to try to criminalize gossip. In Tennessee, state Sen. John W. Butler introduced a bill in 1927 that would have made gossip a misdemeanor. He was less successful with his antigossip bill than his antievolution one, which two years earlier had sparked the Scopes trial. As a Tennessee "society matron" told a reporter, "I know this bill is aimed at slanderous misstatement, but if you interpreted it in a technical way, every bridge party would end by all the ladies being jailed for gossip." I suspect that any thorough analysis of fraud will also have to confront the brute fact that we love to lie, make up information, and disseminate.

Nicholas Carr, with another great title, The Ignorance of the Crowd, has a timely skeptical view about how well open source actually works. "What makes the open source model so well suited to finding and fixing software flaws is that debugging is a task that requires little coordination among workers. Debuggers are able to sift through chunks of code in isolation -- whether "splendid" or not -- without knowing or caring what their fellow bug finders are doing. "Debugging," as Raymond puts it, "is parallelizable." All the debuggers have to do is communicate their findings and fixes to some central authority, like Linus Torvalds. The central authority takes care of synthesizing the work of the crowd, choosing the best contributions, melding them together into a coherent product, and then redistributing the work to the crowd for the next go-round." Carr trains his skeptical eye on technology, and does not accept the easy answer.

Janet Sparks, at www .bluemaumau, casts a critical eye on Health Care Franchising in Kenya. "A PBS NOW expose' on May 25 took a hard look at a for profit-healthcare program that was eager to provide basic care and essential drugs to treat millions of sick people in rural Africa through the same principle used to make fast food franchises a success. It's plan is to use a business-format franchise system to open healthcare franchises in Kenya that could help diagnosis illnesses and distribute medications for easy-to-treat diseases, services urgently needed to cut down the sky-rocketing death rate among the poorest of people. On the surface it sounds like a noble undertaking, but with their desire to open thousands of these shops under a "Subway-type" model of consistency and growth, some are questioning the dynamics of the program. ..."

At Marginal Revolution, I found a nice reference to a new work on the tulip mania in Holland, 1630-1637, TULIPMANIA: Money, Honor, and Knowledge in the Dutch Golden Age, by Anne Goldgar. The Financial Times reviewed the book, "We think we know the story of 'tulipmania': the 17th-century Dutch dropped fortunes on tulips, ruined their economy, even killed themselves over the bulbs. In short, tulipmania is remembered as the first market bubble. It has been used as an analogy for subsequent ones, most recently during the dotcom boom. However, Anne Goldgar tells us at the start of her excellent debunking book: "Most of what we have heard of it is not true." For instance, Goldgar couldn't identify a single person bankrupted by tulipmania. In this dense academic work - with longueurs for readers who aren't themselves tulipmaniacs - she tells a new story."

Finally, although I wasn't knocked out with ABC's 20/20 story on Mannatech, it provided me with a chance to review Barron's original story in May, 2005. "Mannatech is selling Ambrotose only as a food supplement and so needs no blessing from regulators. However, the company is strictly prohibited from claiming Ambrotose "treats" or "cures" anything. Moreover, the Federal Trade Commission requires Mannatech to have "adequate substantiation" for its claims, meaning they must be based on "competent and reliable scientific evidence." Associates receive clear guidelines about what they can claim, Caster asserts, and the company disciplines or dismisses those who break the rules. Yet even the most cursory visit to the Websites of Mannatech associates reveals that these sites are replete with the most astonishing of claims. For example, one such Website, with no readily visible disclaimer, tells with graphic visuals and somewhat primitive prose the remarkable story of Jaclyn, a young woman suffering from multiple sclerosis. She is shown first sitting in a wheelchair and then, in a second photo, working out on a treadmill!" Pascal's Wager strikes again.

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May 31, 2007

Why You Are an Idiot - When it Comes to Investing.

From the Cheating : Billable Hours : Settle It Now Negotiation Blog, we learn that evolutionary psychology argues

"In other words, our modern skulls house a stone age mind. The key to understanding how the modern mind works is to realize that its circuits were not designed to solve the day-to-day problems of a modern American -- they were designed to solve the day-to-day problems of our hunter-gatherer ancestors. These stone age priorities produced a brain far better at solving some problems than others. For example, it is easier for us to deal with small, hunter-gatherer-band sized groups of people than with crowds of thousands; it is easier for us to learn to fear snakes than electric sockets, even though electric sockets pose a larger threat than snakes do in most American communities . In many cases, our brains are better at solving the kinds of problems our ancestors faced on the African savannahs than they are at solving the more familiar tasks we face in a college classroom or a modern city. In saying that our modern skulls house a stone age mind, we do not mean to imply that our minds are unsophisticated. Quite the contrary: they are very sophisticated computers, whose circuits are elegantly designed to solve the kinds of problems our ancestors routinely faced.

A necessary (though not sufficient) component of any explanation of behavior -- modern or otherwise -- is a description of the design of the computational machinery that generates it. Behavior in the present is generated by information-processing mechanisms that exist because they solved adaptive problems in the past -- in the ancestral environments in which the human line evolved."

There is very little surplus cash on the Savannah, we didn't have the time to worry about base rates, confirmation bias, or the logic of covariation tables - all of which is needed to properly engage in modern decision making.

The authors Leda Cosmides & John Tooby, of the above paper, suggest an neat demonstration of how to defeat the confirmation bias, despite our stone age mind. Recall the problem John Wason discovered, we tend to seek confirming evidence for conditional statements. (They come to a different conclusion than I do about their experiment.)

Such analyses provided a principled basis for generating detailed hypotheses about reasoning procedures that, because of their domain-specialized structure, would be well-designed for detecting social conditionals, interpreting their meaning, and successfully solving the inference problems they pose. In the case of social exchange, for example, they led us to hypothesize that the evolved architecture of the human mind would include inference procedures that are specialized for detecting cheaters.

To test this hypothesis, we used an experimental paradigm called the Wason selection task (Wason, 1966; Wason & Johnson-Laird, 1972). For about 20 years, psychologists had been using this paradigm (which was originally developed as a test of logical reasoning) to probe the structure of human reasoning mechanisms. In this task, the subject is asked to look for violations of a conditional rule of the form If P then Q. Consider the Wason selection task presented in Figure 3.

Figure 3.

Part of your new job for the City of Cambridge is to study the demographics of transportation. You read a previously done report on the habits of Cambridge residents that says: "If a person goes into Boston, then that person takes the subway."

The cards below have information about four Cambridge residents. Each card represents one person. One side of a card tells where a person went, and the other side of the card tells how that person got there. Indicate only those card(s) you definitely need to turn over to see if any of these people violate this rule.

Boston

Arlington

subway

cab

From a logical point of view, the rule has been violated whenever someone goes to Boston without taking the subway. Hence the logically correct answer is to turn over the Boston card (to see if this person took the subway) and the cab card (to see if the person taking the cab went to Boston). More generally, for a rule of the form If P then Q, one should turn over the cards that represent the values P and not-Q.

For example, to show that people who ordinarily cannot detect violations of conditional rules can do so when that violation represents cheating on a social contract would constitute initial support for the view that people have cognitive adaptations specialized for detecting cheaters in situations of social exchange. To find that violations of conditional rules are spontaneously detected when they represent bluffing on a threat would, for similar reasons, support the view that people have reasoning procedures specialized for analyzing threats. Our general research plan has been to use subjects' inability to spontaneously detect violations of conditionals expressing a wide variety of contents as a comparative baseline against which to detect the presence of performance-boosting reasoning specializations. By seeing what content-manipulations switch on or off high performance, the boundaries of the domains within which reasoning specializations successfully operate can be mapped.

The results of these investigations were striking. People who ordinarily cannot detect violations of if-then rules can do so easily and accurately when that violation represents cheating in a situation of social exchange (Cosmides, 1985, 1989; Cosmides & Tooby, 1989; 1992). This is a situation in which one is entitled to a benefit only if one has fulfilled a requirement (e.g., "If you are to eat those cookies, then you must first fix your bed"; "If a man eats cassava root, then he must have a tattoo on his chest"; or, more generally, "If you take benefit B, then you must satisfy requirement R"). Cheating is accepting the benefit specified without satisfying the condition that provision of that benefit was made contingent upon (e.g., eating the cookies without having first fixed your bed).

When asked to look for violations of social contracts of this kind, the adaptively correct answer is immediately obvious to almost all subjects, who commonly experience a "pop out" effect. No formal training is needed. Whenever the content of a problem asks subjects to look for cheaters in a social exchange -- even when the situation described is culturally unfamiliar and even bizarre -- subjects experience the problem as simple to solve, and their performance jumps dramatically. In general, 65-80% of subjects get it right, the highest performance ever found for a task of this kind. They choose the "benefit accepted" card (e.g., "ate cassava root") and the "cost not paid" card (e.g., "no tattoo"), for any social conditional that can be interpreted as a social contract, and in which looking for violations can be interpreted as looking for cheaters.

I doubt that we have the ability to spot cheaters, but I do think that when the costs of being wrong are in the conditional or if/then we are lead to the right conclusion.

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May 28, 2007

When are Delusions Useful in Network Marketing?

New School Network Marketing by Kim Klaver: Affirmations: delusions for sale?

The short answer is: never. Misrepresenting your income level to prospectives is actionable misleading advertising. It is called being a "shill". You have no reasonable basis for your earnings representation, and so you cannot "affirm" it to the public.

Affirmations are perfectly fine, indeed the ability to contract with your future self is a well known device.

The Nobel Prize winner, Thomas Schelling, contracted with himself to give up smoking. The contract device worked and Schelling gave up smoking.

Not all public affirmations of commitment will succeed. But there is a clear legal difference between an affirmation which is forward looking - I will make $10,000 a month and an affirmation which is not - I am making $10,000 a month.

The former cannot be relied upon, legally. While the latter could well be a representation forming the basis of a lawsuit for negligent misrepresentation.

It may be acceptable to trick yourself for reasons of self-improvement, but it is actionable to trick other people.

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May 24, 2007

Franchise and Business Opportunity Fraud

Franchise Remedies: Franchise and Business Opportunity Fraud Richard A. Solomon writes, on his legal website, "Franchising and business opportunities have had their very bright success stories. They were always rare. They are even more rare now. There is a saturation of concepts such that most offerings are just knock offs of concepts that may be found all over the place. Worse, many franchise and business opportunity offerings today, especially the new ones, are nothing more than what would normally be considered a job, but described to make it seem like a business. Today around eighty percent of new franchisors fail. Those who bought those franchises usually lose their investment."

Richard, with over 40 years of experience in franchising, is making some excellent points. You must read the entire article.

1. Franchising bright success stories have been rare, and even more rare now. Why, then do so many people fall for what Bob Purvin called "Franchising Fraud"? The idea that buying a franchise is relatively risk free? Part of the problem is what psychologists call the base rate problem - the vividness of the successful departures from the base rate of success is more striking than failures. A franchise system that failed, fails to register for very long in the collective memory. (See this thread at Blue Mau Mau on failed franchise systems.) For the same reason we hold dear our childish infatuations with jinxes, it is much easier to recall when the jinx worked than when it didn't.

2. Many franchise and business offerings today, especially the new ones, are nothing more than jobs, described to make it sound like a business. Again this is a very important observation. Why would a person pay for a job? Again, there is a psychological component to the decision making. The individuals looking at franchise opportunities looking for a change. They want and need to make more money than the current situation allows. Many times they have a severance of $X in hand. The rational decision should be between Option A -invest $X and get a new job for $Y and Option B- Buy a franchise. Unfortunately, Option A loses its attractiveness, not because it is a worse decision than Option B on a risk adjusted basis, but $Y is by comparison smaller than the earnings of their old job. To take Option A feels like failing, even if it is a superior decision to Option B. (There is a simple way to calculate the value of Option B from the franchise disclosure documents.)

3. Today around eighty percent of new franchisors fail. Those who bought those franchises usually lose their investment. Can you afford to lose your entire investment? Do you know how to calculate the potential risk of losing your entire investment? Do you know how to calculate your average gross earnings? If you don't have a clue about how to do this, then you are the person at the poker table wondering who the sucker is. It is you.

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The 75% Solution - Is Usana Overpriced?

One of the interesting parts in this video is the information that USANA believes that if they had to market their drugs traditionally, through a normal retail distributor chain, that price for their vitamins would be over $200. Increasingly, I see this as one of the critical representations made by the company -be our distributor and sell vitamins directly to the public at a substantial savings to them.

Is it true? Or are the vitamins horribly overpriced and marked-up to feed the compensation owed to the upstream, ultimately 75% of it flowing to just 2% of all distributors?

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May 23, 2007

Comments Working and SEC Due Diligence

Thanks to Davis, who wrote:

"I was reading your article where you suggested that people use the SEC's website to look for information and I wanted to leave a comment mentioning that the SEC just launched full text search for the last four years worth of filings, but I think that your comment system is down.

Full text has been around for Bloomberg users for years, but the general public hasn't had access. I've been playing with the feature and it's pretty neat. Instead of just looking up companies, you can put someone's name into the SEC search and see if they show up anywhere in any filings.

I've already found out new information on big companies, but if I was research a penny stock, you can bet that some of the names you put in would return some pretty crazy results.

It'd be nice to see the SEC add more archives to the database, but this is probably the best new filtering tool I've seen in a year. It doesn't replace other forms of due diligence, but even though the program is still in beta, the SEC has just turned over a tremendous amount of information to the public. The link to full text search can be found at their main website. I bet if you put in some of the names from your research, you'd find more than a couple of MLM scam artists who have also used the public markets to hawk their schemes.

Regards,

Davis"

I believe that I have fixed the problem with comments, but if you are having trouble, please email me. You may have to delete the cookies for www.bizop.ca in your browswer before you are able to post.

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When Magical Thinking Works - It's Not a Secret

In 1959, Evon Z. Vogt and Ray Hyman wrote "Water Witching". It was a fascinating objective review of the practice of water witching -using a forked stick to find or indicate an underground source of water. The book was reprinted in 1979 and 2000, and despite our technological advances, it appears that dowsing is still with us.

I almost passed this book over -who in their right mind could believe that dowsing has any merit? But I would have missed a fascinating examination about human decision making and the utility of "magical thought".

