He has set up this website, explaining why he thinks that PrePaid Legal is a scam.

Robert Fitzpatrick writes:

"To examine this trend of financial decline, the report focuses primarily on data of Pre-Paid's "sales" force, which is the driver of its marketing. Pre-Paid does no national advertising.

Marketing is ultimately borne by the sales people individually.

The sales force is also the core of the company's revenue. Their own purchases alone constitute about a third of all company revenue.

Each "Associate", on average, recruits only a handful (less than four) actual "customers" (called Members).

The "Members" are directly connected to the salespeople as family, friends or neighbors, as the "one-to-one" model dictates.

Therefore, as the trend of recruiting salespeople goes, so goes the company. That trend is clearly negative now. The reasons are fundamental, not cyclical, and therefore not reversible.

This report presents the mathematical and demographic basis for Pre-Paid Legal's inevitable and fully anticipated slide toward saturation and decline.

It details and explains the flawed and fraudulent business model - an endless chain recruitment scheme - that the Pre-Paid employs, which leads to this inexorable status.
This business model propagates, as all such pyramid schemes.

Read more from the Robert FitzPatrick's report on PrePaid Legal, is he right?

"This case could also potentially change the manner in which franchisors must allocate funds received from franchisees to various categories of debt.

Additionally, while not mentioned in the decision, the plaintiffs can be expected to raise the issue of whether the two-year rescission period had expired, as the note was dated July 31, 2002 and the notice of rescission delivered on August 13, 2004."

The Osler case brief unfortunately misses the key facts, and the grounds upon which the Judge denied summary judgment on promissory note.

Tupperware purported to revoke the franchise, and then calculated how much good will was owing according to a formula.

The good will was then allocated to the trade debt and not the promissory note.

The argument was that Tupperware never explained to the Court, for almost 3 years, why they set-off of the good will payment against the trade debt rather than the promissory note.

The legal issue in question was whether the promissory note had been paid - since a franchisor owes a duty of good faith in the performance of the contract to the franchisee.

That statutory duty might have required them to pay off the promissory note with the proceeds from the good will payment.

But there was no evidence before the Court about how and why Tupperware exercised their discretion.

No evidence - no summary judgment.

Tupperware has sought leave to appeal, will keep you posted.

"AdSense for content automatically crawls the content of your pages and delivers ads (you can choose both text or image ads) that are relevant to your audience and your site content--ads so well-matched, in fact, that your readers will actually find them useful.."

Your readers will actually find them useful - that is the pitch that keeps the Google money machine running.

The problem for any consumer/business protection site is that the ads are "not useful" but rather examples of the various scams and frauds that exist. (This is one way I keep up with what is going on -since the vast majority of frauds no longer appear in the print newspapers' classified section.)

Tracy Coenen details her frustration with this type of adsense fraud.

"A few weeks ago, I wrote about my experience with Google's new Ad Review Center. This tool enables you to block advertisements from certain advertisers. When you use this feature, advertisers who want to bid on your ad space must be approved first.

But it's not quite that easy. There are a lot of advertisers who aren't going through the bidding process, so they can still end up on your site without your approval. To block them, you need to use the competitive ad filter.

Initially, this whole process was appealing to me, because I had advertisements for a lot of scam "business opportunities" showing up on my sites. This process helped me eliminate many of them. It's not a foolproof process, and there are still plenty of scams that can easily pop up on my sites."

So what would you recommend?

Canadian House of Cards Continues to Fall, as Bogus Biller Settles FTC Charges: "Ex-wife of Ringleader Was One of Only Two Remaining Defendants in Case"

"The Federal Trade Commission today announced the issuance of a stipulated final court order against Emma G. Wanjiku, a Kenyan citizen and Canadian resident who participated in a wide-ranging scheme to trick U.S. consumers into paying for bogus business and travel directory advertisements and listings, office supplies, and consulting services they never authorized, ordered, or received.

Under the terms of the order, Wanjiku, the ex-wife of the now-jailed ringleader of the Canadian defendants, has been barred from making the claims alleged in the Commission's complaint and is subject to a $4 million judgment that will become due if she is found to have misrepresented her financial condition.

The Commission previously settled similar charges against another individual and corporate defendant in the case, with the court imposing similarly strong injunctive and monetary relief.

(Via Federal Trade Commission (FTC) - Consumer Protection Press Releases.)

