THE BIZOP NEWS

Here is a typical government warning about an illegal pyramid scam.

ScamNet reports on Canadian Pyramid, and describes it as follows.

"Canadian Diamond Traders (CDT) is being promoted on the Internet, explaining how people can join the scheme and by recruiting others, receive a diamond and money at exit when they reach the top of the pyramid.

The website shows a pyramid diagram with four levels. Recruits place a deposit on a diamond through the website and commence on the base level as a Diamond Miner (8 positions). By recruiting others, participants progress through to Diamond Cutter (4), Polisher (2) and the top, the Diamond Collector. Once reaching the top, they supposedly receive the diamond and $3,000 cash. They are also encouraged to rejoin, which continues the scheme.

CDT's website makes such statements as:

* If you have $100 to invest and you know two other people with $100 to invest, you can make $3,000 over and over again;

* You earn commissions by referring other members to the program. When they make a purchase, you get credit for the sales; and

* The more people you directly sponsor, the faster you will cycle out and the more frequently you will cycle. The ideal is to sponsor at least two members as soon as possible."

This is an illegal pyramid scam.

But how should such pyramid scams be dealt with? The typical regulatory approach is:

Participants risk prosecution or other legal action if they ignore warnings and become involved in this scheme. They risk fines of up to $20,000 as individuals or $100,000 if they are involved as a company.

Can we educate enough people about the illegality of such schemes and make the fines significant enough to deter them? Or should we add on jail sentences?

I don't think so. With pyramid trading schemes, people are attracted to the prospect of earning quick money merely by recruiting other people into the scheme.

In my opinion, instead of criminalizing this human attraction, we should regulate it. Since these things have been around forever, so what not legalize and monopolize the playing field?

We should have a State or Province sponsored lottery in which, say the number of friends that you have on your myspace account, is used to randomly generate your movement up the ladder. After a time period, the person who got moved to the top is the winner -with a little cut to the lottery for playing.

Society as a whole could benefit from our addiction to pyramid risks.

Posted by michael webster at 11:06 AM | Permalink | Comments (2) | TrackBacks (0)

Texas Attorney General

Texas Attorney General Greg Abbott today charged Coppell-based Mannatech, Inc., its owner, Samuel L. Caster, and several related entities with operating an illegal marketing scheme in violation of state law. Today's enforcement action stems from a large-scale investigation by state authorities, who examined Mannatech's dubious claims about the health benefits of its products.

Documents filed in Travis County district court reveal Mannatech's scheme to exploit families, including those challenged by cancer, Down’s syndrome, cystic fibrosis and other serious illnesses. According to investigators, exaggerated claims about the therapeutic benefits of Mannatech's dietary supplements and nutritional products were unlawfully used to increase sales. The attorney general’s enforcement action asserts that Mannatech’s deceptive practices pose a health risk to seriously-ill consumers who may forgo traditional medical attention because of the company's false claims.

Today's lawsuit charges Mannatech with encouraging their salespersons' false statements by allowing sellers to continue utilizing various sales tools, brochures, videotapes and personalized Web sites that exaggerate the supplements' effectiveness. According to investigators, the defendants encourage product user “testimonials” that tout their supplements’ alleged healing effects. These exaggerated testimonials, along with misleading “before and after” photos, are displayed prominently in seminar booths, brochures, videos, sales associates’ personal Web sites and training materials. Together, these marketing techniques mislead consumers into believing that the supplements dramatically cure or treat serious illnesses.

The lawsuit promises to be interesting as it accuses Mannatech of systemically trying to divorce itself from marketing techniques it knows to be illegal under Texas law.

Posted by michael webster at 2:16 AM | Permalink | Comments (1) | TrackBacks (0)

The FTC certainly thinks so, FTC Asks Court to Shut Down Illegal Pyramid Operation.

In their press release, the FTC alleges

"On June 6, 2007, the FTC filed a complaint in the U.S. District Court for the Central District of California against BurnLounge, Inc. The complaint charges that BurnLounge sold opportunities to operate on-line digital music stores that was, in fact, an illegal pyramid scheme. The agency is seeking a permanent halt to the illegal pyramid practices as well as other illegal practices alleged in the complaint.

According to the FTC, BurnLounge recruited consumers through the Internet, telephone calls, and in-person meetings. The sales pitch represented that participants in BurnLounge were likely to make substantial income. BurnLounge recruited participants by selling them so-called "product packages," ranging from $29.95 to $429.95 per year. More expensive packages purportedly provided participants with an increased ability to earn rewards through the BurnLounge compensation program.

The BurnLounge compensation program primarily provided payments to participants for recruiting of new participants, not on the retail sale of products or services, which the FTC alleges would result in a substantial percentage of participants losing money.

The FTC specifically alleges that the defendants operate an illegal pyramid scheme, make deceptive earnings claims, and fail to disclose that most consumers who invest in pyramid schemes don't receive substantial income, but lose money, instead. These practices violate the FTC Act, the agency alleges."

There a number of interesting points in this scheme. First, the pitch of the business -on line digital musical stores- has just enough weight to make it reasonable. After all, who doesn't want a chance at becoming the next iTunes? Second, as reported by Jason Ryan,

"BurnLounge marketers, including former USC standouts Rob DeBoer and Todd Ellis, promoted BurnLounge Web pages as a way for owners to earn music and cash through the sale of digital music and other BurnLounge franchises, which are priced from $30 to $430. ... So why place these big bets on unconventional investments? Blame the halo effect, said Brent Simpson, a sociology professor at USC who has studied trust. The esteemed status of the salesmen -- established in the classroom, on the ball fields, in the political arena and elsewhere -- translated into financial credibility for potential investors, he said. Some investors also like to identify with the promoter, relating through sports or religion "I can trust these people because they're like me," said Simpson, characterizing their mindsets."