In their chapter, entitled "Water Witching as Magical Divination", the authors argue that when an individual is faced with a one-shot decision, uncertainty and the need to make a decision, water witching makes sense as measure of psychological control over the state of nature -even if the practice is completely unscientific and unsupported by evidence. When we need to make a decision, a decision which is not going to be repeated, modern decision theory offers us thin gruel, focussed as it is on the long run or similar situated choices. "The key feature of this picture [of rational decision making] is that we assume that the decision he is making is one that is to be repeated over a large number of trials. And, in this way, it becomes meaningful to speak of his average gain from repeated events over the long run. But what happens to our hypothetically rational man his decision is restricted to one event? ... Water witching from the scientist's point of view is "irrational" divination; he is evaluating a large series of outcomes from water witching. But from the viewpoint of an individual decision it is perhaps meaningless to call water witching "irrational". At least, if we do label it, we must be careful to specify precisely in what way we are making the transition from the institutional [long run] view to the individual situation."

The author's conclusion is based on their scientific observations that dowsers have no better than chance of being correct in locating water and that the regions in which there is high dowsing activity could be characterized as Pascal's Wager with respect to water - it is better to take a chance, any chance, that water will be found than do nothing. There is nothing to lose, if action is going to be taken. Modern decision, if informed that dowsing is no better than guessing about water, would recommend flipping a coin between the two method -assuming the costs of dowsing and guessing were roughly equal. (They appear to be, since according to Vogt and Hyman, view dowsers make a living from their "talents".)

I am reminded of a talk in which a famous philosopher declared that modern decision theory was irrational. His example was this. His wife was tied to the train tracks and only if he could warn the train, coming from the east or west we know not which, to brake could his wife be saved. The train needed to brake 100 yards from his wife, a distance our philosopher could reach in 10 minutes. He is told that a train is coming, from the east or west we know not which, and the train will be 100 yards away in 10 minutes. The famous philosopher opined that modern decision theory dictated that he must stride of in one direction, not look back and hope for that the choice was correct. While, it was clear to him, that he would run a little bit east, backtrack and go west, trying to cover all bases. But our famous philosopher was clearly irrational -you have ten minutes to achieve one goal, the consequences of running around and ignoring what you have to do are severe. You may go in the wrong direction, but going in no direction is completely wrong.

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The One Way to Prevent Telemarketing Fraud - Call Senator Obama for an Example

Illinois Channel: Sen. Obama Wants FTC to Crack-down on Fraud Aimed at Seniors Senator Obama, as the result of reading the New York Times's article on list brokering wrote the FTC and asked:

"The FTC is charged with protecting consumers from fraud, deception, and unfair business practices. The Commission is responsible for enforcing our nation's consumer protection laws and developing rules and procedures to protect and educate consumers. Given this clear mandate, the widespread and sophisticated abuse of many seniors raises a number of questions:

What if anything is the FTC doing to assess and address the particular consumer protection challenges faced by seniors or other groups of American consumers who may be especially vulnerable to abuse?

In particular, what is the FTC doing to regulate the sale of telemarketing databases to companies that are under investigation or have been prosecuted for fraud?

How have FTC resources been allocated to protect rising numbers of seniors who are conducting remote consumer transactions at increasing rates? Are additional resources necessary and for what priority purposes?

What if any programs exist to assist seniors with questions or complaints about marketing practices of which they may have been victims? What are the utilization rates of these programs over the past ten years? Have these programs been evaluated, and with what results?

Is there adequate coordination between the FTC, the Federal Reserve, and the Department of Justice to ensure effective prevention and prosecution of marketing abuse?

What if any multi-agency initiatives are currently underway or planned for the near future? Please give specific examples of enforcement actions that have been taken recently against data brokers, telemarketers, or enabling financial institutions.

What if any changes to regulatory authority or direction are necessary to enable the FTC to fulfill its consumer protection mandate in light of evolving marketing, communication, and transaction technologies?"

Prevention of this fraud is not rocket science -telemarketers succeed because people answer their telephone expecting the caller to be a family or friend, but not foe. But foes are phoning -put a lock on it and buy a telephone answering machine. Don't answer calls - let friends and family know that this is your policy. The telephone is no more your friend than unsolicited email. (Do you think that Senator Obama answers his own phone -use him as an example and buy your own phone security for $10.)

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May 21, 2007

How to Get off the Sucker's List

In an interesting article about sucker lists, Charles Duhigg, writes in the New York Times about Bilking the Elderly, With a Corporate Assist.

"Telemarketing fraud, once limited to small-time thieves, has become a global criminal enterprise preying upon millions of elderly and other Americans every year, authorities say. Vast databases of names and personal information, sold to thieves by large publicly traded companies, have put almost anyone within reach of fraudulent telemarketers. And major banks have made it possible for criminals to dip into victims’ accounts without their authorization, according to court records.

The banks and companies that sell such services often confront evidence that they are used for fraud, according to thousands of banking documents, court filings and e-mail messages reviewed by The New York Times.

Although some companies, including Wachovia, have made refunds to victims who have complained, neither that bank nor infoUSA stopped working with criminals even after executives were warned that they were aiding continuing crimes, according to government investigators. Instead, those companies collected millions of dollars in fees from scam artists. (Neither company has been formally accused of wrongdoing by the authorities.)

'Only one kind of customer wants to buy lists of seniors interested in lotteries and sweepstakes: criminals,' said Sgt. Yves Leblanc of the Royal Canadian Mounted Police. “If someone advertises a list by saying it contains gullible or elderly people, it’s like putting out a sign saying ‘Thieves welcome here."

I have previously explained that there is simple way to avoid telemarketing fraud: buy a answering machine, and don't respond to telemarketing calls. (My parents hate my solution as they live in a foreign country and aren't that keen on speaking to our answering machine for ten to twenty seconds. Pshaw.)

But would the answering machine solution have worked in this case that Charles Duhigg reported on? Let's read on.

"Investigators suspect that Mr. Guthrie’s name first appeared on a list used by scam artists around 2002, after he filled out a few contest entries that asked about his buying habits and other personal information.

He had lived alone since his wife died. Five of his eight children had moved away from the farm. Mr. Guthrie survived on roughly $800 that he received from Social Security each month. Because painful arthritis kept him home, he spent many mornings organizing the mail, filling out sweepstakes entries and listening to big-band albums as he chatted with telemarketers.

“I really enjoyed those calls,” Mr. Guthrie said. “One gal in particular loved to hear stories about when I was younger.”

Mr. Guthrie lived alone and looked forward to telephone calls, and so the answering machine solution might have only forestalled the inevitable telephone contact. Once the con criminals get you on the telephone line, their superior psychological insights will keep you talking, digging yourself a financial grave. This is why I always recommend not answering the telephone at home --you wouldn't keep the keys of your car, or your home in the door, so why open your mind to con criminals by answering the phone. If it is somebody that you want to talk with, they will leave a message. But 95% of telemarketers will simply hang up and move on to easier prey.

So how do you get off the sucker's list - don't respond to sucker calls.

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Why Churches are Targetted by Fraud Criminals

The criminal's "approach was always the same, according to the detectives. He would move in to town, join a church or temple with a large congregation... Newcomers always attract attention and stimulate curiosity, and Sam's seemingly endless energy, unwavering sincerity, and positive outlook led many parishioners to seek him out for friendship ... In so many words, Sam explained that he was once a high flying investment banker who realized the shallowness of his chosen career only after his young wife and infant daughter died in a horrible car accident. His resulting bout with depression, alcohol, and pills finally led him to understand that Creator had some thing more in store for his life. Sam quit his job and moved out of his family penthouse apartment to fulfill his newly found purpose. Because he continued to do well with his investments, he didn't have to work but could dedicate his life to helping others, and give back to community in the name and spirit of his lost family."
The story story had this type of ending. AHN | Federal Jury Convicts A Kansas City Man For Committing $1. 5 Million In Fraud Against A Church And Individuals | May 11, 2007

Why are churches and temples so prone to affinity fraud? And what can they do about it? There are three factors, or principles of decision making, which make it easy to concoct an affinity fraud. First, although the congregation has to be large to maximize the chances of finding the rich suckers, there are only a few individuals who typically have to be conned -those individuals who provide the leadership to the congregation. Although they provide spiritual leadership, they are unlikely also to have the necessary practical skepticism needed for the investment industry - a tankful of large sharks would be hard to find. Enough people in congregation will defer their decision making to what the "most spiritual" leader is recommending.

A painful reminder of this group myopia can be gleaned from reading the various books on Alan Eagleson's involvement with the NHL Hockey Player's association. Eagleson only had to obtain the friendship of several of the top NHL players in order to control the entire group. Mean spirited and vicious, Eagleson would challenge any attack on his authority by demanding to know what the "f**k you ever did in the league"?

The second problem, both churches and temples face, is that after the scheme unravels. There will be a large number of the congregation who will remain in a state of denial -they simply cannot appreciate the possibility of intra species predators. They remain the committee of the blind trying to describe the elephant. Finally, this group of individuals rarely gets the appropriate counsel, nor are they encouraged to discuss their experiences with members from other churches or temples.

What is the solution to this problem, the problem of affinity fraud? Again, as with any attack of a predator the goal must be to minimize losses --you will never eliminate the loss because psychopath predators are superior at using people solely as means to an end. Churches and temples remain at risk because after the predator strikes, they have no early warning system to alert other similarly placed churches or temples. Without such a system, churches and temples remain at risk.

I will also make a prediction - for the next ten years, the most unreported ponzi criminal frauds will take place in mosques across United States and Canada. The pitch will be for some brand new sharia approved investment vehicle, complete with vague references to empowering Muslims throughout the world. Most of these won't be reported, but many mosque leaders will end up driving brand new hummers."

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May 18, 2007

The Six Red Flags of Multi-Level Marketing

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May 17, 2007

How a Simple Secret in Due Diligence could have Saved the Day.

The FTC announced, May 15th, 2007 they had recovered $160,000 for Franchisees Who Bought Web Services Businesses. Although the press release doesn't say so, it is unusual for the FTC to recovery anything from a business opportunity fraud -by the time they get sufficient complaints, the fraud has run its course and the "sales" criminals have scurried back into their holes.

What is interesting about this case is it shows how a simple exercise in proper due diligence could have saved the day.

According to the press release,

"A company and its owner will return $160,000 to consumers and are banned for life from promoting or selling franchises or business opportunities. The Federal Trade Commission charged that they used bogus earnings claims to lure franchisees into buying their Web services businesses, and failed to tell customers that the owner was under a previous FTC order for deceptively promoting rare coins.

The FTC charged that Netvertise, Inc. and Elliot Krasnow violated federal law when they sold franchises for Web site design and promotion services to businesses. The franchises, which cost between $20,000 to $100,000, offered various Internet services to small and medium-sized businesses, including the construction and promotion of Web sites, use of e-mail marketing, and off-site data protection. The franchise included Netspace's Search Engine Optimizing software, which they claimed would allow franchisees to create high-quality Web sites for clients that would appear on the first page of results from an Internet search engine.

According to the FTC's complaint, the defendants misrepresented that franchisees were likely to earn substantial incomes and overstated the value of the Netspace software. The complaint also charged that the earnings claims were unsubstantiated and that the defendants provided consumers with defective disclosure documents. In 1990, an order entered against Krasnow required him to pay $400,000 and prohibited misrepresentations when dealing in rare coins. The franchise disclosure documents did not disclose this to franchisees as required by law. The defendants also did not provide franchisees with an earnings claim document even though they made earnings claims to potential buyers. In fact, even though they made oral representations, the defendants' basic disclosure document said no earnings claims were made."

Here is the simple secret: 1) Figure out who all the directors of Netvertise, Netspace and the other related companies are. 2) Simply search at www.sec.gov, or at www.ftc.gov searching for information about the directors. In this case, you would have found the 1989 FTC case against Elliot Krasnow. A huge red flag!

Is this all way too easy, after the fact research? No. Look at this thread, in franchise-chat, started in February, 2005 shows exactly how and in real time I saved two investors from losing their money. A simple secret, which you ignore at your peril.

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May 16, 2007

Crystal Lake Scam

A Crystal Lake business and its owner face civil charges alleging that they bilked customers out of at least $3,500 each in enrollment fees while violating both the Consumer Fraud Act and Business Opportunity Sale Law.
Attorney General Lisa Madigan on Monday filed a 21-page, two-count civil complaint against Insider Real Estate and Christopher Scanlan in Cook County Circuit Court.
Calls to Insider Real Estate, on McArdle Drive in Crystal Lake, went straight to voice mail. Messages left for the company were not returned Monday night.
According to the company's Web site, however, Insider Real Estate is committed to 'providing the best in real estate education and customer service.'
Madigan's complaint alleges that Scanlan, the founder and owner of Insider Real Estate, misled consumers into signing up for seminars designed to teach methods for profiting in the pre-foreclosure real-estate market.
Customers were led to believe that, by signing up for the course, they would get inside information that could help them make between $18,000 and $25,000 on an average transaction, the complaint alleges.
Instead, according to the civil complaint, the clients were given no inside information, but instead were trained to do networking for Scanlan and his property.
'Consumers are led to believe they are paying for an educational program,' the complaint reads. Instead, [Scanlan uses] the [Insiders Real Estate] program not to teach consumers about making money off the foreclosure market, but rather to deceive customers into paying $3,500 for the privilege of generating leads for the defendants."
At least six people have complained about the deal, according to the complaint. It also says Scanlan founded Insider Real Estate on Feb. 17, 2005, with the goal of advertising and offering for sale business opportunities regarding the pre-forclosure marketing to the public.
The complaint alleges that Scanlan and his company violated the Business Opportunity Sales Law by selling business opportunities without proper registration.

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May 15, 2007

The One Thing You Need to Know about Florida Law, Even if You Don't Live There.

With a graphic of individuals running barefoot over coals, Hillsborough County (Florida) Government's, advice about due diligence for purchasing franchises or business opportunities, stops the reader. At least for a novel graphic.

But is the advice about buying a business opportunity worth the stop? Does it matter if you are not a resident of Florida?

Yes, and no.

There are several articles about due diligence for business opportunities, but the best article on due diligence for business opportunities is here. (Strangely, it is called "CREDIT REPAIR: SELF-HELP MAY BE BEST!)

The article first lays out what a business opportunity is and what rights you as a purchaser have.

