Former FTC Economist’s Response & Thoughts on Vemma

In this post, Dr. Vander Nat responds to the comment below on his previous post calling for a federal pyramid scheme rule.

It is true, Mr. Steadson, that I based my comments re Vemma on what was described in FTC documents, and I trusted the agency’s characterization for a simple reason: my work and knowledge of the FTC for 25+ years, with numerous years spent on pyramid scheme analysis.

In an ex parte action, the agency is asking the court for the highest and most immediate level of relief permissible under federal law. While at the FTC, I was involved in a number of such cases (again, not Vemma) and believe that, precisely because of the extraordinary nature of the sanctions being sought, the agency would be fully prepared to substantiate each element of the complaint, as well as its further characterizations in briefs and documents to the court.

I was especially struck by your statement “… the assertions are wholly wrong, and the actual facts of how Vemma operates in practice is significantly different from what the FTC claimed.” Having just read the transcripts of the Sept. 15 hearing, I see nothing there that would lead one to think that the FTC has mischaracterized Vemma’s operation, including any company data to the extent that data have been presently analyzed (both sides say there’s more to come on data analysis).

Since your comments are largely based on expected “data presented in Vemma’s defense,” I make some observations about company data as conveyed in the transcript. The temporary receiver wrote an analysis of certain data, including a classification of participation as either an Affiliate or a Customer –a distinction conveyed in Vemma’s compensation plan and other company materials. Consistently, the receiver employed the classification as it was/is encoded in Vemma’s database and thus used the designation that participants themselves indicated upon joining. The associated data are (rounded): 2013: Affiliates 86%, Customers 14%; 2014: Affiliates 71%, Customers 29%; 2015 (thru Aug1); Affiliates 78%, Customers 22%.

In contrast, Dr. Carr, who is Vemma’s economic expert, believes that the relevant data over the entire period of years he analyzed are more correctly summarized as: Affiliates 23%, Customers 77%. The manifest divergence between the FTC’s receiver and the company’s expert is not the result of some deep statistical technique or by looking at different information in the database, but directly results from a re-definition of terms. Mr. Carr defines a “customer” as a participant who did not buy an Affiliate Pack, received no commissions, and enrolled no other person into the organization – further asserting that his description is likely to be more accurate, in spite of overriding what a large number of participants indicated upon joining. He uses this definition throughout his analysis, including all summary statistics. He further maintains that he did not adopt his definition due to any company urging (never mind that this re-definition is also expressed in internal company emails) but that he derives it as an objective operational definition from the FTC’s own documents, including the report of Dr. Bosely (the FTC’s expert).

Mr. Carr introduces a definition of the critical term “customer” that, to my knowledge, has never been employed in any earlier court proceedings regarding a pyramid case. One would think this already places an obligation on Mr. Carr to explain why he believes his definition to be more accurate or compelling than a commonly accepted characterization of the term: a person who buys product simply for personal use and is not incentivized to buy the product via a proposed business venture. An entire declaration could be written in evaluating Carr’s definition and what he ostensibly shows by employing it, but that is not my role here. Instead, I offer a simple illustration on a core issue of the distinction between consumer demand for a product versus induced demand achieved by a proposed income opportunity – a recurring theme in pyramid cases.

A jewelry outlet offers a certain gold ring for (say) $600, emphasizing high product value for the money spent. In response, there will be takers and leavers, where the volume of takers expresses the consumer demand. Now suppose the outlet offers an enhanced package: the $600 ring joined with a lottery ticket having a multi-million dollar payout. An evaluation of the level of induced demand incentivized by the package deal would be obtained by comparing the sales of the $600 ring alone to the sales of the enhanced package. But alas, this straightforward procedure happens to have a complication. No sales data on the $600 rings alone exist, and the outlet only collects data on enhanced package sales. Curiously, the outlet maintains that although it could collect data on the sale of the rings alone, it sees no business need to do so. And it maintains that there is no requirement to collect such data, challenging the nay-sayers to show the contrary.

Returning to Mr. Carr’s analysis, my take on the Sept 15 transcript of his testimony, though including references to the court’s analysis in BurnLounge, pays lip service to that court’s emphasis on “meaningful opportunities for retail sales” upon employing a never-used-before definition to ascertain such sales and inadequately addressing the court ruling that the rewards BurnLounge paid for its package sales were not tied to consumer demand and were incentivized by the income opportunity. For example, when asked whether his definition would not pick up (or classify) any number of Affiliates as “customers,” he grants possibly so (see transcript, especially pages 130-138) but quickly adds that it might also pick up people in the reverse direction and classify customers as though they were Affiliates. He gives no persuasive explanation or support for that assertion, evidently just hoping that the listener would nonetheless infer that the stated issue is a wash, with the one error balancing out the other.

Mr. Steadson, when you read the transcript of Mr. Carrr’s data analysis, is this the kind of analysis you had in mind when you refer to “data presented in Vemma’s defense” further showing “actual facts of how Vemma operates in practice”? If so, I think it is not at all persuasive and lacks a basis for highlighting Vemma to be significantly different from what the FTC claims. We will indeed see how the judge rules on all of this, expected on Sept 18.

*Disclosure. I have never been, nor am I now, involved in the Vemma matter and I simply offer personal observations in the interest of public appreciation of certain issues.

The views, opinions, and positions expressed in this blog post do not necessarily reflect the views, opinions, and positions of TINA.org.