Hmm, one more case in which the FTC will chalk up a win for consumers, but there is actually no money recovered.

" The order also requires her to cooperate with the FTC in its ongoing case against her ex-husband and contains standard monitoring and record keeping provisions to ensure her compliance with its terms.

Finally, while Wanjiku lacks the funds to provide for consumer redress, the order contains a $4 million judgment against her that would become due if she is found to have misrepresented her financial condition.

The order settles the FTC's case against Wanjiku, one of the final defendants in this matter.

The last defendant, Wanjiku's ex-husband, Michael Robert Petreikis, was arrested by the Toronto Police Service in August 2006 and pleaded guilty to Canadian criminal charges.

Petreikis was recently released from jail in Canada and is currently incarcerated in the United States for violation of an earlier probation order.

The FTC's litigation against him continues."

It is a surprisingly dark story, in which Mr. Einhorn's usual winning touch vanishes for most of the narrative.

As he struggles to figure out why, he appears naïve at certain times, petulant at others. But he presses on anyway, confident that vindication will come. It never really does.

The story starts in 2002, with Mr. Einhorn rightly proud of his ability to spot companies with shoddy accounting practices. He sells their shares short, betting on a stock-price collapse.

Generally he wins big within months. Convinced that he has found another juicy target, he zeroes in on Allied Capital, a business- financing company that seems to dawdle when it comes to marking down the value of its troubled loans.

This book appears to be well worth reading, for its discussion of how the market for accounting fraud - short selling- doesn't work.

This might be bad news for Barry Minkow, who is currently shortselling Herbal Life arguing that their business model is based on a fraud.

The forward to the book is written by Joel Greenblatt - a noted investor who has his own fascinating no brainer or lounge chair investment strategy.

Don explains the origin of the name "Blue Mau Mau" as referring to a species of small fish which travels in large groups - a reference to small fish franchisee investors.

Paul correctly notes that many franchisees are bewildered after the purchase to learn of all the relevant and material information that they did not know about.

Don thinks that the new trade magazines will be more interactive. BMM has a combination of hard news and volunteer blogs.

So far, Don's dream of having prospective franchisees share and learn information seems just that. The comments on the site are still largely from disgruntled ex-franchisees who bitterly regret how they went about their due diligence.

Until large franchise systems start demanding evidence of franchisee due diligence, I fear we will never get anywhere.

Jaqui Walker reports that

"However, the ACCC is holding "continuing discussions with Bakers Delight with a view to ensuring its trade practices law compliance procedures and complaint handling processes are best placed to deal with issues that might arise in the future".

A number of franchisees had alleged Bakers Delight had been churning (selling franchises destined to fail and then reselling them to others) and collusion with banks, including that Bakers Delight shared information about a franchisee with a bank which led to losses being suffered. "

Here is what the Australian Competition and Consumer Commission stated in their own press release:

Having conducted an in-depth investigation, including analysing a large amount of documentary evidence and conducting a number of detailed interviews with various witnesses the ACCC has decided not to take any further action. This position has been informed by a number of conclusions:

* the evidence assessed - in the ACCC's view - did not demonstrate that Bakers Delight had engaged in unconscionable conduct or breached the Franchising Code.

* although there is no suggestion that the allegations made by the franchisees were made with any improper intent, in many cases, it was difficult to substantiate claims and in some cases information given was directly contradicted by documents and other evidence.

* there were a few circumstances where franchisees alleged that Bakers Delight representatives had made misleading verbal representations which investigations have neither substantiated nor dismissed. However in each of these cases, the ACCC considers steps taken by Bakers Delight to remedy the alleged wrongdoing were reasonable or other factors led to the losses suffered by the franchisees.

* there was no evidence produced to or obtained by the ACCC that - in its view - evidenced widespread or systematic problem of compliance within the Bakers Delight franchise system.

For an alternative view, please see the website Baker's Delight Lies.

This is an interesting story, as the person complaining says that "Google instead charged him for pay-per-click ads on AdSense pages--which, he alleged, "are demonstrably inferior to ads appearing on search result pages."

I understand that Adsense can be confusing, but would you not have noticed after the first day that you were paying for something that you didn't want?

There is an interesting comment about the story at webmaster world:

Google's pricing CPC boxes certainly should raise flags.

On adwords editor if you type in 015 I think it should safely be assumed that the person was trying to type in 0.15 but somehow missed the decimal point.