A business opportunity is an offer to assist a person in starting his or her own business by providing - either through sales or lease - products, equipment, supplies or service needed to carry on the business.

Business opportunities range from addressing envelopes or assembling toys at home at a cost of a few dollars, to establishing vending machine routes or installing pay telephones for thousands of dollars. Many times, these promoters imply that investors can see a substantial return with minimal effort.
This brochure is intended for those individuals considering a purchase of a business opportunity with an initial investment of more than $500. If you are considering a work-at-home opportunity requiring a more modest investment, such as stuffing envelopes, assembling products or making crafts, contact the Florida Department of Agriculture and Consumer Services at 1-800- HELP-FLA (435-7352) before investing your money, or request a copy of the free brochure, "Home Employment Opportunities."
Florida Law Requires Disclosure
The Florida Sale of Business Opportunities Act is intended to help protect prospective investors by requiring the seller to provide information about the business opportunity. It requires sellers of businesses to provide a disclosure document that includes the information necessary for the prospective investor to make an informed investment decision. This disclosure document must be presented prior to the time an investor signs a business opportunity contract or makes any payment.
The law is administered by the Florida Department of Agriculture and Consumer Services, which is the state's lead agency for consumer issues. The Department operates the state's consumer hotline, 1-800-HELP-FLA (435-7352). As stated in the Florida Statutes, the State of Florida does not review and does not recommend, approve, endorse or sponsor any business opportunity, and the information contained in the disclosure is not verified by the state.

Quick take away: Investing in business opportunity that sells in Florida, you are spending more than $500, then check with Florida Department of Agriculture and Consumer Services that the business opportunity is first registered and then obtain the disclosure document. It doesn't matter that you are not in Florida, or the corporation is not Florida - if they are selling opportunities in Florida, they have to be registered. If they cannot produce a disclosure document, they are very likely a fraud. But don't ask the promoter, ask Florida Department of Agriculture and Consumer Services at 1-800-HELP-FLA (435-7352) first.
Even if they can produce a disclosure document from Florida, which you can order from Florida Department of Agriculture and Consumer Services, you still need to review the document for accuracy. Remember, As stated in the Florida Statutes, the State of Florida does not review and does not recommend, approve, endorse or sponsor any business opportunity, and the information contained in the disclosure is not verified by the state.
What is the Florida Business Opportunity Disclosure Document?
Disclosure Document must include, in part:
* The history, background and financial status of the seller, including the names of officers and general managers of the business, felony convictions, if any, and their bankruptcy history.
* The amount of money required for the investor to get started and whether the money is refundable and under what conditions.
* The financial arrangements and any additional fees that might be required.
* A statement whether the seller guarantees to buy back unsold products. If such a guarantee is offered, the seller may be required to post bond with the Department of Agriculture and Consumer Services and disclose information relative to such a bond.
* A copy of the contract defining the relationship between the seller and the investor.
* A full and detailed description of the actual services to be performed by the seller.
* A copy of the current (no older than 13 months) financial statement.
* A description of the program if training is offered by the seller, and a statement of whether the buyer is required to complete the training to the satisfaction of the seller.
* The condition under which the agreement may be canceled.

There are several important items to investigate, once you have the disclosure document. But I want to address three important items. First, the background of the sellers. Many times the sellers of fraudulent or scam business opportunities do not use their real names. Get positive identification before dealing with anyone. Also check the local corporate records to verify how long the company has been in existence, as compared to what they say.
Guarantees figure large in business opportunity frauds. Purchasers wrongly assume that a guarantee reduces the risk; generally it increases the risk dramatically unless the guarantee is funded. Check the financial statements to see what reserve has been set aside for the guarantee. No reserve and the guarantee is worthless.
Finally, always contact by mail, email and then telephone all the distributors in the disclosure package and ask them what they would have done differently. Don't contact one or two, and be prepared for bad news. Generally, business opportunity frauds are clever ideas for a business, but the operator is only interesting in selling the dream or sizzle. There will be nothing behind the sizzle.

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May 14, 2007

How to Influence People and Gain Sales From Parties

During the Korean War, the Chinese Communists, in contrast with their North Korean Allies, were able to persuade more American POW's to engage in some sort of collaboration with the enemy. The most extreme of these collaborations involved statements from the soldiers denouncing the American involvement in the Korean war.

How did the Communists achieve this? The American soldier was well trained to give nothing more than their rank and serial number. But the Chinese realized that if they got the POW to commit to some mild statements, such as "America is not perfect", then it would be easier for the Chinese to obtain further commitments. Robert Cialdini, one of my favourite authors on influence, explains this in more detail.

What does this have to do with influencing people and making sales?

Cialdini also discusses the "quintessential American compliance setting", the Tupperware party. It is his view that there are four "weapons of influence" being used at the typical party demonstration. First, at the beginning of the party or demonstration, a number of silly games may be played and those persons not "winning" the game will be offered a loot bag -reciprocity. Second, is commitment: everyone is asked to declare how Tupperware will change their lives. Third, one the selling begins, and everyone at the party sees other people re-affirming their the value of the Tupperware product, social proof kicks in. All of these people cannot be wrong can they?

Finally, what Cialdini calls the "real power" of the party is that fact that the request to buy comes from a friend, whom you presumably like well enough to at least attend their party or demonstration. The sales pitch is not from a "professional" but an amateur neighbour. Even when you know that your friendship is being pitched for a sale, you comply. Interesting.

But Cialdini, who wrote this originally in 1984, has not kept up with evolution of the party or demonstration systems. He doesn't explain the further attraction of the network marketing aspect, at its worst the pyramid scheme illusion. Nor does his explanation resonate with why Tupperware has failed to keep sales consultants in their system in North America for the past seven years.

Any ideas as to why Tupperware or the party sales system is faltering in North America?

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Who Else Wants To Find a Risk Free Investment?

Susan Ferris, from the SEC, has some interesting Testimony Concerning Elderly Investment Fraud , from her appearance before the U.S. Senate Special Committee on Aging. Ms. Ferris is the Director of the SEC's Office of Investor Education and Assistance. "My Office is the "front door" to the Commission for individual investors. Every year, my staff handles tens of thousands of complaints and questions from investors who contact the SEC. And nearly every day, my staff fields telephone calls and receives letters and emails from seniors or from the children and care-givers of seniors."

Ms. Ferris speaks about the difficulty they have in educating investors to avoid fraud, but doesn't slip into the popular refrain that investors just need to be on the look-out for things that are too good to be true.

Ms. Ferris stated "Our examination program aims to detect fraud and other possible violations of the federal securities laws; foster compliance with these laws; and inform the Commission and its staff of compliance issues. The Commission's Office of Compliance Inspections and Examinations (OCIE) uses risk-based techniques to focus resources on those activities that could pose the greatest compliance risk to investors and the integrity of the markets."

I want to quote a long portion of Ms. Ferris's speech, in which she talks about an interesting initiative.

At the SEC, we spend a great deal of time creating and disseminating neutral, unbiased information directed at helping people make wise investment choices and avoid fraud.
While we cannot tell investors which products to purchase, we can and do arm them with the information they need to assess various products and investment strategies. The dominant theme of the SEC's investor education materials is "investigate before you invest." We encourage individuals to ask questions and to check out the background and credentials of any salesperson or financial professional they use. In addition, we give investors resources for researching companies and tips for avoiding fraud. We do not copyright any of our materials, and we make them freely available to all, in both Spanish and English. Our goal is to empower investors, to give them the tools they need to evaluate their investment options and make informed decisions.
We know that many seniors, and many children and caregivers of seniors, use the Internet to search for information on investing. That is why we created a page on our website aimed specifically at senior citizens. This page provides links to critical information on investments that are commonly marketed to seniors -including variable annuities, equity-indexed annuities, promissory notes, and certificates of deposit. It also warns against the dangers of listening to the sales pitches of cold-callers and alerts seniors to the very real threat of affinity fraud - scams that prey upon members of identifiable groups, such as religious or ethnic communities, professional groups, or the elderly. Senior citizens who want to learn more can browse through our "Senior Care Package," a collection on our website of our most popular brochures for seniors (which are also available in hard-copy). Illustrative examples of brochures that we publish that might be of special interest to seniors include: Cold Calling and Variable Annuities: What You Should Know.
One of the most successful educational tools that we have found in recent years has been - if you will - running our own con on gullible investors. Experience has shown us that some investors troll the Internet to identify the next "big thing," the next sure-fire investment winner. We have discovered that these folks, some of whom turn out to be victims in the enforcement actions we bring, did not visit www.sec.gov to get the benefit of our prudent, sensible advice before investing in a get-rich-quick scheme. Knowing all of this, we go to our audience, instead of expecting them to come to us. We run a series of fake investment scams on the Internet, all designed to illustrate the warning signs of on-line investment fraud. Each scam boasts a "can't-miss" investment, offering truly unbelievable returns. If the user clicks to invest, he or she gets a message from us about the necessity of researching before investing. Our goal is to warn investors about fraud before they lose their money.
Our most recent foray into the world of Internet fraud is a Katrina-related "fake scam site" at GrowthVenture.com. Like our other fake scam sites, Growth Venture purports to be a no-brainer investment. But if you click to invest, you'll get a stern warning from us, the FBI, U.S. Postal Inspection Service, and NASD. Our other fake scam sites cover initial public offerings, hedge funds, mutual funds, and online newsletters that tout emerging technology and pharmaceutical companies.

This is a new development, and a welcome one. Instead of relying solely on the rational man model, the SEC has apparently realized that its is better to fish where the criminals are trolling instead of hiding on shore. <
Nobody is listening to the message. Bizop, in blue, is much more popular that the SEC's scam site, in red. Clearly, the SEC is not putting sufficient thought, advertising or much else into making their site popular. Too bad because there is the beginning of a good idea here, but it needs more work.
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May 10, 2007

How To Avoid Losing Your Credit

The Salt Lake Tribune has an interesting story about how a $20,000 scam costs victim much more.
According to the story, "Dan Anderson did not lose his money in some sophisticated Ponzi scheme or extravagant securities fraud. The scam Anderson succumbed to was simple: He gave $20,000 to a business associate to invest, but the associate spent it on things such as rent and a boat. He claimed he was putting the money in a mutual fund but he just out and out took it," said Charlene Barlow, an assistant Utah attorney general."
Interesting, but how does the $20,000 become "much more.'? Well, " Anderson said he met Jones in the summer of 2003. Jones was operating a Salt Lake City-based business called Monarch International Holdings Inc., which brokered freight loads over the Internet. Anderson's brother and cousin were partners in the company. The businessmen asked Anderson if he would like to obtain capital for Monarch. Anderson said he had no experience in venture capital or investments. His background was in sales. But Anderson's credit score was good and banks would issue loans that he personally guaranteed. In return for the capital, Anderson said, Jones and Monarch agreed to pay him monthly fees through which he could repay the debts. Anderson also became an officer in the company. " (my emphasis)
Oops, this story is not going to have a good ending.
" In March, Jones pleaded no contest to one county of securities fraud. A judge on April 27 sentenced Jones to six months in jail, three years of probation and ordered him to begin repaying Anderson the $20,000. But much damage has already been done. Anderson filed personal bankruptcy in May 2005. Between the bogus investment, the loans for Monarch and personal expenditures, Anderson and his wife accumulated $481,000 in liabilities, according to the bankruptcy filings. That was about $150,000 more than the couple's assets. Anderson was able to keep his house and car but is trying to pay back his creditors. Anderson said he wants to make sure Jones will not try to scam anyone else. "If this guy gets out in six months, I'm thinking he's going to go right back to doing this," Anderson said. "I'm trying to help people avoid being victims in the future, especially with Dale Jones," Anderson said."
Hmm, six months and Dale is off to the races again. Be good to remember this name, "Dale Jones".

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How Google's Adsense has Innocently enabled Scams and Fraud

One of the unintended consequences of Google's wildly popular adsense program is that a number of websites sincerely aimed at providing consumer protection now carry google ads for scams. How do these webmasters explain why they allow such ads. Here are some sample justifications from these webmasters.

Webmaster 1: In answer to my questions about enabling fraud.

My Question: Given that this site, among others, attempts to educate, warn and advise individuals of bogus opportunities, how appropriate to have Ads byGoooooogle on the site which may lead to bogus, fraud or scams?

Reply: That's why I didn't do it for so long... then I decided to put a warning in plain sight and stop throwing money away. (It's the first time in my life I've put making my mortgage payment ahead of my obsessive-compulsive "value system" and I think I've been a fool for too long.)
My Question: The site has credibility, and it is one of the few consumer sites that I have my blog link to, but I worry about the difference between the message and the ads.
Reply: Three people said it best. Like I said, the thread is gone, but this is the gist of their messages:
"You can't be everybody's mother."
"If they read Scams 101 AND the warnings AND the board and they still get scammed, it isn't your problem; if they didn't click on the scam here, they would have clicked on it somewhere else.
"Do you honestly believe that reputable newspapers and magazines worry for one second about whose ads they're carrying?" (No, they don't. Witness the envelope-stuffing schemes that used to fill a page in T.V. Guide.) (my emphasis)
Webmaster 2: From their FAQ.

