For centuries, this society has been especially receptive to economic innovation and the strategies of wealth-seeking that so often accompany it. Openness to new technologies and new ways of doing business exacerbates information gaps between sellers and buyers. Those gaps, along with the enthusiasm that comes with new products and investment vehicles, create opportunities for fraudulent promoters and the bait-and-switch brigade.

As the journalist Edward Smith noted in the 1920s: “Every social change, every new invention brings to life a fresh manner of separating the sucker and his money. It may be and usually is only a disguised evolution of an older swindle, but it is new to the victim and therefore effective.”

That said, the last few decades—the period since 1980—have seen a dramatic increase in the scale and breadth of American business fraud. Of course, Americans in earlier eras encountered fraudulent investment scandals, like the market manipulations at the Re brokerage firm (which came to light in the early 1960s), or the misrepresentations made by the National Student Marketing Corporation (in the early 1970s). There also were egregious consumer frauds, such as the abusive mode of selling home heating systems by the Holland Furnace Company. But the worst of these episodes took place within medium-sized corporations, or on the fringes of the economy.

Today, fraud has become big business. In the last four decades, fraud cases running into the billions of dollars have become commonplace. So have allegations of marketing duplicity or false accounting against many of the largest corporations operating in the United States. Massive government contracting frauds roiled the defense industry in the 1980s and the healthcare industry the following decade. Consumer frauds have steadily targeted older Americans, first through telemarketing and now via the web.

During the late 1990s and early 2000s, accounting scandals rocked a series of major corporations, including Enron, WorldCom, and Sunbeam. Over the past decade, pyramid schemes such as those run by Bernard Madoff and Allen Stanford have bilked tens of thousands of investors. And in the run-up to the global financial crisis of 2008, the provision of marketing information throughout the entire chain of the American mortgage system became shot through with duplicity, with falsehoods embraced by appraisers, mortgage brokers, third-party loan assessors, underwriters, and distributors of derivatives.

This era of gargantuan fraud scandals is still with us. Even after the reality check of the most recent financial crisis, major fraud scandals keep happening: LIBOR rate-fixing; creation of myriad unauthorized accounts at a major nationwide bank, Wells Fargo; and another alleged billion-dollar pyramid scheme, Platinum Partners.

What accounts for this dramatic growth in the magnitude of corporate deception? The post-1980 preference for deregulation has played a big role. Cuts to enforcement budgets have been a common theme in explanations of fraud episodes. So has the disinclination among policy-makers to impose regulatory constraints on newly emerging markets such as financial derivatives.

A key premise among supporters of deregulation is that the reputational incentives created by markets will serve to check the rankest frauds. Corporations won’t go down the path of duplicity, this way of thinking presumes, because the long-term consequences of lost business can be so devastating. Unfortunately, the behavior of scores of corporations over the past few decades belies this comforting narrative. Companies have so decisively bought into the use of short-term incentives to structure compensation for employees and executives that it’s often hard for them to think much past the next quarter’s financial results.

After the 2008 financial crisis, American policy-makers placed a premium on containing marketplace duplicity. Most importantly, Congress created the Consumer Financial Protection Bureau (CFPB), with major duties: improving the flow of financial information to consumers, monitoring the operation of consumer credit markets, and bringing enforcement actions against businesses that engaged in unfair, deceptive, or abusive tactics. The CFPB has worked hard to simplify financial disclosures to consumers, and has clawed back almost $12 billion through a series of settlements with financial firms accused of wrongdoing. But in this same period, Congress also loosened disclosure requirements for many start-ups, a deregulatory move that has raised concerns about new opportunities for fraudulent promotion of new companies.

We now have an administration in Washington that trashes regulation of all sorts and appoints vehement opponents of regulation to run federal agencies. It’s not hard to imagine that enforcement budgets for consumer and investor protection will once again take a big hit, and that federal regulators will adopt a more forgiving posture toward dodgy marketing tactics.

Such policies are their own kind of sucker’s bet. If the Trump Administration implements them, the long history of American business fraud suggests that we can look forward to more headlines about major corporations that have cooked their books or cheated their customers. When scandals of this sort accumulate, they have consequences beyond short-term economic losses. Indeed, they undermine the social trust that underpins our country, and healthy capitalism itself.

The post Why Suckering Americans Is a Booming Business appeared first on Zócalo Public Square.

Too bad: Broadcasting really needs a term for Brian Williams and his Choppergate misadventure. Who knew he was a pipe artist? And now that we know he invented a story about being in a helicopter that took enemy fire in Iraq, we must all wonder how much of his work over the years has been infected with pipeski. And beyond that, why was there pressure for him to embellish in the first place?

The answer to that may lie in the nature of the medium. A network half-hour newscast contains only 22 minutes of content–the other eight minutes are filled with commercials. Thus, competition among reporters for those precious minutes is fierce. There are more stories than there are minutes to accommodate them, so correspondents need to advocate for their stories. Part of a producer’s job is to separate the salesmanship from the journalism, discard the former and go with the latter.