Trusting people without independent verification will provide you with a short ride to financial suicide.

Posted by michael webster at 9:22 AM | Permalink | Comments (0) | TrackBacks (0)

Forbes Affinity Fraud

William Barrett has a nice article about Universo FoneClub and two associates, Sann Rodrigues and Victor Sales, An Affinity For Fraud.

"Federal pleadings describe the hotel meeting, held on May 18, 2006, as akin to a revival meeting. "God did not want the Brazilian community to be poor," Sales is quoted as saying, adding that "God did not want the Brazilians to spend all of their lives working as house cleaners, dishwashers and landscapers."

A PowerPoint presentation reportedly showed photographs of golfers and expensive homes, accompanied by a commentary that Universo investors would even earn enough to buy their own island. The firm's Web site held out the possibility of earning $17,000 a month.

To emphasize that point, the feds say, Universo officials handed out checks, ranging from $400 to $7,000, to 10 attendees."

The quote about what God wants always catches my eye: how could you deny it? Would anyone go around saying that God did want the Brazilians, and especially the Brazilians in Boston, spending all of their lives working as house cleaners, dishwashers and landscapers? Recall that this compliance trick was also used Cambodian ponzi scheme.

Barrett rightly ponts out, in his seven tips to avoid affinity fraud, that "Be suspicious if anyone touting an investment opportunity says it is limited to a group with a common heritage, religion, nationality, race, fraternity or other shared trait. There rarely is a valid economic reason for such a limitation."

How good are his other tips? Which are: No risk, no reward, Get it in writing, Don't buy on the spot, Check out the pitch, No secrets here, and But Bud says so!

The problem here is that except for the last bit of advice, which I will get to, there is no evidence that the tips actually prevent fraud.

However, consider what Barrett says about "But Bud says so!" tip.

"Don't rely solely on the recommendation of even a trusted fellow member of the local Order of Ancient and Honorable Groundhogs. He, too, may have been fooled"

This is an excellent tip, if you can remember how to put it into practice: When you hear the report of an economic miracle from a trusted source, don't frame the question is my trusted friend lying. Rather ask, could my trusted source be mistaken? Or in the language of economists, use Bayes Rule to update your beliefs.

Posted by michael webster at 10:48 AM | Permalink | Comments (0) | TrackBacks (0)

According to the SEC's press release about the Universo FoneClub Corporation

"The Securities and Exchange Commission ("Commission") announced today that, on May 16, 2007, the Honorable Mark L. Wolf of the United States District Court for the District of Massachusetts entered Final Judgments against Universo FoneClub Corporation, Sanderley R. De Vasconcelos and Victor Sales in connection with a pyramid scheme targeting members of the Brazilian-American community that raised approximately $3.2 million. The final judgments, entered by consent, enjoin De Vasconcelos and Sales from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, the final judgments hold De Vasconcelos and Universo FoneClub jointly and severally liable for $3,269,459 in disgorgement plus $151,928.49 in prejudgment interest but waive payment of all but $1,805,612.66 of that sum and do not impose a civil monetary penalty against De Vasconcelos or Universo FoneClub based on the sworn representations made in their Statements of Financial Condition and other documents and information submitted by them to the Commission. The final judgments also require Sales to pay, over a seven month period, $9,423.80 in disgorgement plus $437.92 in prejudgment interest and a $25,000 civil penalty.

On May 30, 2006, the Commission filed a complaint alleging that De Vasconcelos and Sales were promoting a pyramid scheme known as AFoneClub@ that targeted Brazilian-Americans. The complaint alleged that the defendants falsely promised members of the Brazilian community that they would earn substantial sums of money by paying approximately $2,000 to $5,000 to become members of a company (referred to as the FoneClub) that purportedly sold prepaid telephone calling cards through a multi-level marketing structure. However, the complaint alleged that the defendants, who had emphasized to potential investors that neither they nor the company would earn profits from the sale of phone cards, were in reality luring victims into a pyramid scheme in which its members would only make money through the recruitment of new members. The complaint further alleged that the defendants emphasized in their sales pitches, which were made in Portuguese, that God wanted the Brazilian community to prosper financially and that FoneClub would provide the opportunity for it to do so."

So God wanted the SEC community to also prosper by granting them this consent order? As I reported earlier, "the defendants actually told the individuals they were recruiting that there was no way to make money by selling the FoneClub products and they could only make money by bringing in new marks, or sorry, new recruits." Does stupidity among the organizors explains why this scam lasted only from April, 2006 or several months.

Posted by michael webster at 5:40 PM | Permalink | Comments (0) | TrackBacks (0)

In Dallas, Fraud Update Link reports that on May 4th, 2007, "A federal jury has convicted James Ray Phipps, on all 19 counts of an indictment charging various offenses related to an elaborate pyramid investment scheme he operated, announced U.S. Attorney Richard B. Roper, of the Northern District of Texas. After eight days of trial, that began on April 23, 2007, before U.S. District Judge Barbara M.G. Lynn, the jury found Phipps guilty of three counts of mail fraud, one count of wire fraud, 11 counts of money laundering, one count of corrupt endeavor to obstruct and impede the Internal Revenue Service (IRS) laws, and three counts of income tax evasion."

What makes Mr. Phipps worthy of comment is that "Phipps, 59, was arrested in April 2006 by federal agents outside of a post office in Anniston, Alabama, on charges outlined in a federal indictment. He was released on bond, but in October 2006, a U.S. Magistrate Judge in Dallas revoked his pre-trial release and remanded him to custody, finding that he had violated a condition of his release by continuing to operate his scheme with a different name."