"Why are there ads on your site?
The ads are the only source of revenue our Web site has. Without them, it would not exist. Our site is very large and handles a lot of traffic each day. It is very expensive to maintain. We also spend a lot of time (and money) fighting off companies that try to shut us down, sue us or intimidate us into silence.
One of the things that makes our country great is a free press, supported almost entirely by advertising. In totalitarian countries, the government controls the press. Bad news.
I see ads for companies that are criticized on your site. What's that all about?
We don't control which ads appear on our site. They are placed by outside agencies. A crafty consumer understands that ads are not an endorsement, they are paid propaganda. The fact that an ad appears on our site by no means indicates we approve of the product. Same thing's true for an ad in the newspaper, or on television or radio.
We would suggest that you should be worried about whether we have to kowtow to individual advertisers. This would make it tempting to go easy on those who advertise on our site. With our third-party arrangement, we have no contact whatsoever with the companies advertising on our site and could not care less whether they approve or disapprove of what we say about them.
This seems wrong. How can you take money to advertise products you don't approve of?
It's a free country. Companies, even the ones we don't much like, have as much right to advertise as we do to publish our site, just as we have the right to publish critical comments about them. There are government agencies that can and do prosecute companies who make false advertising claims.
I'd rather depend on a government agency for my news.
Fine. We're not the only game in town and don't want to be. Keep in mind that governments publish an "official" version of the news, which tends to be mostly about what a great job the government has done for you today. If you want to believe that, be our guest.
Why don't you get rid of the ads and raise money from foundations and corporations?
Foundations, especially those backed by big companies, want to control the content of Web sites and publications they underwrite. We have sat at tables where big drug companies dictated, line for line, what a not-for-profit agency would say in a publication financed by a supposed "unrestricted educational grant" from the foundation. This goes on every day. We don't trust anything any big not-for-profit organization says. Most of it is corporate propaganda disguised as unbiased truth. This is much worse than advertising, which is at least clearly identified as such.
service. We're not set up to handle written or telephone complaints. We forward the written complaints to the lawyers for their review but at the moment, that's as far as it goes. It would be too labor-intensive and expensive to type them into the database or actually print out a response and mail it. Sorry". (my emphasis)

Webmaster 3: In response to my question.
It hit us on Day 1, when the very first ad that came up in AdSense was a Pure Trust scam. So, we moved the AdSense ads off the front page and to some back pages where at least people would have time to read the warnings before seeing the advertisement, and then we try to make sure they understand that it is an advertisement.
The best that this site can do is to educate and try to teach people what a scam is or isn't. At the end of the day, they will have to choose. I can't tell you how many e-mails we get per week the have the tenor of "I saw your site before I invested, and wished that I had listened to you earlier."
For a financially very small non-profit like [true sponsers of site], raising even minimal money is difficult and AdSense seems to be an easy way to do it. But people are still going to have to look out for themselves, hopefully just a little smarter after reading some of our warnings.
Any ideas or suggestions appreciated; please don't think that we haven't given this any thought. (my emphasis)

Is it futile to complain about scams, frauds and business opportunities when you are indirectly enabling them? And why are there adsense ads on www.bizop.ca?
Very simple.
I want you to click on ads which look like scams or frauds, and report them.
Just that simple.

Click and report. Click and report, repeat until the scam ads vanish from the internet.

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Why we need Irrelevant Data?

A little over two years ago, Edward Teach wrote a nice little piece summarizing some of what we know about heuristics or rules of thumbs we use to make sense out of a confusing and contradictory world. Some of the experimental results appear to be quite odd.

For example, "Dan Ariely, professor of management science at MIT Sloan School of Management, conducted a mock auction with his MBA students. He asked students to write down the last two digits of their Social Security numbers, and then submit bids on such items as bottles of wine and chocolate. The half of the group with higher two-digit numbers bid "between 60 percent and 120 percent more" on the items, says Ariely." (my emphasis) Professor Ariely's webpage is here.

Anchoring on irrelevant or inaccurate data is prevalent. According to Ariely, "People don't know how much something is worth to them," he comments. An anchor helps them decide. Once a value is set, people are good at setting relative values, Ariely explains. But "it's very hard to figure out what the fundamental value of something is," he adds, whether it's an accounting system, a company's stock, or a CEO."

What does anchoring have to do with the new FTC Biz Op Rule?

Proposed section 437.4 c of the new FTC Biz Op Rule deals with the use of industry standards, such as the number of "vends per day". Business Opportunity sellers would not be able to use these statistics, unless the seller has "written substantiation that the industry standards are representative of the typical biz op purchaser." It is interesting that the FTC is alive to the abuse of this heuristic, but does not understand how the commitment heuristic will overwhelm the seven day cooling off period. We can only hope that the FTC will take the lead from California and publish the business opportunities disclosure documents.

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May 9, 2007

Franchise and Business Opportunity Due Diligence

Richard A. Solomon is a Texas lawyer with over forty years of legal experience, including the areas of franchising and business opportunities. He has seven fraud tutorials on his website. Richard pulls no punches and I am going to quote some of what he said about business opportunities due diligence and fraud.

"The problem with which I am usually faced when a potential franchise investor comes to me for counseling is that the investor is already a totally pre-sold glob of quivering protoplasm, just itching to write that big check. Salesmanship is very aggressive here. Misrepresentations abound. A suggestion that what the client is enthused about may not be anything like it has been described is a very deflating event, and sometimes the client is so sold that the investment is made anyway, and the results occur that were predicted. By then it is either too late to get the money back for any number of reasons; the client no longer has money to hire a lawyer to seek redress anyway; and a terrible loss of money and emotional energy for the investor and for the investor's family simply destroys everything. The people selling these opportunities are very tough. The investor needs to have access to tough analytical resources to deal with it." (my emphasis)

Over and over again, I have emphasized that you cannot perform due diligence during the 10 or 14 day cooling off period you are permitted by law. If you start your due diligence after a trade show, then just go to a casino and bet your house on red - at least you will know where your money went.

What else does Richard have to say about due diligence?

First, get an expert franchise or business opportunity lawyer to review the distributorship materials, including all promotional materials.

"Inasmuch as I am convinced that there is a paucity of professional resources to which potential business opportunity investors have recourse in deciding upon such investments, this discussion is offered, not as the answer to due diligence issues, but as an eye opening warning. It is my hope that readers of this article will come to an awareness that what they read in a document is often the opposite or quite at variance with the expected meaning of the statements in normal experience, and that taking the documents to 'a lawyer' for review may be quite useless if the lawyer is not highly experienced in business opportunity vetting. The lawyer who does tax compliance, divorces, estate planning and personal injury work is certainly a lawyer in those areas, but probably not even remotely adequate for the vetting process of which we speak."

Second, beware of the offer of location assistance, the difference between what you were told orally and what the operator is contractually obligated to do.

"One of the selling points of any franchise or other business opportunity is site/location selection for your business. Often a potential investor will be told of a secret point system evaluating method that the selling company has developed, or other similar fairy tales. They may have a point system, but it is neither novel or unique or unusual. For most of franchising history, if you were thinking of investing in a fast food franchise, you needed only know that you had to be within half mile of a McDonalds. That's probably accurate even today. Whenever site location selection assistance is touted by a company asking you to invest in one of its deals, compare the bragging language of the sales/marketing statements against the language of the contract."

Third, getting back to the first point, get good and appropriate legal help.

"Every potential franchise or business opportunity investor has the ability to get on the Internet and find due diligence help from the many experienced franchise lawyers who maintain web sites and invite inquiries. It does not matter that any one of them may be located in another state or country. The issue is the scope of their experience to advise you about what you are thinking of doing. Ask them specifically about that experience, and keep on asking until you find the person who has the credentials to be of specific assistance to you. It does not matter if someone has been the high panjandrum of this or that credentialed honorific. Do they know what it is that you wish to do and have they sufficient experience in that or in things similar to that to be of assistance to you? You are not looking for someone to 'read the contract'. Hopefully you can at least read. Analyzing a small business ownership investment is far broader in its requirements than 'reading a contract'. It won't be cheap, but it will help reduce -- not eliminate -- many critical risks. In the final analysis, your success or failure will be a matter of your ability as a business operator."

This last point is very important, franchising and distributorship are not an industry, I may detailed experience on the business of ATM distributorships but have little knowledge about bakery franchises. Just ask. After all, it is your money.

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May 8, 2007

Why Some People Always Buy From Fraudsters

The FTC, on May 8th, 2007, announced that Richard C. Neiswonger, based in Las Vegas, Nevada, his business partner, William S. Reed, and their firm, Asset Protection Group, Inc. were Repeat Offenders Permanently Banned from Telemarketing and Selling Business Programs.
The con criminals told consumers that "told consumers with no sales experience that by purchasing their "APG Program" they would become well-paid business consultants selling APG’s "asset protection" services. For $9,800, consumers received training materials, a one-day training session, and a business affiliation with APG, which defendants claimed would provide consumers with carefully-screened "qualified prospective clients." Consumers were supposed to make money by selling APG’s asset protection services to clients who wanted financial privacy and wanted to make their assets less obvious to potential litigants or creditors. These services involved guidance on forming Nevada corporations and creating offshore corporations. The defendants promised consumers that they would readily make a six-figure income; the company even provided references that consumers could call who would back up their claims."
Now strange as it seems, the consumers were not provided with carefully-screened qualified prospects. Why would the defendants sell their sucker list for $9,800 if it really was filled with "qualified prospective clients."?
"In fact, consumers paid thousands of dollars for cold call lists, rather than pre-screened clients. Not only were they unable to achieve six-figure incomes, according to the receiver appointed to oversee the business, approximately 94 percent of the consultants failed to earn back their initial purchase fee for the program. Only one person ever earned a six-figure income, while hundreds of consumers lost money. The company’s references were, in fact, paid to deliver positive reviews of their experience. In addition, the 1997 order required that Neiswonger provide written proof to the FTC of a $100,000 performance bond to the Commission before marketing any program, which he failed to do while continuing to market his business opportunity program."
So why are some people always scammed by fraudsters? Because they cannot use the search button on the www.ftc.gov site: try "Neiswonger" on www.ftc.gov, for fun. You might find this interesting read.

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April 28, 2007

What's New in European Direct Selling?

Here is a fascinating story. Apparently the European version of the Direct Sellers Association,FEDSA, seeks "reform" of EU direct selling directive.
Reform of the EU Direct Selling Directive, what ever could that mean?
"With direct selling predicted to grow in the run up to 2010, many cosmetic companies such as Swedish based Oriflame and global company Avon make high sales revenue from the European market.
In response to this predicted growth, a meeting took place earlier this month between FEDSA chairman Richard Berry and Mrs Kuneva, European commissioner for consumer affairs to educate the EC on 'the role direct selling plays in strengthening the economies of EU member states'.
Berry highlighted the opinion that current consumer legislation imposes unreasonable restrictions on the significant sector of European trade, that brings in over €19bn in total annual sales, and called for an early reform of the legislation in a new harmonisation directive.
Many direct sales cosmetic companies, such as US business Mary Kay, are beginning to benefit from the recent upsurge in the direct sales trend in China, following the lifting of a ban imposed to halt scam door-to-door sales people.
Therefore the uncertain legislation in Europe could cause uncertainty over the future of the market as emerging areas, such as China, benefit from the majority of the growth in this sector."
So what is the problem with this legislation, according to the FEDSA?
"The legislation was originally designed to provide order-cancellation rights to consumers entering into substantial contracts at home. However, it has allegedly evolved and now causes unnecessary red tape for European based agents - resulting in an outright ban on direct sales in Luxembourg.
In the lucrative French cosmetics industry the directive denies the direct seller from collecting payment from the consumer before the end of the cooling off period and allegedly has unreasonably low thresholds for regulated contracts in all member states."
Well, here is an idea from across the big pond - FTC Business Opportunity Rule.

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April 27, 2007

New Concept in Network Marketing

Kim Klaver has a new concept for Network Marketers, in New School of Network Marketing. It is called telling the truth.

I wonder if it will catch on.

There is a certain simplicity about it.

Without futher ado, here is what Kim says Network Marketers should tell the truth about.

1. Tell the truth about the drop-put rate:

" Acknowledge and tell prospects the drop out rate ourselves, so the news media doesn't have a field day (and get so much attention) reporting it. We all know it first hand. Why continue to suppress it? (Wouldn't an impending challenge bring out a better side of people anyway?)"

2. Tell the truth about making money:

"Tell people exactly what they need to do to make money. There are only two things that earn them money - everything else costs them money and/or time." The two thing that earn money are customers and representatives.

"Whatever else one does - buying leads, duplicating 'proven systems', going to meetings or events, buying websites, training materials (yes, including mine), developing yourself - all this COSTS money. These things are means to enable you to do one of those two things above."

3. Tell the truth about the nature of the program:

"Reframe the question new people ask themselves. Ask not: "How much will the business give me and when?" This is not an entitlement program. Ask:
What can I do to get enough customers and reps to earn the income I want?"

I would add that you should tell the truth about selling - you have to sell to earn an income. No matter how it is framed, you need to be able to sell. If you cannot, then pass. This is true for franchises, distributorships and other income earning opportunities.

If you are told "this product/opportunity/franchise sells itself", walk away. No, run away as fast as you can. (If the product/opportunity/franchise really does sell it self, it will figure out how to follow you.

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April 26, 2007

The Pemberton Gang - Internet Kiosks

At Trade Regulation Talk, Peter Reap writes, about the Pemberton Gang, Paul, Ferris and Margaret:

"Two corporations and three individual officers and directors of the corporations violated the FTC franchise rule by making insufficient disclosures to prospective purchasers of public access Internet kiosks sold by the companies, a federal district court in Miami has ruled.

The defendants were jointly and severally liable to purchasers of the business, for varying portions of the more than $48 million defrauded from purchasers of the businesses.

The business ventures sold by the defendants were "franchises" under the meaning of the rule, according to the court. The defendants provided some prospective purchasers with a Franchise Disclosure Document, acknowledging in the document itself that the kiosk businesses were business opportunity ventures subject to the franchise rule."

The complaint can be read here, and the reasons for summary judgment can be read here.

This would be an ordinary business opportunity fraud, misrepresentations about earnings, location assistance, the use of shills, and obscuring the corporate structure, except for one interesting fact.

Pemberton had constructed a "Franchise Disclosure Document" and distributed it to some if not all of the distributors. The disclosure document was deficient and the Judge found that:

" the basic disclosure document for Transnet failed to correctly identify all of the directors and executive officers of the corporate defendant, their business experience for the past five years, and litigation history. The disclosure document failed to identify Paul Pemberton even though he was one of the individuals who directed and controlled the operations of Transnet as regional director and director of sales and marketing. In addition, the Transnet disclosure document failed to disclose that Cartwright previously worked at and was Director of Operations at Nationwide.

In addition, Defendants' basic disclosure document failed to provide a statement disclosing the names, addresses and telephone numbers of any previous customers of either Nationwide or Transnet, as required by the Franchise Rule.

Moreover, Defendants did not provide a reasonable basis for its earnings representations, failed to disclose additional information including the number and percentage of prior purchasers known by it to have achieved the same or better results, and failed to provide prospective business venture purchasers with an earnings claim document containing information substantiating its earnings representations (constituting a reasonable basis for those earnings claims). "

The difficulty this partial disclosure document presented is that the usual way of dealing with business opportunity fraud is for the FTC to point out the lack of a disclosure document, which has an immediate remedy. The failure to deliver a disclosure document, essentially, allows the FTC to shut down the biz op and obtain restitution as a matter of law. No further facts are required.