Adwords editor does not make you use a decimal point, as a result 015 is automatically $15 and not $0.15.

Do you know know how much money Google makes off simple decimal point mistakes that they know people will make? Why not just have all bids verify a decimal point?

Well I think it's pretty obvious why they don't verify for the decimal points anymore.

Psychic Con Game

"By repealing the Act, the onus will go round the other way and we will have to prove we are genuine," McEntee-Taylor told Reuters. "No other religion has to do that."

Is it too much to ask for a proof of miracles?

Cell Phone Spam

Attorney General Tom Corbett urged consumers to be alert for scam and "spam" text messages on their personal cell phones and urged consumers to never divulge personal information in response to an unsolicited text message.

Corbett explained that the Attorney General's Bureau of Consumer Protection has been receiving a steadily increasing number of complaints about unwanted cell phone text messages - primarily involving advertisements for prescription drugs and pornography.

I ran into this phishing scam several months ago, when someone left me a text message to call their number. Stupid cell phone almost did so by itself.

The Ritz Hotel in London

When businessman Terry Collins was offered the chance to buy the Ritz Hotel for a knockdown price of £250million it was an opportunity that sounded too good to be true.

And it was indeed too good to be true. The hotel, with an estimated market value of around £600million, was not on the market.

Yet two conmen managed to persuade Mr Collins, co-founder of a large and reputable property company, that the hotel's owners, the Barclay brothers, were prepared to sell it at a bargain price.

Once again proof that that being a successful business man or woman is no protection against the lure of something for nothing.

Lawyer Fraud

On Friday afternoon, as the WSJ Law Blog was reporting the unfortunate tale of Samuel Fishman, the former Latham partner who defrauded his firm and his clients out of more than $300,000, one major question of human psychology seemed to hang unanswered over the story.

Why, given the annual take-home of a Latham partner and the long period of time over which Fishman's fraud played out, would he risk so much for so little?

A good start to this question would be to review Dan Ariely's work on Dishonesty, he suggests that the farther removed from cash we become the easier it is to cheat.

Charity Fraud

Robert Eugene Cheney had a charity, too, called HARP -- "Helping All Races of People."

He said it provided funding and services "to the poor throughout the world."

But his enterprise was no more real than George's, according to federal agents, who say he and a partner invented it as part of a scheme to rip off investors in Crawford County and across the country of some $2 million from 2003 through March 2007.

The FTC has a new webpage on charity fraud.

Monty Hall Game

Recently, the New York Times John Tierney reported on a serious instance of the Monty Hall fallacy.

"The economist, M. Keith Chen, has challenged research into cognitive dissonance, including the 1956 experiment that first identified a remarkable ability of people to rationalize their choices.

Dr. Chen says that choice rationalization could still turn out to be a real phenomenon, but he maintains that there's a fatal flaw in the classic 1956 experiment and hundreds of similar ones.

He says researchers have fallen for a version of what mathematicians call the Monty Hall Problem, in honor of the host of the old television show, "Let's Make a Deal."

Somewhat coincidentally, Diane Levin at the Mediation Channel, also wrote a short article about the Monty Hall problem, and she reference her article from 7P productions' article which started off asking "If you made the wrong choice, are you smart enough to change your mind?"

In this article, I want to point out the value of simple decision models and the scientific method -working from easy solutions to hard problems.

Here is the generic description of the Monty Hall problem from John Tierney.

"Here's how Monty's deal works, in the math problem, anyway. (On the real show it was a bit messier.) He shows you three closed doors, with a car behind one and a goat behind each of the others. If you open the one with the car, you win it. You start by picking a door, but before it's opened Monty will always open another door to reveal a goat. Then he'll let you open either remaining door.

Suppose you start by picking Door 1, and Monty opens Door 3 to reveal a goat. Now what should you do? Stick with Door 1 or switch to Door 2?"

One argument, which is relatively attractive, for not switching points out that the odds that you were right initially can not have changed, so that there is no point in switching. The other argument, for switching, is more subtle and basically requires you to count the possible ways in which switching works and does not work. There is a good diagram of this counting technique here.

I want to focus on an easier solution, and one that is not limited to discovering the flaws in reasoning about Monty Hall.

It is clear that the problem doesn't have an obvious or easy answer. So let's turn it into an easy problem. We suppose that Monty Hall is lazy and only picks Door 2, when the prize is in fact behind your first choice Door 1. He never opens Door 3, if your first choice was correct.