Phipps ran the standard illegal pyramid. "Phipps ran the scheme using unsolicited faxes, unsolicited mailings, weekly conference calls and live seminars that encouraged others to become members and contribute money to "Life Without Debt," promising that in return, they would receive money for recruiting other members. Members were encouraged to contribute between $2,000 and $100,000. The larger the contribution to "Life Without Debt," the larger the supposed return of money from the plan. The $2000 plan, for example, required each member to recruit two new members, repeating this cycle until there was an eight-level matrix with 510 members. Phipps' literature represented that "the end result is that $2000 will grow into $122,400 with minimum effort and absolutely no risk." Participants were then told to "compound leverage" that money into the larger investment plans. Contributions were restricted to cash and money orders only, but eventually Phipps began requiring payments in cash only."

The fraud update report confuses a ponzi scheme -future investors pay off old investors- with a pyramid -investors need to recruit other investors to be paid. But goes on to describe how Phipps ran his plan "From 1998 to 2006, Phipps received more than $25 million from “Life Without Debt” members. There were more than 30,000 participants in “Life Without Debt,” more than 90 percent of whom lost their money.

In every way, “Life Without Debt” was a Ponzi scheme, marketed as a multi-level marketing program, claiming to use compound leveraging to generate large sums of money for its members. Members were required to recruit two new members within 90 days of enrollment and those two members were required to recruit two additional new members. The classic “pyramid” was created with the new members positioned below the earlier established members and those initial established contributors positioned near the top of the pyramid. Phipps represented that he would collect a four percent fee for administering “Life Without Debt” and would distribute the remainder of the contributed money to people above them in the pyramid matrix, referred to as “upline” from new recruits. In fact, an expert witness, Peter J. Vandernat, Ph.D., of the Federal Trade Commission, testified that based on his examination and analysis of “Life Without Debt” promotional materials and organizational structure, that “Life Without Debt” was an illegal pyramid scheme. He further testified that all pyramid schemes are inherently fraudulent because the vast majority of participants are never in a position to recoup their initial payment.

To perpetuate the scheme and conceal its illegality, “Life Without Debt” provided purported “educational” materials to new members including literature and audiocassette tapes which were anti-government/anti-income tax, in nature. Phipps would also send lulling cash payments to “Life Without Debt” members to keep them in the scheme and entice them to recruit other potential investors.

So we have 30,000 people, each putting up around $1250 to play a lottery in which 10% of them can make money -but since it is unregulated, we are not sure that the 10% actually won legitimately. Is $1250 to a win a lottery something we should be: a) shutting down as criminal, or b) regulating and keeping the money with the state? I tend to favour the latter course of action.

Posted by michael webster at 6:25 AM | Permalink | Comments (0) | TrackBacks (0)

Wouldn't we all like a Life without Debt? Eric Torbenson writes about Mr. Phipps in Scheme suspect on trial about Life without Debt - unfortunately a pyramid scheme.

"Federal prosecutors allege that Mr. Phipps swindled millions of dollars from thousands of people over 20 years through a series of pyramid schemes, including a program called "Life Without Debt" that he ran out of his Colleyville home from 1996 to 2001, according to a 22-count indictment alleging mail fraud, money laundering and tax evasion."

The interesting thing about Mr. Phipps is that he is a recidivist, committing pyramid scheme after scheme. How was he able to get away with it?

"Officials say it's difficult to stop such pyramid schemes, which mask themselves as legitimate multilevel-marketing businesses. The schemes spread through friends and family, and victims often won't talk to investigators when the pyramid collapses.

"One of the problems with tracking them is that victims often refuse to acknowledge they've been had," said Susan Grant, director of the fraud center for the National Consumers League in Washington. "We hear of victims who turn on prosecutors because they think they're denying them their chance at more money."

The federal charges are the first Mr. Phipps has faced after plying his trade for two decades." (my emphasis)

On straight pyramid schemes, as opposed to mixed pyramid and MLM schemes, I actually favour legalization and a state monopoly. Straight pyramid schemes attract the same people who like lotteries. For years, regulators did their level best to shut down the numbers games -until they realized that if lotteries were a tax on the stupid, why shouldn't the state get its fair share?

Straight pyramids, in my opinion, should not be benefitting the low life the currently run them. Let's have a open and state sponsored lottery which mimics the thrills of a pyramid.

Posted by michael webster at 7:38 AM | Permalink | Comments (0) | TrackBacks (0)

The White Collar Crime Prof Blog has a brief description of an International Pyramid Scheme, and the Department of Justice's press release on the Pyramid scheme can be read here.

Unfortunately, these short descriptions of the New Millenium Group scam don't capture the mystery of the scam.

The Department of Justice simply reports: "In July 1998, Dompier launched an investment opportunity through his business, The New Millennium Group (NMG), headquartered in Roseburg, Oregon. Dompier told potential investors that if they invested $98 with his company, he would provide them with a one-ounce bar of silver and commission checks totaling $15,853.50 over a fourteen month period. Dompier utilized the internet, direct mail, and a number of promoters he had in the United States and England to sell the scheme. In reality, the program was a pyramid scheme as NMG had no legitimate business activities, and Dompier paid initial investors with funds obtained from investors who later joined the NMG silver program." (my emphasis)

The story, told in the Court documents, is far more interesting. Let's look more carefully at the allegations from the trial brief.. There is the advertising letter, the reliance on legal advice, the rogue operator, and then mysterious loss of funds to Nigerian scam criminals.

First, read misleading advertising letter that Dompier wrote. The letter is an absurdity. How could anyone reasonably believe that they would receive commissions for buying a piece of silver, as it turns about $98 for a $6 ingot of silver? And the value of these commissions, $15,853.50 over fourteen months. For many, the absurdity of the letter is the end of the story. But how do we explain the attraction of the scheme to some 4000 participants? Even if they are completely stupid, what bastardization of reasoning took place?