In this case, however, the FTC was required to gather evidence from more than 30 distributors and present their evidence via affidavits. The defendants chose not to put in any material. But the FTC was put to greater cost and delay.

It will be interesting to see if the FTC, if biz ops start putting out disclosure documents, argues that a disclosure document that is so deficient is not a disclosure document at all, for the purposes of the Act. (This is the official position of the franchise bar in Ontario, for the most part. The FTC Franchise Rule is materially similar to the Ontario Franchise Disclosure Act.)

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April 25, 2007

The Real Trouble with Ripoff Commericals

Mark Cuban in his post on Ripoff Commercials = Stupid TV Stations and Networks states that his television network

"HDNet wont run informercials or any ripoff commercials. We don't need or want their money and I would rather go without commercials than run them. My viewers are my customers. For some reason that is a strange concept to stations and networks these days. They would rather squeek out a commission on herbal enhancement pills and end up with a poorer, upset viewer than run a show without commercial breaks. Thats ridiculous. Its a brand killer"

I do wish that rip-off commercials came with the tag "rip-off commercials", but for good logical reasons, as I have articulated before, scams do not self-announce.

If rip-off commercials don't come with a tag screaming "I am a rip-off", then in order to filter them out we will have to rely upon the sensitivity of Mark Cuban or whomever he hires as his social censor.

Censoring commercial speech has never worked before, so why should it work now?

I suggest a different approach, one which relies upon the open network of bloggers to get to the heart of the matter. Cuban should run any ad for an income earning opportunity as long as he also confirms that the income earning opportunity is registered under the appropriate state business opportunity laws and the federal business opportunity rule disclosure is available. All of this information should be available digitally and television viewers allowed to comment and review the disclosure documents.

This would be a better solution that an outright ban for five reasons:

Cuban would not have guess at which ads to censor.
The audience would be provided with the relevant disclosure information.
Ads that didn't have the necessary registration documents could also be exposed.
There would be a lot more fire between the true believers and skeptics based on what the disclosure documents revealed.
Many people are unaware of the information that is legally required to be given to them, and having it disclosed would be generally useful. (None of the commentators on his post or the blogs that linked to his post mentioned the FTC or state business opportunity laws.)

The main trouble with any advertising is that the broadcaster lends some credibility to the content of the ad. By disclosing the relevant information that is required by the FTC and the various states, Cuban would be doing a great service and providing high quality internet broadcasting.

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April 24, 2007

Bad Advice From American Chronicle

Here is some poor due diligence advice from American Chronicle: Work From Home Business Opportunity.

The author starts out promisingly:

"While there is definitely work to be had and money to be made with a work from home business opportunity, finding the right work from home business opportunity for you will definitely require some legwork and preliminary research on your part. Why? Well, the unfortunate reality is that not every work from home business opportunity is legitimate. Often, a work from home business opportunity reels interested people in with a lot of lofty promises about unbelievable revenue streams without a lot of effort required on your part. "

How does the author suggest that you do your due diligence? How do you verify the earnings claims, alluded to? What information is legally required from these business opportunity sellers?

Unfortunately, our author reveal himself to be ignorant of the basic federal and state laws concerning business opportunities.

There is the requisite and absurd claim about the Better Business Bureau. "Find out as much as you possibly can about the work from home business opportunity you are thinking about pursuing. Investigate the owners, operators and current associates. Check out the Better Business Bureau or websites that specialize in identifying scams to find our about any potential negative experiences others may have had with this work from home business opportunity. "

Once again, I have to stress that the BBB has nothing to do with due diligence. The BBB is a system which attempts to resolve consumer complaints and keep track of the number of resolved complaints.

Our author knows nothing of the Federal Trade Commission's site on Business Opportunities scams or any of the individual State Business Opportunity Laws and shares his ignorance with the reader.

It is really quite pathetic, and would not be worth commenting on except for the fact that so many individuals looking at business opportunities live in the same space - ignorant of the how the Federal and State laws on business opportunities work on their behalf.

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April 23, 2007

3 Ways to Protect Senior Fraud

Sheyna Steiner interviewed Christopher Cox, Chairman of the Securities and Exchange Commission and got his thoughts about Protecting Seniors From Scams.

Cox has some personal experience with semi-legal bullying tactics that scammers use. A salesman was constantly badgering his parents about an inappropriate mortgage refinancing tool. Despite Cox's warning, the individual continued to phone.

"Both in Congress and since I've become Chairman of the SEC, I've heard hundreds of similar stories from constituents and colleagues. It is heart breaking to see a loved one ripped off by semi-legal but under-handed tactics. That's why, at the Commission, we're always doing our best to protect everyone as if they're our own mother or relative."

What does Cox advise in order to deter fraud?

Cox summarizes what the SEC believes are the important social influencing tools.

"It isn't just financial competence but also street smarts and a healthy dose of skepticism that are in order to detect and avoid scams. We've identified more than a dozen social tactics that scam artists use in making their pitch.

Among the most common:

Phantom fixation: the con-artist dangles a sum of money, or possibly a vacation, to tantalize the victim.

Social consensus: the scammer convinces the victim that his or her peers and neighbors, and other respected people in the community, are all making this particular investment.

Scarcity approach: the victims are pressured to act fast, before it's too late.

Reciprocity principle of social interaction: the con does a small favor for the victim, relying on human nature to induce the victim to return the favor in kind by buying the investment."

Here are the 3 Ways to Protect Seniors from fraud, according to Cox.

"Here are some specific ways that you can limit the number of solicitations that a parent or other senior in your charge receives, in order to better protect them from potential scams:

-- Register your parent or charge with the National Do Not Call Registry to reduce their exposure to unwanted cold calls. Children of senior citizens can do this for them.
-- Encourage your parent or charge to skip "free lunch" seminars, even if they are pitched as educational events, unless you have first researched the background of the sponsor, and unless you go to the seminar, too.
-- Maintain constant communication with your parent or charge about issues of significant financial consequence. This will give you an early-warning system when an unwanted solicitation first occurs, and help you to insure that it doesn't continue. "
The one other tip I would add is to buy a answering machine and make it a rule not to answer the phone.

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April 20, 2007

Can Oprah Stop Fraud?

I was disappointed with Oprah's recent show on scams, Cunning Cons. I have purchased Sid Kirchheimer's book, Scam-Proof Your Life. Sid Kirchheimer was one of the experts on the show. The book has some decent advice, but it is more of a consumer protection book than a detect fraud book.
Oprah failed to explain the essential mystery of all fraud: After the fraud is discovered, it seems incredible that anyone could have fallen for the scam. The victims are trotted and my, my my don't they all look mental. The woman who sent money overseas, the woman who thought she had won the lottery, and others. All look pathetic, but only after the fact.
How is it possible that after we discover the fraud, it becomes incomprehensible how we got taken? A television show would be the perfect vehicle to recreate the sense of urgency, the phantom dreams, and the compliance techniques in place. Instead, we were given some perfectly presentable and forgettable victims. Fraud becomes too easy: blame the victim, who was too greedy or didn't do their due diligence.
We don't blame victims of criminal acts for their own states of mind; why do we blame the victims of economic crimes?
Equally lame, in my opinion, was Brian Ross, ABC News Chief Investigative Correspondent's explanation of why Nigeria is a source of so many scams.
"Brian says one of the reasons Nigeria is a source of so many scams is because a large number of citizens are living below the poverty level. "This is a desperately poor country with wonderful people who are very intelligent, a good school system [but] no jobs," Brian says. "It's [also] a corrupt country where the leaders have been corrupt for years. They've doomed their people to a life of poverty, and the lesson has been taught that you can get away with crimes and nothing happens."
For years, Nigerian con men got away with their crimes and made small fortunes…but not anymore. Pressure from the United States and Great Britain has prompted the government to start cracking down. The men caught during Brian's investigation are facing criminal charges."

This is not a convincing explanation, given the number of countries with "large numbers of citizen living below the poverty level."
I would like to see Oprah will take on the fraud inherent in many network marketing schemes. Now that would be a worthwhile project, and aimed directly at her core audience.

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April 19, 2007

Are You a Cheap Date?

All of us have our price, or so we are told. In our defence, we would like to believe that our price, what we would trade our integrity for, is so high that our sell out would be understandable.

Few of us would accept that our integrity might be had for a few pence, or other cheap tricks.

But the famous social psychologist, Leon Festinger, showed over 50 years ago just how easily we can be bought.

In a remarkable experiment, Leon Festinger and James Carlsmith, concluded that

"In short, when an [participant] was induced, by offer of reward, to say something contrary to his private opinion, this private opinion tended to change so as to correspond more closely with what he had said. The greater the reward offered (beyond what was necessary to elicit the behavior) the smaller was the effect."

The full experiment can be read here, and the following is my summary.

A participant is asked to perform a boring job, as part of an experiment.
After the boring job is completed, the participant is hired at either $1 or $20 to explain the task to another participant.
In both cases, the participant is asked to describe the boring job as exciting to the next "participant", who is an actor.
The participant is then asked, after convincing the actor, how boring the job was, whether the experiment was scientifically useful, etc.
Those participants who were paid a $1 lied on the survey, describing the boring job as moderately interesting, an experiment of value; those who were bribed $20 felt no need to describe the boring jobs as anything other than dull, with no scientific value.

When I speculate on what I would have done in these circumstances, I find myself being bought for the $1 bribe, too. At the $1 hire, I can see myself lying, but not at the $20 hire. [Recall that this experiment was first done in 1959.] Social psychologists have found this to be a very robust result, having performed the experiment under numerous conditions.

The implications of Festinger and Carlsmith's work are relevant today. Pay for post would seem to entail massive hypocrisy, given the small amounts paid to individuals to blog about "wonderful" consumer goods. We might expect the project to collapse under its own weight, but Festinger and Carlsmith would have argued that the small payments would effectively bring about a change in the blogger's opinion.

Public consumer groups have worried about the use of "shills" by large consumer companies in either word of mouth or buzz marketing. One group, several years ago, contacted the FTC.

"We are asking the Federal Trade Commission to investigate that shills are not disclosing that they are shills," said Gary Ruskin, executive director of Commercial Alert. "We've done some deceptive advertising complaints with FTC, and have talked with many audiences over the years about the deception involved in buzz marketing."

But there would be no deception involved, at least from the participants point of view, if they are given small samples and asked to say something about them.

Here is a description of one the companies involved, from the Boston Globe, two years ago.

"Agents aren't paid for their work, but they can collect reward points by participating in campaigns, which are redeemable for goodies, such as an iPod. They're not obligated to be positive in what they say about a new coffee-maker or a business book, but they are expected to file a report with BzzAgent letting the firm know what they've been up to.

Bzzagent is still going strong, and we aren't going to see the end to word of mouth marketing anytime soon.

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Barry Minkow versus Len Clements: Who is Winning?

Mr. Les Clements, who describes himself as a Court recognized expert on Network Marketing, has written a response to the Fraud Discovery Institute's report on USANA.
Mr. Clements response to the FDI report can be read here, and Mr. Minkow's rebuttal is here.
Clements makes a number of points, but I wish to concentrate on what is the main issue, which is a two-parter. The FDI claims, in essence, that since USANA's products are too expensive, a distributor cannot make money by selling vitamins retail and can only make money by recruiting others, who have to recruit others, etc. Eventually, according to the FDI, the recruitment must fail for most individuals as a matter of cold hard mathematics.
Clements takes issue with this argument. With respect to the second premise, Clements claims that:
"Eighty-five percent of distributors lose money because 85% of distributors don’t do what they’re suppose to do to make money!

People who spent $1,000,000 for a Taco Bell franchise typically take their business pretty seriously. People who spend $20 for a distributor kit do not. People usually spend 4-8 years and tens-of-thousands of dollars preparing for their career. For those who join a network marketing venture to eventually earn a living income (92%) this would essentially be a career choice. Yet, most will make this decision based on nothing more than a compelling “opportunity call” or a jazzy online flash presentation. Sure, a few really do their due-diligence, work hard and give it their best shot and still fail, as is true in any business. But the vast majority of those who enroll as an MLM distributor do little more than tell a couple friends about it, who decline, and they’re done. Many don’t even do that much. Some may even give it a good effort for a month or two, then not understanding the commitment level necessary to succeed they either drop out, or more likely hop from one “better” MLM program to another. Over and over and over. Much like a marathon runner who repeatedly stops at the one mile marker and returns to the starting line, then stands their scratching her head wondering why she can’t “succeed”. Then finally, as most ex-MLMers do, they walk away disgusted, blaming their failure on their shoes, the course, the race officials, the weather – everything but themselves." (my emphasis)

Clements is at odds with the official USANA explanation, most "distributors' join in order to access discounts on vitamins. While, I don't doubt the veracity of Mr. Clements description of what the average MLM does when they encounter failure, this is not an explanation for the failure. Mr. Clements description of the what the average MLM recruit does is complete consistent with the FDI claim that MLM recruitment must fail, as a matter of design.

The critical question is not whether 85% of distributors don't do what they are supposed to do to make money, the question is whether the USANA products can be sold in highly competitive retail marketplace. If the products are not being sold, then a distributor cannot be buying them with the intent to retailing them, and therefore is buying them primarily to keep his or her recruitment income in place -or at least that is how I understand the FDI argument.

So who has got the better argument against retail? Clements argues:

"Most network marketing companies extol the benefits of this bypassing of the middleman as a means to afford greater commissions to their sales reps. This, and the dramatically reduced advertising costs, allow for a much larger chunk of the margin to go towards distributor rewards and compensation than those that are sold via conventional channels (since the distributors themselves are essentially the ‘middleman’ and their advertising mechanism). And that’s exactly what Usana is doing here. Note the slide above exclaims “Receive a generous percentage of the profits,” not “Receive a generous discount on the products,” let alone a 75% discount."