What should you do if Monty Hall opens Door 3 to show a goat? Well, the prize has to be behind Door 1 and Door 2. But we know that Lazy Monty Hall never opens Door 3 if the prize is behind Door 1. Therefore, the prize must be behind Door 2 and switch guarantees you will win. (What should you do in the Lazy Monty Hall game if Monty Hall opens Door 2 is harder, but I have detailed the calculations here -basically, it doesn't matter if you switch or not.)

Suppose Monty Hall was just a little bit less lazy, and in only 1 out of 100 times opened Door 3, if the prize was behind Door 1. Then, while not a guarantee, it still makes sense to switch. We can imagine making Monty Hall progressively less lazy until he is indifferent between showing you Door 2 and Door 3. And is now Coin-Flipping Monty Hall.

It is harder to show that the Monty Hall game is just like the Lazy Monty Hall game, where Lazy has been replaced by Coin-Flipping. Coin Flipping Monty Hall chooses to reveal Door 2 or 3, when your first choice was right, based on a coin flip.

Now we have a new puzzle because John Tierney said: "If you switch, you'll win whenever your original choice was wrong, which happens 2 out of 3 times." And he invites you to play simulated game to prove his point. This is the accepted "right" answer. But in the Lazy Monty Hall problem, switching if shown Door 3 wins all the time, and switching if shown Door 2 is irrelevant.

This new puzzle dissolves quickly. All of the simulators running Monty Hall games, such as this one and this one, are all models of the Coin Flipping Monty Hall game. Only in the Coin Flipping Monty Hall game is John Tierney's mathematical point correct. Most mathematical commentators assume that we are playing the Coin Flipping Monty Hall game.

One commentator, at the New York Times, summarized my feelings exactly:

"I am getting a bit tired of the media presenting versions of the Monty Hall problem without yet highlighting the basis for the issues that caused so much furor over the problem to begin with.

Like so many mathematical conundrums, the issue that causes people difficulties with the Monty Hall problem is that the assumptions specified in working out the solution are not made precise."

Which is why we need simple models to spell out exactly the assumptions in our models of thinking about the world.

This is the final piece of a five part series on Arlan Galbraith Pigeon King scheme. The other four other posts were: What is New in Family Farming?, Why being a Sucker Seems So Right, Pigeon King and Testimonials, and How Will Pigeon Scheme End?

We have learned that even when we see a Ponzi scheme for the illogical economic mess that it is, it still remains an attractive - as Charles Ponzi said about his own scheme: Many people who would not gamble can be tricked into experiencing the same hedonistic delight by dressing the scheme up as an "investment". The narcotic of gambling made all the more toxic by its illicit masquerade as an "investment" drives all Ponzi schemes, and pyramid schemes.

If you have come to the conclusion, as many people have including the Attorney General of Iowa, that Arlan's PKI is an illegal Ponzi scheme and you have a contract with Arlan what can you do?

What follows is general legal information and should not be taken as legal advice. Your own circumstances are different, and it would be unwise of you to rely upon an article even written by a lawyer as a substitute for purchasing legal services.

There are at least four legal methods you can use to try to get some of your money back from Arlan, before the whole scheme blows up.

State Business Opportunity Laws

In 26 States, there are Business Opportunity Laws - which regulate the relation between the seller of a business opportunity and the purchaser. Here is a helpful and short checklist from the FTC:

Look at the ad carefully. If it claims buyers can earn a certain income, then it also must give the number and percentage of previous purchasers who achieved the earnings.

Get earnings claims in writing. If the business opportunity costs $500 or more, then the promoter must back up the earnings claim in a written document. It should include the earnings claim, as well as the number and percentage of recent clients who have earned at least as much as the promoter suggested. If it's a work-at-home or other business opportunity that involves an investment of under $500, ask the promoter to put the earnings information in writing.

Study the business opportunity's franchise disclosure document. Under the FTC Franchise Rule, most business opportunity promoters are required to provide this document to potential purchasers. It includes information about the company, including whether it has faced any lawsuits from previous purchasers or lawsuits alleging fraud. Look for a statement about previous purchasers. If the document says there haven't been any previous purchasers but the seller offers a list of references, be skeptical: the references probably are phonies.

Arlan doesn't have a disclosure document, for either a franchise or business opportunity. He is likely violating many of the states Business Opportunity Laws, much in the same way Interlake Chemicals of Manitoba did.