Unlike a number of Ponzi schemes, there is no attempt to explain the economic transactions or viability of a scheme which returns $15,853.50 for the entry price of $98.00. No arbitrage of international stamps, no wealth donors to charity wanting to stay anonymous, and no internet surfing for ads. Nope, simply sign on the dotted line and send your $98 in, and wait. Course there is the little matter of the "automatic renewal" option. What is that you say? Oh yes, if you just check off the "automatic renewal" your commission check will automatically be "re-invested". To quote: "Choose the automatic purchase option to purchase another Silver Ingot from your first level check. When you choose this option, you will continue receiving $15,853.50 every two months for as long as you continue this option. Plus you will save the difference between your $94. 50 check and the cost of another Silver Ingot."

So very clever individuals believed that for a low risk of $100, the possible gain of $16,000 every two months, was a rational bet. After all in two months, they would find out whether they won their bet or not.

Next up on the list, is Dompier's attempt to provide himself with a due diligence defence. That is, he attempted to obtain a legal opinion that he could rely upon stating his network marketing scheme was legal. Unfortunately, for him, both his lawyers told him that the scheme was clearly fraudulent. Oops.

Faced with two legal opinions, several angry AG's, Dompier did the only thing a man could do: he expanded into Britain and Europe, using an agent named Simon Hill. This part of the project brought in another $1.5 million, but it is unclear how much Simon Hill retained in fees for his work.

Finally, Dompier is alleged to have lost $200,000 to some Nigerian fraud criminals. Hmm, maybe. It is not unknown for fraud criminals to be gullible, but I would have those funds traced. I would not be surprised if the Nigerian fraud turns out to be non-existent.

Dompier is to be sentenced in June, 2007.

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Pyramid Scheme Alert, "In a crucial development that could rock the entire multi-level marketing business, a class action lawsuit has been filed this month against Quixtar (Amway) charging that the company is running an illegal pyramid scheme. (filed in US District court in the northern district of California on January 10, 2007, case number 3:07-cv-00201-EMC.)

The charges against Amway/Quixtar go to the very heart of the company's business practices and most other multi-level marketing (MLM) schemes', that there is no retail "direct selling" opportunity, only an endless chain recruitment program."

The claim that Quixtar, the successor to Amway, is an illegal pyramid can be read here.

A great overview is on YouTube:

Posted by michael webster at 9:56 AM | Permalink | Comments (0) | TrackBacks (0)

In the early 1920's, the Yellow Kid and his associates devised a clever racing bookmaker fraud. The Yellow Kid set up, what today would be called, an "offshore" horse racing bookmaker. They solicited money through the mail, an interesting exception to most of the Kid's criminal schemes, but every winning bet was paid off. (Otherwise the scheme would have collapsed in a matter of weeks, and involved the Feds with the mail fraud charge. Always to be avoided.)

Nonetheless, the venture was extremely profitable for the criminals. How could this be if every winner was paid out?

At that time, the race results were posted appeared in the newspaper the next day. But the winning odds were not posted. It became a simple thing for the Yellow Kid to skim off the from the winning results a portion for his syndicate's "profits". For example, if a winning bet return $3, the Yellow Kid would send $2. There was of course no actual bets laid, the losing bets were kept and the winning bets returned less than a fair return.

It would take some bookmaking skill to make this fraud run, as the race odds are determined by the betting population at the track and the money coming in by mail would not likely reflect those odds. For example, the track might post horse 1 in race 3 as 3-1, but the mail betting might have him running at 1-1, half the money coming in by mail being on horse 1. If horse 1 does win, then the Yellow Kid would only enough money to pay off, at a maximum odds of 2-1, and that with no profit. (The easier way to run this fraud is to skim before, lay all the bets off at the race track, and return a diminished pay-off. Call the difference "advanced breakage")

This scheme was one of the few that didn't rely upon the Yellow Kid's understanding of the something for nothing impulse, that he cultivated in marks.

In a very interesting article about Second Life, Randall Harrison in Capitalism 2.0: SecondLife: Revolutionary Virtual Market or Ponzi Scheme? discovers a similar fraud in the Second Life exchange system, the story about Second Life being a Ponzi was also picked up by ValleyWag. Second Life is essentially a online version of the Sim's Game, with a twist. In a Sim game, you try to expand your virtual budget by actions taken in the game; in Second Life, you can expand your budget by purchasing Linden Dollars for play in the game with US Dollars. This represents a happy medium between tedious game play and using the cheat codes in a Sim game. If you want to "advance" faster in Second Life, you purchase Linden dollars.

Naturally, any system of exchange presents arbitrage opportunities. Can you purchase Y Linden dollars for X US dollars, engage in some commercial transactions in Second Life, emerge with more Linden Dollars and cash them out into more US dollars than you started with?

Well, as Randall Harrison discovered, in Second Life, you don't know what the rate of return is, viz. the value of an arbitrage bet, in advance. The posted rate of exchange between Linden Dollars and US Dollars may be 280-1, for example, but if you try to cash out a large amount of Linden Dollars, the rate zooms up to something like 800-1. Talk about a harsh currency control system!

But the scheme is not a Ponzi, Pyramid, or a HYIP. Which doesn't make the currency exchange manipulation any less of a scam.

Randall Harrison's article had types of responses or comments that appeared on his blog. One category of response was: you don't know anything because I actually make money selling goods to other Second Life participants. The other category of response was: making money off of a currency exchange is fundamentally different from selling goods to other Second Life participants, and is plain wrong.

Harrison did a good job of pointing out that the first response is true, but irrelevant, and the second response is just plain false. However, there is a better observation: the second type of response is false, which makes the first type of response now very relevant. How come those selling goods, which include Linden dollars, cannot succeed above a certain size?