The FDI's response is:

"If what you are saying is correct, then I would expect the financial information disclosed by Usana to include something to the effect that distributors receive “a generous percentage of the profits.” Yet as we have seen, the 2006 associate earnings information released by Usana shows that more than 94,000 North American distributors never earned a dime in commissions (that’s of the 142,000 that are counted). It also shows that 72% of the compensation paid went to 2.6% of the distributors. These facts can’t be spun. So much for the newcomers to Usana receiving part of that 75% of profits! And beyond that, you clearly missed the point in the report: that the products are so hopelessly overpriced that very little actual retailing of the
products occurs and that no such 75% is pulled out at all! If it were the commissions going to distributors and the current retail price for Usana products would be a ‘push’ but instead even with the “75% being saved and passed on to the distributor commissions’ the prices for these
products post that calculation are still hopelessly overpriced dooming distributors to failure because they cannot retail."

Well, who has the better argument, on the numbers, here? It is hard to understand Clements since an upline by definition is a middleman, stuck between the consumer and USANA. If there was a single level of distributors, then the standard marketing company's line about a 75% saving might make some sense.
On the other hand, the FDI is making a different point, on disclosure of the amount of commissions paid to how many distributors.
What about those preferred customers, surely those are retails sales? Clements raises this very point.
Here is FDI's take on the preferred customers.

"76,000 Usana Preferred Customers purchased $52.3 million in products during 2006. You use this statement to debunk our assertion that little to no
retail sales are occurring at Usana.

Initially, your numbers appear impressive, until one does the math on direct sales and the number of associates and preferred customers. For example, Usana reported 142,841 “average distributors” and 70,000 “active” preferred customers in North America in 2006. Total direct sales in North America for 2006 were $246.5 million. This averages to about $89 every four weeks, per associate or preferred customer. (And the amount purchased per associate or preferred customer is actually lower than $89, as the associate and preferred customer numbers released by Usana only included “average” and “active,” and not all participants throughout the year.)

What does $89 every four weeks get an associate or preferred customer? About 84% of a 28 day supply of the HealthPak 100. If you want proof that products are not being retailed, the discussion is over. Distributors and preferred customers themselves are not even purchasing one full HealthPak 100 every four weeks, one of the company’s best selling products.

Okay Mr. Clements, maybe the 2005 Usana numbers are more favorable? Not much. Usana reported 101,361 “average distributors” and 63,000 “active” preferred customers in North America in 2006. Total direct sales in North America for 2006 were $209.4 million. This averages to about $98 in wholesale purchases every four weeks, per associate or preferred customer. That’s still not enough money to buy even one four-week pack of the now famously overpriced HealthPak 100." (my emphasis)

The overall calculation appears correct, and the preferred customers on average don't appear to even be ordering a four-week pack. But they could be ordering something else, other product. How many products are the preferred customers ordering before they find them too expensive, if they do? Neither side hit a home run here, but I think that the FDI hit at least a double, and probably a triple.

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April 3, 2007

Unscrupulous Franchisees take advantage of Unwitting Franchisors.

A unscrupulous franchisee taking advantage of an unwitting franchisor? Whatever could this refer to? The actual sentence, in context, is from a recent Ontario Court of Appeal Case, Personal Service Coffee Corp. v. Beer.

"The other flaw with the respondents' argument is that it ignores the fact that, on the franchisee's own admission, he set up a competing business the very day he rescinded the franchise agreement with the appellant and he continues the very same business to the same customers whose names were provided to him by the franchisor and uses equipment provided by the franchisor. While I accept that the facts of this case are still in dispute, it is nonetheless clear that in some cases the respondents' position would allow unscrupulous franchisees to take advantage of inadvertent non-disclosure by unwitting franchisors. In my view, this would be an unacceptable result."

Inadvertent non-disclosure? By an unwitting franchisor? That would be novel. Are there novel facts in this case?

"The facts giving rise to the appeal are as follows. The appellant PSCC has carried on business throughout Ontario for fifteen years in the supply and distribution of coffee and coffee-related services to offices and businesses. The company loans or rents equipment such as coffee brewers to a customer in return for the customer's agreement to purchase all coffee products from PSCC. Such products include coffee, filters, cream, and filtered water. PSCC also sells a variety of brand name coffees and related products in addition to its own lines of coffee.

In the fall of 2002, the respondent Mr. Beer contacted PSCC with a view to becoming a dealer in Durham region. On October 28, 2002, Mr. Beer and PSCC executed a five-year dealership agreement. Mr. Beer paid PSCC an initial royalty fee of $10,000 and executed a $25,000 promissory note in favour of PSCC. He agreed to pay a monthly royalty fee of $100 and to purchase all inventory and equipment from or through PSCC. Training was to be provided by PSCC, and Mr. Beer was obliged to attend. Equipment leases were to be arranged through PSCC. In exchange, PSCC provided Mr. Beer with its list of existing customers and the value of the equipment being loaned or rented to those customers in Durham as at the date of the agreement. Mr. Beer had the right to use the PSCC trademark and systems, as well as the exclusive right to market them in Durham.
About one year later, on October 1, 2003, Mr. Beer executed a second dealership agreement for the Peterborough area on similar terms. He was permitted to pay the initial royalty fee of $10,000 over time.
On September 27, 2004, Mr. Beer, through his solicitor, served two notices of rescission on PSCC pursuant to the provisions of s. 6(2) of the Act. It is a matter of dispute between the parties as to what, if any, conduct on the part of PSCC precipitated Mr. Beer's decision to rescind the agreements. The notices came three days before the expiration of Mr. Beer's two-year right of rescission for the original Durham dealership agreement.
...
Mr. Beer admitted in cross-examination that he is operating a business "similar" to the one he carried on under the agreements with PSCC. He is competing with PSCC in the same business and is selling to the same customers that he serviced during the terms of the dealership agreements with PSCC."

But what should the penalty be for the franchisor doesn't know the law, doesn't know that he is peddling a franchise? The public policy behind the Arthur Wishart Franchise Disclosure Act is to protect the consumer by requiring or mandating the disclosure of relevant information. The failure to provide the disclosure document provides the failed franchisee with an expansive remedy: the franchisor must, within 60 days, repay the franchise fee, purchase inventory and supplies at cost, and make good any losses.
The Ontario Court of Appeal ignores this public policy and focusses on the losses for the "unwitting franchisor". A distributor who doesn't know the law, or care about informing his franchisees. But why isn't the loss of the franchisees' goodwill, ie its customers that it serviced, to be counted as a loss for which the franchisor has to compensate the franchisee for? The franchisor can either compensate the franchisee for the loss of goodwill, or compete with it in the same market. Neither remedy seems too harsh or unfair to the "unwitting franchisor."
(PSCC appears to treat its dealership agreement as non franchise business.)
Franchisees complain that their franchise agreement gives too much discretionary power to a franchisor. The pundits are not sympathetic and retort that the franchisee should have read the f....g agreement and disclosure. Read the document, know your rights, franchisees are told. Well, for "inadvertent non-disclosure" I have a similar retort: Read the f...g Arthur Wishart Act.

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April 2, 2007

The Case of the Inadvertant Franchisor

A number of business models which appear to be different from the franchise model exist. For example, distributor, dealer, exclusive dealer, etc. These arrangements usually provide some exclusive territory to the purchaser, for consideration.

However, in Ontario, as with many other jurisdictions in North American, what people chose to call their business arrangement will not alter the legal character of that arrangement. Many sellers are not aware of their legal liabilities.

Many business arrangements are at law franchises. Lord and Partners, learned an expensive lesson about not knowing that they were selling a franchise.

As reported, last January, 2007, the Ontario Superior Court granted Doug Payne summary judgment in the amount of $71,683.73, before legal costs against Lord and Partners. Lord and Partners entered into an agreement with Payne Environmental in or around December 12th, 2002, in which "Payne Environmental was provided the exclusive right to show Lord and Partner products, accessories, parts and associated products in the territory of Mississauga East. Lord and Partners did not provide Payne Environmental with the disclosure documentation required by s. 5 of the Arthur Wishart Act at the time of execution of the agreement. It is also agreed that after signing the agreement, disclosure was not provided." (my emphasis)

Once you sell an exclusive territory, offer significant assistance, or exercises significant control, or provide location assistance or help with getting sales accounts, then you have probably sold a franchise. Although Lord and Partners doesn't look like McDonalds, it is a franchise nonetheless.

On Payne's motion for summary judgment, the Judge found that Lord and Partners had to pay the franchisee back the cost of the franchise, the cost of the equipment and compensate the franchisee for two years of operating losses.

Lord and Partners had a novel defence.

"Lord and Partners Ltd. has commenced a third-party claim against, Mr. Murray Box and Pallett Valo,LLP. In this action the plaintiff claims that Mr. Box, a solicitor with the firm of Pallett Valo, provided legal advice to the plaintiff and to the defendant from October to December 2002 concerning the franchise agreement. It is alleged that the legal advice of Mr. Box and Pallett Valo was relied on and acted on by the defendant. It is asserted that Mr. Box or Pallett Valo did not advise the Lord and Partners Ltd. that it did not comply with the disclosure requirements of the Arthur Wishart Act."

Payne Environmental's lawyer knew about the requirements of Arthur Wishart Act, but did not explicitly require the seller to comply with the Act, giving his client a free ride. If the franchise worked out within two years, do nothing. But if it didn't work out, rescind just before the deadline.

Should have the plaintiff's lawyer advised the defendant of the necessity of compliance with the Arthur Wishart Act? I believe that the answer is no, but he might have advised Lord and Partners to obtain their own legal representation. On the facts, it is not clear that the lawyer had any contact with the defendants.

But the point here is clear: if you are buying or selling a business in which there is going to be a continued relation, get proper legal advice as to whether it is a franchise or not. If you have bought a distributorship or dealership within the last two years, in Ontario or other jurisdictions, get an opinion as to your legal options.

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March 30, 2007

What is a Deceptive Earnings Claim?

In some ways, this an easy question. If a distributor simply lies about about how much they make to sell you the opportunity that is misleading. This recently seemed to happen over at pink truth, in which a Mary Kay distributor's claim of six figure income was shown to be inaccurate.

But in other cases, it is more difficult. Consider Nu Skin, for example.

In 1994, the FTC obtained an order against Nu Skin International which

"prohibits the respondents from misrepresenting the earnings, profits or sales of anyone participating in a sales or distribution plan. It also requires them to disclose clearly and conspicuously in conjunction with any future earnings claim they make both the average earnings of all distributors and the percentage of those distributors who actually achieved the claimed earnings." (my emphasis)

What does Nu Skin disclose about its business opportunity? From their website, we have the following:

While the disclaimer is useful, consider the last line. "The company currently provides neither an estimate of average income from retail sales nor includes distributor retail income in its average commission information."

Think about this. You are selling product, but your wholesaler doesn't know or won't tell you how much money that you will even gross by selling the product retail. What is the reason for this? "Distributors are free to set their own selling price and may personally consume some of the products they purchase." That isn't a reason not disclose or estimate how much money distributors make selling the product retail. Ask the distributor - "how much money did you make selling our product?" We might want to raise or lower our prices based upon perceived demand. Can you imagine that Coke has no idea or estimation about what its bottlers gross retail sales are? Or does McDonalds have no idea or estimate about how much its franchisees gross because some operators may actually eat at McDonalds?

Isn't it important to the FTC 1994 order to know how much of the Nu Skin product is never sold on a retail basis, but is left rotting in the distributor's basement or garage?

Obviously, people are not entering into this business opportunity because of the disclosure about earnings. If you don't know even an estimate of your gross earnings from retail sales, then what are you buying?

You are buying the right to have a commission stream, by selling others the right to have a commission stream. And how lucrative is that commission stream? Consider the following chart.

(Also, in order to read the chart, we have to know what the footnotes refer to. Can you read what is below? Because I cannot.)

The FTC order covered representations about earnings, profits or sales and required that average "earnings" be disclosed.

Clearly, this is not being done. The only disclosure is on the amount of commissions paid to "Active Distributors". As the chart indicates, "these figures do not represent a distributor's profit, as they do not consider expenses incurred by a distributor in promotion of his/her business and do not included retail mark-up income."

Second, notice the use of the term "Active Distributor". Only 35% of people who sign up as distributors actually sell product to another distributor; but only 16% of them actually earn a commission for doing so.

Third, we are not told how many "Active Distributors" remain active, on average and for how long.

Fourth, the average commission is over inflated because it refers only to a commission received by an "Active Distributor", or 35% of everyone who signs up to be a distributor.

Fifth, there is no meaningful disclosure of commissions in column three. The percentages add up to something around 15%, are we to infer that 85% of the other distributors received no commissions? Why isn't that clearly disclosed?

Six, column 4 has no real purpose, except to trick you into believing that there is 64% of making at least $4332.00 in commissions - not true, only a 64% chance if you are already at the executive level - which we don't know how long it takes on average to get to.

I don't understand how you could read this chart and meaningfully understand the promise of this business opportunity.

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March 27, 2007

The Mystery of the Fourth Cell

We are a story telling people. Stories encapsulate a large amount of information and pass it on efficiently, more efficiently than mere logical or rational justification can. Our ancestors sitting around on the savanna plain did not have the luxury to engage in deep machinations of logic and so devised stories, parables or allegories as the method for passing on social wisdom. Rational decision making is incomplete because it ignores the power of stories, myths or parables as method of delivering important information.

In fact, one recent author, Christopher Booker, the Seven Basic Plots, claims that there are really only seven basic wisdom stories.

As neatly summarized over at onlyagame,

"Booker believes we tell stories as a mechanism of passing a model for life from generation to generation; that in essence, all stories are archetypal family dramas, and that their core message is that we must resist selfish evil (Booker doesn't use this term, preferring 'ego-centred', according to his Jungian framework). I find this a lovely belief system, although it will likely be quite unpalatable to those who idolise testability." (my emphasis)

Are the above paragraphs ture, just a story, false but important, or something else? I don't know. Did story telling develop in tandem with the ability to count in different ways? Did story telling evolve from stock stories to variants in which it wasn't possible to tell what the plot was before the final paragraphs ended? Is rational decision making just a hard skill to learn in the same way being a concert pianist is hard? Again, I don't know. I don't know because I have no idea what evidence would count against the hypothesis being true, stories being more efficient than rational decision making.

But I do know that there is a tremendous amount of poor reasoning about correlations because we don't employ on a regular basis a simple analysis, what academics would refer to as a two by two covariation table.

When we ask whether A's are related to B's there are two distinct questions that we could be asking. First, in a world full of A's, what is the ratio of B's to non B's? Second, in a world full of B's what is the ratio of A's to non A's? These are distinct questions.