Here is the list of the 26 regulatory agencies which control, in one way or another, Arlan's type of contract, the sale of a business opportunity. (Don't be put off by the name, it is simply a technical legal term.)

A group of individuals from any state ought to make complaints to the correct regulatory authority: your complaint will be that Arlan didn't register and has no disclosure document. You should obtain counsel to help you draft the complaint so that you are not ignored. You also want to make a complaint to the FTC -the FTC routinely acts to shut down business opportunities which do not have or give out the required disclosure documents.

Canadian Competition Bureau and Misleading Advertising

Although several Canadian Provinces have similar business opportunity laws, embedded in their franchise laws, no Canadian Province has the equivalent of the US Regulatory schemes.

However, at a Federal level, misleading advertising is both a criminal and civil offense. Arlan has been advertising his scheme to the public for a number of years now. In particular, he represents both that his company is debt free and that PKI intends to repurchase the pigeons back from the farmers.

If the Arlan scheme is a Ponzi scheme, then both of those representations are false, and knowingly false.

Unlike the US regulatory world, in Canada a group of individuals can directly petition the Competition Bureau to investigate a scheme. But the petition must be done correctly and with affidavit evidence. Again, you will need to obtain counsel familiar with the Misleading Advertising provisions in the Competition Act to help you draft your complaints.

Good luck with all your efforts.

Related Posts: What is New in Family Farming?, Why being a Sucker Seems So Right, Pigeon King and Testimonials, and How Will the Pigeon Scheme End?

The majority of observations in this blog are:

a) deception, or the tort of misrepresentation, deceives smart people who are none the less completely aware of many of the warning signs of fraud, and that

b) public education aimed at giving more information to consumers to make their decisions is likely to fail or worse induce uncertainty at the wrong time which then pushes the decision maker to make the bad decision faster, just in order to preserve internal consistency.

None of these claims are novel in the world of social psychology, but they appear to be unknown among lawyers, regulators and judges.

This leads to a large concern about what lawyers should know and learn from other disciplines that is relevant to tort law.

One obvious area is the study of valid inferences. Over at the Torts Prof Blog, Peter Norberg writes:

"As it happens, lawyers have no monopoly on the study of valid forms of inference. The issue has been investigated by philosophers and logicians for millennia, and they have made especially valuable progress over the last hundred years or so.

Law students should be given technical training in how to spot a valid or invalid syllogism, how to identify (and avoid committing) the standard logical fallacies, and how to disambiguate imprecise propositions.

They should know their way around modus ponens and elementary principles of quantification, and they should be equipped to battle the law's repeated attempts to seduce their minds with spurious invocations of the Law of the Excluded Middle.

I

f there's time left over, we might give law students some bonus units on statistics, epistemology, and the sociology of knowledge.

Statistics, because a nodding acquaintance with statistical modes of inference is increasingly an indispensable component of modern professional literacy.

Epistemology, because lawyers should be professionally preoccupied with the question of what constitutes justified true belief.

Sociology of knowledge, because lawyers should also be interested in how social forces shape the structure of knowledge and information, and should learn not to confuse the study and analysis of that topic with a simplistic relativism."

While I am sympathetic with the results that Peter wishes to obtain, I can reliably report that despite decades of teaching by Philosophy Departments students the many forms of fallacies, the only result has been a small boom in the textbook department.

Few who survive a course on informal fallacies learn to think any better, they are able identify virtually every argument as both fallacious and attractive an inference form.

Part of the problem is that, until around 15 years ago, there was no systemic focus on particular types of bad inferences: fallacies which remain attractive, even when exposed as bad reasoning.

Here are some examples:

a) well, I know that the chances of A are low, but if it happens the reward will be very high, so I will take a chance on A, a secular version of Pascal's Wager;

b) expert B has testified that a rare event happened, so it seems reasonable to trust the report, an inference David Hume throughly discredited in the 17th century.

There are other bad, but hard to dislodge, inference patterns and if lawyers were going to taught something about inference, then they should learn how to identify and avoid variants of these bad but attractive inferences and not make a study of inference in general.

Recall what we have learned in the first three days investigating what was behind the Iowa Attorney General's concern that Arlan's PKI is a Ponzi scheme.