Posted by michael webster at 9:37 AM | Permalink | Comments (0) | TrackBacks (2)

I am a sucker for secrets.

When I see advertising copy with the word "secret" in it, long before the logical part of my brain deduces that most secrets are worthless -which also should not be a secret- the part of the atavistic brain hardwired for the click her and buy now has rushed to judgment.

Google's Adsense only makes the temptation to click away on "secrets" links that much easier.

So when the Texas Attorney General announced the resolution of their BioPerformance lawsuit, I was most intrigued to read the press announcement at the BioPerformance website.

At the corporate website, we read "Recently completed testing of BioPerformance Fuel by an independent laboratory using the Federal Test Procedure (FTP) and Highway Fuel Economy Test (HFET) protocols of the Environmental Protection Agency (EPA) in a group of vehicles established a reasonable degree of confidence that the product gives a real improvement in fuel economy and reduction in harmful emissions." (my emphasis)

But further down the page, Wallace Labs who performed this test, state, in effect, our test methods are secrets and you can't have it. Ah, so much for scientific testing - our results which produce a miracle are not reproducible, because they are a secret. So there.

Some other interesting points about the judgment:

Paragraph 2 b) requires BioPerformance to refrain from making any statements about fuel economy or efficiency unless they are in possession of scientific testing showing the specific amount or percent of increased fuel economy or efficiency.

Compare this to the language from Wallace Labs: "Reasonable confidence that ... causing real improvement in fuel economy."

Paragraph 2 h) requires BioPerformance to disclose on their website that the product contains napthelene. Which has not been done as of January 26th, 2007.

Paragraph 2 0) is going to have the real bite, if enforced. It prohibits BioPerformance from making misleading representations about income levels obtainable as a BioPerformance distributor, including by not limited to: displaying bonus cheques or commissions. Reasonable earnings claims can be made as long as the earnings claim is: a) for a certain geographic region, b) states how many distributors were in the region, c) what the average distributor income, and d) how many distributors achieved this average income.

The order would have been better if it had incorporated by reference the proposed new deceptive marketing practices in the FTC's Business Opportunity Rule.

But all in all this is a very good win for the consumers.

Posted by michael webster at 8:25 AM | Permalink | Comments (0) | TrackBacks (0)

TheTexas Attorney General Greg Abbott today stopped a Dallas-based pyramid scheme from illegally marketing the so-called "top secret gas pill" that it falsely claimed would increase fuel efficiency in automobiles. The Attorney General's settlement with BioPerformance and its owners, Lowell Mims and Gustavo Romero, prevents the defendants from continuing to deceptively market their products and ends the State's eight-month legal action against the company.

How are the consumer defendants going to get paid? Is this one of judgments that is simply a piece of paper?

No, apparently "A combination of the defendants' frozen assets and the dissolution of two trusts created by Mims and Romero will provide more than $7 million in compensation to deceived consumers. Mims and Romero may continue to operate any legitimate enterprise, but may not deceptively market BioPerformance pills or similar fuel additive products."

This is a terrific result for consumers, $7 million in real money.

According to the press release, "Attorney General Abbott added: "Texans will not tolerate con artists who prey upon unsuspecting consumers. Though we will continue aggressively cracking down on fraudulent pyramid schemes that profiteer from worthless products, consumers should always be dubious when offered 'miracle' products that are long on hype but short on credible proof." (my emphasis)

Now how do consumers determine that a product is long on hype but short on credible proof?

Well consider this, "The Attorney General further alleged that the worthless product, combined with the defendants' downline marketing scheme, constitutes a product-based pyramid scheme, which violates the Texas Pyramid Promotional Scheme statute. By the defendants' own admission, they recruited 50,000 participants within six months of their scheme's inception."

This type of growth is typical of a product long on hype but short on credible proof. Fast and out of control growth is more likely a cancer than a real sustainable business.

Technorati Tags: texas attorney general, mims, fuel additive products, greg abbott, pyramid scheme, consumers, bioperformance, gustavo romero, fuel efficiency, legitimate enterprise

Posted by michael webster at 10:45 PM | Permalink | Comments (0) | TrackBacks (0)

One of major factors in cracking a fraud is the willingness of the office staff to blow the whistle of the fraud.

It is a very difficult task, with no reward.

I wrote a couple a small story about Stan Van Etten and the International Heritgage Pyramid Scam.

The legal conclusion of that scam was that the"United States Attorney George E. B. Holding announced that Stanley H. Van Etten, 45, of Windemere, Florida, has been sentenced to ten years in federal prison for bilking thousands of investors out of over $165 million dollars. On Tuesday, November 21, 2006, United States District Judge Terrence W. Boyle ordered Van Etten to serve two 60-month terms in prison and to make restitution in the amount of $14,339,820 to the victims of the now defunct Mayflower Venture Capital Fund III."

Recently an employee, who worked in the office, wrote me and stated:

"I read your article regarding Stan Van Etten's recent sentencing. I am overcome with a sense of justice that I can't even describe. Stan was indeed a con man of the truest sense. For five years, I served [worked for him]. At the time, I was very young and very naive, but in retrospect witnessed some pretty pathetic stuff (not even realizing at the time, how illegal it was). I spend the majority of those five years fending off unwanted advances (I finally had to threaten him with a law suit), putting off bookies that Stan owed tons of money to and explaining to his banker why his account was continuously overdrawn. I finally left, when the SEC began it's investigation of F.N. Wolf. The only reason I stayed as long as I did, was because I too, even bought into this man's crap. When I finally figured out what a crook he was, I completely distanced myself from him. He tried to maintain contact, but I refused his calls. Make no mistake about it, Stan was not a "whistle-blower" regarding F.N. Wolf. He was in fact probably one of the guiltiest parties of the entire lot and only decided to assist the SEC to save his own behind. I have been following the IHI case since it's onset and am so very glad the those individuals who were scammed by this creep, have finally received justice."