Let's take a concrete example. Let A = statements I believe, and B = statements that are true. Consider only 20 statements. We can diagram the relation as follows:

True Statements False Statements

I believe the statement. A B A+B

I don't believe the statement. C D C+D

A+ C B+D 20

Now, how do we tell if I am an oracle? The usual focus is on the first cell, how many of my beliefs are true. Surely if A is high, then I am an oracle. My beliefs are true. But that is not true. Suppose that C = 3, D = 5, while A = 7 and B = 5. Then in the world only of true statements, I believe A/A+C or 7/10 and incorrectly disbelieve 3/10. Similarly, in a world only of my beliefs, A/A+B or 7/12 of my beliefs are true, while 5/12 are false. So in this case, I am pretty good at detecting a true statement, but almost half of my beliefs are false. That is if something is true, there is a 70% chance I will believe it, but if I believe something, it only has about a 60% chance of being true.

We don't have to limit the table to belief versus truth. There are a number of other interesting dichotomies, attractiveness of belief versus truth, social consistency versus truth. Basically, we want to use these tables when we are dealing with the interaction between the way the world is reported and the way the world is.

Now what makes using these tables hard is that we don't focus on all four cells, and usually completely ignore D, something explored in great detail by Thomas Gilovich in "How We Know What Isn't So." In discussing why bad interpersonal strategies persist, Gilovich considers someone who thinks that is necessary to push at all costs. We have a table like the following, using the dichotomy be pushy versus personal gain.

Individual Gain Individual Loss

Be Pushy A B A+B

Don't Be Pushy C D C+D

A+C B+D
Gilovich points out that a pushy or overbearing individual might find that the social world does become hard for him or her, an increase in D, or that B increases. By never trying an alternative strategy, focussing on A, the pushy individual might develop a story about why being pushy really works. I imagine that they would call the story "The Squeaky Wheel Gets the Grease". Squeaky Wheel could then efficiently pass down his false story to future generations, who didn't understand how to read covariation tables.

It isn't that I hate stories; I read them to my three year children. As a result of reading the cat book, my young son now says he has three cats, black, pink and purple that he has to feed. But let's leave the stories to children and move on to evidence based business making decisions.

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March 26, 2007

Greed Masquerading as Need

Daniel Gilbert writing about the emotional pain on discovering that you have been defrauded, at Stumbling on Happiness, says:

"It was 1997, and the man who was crouched on the sidewalk at 68th and Broadway in New York City was one of the most pathetic souls I'd ever seen. His limbs were twisted in what appeared to be arthritic agony and tears were streaming down his face. "Please," he whimpered. "Please, somebody help me."

Most passers-by did what they were named for, but my wife and I stopped. The man looked up. "Please," he sobbed. "I just want to go home." My hand needed no guidance from my brain as it reached into my wallet and extracted $10. "Thank you," he said as I handed him the money. "Thank you so much." My wife and I mumbled some embarrassed words and walked on.
We hadn't gone a block when she tugged my sleeve. "Maybe we should have gotten him into a cab," she said. "He could barely stand up. He might need help. We should go back to see." My wife is the patron saint of lost kittens and there is no arguing, so we went back to see. And what we saw was our horribly crippled friend walking briskly and happily up 68th Street, opening the door to a late-model car, getting in and driving away after what was apparently a short day of theatrical work.
I know two things now that I didn't know then.
First, I now know that my hand did what human hands were designed to do. Research suggests that we are hard-wired with a strong and intuitive moral impulse -- an urge to help others that is every bit as basic as the selfish urges that get all the press. Infants as young as 18 months will spontaneously comfort those who appear distressed and help those who are having difficulty retrieving or balancing objects. Chimpanzees will do the same, though not so reliably, which has led scientists to speculate about the precise point in our evolutionary history at which we became the "hypercooperative" species that out-nices the rest.
The second thing I know now that I didn't know then is that this was the most damaging crime I had ever experienced. Like most residents of large cities, I'd been a victim before -- of burglary once, of vandalism several times. But this was different. The burglars and vandals had taken advantage of my forgetfulness ("Why didn't I double lock the door?") and taught me to be better.
But the actor on 68th Street had taken advantage of my helpfulness and taught me to be worse. The hand that had automatically reached for my wallet had been slapped, and once slapped was twice shy. I've never again given money to a stranger without scrutinizing him for the signs that distinguish suffering from its imitation. And because I don't know what those signs are, I typically just walk by." (my emphasis)
Gilbert's personal observation about the damage con criminals cause is consistent with every interview I have had with my own clients. The pain of being forced to reconsider social bonds at every economic transaction is far worse the we ordinarily imagine. We heal from bruises, we replace lost property. But to be forced outside of society's natural bonds for no reason other than a chance encounter with a psychopath is one cruel cut.

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March 15, 2007

10 Red Flags-Is USANA A Pyramid Scam?

Barry Minkow , and his team at Fraud Discovery, published a devastating critique of USANA as an illegal pyramid scheme . (Candid disclosure, I wrote an flattering article about the Fraud Discovery Institutes's due diligence, and in return Barry Minkow promised to buy me a beer if I was ever in San Diego.)

The Minkow Report is making waves over at Pink Truth: Facts, and the Wall Street Journal picked up the story, Usana Sales Plan Draws FireFrom Felon Turned Gumshoe.

Here is my summary of the report, but I urge readers to read the entire report and all 20 addendums and the lab report. There are 8 red flags, and 2 background observations.

Background - Why USANA's stock price might remain high despite not having a credible business model.

The float of the USANA stock makes it difficult or impossible for short sellers to borrow adequate stock. Thus, an essential feature of the market may not correct the price of USANA stock.

The executives of USANA have the incentive to keep the stock price high because their compensation is tied to the stock price. This doesn't mean that the senior executives are dishonest, only that their incentive is to keep the stock price high.

The 8 Red Flags, my summary.

Untenable Business Model - USANA claims in it advertising to potential distributors that in the traditional retail model, with national, regional and local distributors, costs 75% more than a networking model. Minkow describes this as "fairy tale" story. He argues that if the USANA model could save 75% of distributor's costs, then why are USANA's products much more costly than comparable retail products? How has the saving been passed on to the distributor and ultimately the consumer, asks Minkow ?

Material Non-Disclosure - The report questions why USANA represented to the FTC that the new business opportunity rule would "make it difficult, if not impossible for USANA to continue growing", but then told the SEC that the FTC's business opportunity rule might only "require USANA to change some of its pre-sale disclosure practices." Well, which is it? Disaster or some change in pre-sale disclosure?

Misrepresentation about Average Income - The USANA website reports that the average income of a distributor was $802.68. Minkow argues that this is misleading in two respects. First, the average is gross sales and not net income. Second, the reported average is too high because USANA only counts the distributors active in the last 3 months to calculate the denominator. Depending on the turnover rate, the average gross could be significantly less.

Misrepresentations about Business Opportunity -After attending a presentation at the Utah company's location and taping it, Minkow's team was told that the AG of Utah had endorsed the company. The AG's office denies this.

Endless Recruiting Chain - Minkow argues that USANA does not sell 70% of its products to consumers, and therefore should not be granted the safe harbour from illegal pyramid prosecution.

Unregistered Securities - In the opinion of Doug Brooks, the distributors purchases of the USANA business opportunity are unregistered investment contracts because the bulk of the distributor's success relies upon how well his recruits do recruiting. (I believe that at English law this is what gives rise to an unregistered lottery.)

Integrity of Owner - Minkow discovered that a previous majority owner had renounced his American citizenship, but his residence was not disclosed in the SEC filings. It now appears that majority owner is a company incorporated in the Isle of Man, with the sole corporate shareholder residing in Liechenstein..

Stock Trading Patterns - The company has purchased on the open market a large number of shares, while insiders sold at the same time.

According to the Wall Street Journal, USANA disputes these findings because although

"Mr. Minkow says the company's sales model is unsustainable because it requires the constant recruitment of new associates. Eventually, he argues, the company will run out of distributors, who will face long odds selling products or recruiting new disciples. Usana's major product, a multivitamin, is far more expensive than rivals.

As of the end of 2005, only 37% of Usana's associates had ever earned a commission, according to the company's latest figures. Among those who had been paid, the figures show, 87% didn't earn enough to cover the $116 they have to purchase or refer each month to qualify for commissions.

Usana says this kind of analysis misses the point. "The inherent goal isn't about coming in to, quote, break even," says Fred Cooper, the company's executive vice president of operations. Most associates are interested in purchasing the vitamins without commissions, Mr. Cooper says, and most distributors view what they can earn as a vitamin discount, not as a path to profits."

Well, I hazard the guess that if most if not all distributors aren't earning profits, they would view what they can earn as vitamin discount. But a discount from what,certainly not ordinary retail prices for vitamins.

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March 8, 2007

Do You Make this Mistake About Your MLM Due Diligence?

Over at one of my favourite analytical sites about network marketing, and Mary Kay in particular, has a fascinating discussion about churning Pink Truth: Churning New Recruits.

· · · · ·

How Many Recruits?If I told you that Mary Kay had 700,000 independent consultants in the United States in 2006, this would seem like a fairly impressive number. Surely there must be some of them who are making a decent living from selling product?

· · · · ·

How Many Recruits Stay? Well here is where it gets very interesting. According to Pinktruth:

"In 2006, Mary Kay disclosed that the company had over 700,000 independent beauty consultants in the United States. This was similar to the 2005 reported figure of 715,000 consultants in the United States. This implies that at the current time, the number of consultants is staying relatively stable. (i.e. For every consultant recruited, one drops out.)

Mary Kay stated in its response to the FTC's proposed Business Opportunity Rule, that there are 2,400,000 "disclosure opportunities" (meaning interviews) per year. That's 200,000 women interviewed per month. Mary Kay Cosmetics further stated that there are 40,000 new recruits per month. (Thank God those other 160,000 per month said no… a total of two million women per year who turn Mary Kay down.)
At 40,000 new recruits per month…
That means that during 2006, Mary Kay Inc. recruited 480,000 women in the United States, and 480,000 women in the United States quit. Add the 480,000 quitters to the 700,000 (or so) U.S. consultants on the books at the end of the year, and we've got a total of 1,180,000 (yes that's over 1 million) women in the United States who were "in" Mary Kay at some point during 2006.
What a staggering churn rate, though, isn't it? Depending upon how you look at it… 41% of the 1,180,000 involved during the year quit. Or of those 700,000 on the books at the end of the year, 69% of them will quit in the following year. 480,000 women churned and burned in 2006." (my emphasis)

· · · · ·

Other Interesting StatisticsThere are some other interesting statistics that will become available when the FTC amends its Business Opportunity Rule to cover Network Marketing .
Section 437.1(e) will require the Network Marketing Opportunity Seller to disclose the number of cancellation or refund request in the past two years. This disclosure would have to be updated every quarter. It is required even if the Seller has no policy covering cancellations or refunds.
In Mary Kay, individuals can return part of their inventory within a year of joining Mary Kay. Many do not or simply sell their product on e-Bay. The new disclosure document makes the refund policy clear, before signing up, before the distributor meetings, and before a commitment is made. It will be interesting to have numbers to compare across different network marketing opportunities.

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February 15, 2007

Arbonne - How Much Money Can You Make?

Everyone asks, "how much money can I make investing in this franchise, distributorship or network marketing opportunity?"

Sometimes, as in the case of the Arbonne business opportunity, the answer is in plain sight. For anyone who has mastered grade 3 math.

Arbonne has an earnings claim on its website. This chart will tell you how much money you can reasonably expect to make on your Arbonne business from the sales of your staff or consultants.

Assume that you have an $8.00 hour job and are wondering whether you should supplement your income with part time work selling Arbonne products,

A consultant has a 1/100 chance of earning $200.00 per quarter, or $2 per quarter. It is reasonable to spend no more than 15 minutes per quarter on your Arbonne business, assuming your opportunity cost is $8.00 per hour.
Our consultant, after 5 months or $2.25 in earnings, gets promoted to district manager. A district manager has about a 2/100 chance of earning $875.00 per quarter, or $17.50 per quarter. It is reasonable to spend no more than 2.25 hours per quarter on your Arbonne business as a district manager.
A short year later, our consultant now progresses to area manager. How do things look now? An area manager has a chance of 1 /200 in making $4,600 per quarter, or $23 per quarter. It is reasonable to spend no more than 3 hours per quarter on your Arbonne business as an area manager.
It gets better. After two years, the consultant could progress all the way through the ranks to regional vice president. A regional vice president has a chance of 1/1000 of making $20,000 per quarter, or $20 per quarter. Backsliding, I see.
Finally, at the top position listed, the national vice president has a 4/10,000 chance of making $94,000 per quarter, or about $38. It would be reasonable to spend no more than 5 hours per quarter on your Arbonne business.

Definitely a part time business, if a business at all.

What do other consumer sites say about Arbonne's earnings claim?

Arbonne scam, a blog about Arbonne talks about the low chances of becoming a national vice president, but has no analysis of the earnings claim.

In the long thread at Quatloos, there is no mention of the earnings claim.

Over at scam.com, the thread on Arbonne, again, contains no analysis of Arbonne's own numbers.

Do people not care about their opportunity costs? You tell me.

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February 7, 2007

China Announces Crackdown on False Ads

Accord to the Xinhua, "Eleven Chinese government departments have teamed up to crack down on fraudulent advertisements to protect the rights and interests of consumers.

Great efforts will be made to supervise various advertisements and serious offenders will be prosecuted, according to a meeting attended Tuesday by 11 government departments including the State Administration for Industry and Commerce, Ministry of Public Security, Ministry of Information Industry, Ministry of Health and State Food and Drug Administration, among others."
This is a rather interesting and unexpected development.
China was just recently accused of allowing real fur, from dogs, cats, and other animals, to be labeled as "fake fur". In order to sell it to Macy's and in particular found in the clothing line of Sean "Diddy" Coombs. From the press release of the Humane Society of the United States about China's fake fur:
"The Humane Society of the United States (HSUS) released the results of a mass spectrometry test today conducted on a Sean John Hooded Snorkel Jacket sold on Macys.com that was originally advertised as having an "imitation rabbit fur collar" and materials identified as "faux fur."
The jacket, part of a clothing line by Sean "Diddy" Combs, was labeled as containing "raccoon" fur, but has now been found to be fur from a canine species known as "raccoon dog." Macy's informed The HSUS that the company has pulled the mislabeled Sean John garments from its department stores and online shop. The group is urging all retailers to follow the lead of Macy's."