First, even sophisticated business people can be deceived by an attractive Ponzi scheme, because at first, the returns look like the real thing. Second, your gut instinct about the scheme being a fraud will be trumped by "reason", which after the fact will look like bad and magical thinking. Finally, the use of testimonials in the form of cheering, emotional testimonial revivals will often overwhelm an individual's gut feeling of wrongness.

But like all viral madnesses, eventually the Ponzi scheme shudders to an end.

The poorly constructed schemes limp along until someone finally complains to the regulators, who then drain the last bit of resources from the scheme by installing a receiver. But the clever schemes always have a way out.

Many people erroneously think that a Ponzi scheme comes to an end when there are no more recruits. Some commentators go to mathematical extremes to show how a particular scheme must run out of recruits.

These calculations are simply errors: the clever Ponzi scheme always entices a large portion of the investors to "re-invest" their "winnings". In principle, with a high enough re-investment rate, a Ponzi scheme could continue with minimal recruitment.

Arlan says that he has 700 investors, which he claims is a fraction of the possible interest in his scheme. He also claims his company to be debt free - despite being indebted to some 700 individual unsecured creditors. I trust that the falsity of the first statement is transparent.

How did the delightful Ponzi scheme end in Boston? Did the regulators step in, after listening to and evaluating complaints from investors? No, in part because Ponzi had "lent" money to various state, police, and bank officials so they could "invest" in his securities.

Did Ponzi run out of recruits? No, despite imitators and fake securities being redeemed, Ponzi was branching out from Boston into other areas before his scheme collapsed.

So what brought to an end to the collective madness?

Remember Ponzis was offering an incredible return - 50% in 60 or 90 days. He claimed to be using the money to redeem foreign postage stamps into US postage stamps - there was a theoretical arbitrage opportunity here. The opportunity was only theoretical and Ponzi never engaged in it on a commercial basis. Since he wasn't doing this, what was he doing with the money?

Banking it. Earning a normal return of 5% yearly. Think about this signal. Ponzi claims to have discovered a risk free money making arbitrage system, but doesn't invest his own money in it - he uses banks instead. Oh, oh not a good reputation signal is it?

What about Arlan? Recall, in the CBC interview Arlan was asked whether he has eaten squab, any of these birds that he is breeding as "Hinterland Squabs". No, he hadn't. Ah, crow doesn't taste so lovely?

There is another way the PKI scheme could end. Arlan's liabilities could disappear. From Lancaster Farming, we read more about the health conditions of Arlan's flock.

Two recent quarantines of a pair of pigeon facilities in northern Pennsylvania have been linked to a growing and increasingly scrutinized pigeon breeding company based in Canada.

On Nov. 7, the Pennsylvania Department of Agriculture (PDA) quarantined the farm of Robert Leister of Wellsboro, Pa. after some pigeons from his farm were found to be infected with tsittacosis, a bacteria that causes respiratory illnesses in birds and is transmittable to humans.

Chris Ryder, PDA spokesman, said the department made the discovery after Leister noticed some of his birds were sick and he requested PDA test them for infection.

Ryder said he was unsure how many birds tested positive for the illness. But the birds were later traced back to a large 10,000-pigeon "holding facility" in Turbotville, Pa., which is owned by Pigeon King International of Waterloo, Ontario, Canada. That facility was quarantined on Nov. 19 after Ryder said additional tests had to be taken to prove Leister's birds came from there.

Arlan couldn't be expected to buy back sick birds could he? Poof, and overnight his liabilities are quarantined and the breeding company shut down for health reasons. Arlan flies into the sunset with a trunk full of cash. Neat, eh?

Tomorrow, in the final post, we will discuss possible remedies.

Related Posts: What is New in Family Farming?, Why Being A Sucker Seems So Right, and Pigeon King and Testimonials.

We have talked about two of the essential elements in a Ponzi scheme: return of capital masquerading as income and magical thinking.

First, it is very difficult for the ordinary person looking only at the returns to discover whether a scheme is essentially a Ponzi device, the return of capital masquerading as a return on investment. I can take $100 from you, and promise you a 2% monthly return and "achieve" this by simply returning $2 of your $100 to you for 50 months. After the first year, you would be convinced I was a financial re-invest your "winnings".

Only by accessing Arlan's bank account could one determine in advance whether PKI is a Ponzi scheme. Therefore, you have to focus on the reality of the end market.