I asked the employee how Stan was able to convince people of his lies, and the employee responded:

"You know I have often asked myself that very question. He is nothing to look at yet he is very charismatic and extremely convincing. I have finally determined that he is so narcissistic and such a compulsive liar that he now believes his own lies and that is what makes him so convincing. I read one article about him several years ago telling a story about him losing his hearing due to a diving accident as a child. The mere fact that he survived (according to the article) is what makes him such a true survivor today. Stan did suffer from some hearing loss, but the story he and his brother told me was that his brother lit a firecracker next to Stan's ear and blew out his ear drum. See what I mean. Compulsive liar. Yet I guarantee you that Stan totally believes the diving story now. Truthfully, you are not only dealing with a criminal here, you are dealing with a very mentally disturbed individual who would probably be better served in a mental institution.

It said in the news story covering his sentencing that it took him 8 years to admit wrongdoing. Why do you think that is? I'll tell you. Stan truly did not believe that what he did was wrong. It was only after being told what would happen if he were found guilty versus pleading guilty that he finally submitted. I guarantee you that he still believes he did nothing wrong."

The office staff knows of frauds and scams long before anyone else. But they don't want to blow the whistle, for very good reasons.

I want to thank this employee for bringing to light the difficult situation that he/she was in.

But, if you are an office worker in this situation, call or email me -right now, before anyone else gets hurt. Lawyers can provide confidentiality that no other professional can give you. Please think about- help save your a fellow's life.

Technorati Tags: stan van, pyramid scam, terrence w boyle, venture capital fund, blow the whistle, federal prison, united states district, legal conclusion, windemere, united states attorney, mayflower, office staff, restitution, willingness

Posted by michael webster at 9:34 PM | Permalink | Comments (6) | TrackBacks (0)

At the scam.com forum, there is considerable debate about whether ACN is a pyramid scam.

One poster cites, in support of his theory that ACN is an illegal pyramid scam, two Government announcements, one from Australia and the other from the Canadian Competition Bureau.

In the Australian Federal Court,

"On 15 November 2004 the ACCC instituted proceedings against Australian Communications Network Pty Ltd, a seller of telecommunications services, for alleged breaches of the pyramid selling scheme provisions of the Act.

On 23 March 2005 Justice Selway found that ACN participated in, promoted and induced or attempted to induce persons to take part in a pyramid selling scheme in contravention of section 65AAC of the Act, and that Mr Martin Paech, an ACN director, aided and abetted and was knowingly concerned in those contraventions.

The court also found that Mr Keith Janke and Mr Jonathon Gibbs, two ACN Independent Representatives, were knowingly concerned in and aided and abetted the contraventions, and Gibbschade Pty Ltd participated in the pyramid selling scheme, and attempted to induce other persons to participate in the scheme, in contravention of the Act."

And according to the Competition Bureau,

"The Competition Bureau alleges that ACN Canada, as it is known, and its participants, through its web sites and at public meetings, recruited new participants by exaggerating income expectations without disclosing the income of a typical participant. Under the Competition Act, it is illegal to make reference to earnings in a multi-level marketing plan without disclosing a typical participant's income. In addition, operators of a multi-level marketing plan must ensure that any income representation made by a participant in the plan includes disclosure of a typical participant's income."

There is a significant problem with relying on these two cases: the Australian Federal Court's decision was overturned, and the Competition Bureau's case did not survive the preliminary hearing. For the latter, you would have had to gone to Corey Lewis's website, a Manitoba Lawyer, to find this information out as it does not appear on the Competition Bureau's website.

I think that these decisions are probably correct, the deception in most modern MLM's relate to the level of average compensation, the number of drop-outs, and the losses that those drop-outs on average have sustained, concepts related to earnings claims. The usual criminal definition of a pyramid should by applied to concepts like Skybiz.

Notwithstanding that these cases no longer can be relied upon, a number of independent consumer watch sites continue to rely upon these two cases to show that ACN is a pyramid scam. For example, over at mlmwatchdog.com there is a report purporting to show that ACN is a pyramid scam - but it has not been updated to reflect the status of these two competition cases.

Does this mean that I think ACN is not employing deceptive marketing practices? Well, this commentator certainly believes that ACN is employing deceptive marketing practices.

But, my own view is that a proper analysis of ACN's marketing practices should start with the proposed 26 new deceptive marketing practices, proposed by the FTC in April, 2006. Tell me what you think.

Posted by michael webster at 8:27 AM | Permalink | Comments (2) | TrackBacks (1)

One of the more difficult problems any private consumer warning website faces is the problem of defamation. When a single individual takes on an organization and alleges that the organization is in effect a criminal one, you can imagine that the lawsuits will fly.

David John Thorton faced this problem with his website www.crimebustersnow.com in which he alleged that Treasure Traders was an illegal pyramid scheme. Treasure Traders sued him and asked for an injunction requiring him to take down his website, among other things.

The matter was heard by the Honourable Mr. Justice Quigley on June 29, 2006. The decision was recently released, with the style of cause being Treasure Traders International Corporation and Business In Motion International Corporation versus David John Thorton. It should be available soon online. But the entire decision can be read at www.crimebustersnow.com.

The Honourable Mr. Justice Quigley denied TTI's motion for injunctive relief holding that TTI had not made out all three elements necessary for injunctive relief. In particular, he found that TTI had not come to the Court with "clean hands". The allegations Mr. Thorton had made about the company, viz. that it was an illegal pyramid was sufficiently supported by uncontradicted evidence that the Judge decided that the balance of convenience favoured letting Mr. Thorton continue his investigatory work and publish it online.