From the BBC on the China fake fur story:
"NY store drops 'faux fur' jackets. A New York department store has said it is pulling two models of hooded jackets from its shelves after claims the "faux fur" linings were made from dog fur. A US animal protection organisation said the hooded jackets at Macy's were lined with raccoon dog. Raccoon dogs, which are not kept as pets, are bred in large numbers as their fur is like that of the raccoon. Macy's said it was removing the items to comply with its policy against selling any dog or cat fur. A spokesman said that all suppliers were aware of this policy." (my emphasis.)

How difficult is it, do you suppose, to actually sell fake fur as real fake fur? Doesn't it take a special skill in self deception, at the very least, to sell real fur as real fake fur? Wouldn't it suggest a difficulty with the concept "imitation" or "faux"? It is hard to believe that an entire country would have difficulty discerning between the concepts "imitation" and "real". Until one realizes that the particular nation has been engaged in self deception for at least 50 years.
It will therefore not come as surprise to anyone that China also ranks in the bottom five of countries when it comes to protecting intellectual property, according to a recent International Chamber of Commerce survey.
Dan Harris, over at the China Law Blog, disagrees that there is anything to the claim that China is culturally hooked on self-deception and claims:
"This survey is further proof of what I am always saying about how China's failure to provide high levels of IP protection is economically, not culturally based. IP protection will continue improving in China as its economy continues to grow and as Chinese companies start demanding protection for their own IP."

Look if you cannot tell that real fur is not real fake fur, you have a serious conceptual problem. In an intellectual tradition that sees no special linkage between the worth of autonomy and negative rights, this conceptual problem is easy to understand. It is not something that you can "grow out of".

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February 6, 2007

How We are Manipulated and What to Do About It.

David Maister in his article Can We Be Manipulated? discovers an unpleasant truth about manipulation.

Commenting on my one of my favourite books, Weapons of Fraud, he says

"Presumably, the theory behind the book is that, by being aware of the manipulative techniques that salespeople use, we will have better defenses. I'm not so sure. Note that these "tactics" are incredibly similar, if not completely identical, to how someone would behave if they really were trying to be helpful to you. Here's someone showing an interest in me, giving ideas away first to earn my trust, from an institution that I've heard of (the popularity or brand effect). That's what a REAL trusted advisor would do isn't it?" (my emphasis)

David then wonders how to determine real sincerity from fake. But the unpleasant truth remains: the techniques of manipulation are ethically neutral. Manipulators and schemers don't come to the social scene with a set of different tools of persuasion than those who are honest and reliable.

Thus, there is no simple due diligence trick with which to separate the foul from the fair. Certainly no maxim like "If it looks too be good to be true, it probably is." will work.

However, there is something in Weapons of Fraud that is useful - above and beyond the listing of a series of manipulative tricks. The authors introduce the notion of a "Phantom Dream", a state of affairs so desirable that you temporarily lose the ability to engage in skeptical thought. The general themes are health, wealth and death, how to obtain more of the first two, and avoid the third.

Even on the small chance it might be true, heaven is worth having and risking all for. (We have already seen this bad inference before, Pascal's wager.)

In Weapons of Fraud, the authors demonstrate how cunningly a skilled con criminal can detect and reinforce your Phantom Dream. Sometimes in a matter of minutes over the phone.

We may not be able to determine the sincerity of those who manipulate us: but we can resist the allure of Pascal's wager when we find its strange attraction working on us.

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February 5, 2007

When Gatekeepers Fail.

The investigative television show W5 has a terrific undercover story about Reza Solhi and his merry band of franchise bandits, CTV.ca | Taking Your Dough. (Disclaimer: I am the lawyer shown in the video representing some of Mr. Solhi's victims.)

Mr. Solhi is depicted as a one man wrecking show, bilking new Canadian out of hundreds of thousands of dollars. A partial list of those judgments can be found at www.anthonysfranchiseinformation.com.

One may wonder if Mr. Solhi's fraud had anything do with franchising, or was franchising simply a vehicle for his fraud?

The disturbing part is what was not shown: who facilitated Anthony's Kitchen's entry into the United States franchising system? Did he sneak across the border, looking for a couple of quick financial hits? Did he have a Uniform Franchise Circular Offering? How could he expand without one? Did he have some two bit law firm put together a UFOC from a template?

No, I have reviewed Anthony's Kitchen's UFOC. It was put together by one of the top flight U.S. franchise law firms, and it is professionally done. Of course there is one slight problem: there is no mention of the numerous criminal fraud charges, nor is there any indication that Solhi has ruined a number of Canadians. Yes, some but not all of the lawsuits are mentioned, and given a suitable pro-franchisor gloss.

But if you are one of the top flight U.S. franchise law firms, why on earth would you risk your reputation assisting Solhi's entry into franchising? For a fee? The UFOC fee cannot be more than $30k to $40k. Is your international reputation worth so little that you will risk it to assist Solhi?

One of the real dangers inherent in a due diligence law scheme, where information is provided to investors for their own investigation, is when the gatekeepers -the professionals who assist in compliance- are either lazy, conflicted, or just don't give a damn anymore.

The most spectacular examples of this were the accounting scandals, which recently ended with a number of directors and officers going to jail for fraud. The accounting frauds at essence were simple lies about how much money had been earned - complex because of how the lie was put together to pass mustard for the regulator.

But those accounting firms were asleep at the wheel - for various reasons, notably fees for service, the accounting professionals became passive gatekeepers. "Oh, heck, I think that this is all bogus, but if we disclose it, say in a couple of footnotes, then that is all we need to do."

The most telling moment in Jeff Skilling's trial happened at the beginning: Skilling said he was just sick when he learned how Fastow was hopelessly conflicted, and the amount of money Fastow was stealing from Enron because of how the partnerships -which helped Enron disguise its losses- were set up. Apparently, he reached this judgment after minutes of reviewing the partnership documents.

I don't know whether the Solhi UFOC was an aberration or not, but Jim Coen at the highly regarded franchise portal, Blue Mau Mau, argues that

"There is a perception that franchising is a relatively low-risk entry to entrepreneurship because the franchiser provides benefits such as name recognition, bulk buying rates and advertising. But, the reality is that no two franchises are alike and while some provide tremendous value to a franchisee others don't. The franchises that do provide the value are worthy investments, the ones that don't stay away from and hide!

The proposed Franchise Rule changes don't do enough. The FTC should raise the bar and require certain minimum standards for a franchise to be able to start offering franchises for sale."
Those involved in facilitating the entry of franchisors into the economic system ought to worry that this low level of minimum standards is going to attract legal liability because of their deeper pockets.

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February 4, 2007

Super Bowl

In honour of the Super Bowl:

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February 1, 2007

Sweet Tooth Sam - The Sequel

Vampires, notwithstanding Buffy, don't really exist do they? But what then what accounts for the undead like quality of vending frauds?

In 2002, "The FTC's complaint against the defendants was filed in June 2002, as part of "Operation Busted Opportunity" - a coordinated attack on business opportunities and work-at-home fraud by the FTC, the Department of Justice (DOJ), and 17 state law enforcement agencies. According to the complaint, the defendants advertised their candy vending machines, called "Sweet Tooth Sam, the Money Making Man," on the Internet, in newspaper ads, and by telephone. The ads contained statements that prospective buyers would receive "500% Profits" or "$4000 per month." In addition, the defendants allegedly directed consumers to call "shill" references." (my emphasis)

Here is a description of who the business opportunity fraudsters were: "The Federal Trade Commission has accepted two separate settlements with the operators of a bogus business opportunity venture. In separate settlements, one settlement with Jesse Alper and the other settlement with Inspired Ventures, Inc., Victor Alper, I.V.I. Management Corporation, and Source Systems, Inc., the defendants are banned from marketing business ventures and from telemarketing. The FTC alleged that the defendants, based in Miami, engaged in deceptive business practices in the sale of their vending machines. I.V.I. Management managed the advertising for the scheme, and Source Systems supplied the bulk candy for the vending machines."

But in Southern Florida, there really is a fountain of youth, at least for criminals.

On January 31st, 2007, the Department of Justice Southern District of Florida had this Press Release: "R. Alexander Acosta, United States Attorney for the Southern District of Florida, and Henry Gutierrez, Inspector in Charge, Miami Division, United States Postal Inspection Service, announced that defendant Samuel Elmowitz entered a plea of guilty today in Miami Federal District Court to one count of an Indictment, charging conspiracy to commit wire fraud. A second defendant, Allen Fialkoff, was arrested on January 29, 2007 in connection with the same scheme.

Elmowitz worked for MasterVend Marketing, Inc. ("MasterVend), a North Miami Beach based company that purportedly sold candy and "snack and soda" vending machine business opportunities to consumers across the United States."
What was MasterVend selling? You guessed it, "Sweet Tooth Sam" vending machines. The indictment against the company can be read here.
What can we learn from this situation, other than using the internet to search on the name of vending machine being sold is a good idea? Well by googling "Sweet Tooth Sam" we find a number of vendors selling their mahcines. Checking on eBay is always a good idea, and we would learn that 25 Sweet Tooth Sam vending machines were available for $499.00.00. Quite a discount. Someone more optimistically is trying to unload 30 Sweet Tooth Sam vending machines for $2760. These would be really good people to have talked with before buying into the MasterVend scheme.
And in case you think this is the end, Eric Barros, listed as the director of MasterVend Marketing is also the director of Vendmasters of America, which appears to be advertising on this website. How very nice.

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January 30, 2007

Will that be cash, charge or scrip?

Would you buy an ATM which promised not to deliver cash? It sounds like a pretty dumb idea, but in fact there is a big demand for this time of product. For example, Kioskmarketplace reported that,

"The U.S. Department of the Treasury has announced the successful installation of EagleCash at 12 U.S. Army bases in Iraq and Kuwait. EagleCash, the stored-value card program launched in partnership with the Department of the Army, safeguards and simplifies U.S. soldiers' cash management while stationed abroad. EagleCash's smart card technology eliminates coin, currency, scrip, vouchers, money orders and other paper payment mechanisms and replaces them with a card and touchscreen."

But every good idea has its fraud alter-ego, the shadowy version of the real.
Davis Freeberg, who has a terrific website discussing kiosks, and www.Kioskscams.com. alerted me to the latest in the Cash Links business opportunity fraud. I had written before about the sentencing of the principals in Cash Links, but the recent press release relates to new charges in the Cash Link business opportunity fraud.
"The Indictment alleges that Alberto Ferreiras was one of Cash Link's hidden owners and directors, and that he committed crimes at Cash Link at the time he was on release from other, unrelated criminal charges pending against him in the U.S. District Court for the Eastern District of New York. Ferreiras is charged with one count of conspiracy to commit mail fraud, and eight counts of mail fraud. The Indictment alleges that Leslie Rattet participated in the conspiracy to defraud as a Cash Link salesman, and that Rattet committed the offenses while on release from other, unrelated criminal charges pending against him in the U.S. District Court for the Southern District of New York. Rattet is charged with one count of conspiracy to commit mail fraud, and three counts of mail fraud. With respect to each count brought against them, Ferreiras and Rattet are alleged to have committed offenses while on release, under Title 18, United States Code, section 3147." (my emphasis)
The entire indictment against Cash Link's hidden owners, Alberto Ferreiras is here.
The press release goes and states "Prior to the filing of the present charges, four other defendants were convicted and sentenced for their federal offenses for their participation in Cash Link. Leonard Needelman, Cash Link's director of operations, received a sentence of 97 months' imprisonment. Alan Levine, Cash Link's president, received a sentence of 70 months' imprisonment. Jason Kowal, a fraudulent Cash Link reference, received a sentence of 77 months' imprisonment. Leland Balber, a Cash Link salesman, received a sentence of 42 months' imprisonment." (my emphasis)
Could a search of Florida database uncovered the fact that Alberto Ferreiras was Cash Link's hidden owner? Could one find the unrelated criminal charges against Alberto Ferreriras?
The last question is easy to answer. Using the United State Pacer system, searching all District Courts, you would have determined that there were two criminal charges in the State of New York against Alberto Ferreiras.
But the second question has a less than satisfactory answer. While Florida's corporate database is excellent, it cannot determine who is a hidden owner. If you searched it for "Alan Levine", as a director and officer, you would have noted the large number of corporations that Levine was a director of, making it likely that he was only a nominal director and officer of Cash Link Systems. Unfortunately, only a through going examination of the operation would have revealed who the true owner was.

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January 29, 2007

Would Donald Trump be involved with a Pyramid Scam?

I am a pathetic devotee of Donald Trump's television show "The Apprentice", despite its declining ratings. Who doesn't secretly believe that they too could outperform the any of the contestants?

However, as fascinated as I remain with this television show, I regard Mr. Trump's endorsement of ACN with considerably more skepticism. "ACN reps are allowed to use this words to describe Trump's endorsement Donald Trump has agreed to endorse and promote ACN and our vision. He will be featured in a variety of print and video media over the coming months, all designed to help you build your ACN business. In addition, Mr. Trump will be speaking at select upcoming ACN International Training Events. Representatives are not allowed to use Mr. Trump's name, image, footage, website or any other material in any form at any time. ACN says that it will not tolerate any violation of this policy. If any representative is witnessed acting in a way that might compromise ACN's relationship with Mr. Trump, ACN should be contacted immediately. Consequences will be severe and may include deactivation." (my emphasis)

As I have written before, I doubt that ACN is a pyramid scam in the criminal sense of "pyramid". But I certainly don't think that it is a good business opportunity. Consider what was written at Sub-Board I, Inc.

"It's easy to get excited when someone tells you stories of living a life of luxury. But once you start asking questions and trying out ACN's suggested sales pitches on everyone in your phone book, it quickly becomes clear that what Lullo described on stage won't

	True Statements	False Statements
I believe the statement.	A	B	A+B
I don't believe the statement.	C	D	C+D
	A+ C	B+D	20

	Individual Gain	Individual Loss
Be Pushy	A	B	A+B
Don't Be Pushy	C	D	C+D
	A+C	B+D

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