Arlan, according to the CBC report on PKI, he faces two problems. First, the pigeons have no pedigree as racers and so cannot be used for breeding purposes. Second, even Arlan admits that there is no current market for the pigeons as squabs. (In January 2008, Arlan started the registration process with respect to trademarking the name and design "Hinterland Squabs")

The second element necessary for a Ponzi scheme is a suitable crowd for your pitch. It was not accident that Charles Ponzi sold his securities to working class Italians in Boston.

What is Arlan's pitch? "I believe we can save the family farm with pigeons." This is a very attractive pitch to farmers who face a Hobson's dilemma: there doesn't seem any good way to make money, so why not take a chance on Arlan's scheme? The crowd must be disposed on this occasion to magical thinking.

Today, I want to discuss the third element necessary for a Ponzi - the use of both paid and unpaid testimonials or shills.

How can a con work if so many bad things are said about it public? (This is the challenge all fraud reporting sites face.)

The answer lies in Leon Festinger's concept of cognitive dissonance. Roughly, we can expect social proof -usually in the form of cheering, emotional testimonial revivals to overwhelm an individual's gut feeling of wrongness, when:

1. The individual has committed irrevocable actions consistent with his/her belief in the pyramid scheme. The more irrevocable, the deeper the commitment.

2. The individual perceives and is aware of real world events which disconfirm his/her belief. This induces uncertainty in the individual.

3. The individuals in the scheme deal with the dissonance produced by real world events by trying to rally more people to their side, since as Cialdini put it, "The principle of social proof says: The greater the number of people who find any idea correct, the more the idea will be correct." If the facts on the ground cannot be ignored, then look to facts in the air.

Now you can see how the three elements, when combined together, have what Charlie Munger calls a lollapalooza result. A farmer who is first skeptical of Arlan's scheme, invests a little bit of money to "try it out." Unable to distinguish between a partial return of capital and real income, the farmer enthusiastically embraces Arlan's salvation. He or she is already primed to accept magical thinking. Finally, amid the cheerleaders but real uncertainty, the farmer clings desperately to Arlan's pigeon breeding scheme.

Tomorrow, we will talk about how it ends: in fire or ice. And on Friday, we talk about potential remedies or what you can do about it.

Related posts: What is New in Family Farming? and Why Being a Sucker Feels So Right.

"Lifestyle Vending, Inc., and its owners, Michael Eisenberg and Maryann McCulloh, have agreed to settle Federal Trade Commission charges that they misled consumers into paying thousands of dollars for a vending machine business venture without substantiating their claims about its earning potential.

This case was brought as part of Project Fal$e Hope$, an FTC-led effort that targeted bogus business opportunities and work-at-home scams, producing more than 100 law enforcement actions by the FTC, the Department of Justice (DOJ), the U.S. Postal Inspection Service, and law enforcement agencies in 11 states.

According to a complaint filed by the DOJ on behalf of the FTC, the defendants told consumers that they could earn $50,000 per year with the purchase of 30 candy vending machines for amounts ranging from $5,995 to $9,895.

The defendants allegedly violated the FTC's Franchise Rule and the FTC Act by failing to provide accurate and complete basic disclosure documents.

The defendants made earning claims even though they lacked a reasonable basis for each claim when it was made, failed to disclose that information supporting each claim was available to prospective franchisees, and/or failed to provide an earnings claims document.

The defendants also allegedly made earnings claims without disclosing information required by the Rule, among other things, including the number and percentage of purchasers who achieved the same or better results.

Under the proposed settlement, the defendants are barred from violating the Franchise Rule or the Business Opportunity Rule.

They are also barred from making misrepresentations about any business venture or income-generating product or service, including the income, profit, or sales volume that a purchaser is likely to receive or that others have achieved; how long it is likely to take to recoup the investment; the independence or authenticity of any third-party references; the amount of competition within, or a purchaser's territorial rights to, any geographic territory; the availability or existence of profitable locations in a purchaser's geographic area; and the terms and conditions of any assurances, refunds or guarantees of profitability.

The settlement imposes a $2,196,088.90 judgment, all but $150,000 of which is
suspended due to the defendants' inability to pay. The full judgment will be imposed if they are found to have misrepresented their financial condition."

Basically, the FTC recovered their investigation costs. No money is going to anyone who became a distributor.

Lifestyle Vending still lives on, on the internet. As far as I can see, there has been little change on their website.

Wonder why the FTC didn't require Lifestyle Vending to publish this order on their website?