Mr. Thorton also alleges that "Diamond Traders" is an illegal pyramid scheme. Diamond Trader's website which explains it pyramid scheme uses the very same metaphors, with different labels, as did the recent Massachusetts illegal pyramid scheme.

It is a credit to Mr. Thorton that he was able to represent himself effectively in this lawsuit, and we look forward to seeing the results of his security for costs motion. A similar motion for security of costs was recently allowed against TTI.

Technorati Tags: treasure traders international, illegal pyramid scheme, honourable mr justice, quigley, tti, private consumer, injunctive relief, defamation, injunction

Posted by michael webster at 4:31 PM | Permalink | Comments (2) | TrackBacks (0)

There is something about the human mind that craves the uncertainty of a lottery. But would you pay $100, $1,000, or $5,000 for an unknown chance at getting $800, $8,000 or $40,000?

Well according to the Massachusetts Attorney General, at least 300 individuals were victims of an illegal pyramid scheme.

According to the indictments, "from January 1, 2006 through September 14, 2006, these five individuals allegedly organized, managed or recruited people to participate in a type of illegal lottery known as a pyramid scheme. In order to join the game, which used pyramid-shaped tables, individuals were required to pay either $100, $1,000 or $5,000. For this entry fee, each participant received a place on the bottom level of the pyramid and was promised that if they moved to the top of the pyramid, they would receive eight times their initial investment. In order to move up the pyramid, participants were required to recruit at least two new players, with each new player paying the entry fee in exchange for a place at the bottom of the pyramid.

Each pyramid-shaped table had four levels. The entry level at the top of the pyramid was called the "appetizer." As new players were recruited, participants would move up to the "soup and salad" level, and then to the "entree" level, and finally to the "dessert" level. Once a participant reached the "dessert" level, he was entitled to eight times his initial investment (either $800, $8,000 or $40,000). Whether a participant made it to the top of the pyramid depended upon every new participant successfully recruiting at least two new players. As with other pyramid schemes, in this game, hundreds of participants paid entry fees but never won any money because insufficient numbers of new players entered the game at the "appetizer" level."

Hmm, if all 15 places on the pyramid are bought for $100, then the promoter gets $1500, of which $800 goes to the top position. Nice work.

I had occasion to talk with an individual several years ago, who was considering joining a similar plan. She was a professional, well educated, and not in need of quick cash. Her main concern was whether the scheme worked as advertised: she had friends who had cashed out, so she believed that it worked. But was still unsure. She was considering just putting in $100 to test it out.

I explained to her that she should not be concerned about whether it worked, but rather if she did get paid, then which one of her close friends had to lose money so that she could "win" hers.

These illegal lotteries should be made legal, run by the state, and called "Musical Chairs Lottery". The basic premise of everyone throwing in $100 in a pot, buying a lottery ticket and getting a chance at 50%, the 50/50 draw, is the available at every hockey game in Canada. The premise is stale. Why cannot the hockey organizers run a "Musical Chair Lottery", complete with audits, and other constraints? Apparently, there is the demand for it.

Technorati Tags: illegal pyramid scheme, massachusetts attorney general, lottery, join the game, bottom level, initial investment, eight times, indictments

Posted by michael webster at 8:53 AM | Permalink | Comments (0) | TrackBacks (0)

By coincidence, I purchased 60 Minutes' book "Con Men" just a day before the tawdry ending of one of the largest pyramid U.S. based pyramid scheme International Heritage and Stan Van Etten.

As announced yesterday,

"United States Attorney George E. B. Holding announced that Stanley H. Van Etten, 45, of Windemere, Florida, has been sentenced to ten years in federal prison for bilking thousands of investors out of over $165 million dollars. On Tuesday, November 21, 2006, United States District Judge Terrence W. Boyle ordered Van Etten to serve two 60-month terms in prison and to make restitution in the amount of $14,339,820 to the victims of the now defunct Mayflower Venture Capital Fund III."

"The prosecution involved two schemes. The first scheme was the multi-level marketing company International Heritage (IHI), involving over 150,000 individuals and gross receipts of over $150,000,000 at its peak. The second scheme, Mayflower Fund III, a Raleigh-based capital venture fund was supposed to invest in the BuildNet IPO. It was discovered that 120 investors were defrauded of over $15,000,000 when Mayflower funds were used for other purposes without the investors knowledge. United States Attorney Holding said of the convictions, "Stanley Van Etten's Raleigh-based pyramid scheme, International Heritage, and his other frauds have finally come to an end with a 10-year sentence in federal prison. Federal regulators previously called International Heritage one of the biggest pyramid schemes they'd ever seen. Today's sentence is a just end for the man who, with the help of his co-conspirators, built his pyramid and investment schemes on the backs of over 150,000 victims."

Stan Van Etten was prominently covered in "Con Men", a term which should be replaced by "Con Criminal". I had planned on doing some research about him, just prior to reading the SEC's news release.

Although Van Etten had reached a settlement agreement in the civil action by the SEC, in which he was ordered, " barred from association with any broker or dealer" for two years, the criminal action dragged on for nearly ten years; here is the original SEC complaint against International Heritage and Stan Van Etten.

Now, why does a pyramid scheme attract participants? Evidence against the viability of this scheme seemed overwhelming, according to this list from the http://www.cageyconsumer.com/ihilinks.html. So how in the face of this overwhelming evidence, could Van Etten and his chums continue to recruit?

I believe that 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.

If Cialdini is correct, then we may be able to contain the viral outbreak of cancerous pyramid schemes, not by educating the irrational consumer, but by breaking down their irrevocable actions which lead to commitment. How can we do this?

Noah Goldstein, www.influenceatwork.com, has an intriguing observation. In discussing advertising, Noah notes that cigarette advertising was banned from the airwaves about 30 years ago, a ban enthusiastically supported by the cigarette companies. Why?

Prior to the ban, "The Federal Communications Commission had enacted the "fairness doctrine," which ordered radio stations and television networks that broadcasted controversial messages of public importance to also provide free air time to those with opposing views. Anti-tobacco groups capitalized on this ruling by initiating an ad campaign that provided viewers with effective counterarguments that refuted each purported benefit of cigarettes "demonstrated" in Big Tobacco's commercials. The anti-tobacco commercials' potency was further enhanced by the ads' inclusion of mnemonic links to easily recognizable characters, settings, themes, and narrations that were appearing in cigarette ads at the time. The counter-advertisements proved to be enormously successful; per capita cigarette consumption dropped almost 10 percent in the following three years, most of which has been attributed to the counter-ads."

One clever example cited is the counter ad in which, "one Marlboro Man-type saying to another, "Bob, I've got emphysema." The next time individuals see a real life ad for Marlboros, they are more likely to automatically conjure up the counterargument and therefore become more resistant to the cigarette ad's message."

To effectively combat pyramid schemes we need more "Poison Parasite" advertising. We do not need educate individuals about the mathematics of pyramid schemes because although the math is correct, math challenged consumers are not problem. Unchecked deceit is the problem.

Posted by michael webster at 12:25 PM | Permalink | Comments (0) | TrackBacks (0)

The Texas Business Opportunity Act provides a number of required disclosures:

Disclosure Requirement

Under the Texas Business Opportunity Act, the seller must provide you with the following information at least 10 days before you sign a contract or turn over any money to the seller:

The names and addresses of all persons affiliated with the seller in this particular business;

A copy of a current financial statement of the seller;

A complete description of the actual services the seller agrees to perform for the purchaser;

If training is promised, a complete description of the training, length of training, and cost of travel or lodging during the training;

If services are promised in connection with placement of equipment or products, the full nature of the services and the nature of agreements to be made with the owners or managers of business locations;

If the seller or his or her representatives have been adjudged bankrupt or have been subject to a judgment in a civil suit involving fraud or embezzlement during the past seven years, he or she must tell you;

If the seller makes representations about sales or earnings potential, he or she must disclose both the total number of people participating in the business opportunity for the past three years and the total number of people who have actually achieved the represented sales or earnings within the past three years.

Cancellation. The seller must give you the following statement in writing as part of the disclosure requirement: If the seller fails to deliver the product, equipment, or supplies necessary to begin substantial operation of the business within 45 days of the delivery date stated in your contract, you may notify the seller in writing and cancel your contract. (my emphasis)

Imagine how powerful this information would be if it was public, and could be tested by independent third party agents. It is of no use if only disclosed 10 days before the purchase as there is not sufficient time to conduct the due diligence properly.

Technorati Tags: texas business, opportunity act, business opportunity, business locations, current financial, financial statement, bankrupt, purchaser, disclosure, judgment

Posted by michael webster at 11:30 AM | Permalink | Comments (0) | TrackBacks (0)

In an amusing and enlightening description of the attraction of MLM, Kim Klaver writes about attending a recruitment meeting for a MLM product:

"It was a Tuesday evening years ago, and my friend and I watched in awe as the young man in front of the room showed everyone his month's checks - a little over $90,000.

I immediately thought, "Boy, if HE can do that, I MUST be able to do that!

My friend agreed. "Yes!" she said, "You can do that too! Probably better!" The acquaintance who'd brought us beamed.

So far, my brain was fully engaged. My reaction was totally typical of me then (and now).

It's during the first days of the training that my brain had to be manually shut off. And it went without a whimper. Here's what they taught us:

1. It's easy, anyone can do it. Look at me, a former waiter.

2. Talk to anything that moves. Anyone who can fog a mirror.

3. The product sells itself. " (my emphasis)

Keep in mind, Ms. Klaver, according to her blogger profile, is an accomplished salesperson, a Harvard graduate and was selling real estate at the time. She does not fit the profile of someone who could not see what was too good to be true.

Let us suppose that the former waiter is not lying, not a shill, and really did accomplish his selling prowese. What does the $90,000 a month suggest to you? It is easy? This product sells it self?

Technorati Tags: harvard graduate, brain, kim klaver, acquaintance, salesperson, waiter, awe, amusing, fog, mlm, checks, mirror

Continue reading "The Psychological Attraction behind Network Marketing" »

Posted by michael webster at 9:35 PM | Permalink | Comments (0) | TrackBacks (0)

The Competition Bureau of Canada regulates both multi-level marketing and pyramid schemes. In a succient statement of law as it relates to pyramid schemes, the Competition Bureau's website states:

What Is a Scheme of Pyramid Selling?

A scheme of pyramid selling is a multi-level marketing plan that incorporates any one of a number of specified marketing practices that make it a criminal offence under the Competition Act.

It is illegal if:

* participants pay money for the right to receive compensation for recruiting new participants;

* a participant is required to buy a specific quantity of products, other than at cost price for the purpose of advertising, before the participant is allowed to join the plan or advance within the plan;

* participants are knowingly sold commercially unreasonable quantities of the product or products (this practice is called inventory loading); or

* participants are not allowed to return products on reasonable commercial terms.

There is one website which accuses the Competition Bureau of incompetence in not prosecuting a pyramid scheme called Treasure Traders or Business In Motion. He is quite insistent publishing long and interesting posts here, here, and finally here is a cache site of forum no longer available. I wonder if we will hear anything more about this and whether these allegations about the Competition Bureau are founded. Stay tuned.

Technorati Tags: multi level marketing, pyramid schemes, pyramid selling, marketing plan, marketing practices, competition bureau, criminal offence, competition act, inventory loading, plan participants

Posted by michael webster at 9:34 AM | Permalink | Comments (0) | TrackBacks (0)