But producers are only human and they tend to cut star reporters–especially those being groomed for the anchor slot–more than a little slack. In fact, the presence of a star reporter, in the minds of many producers, makes a story more important and thus more worthy of airtime.

When I was executive producer of Good Morning America, the network assigned us a correspondent who had been a star reporter at a local ABC station. He was our “on the go” guy, but I had a problem with him because I knew him to be a pipe artist. He had faked a combat incident in one of Israel’s many wars with its Arab neighbors (although he fooled his bosses at the local station) and so I accepted him on the show with great reluctance.

He sold stories to me with vigor. Every story he covered was the most important story of the day, if not the decade. And if I responded with a dubious lifted eyebrow, the details of the story got more and more dramatic. It was a constant struggle to keep his reports within the bounds of journalistic ethics. The audience, by the way, loved him.

Which brings us to Brian Williams, a smooth, self-assured anchor with a ready wit. He seemed to combine Peter Jennings’ panache with Walter Cronkite’s gravitas, spiced with a hint of David Brinkley’s humor. But now his mistake reveals a fabulist with a self-aggrandizing streak, an anchorman who brought the sensibilities of barroom bragging to his newscast.

No one contests that Williams–when he was a correspondent for, but not yet anchor of NBC’s Nightly News–flew in a U.S. military helicopter in Iraq in 2003. But it was another helicopter, in another formation, that was sufficiently damaged by an RPG–a rocket-propelled grenade–to force it into an emergency landing at a tiny U.S. enclave in the desert known as Rams Base. In the news report that aired shortly afterward–the first time he told the story–Williams acknowledged the downed Chinook helicopter was a different vehicle. But there was some exaggeration even then: Williams’ report gave the mistaken impression that his Chinook was in the same formation and was flying the same mission as the RPG-damaged chopper, and that the one he was in had taken ground fire. Pilots later said it hadn’t.

A few years ago, Williams went on the David Letterman Show and retold the helicopter story, only this time he was a passenger in the RPG-struck aircraft. And then last week, on his own show the version of the story that had him in the RPGed Chinook was repeated. The helicopter’s crew took to Facebook to vent their anger about the misrepresentation. Stars and Stripes, the military newspaper, picked up the story and found other crew members who criticized Williams’ account.

Faced with the facts, Williams went on the air and apologized. Apparently, he said, he had conflated being a passenger in a helicopter that had taken fire with being in a helicopter so badly damaged it was forced down. The fog of war and a dozen-year-old memory were his excuses.

That doesn’t wash. You conflate the restaurant you ate in last month with the one you ate in two months ago; you don’t conflate a life-threatening situation with a weather-related aborted helicopter ride. The original 2003 news report was only slightly factually wrong but Williams had expanded on that inaccurate tale. And now witnesses are coming forward claiming that he injected fabulist elements into his award-winning coverage of Hurricane Katrina’s aftermath. Among other things, he reported flooding in the French Quarter–where he was staying, although it was one of the neighborhoods in the crescent city that was spared flood damage. He also gave shifting accounts of whether he heard about or witnessed a suicide in the Superdome.

Why would a news correspondent jeopardize his career by exaggerating a story? What was wrong with “After we were forced down by a sand storm, we met the crew of a similar helicopter that had been shot down?” And why jeopardize a multi-million dollar anchor chair by adding more fictional elements to the story?

If you ever belly up to the bar with correspondents who have been to war, they will tell stories. And sometimes these encounters wind up as “can you top this” contests where facts may get gilded with light fiction. But the ethical ones leave that stuff in the barroom, even when they are selling their stories to editors and producer. And they certainly keep it out of the newspaper and off the air.

But even if a good journalist is supposed to check his ego–and his fictions–at the door to the newsroom, TV strokes egos like no other medium. And no ego gets stroked as much as an anchor’s. Perhaps Williams, feeling diminished because he wasn’t in a Chinook that took enemy fire, just put himself there.

Or maybe he was trying to live up to the impossible-to-match tradition of Edward R. Murrow, who flew a very dangerous mission over Berlin during World War II in an RAF bomber named D-Dog. Read Murrow’s amazing 19-minute report. Even better, hear Murrow deliver it.

Murrow didn’t report D-Dog to aggrandize himself–it was very clear to him the high price that could be exacted for we-were-there reports. In the next-to-the last paragraph of his story, he tells his audience: “There were four reporters on this operation. Two of them didn’t come back. Two friends of mine, Norman Stockton of Australian Associated Newspapers, and Lowell Bennett, an American representing International News Service. There is something of a tradition amongst reporters, that those who are prevented by circumstances from filing their stories will be covered by their colleagues. This has been my effort to do so.”

Murrow’s D-Dog sets a high bar for war reporting. But there is a much lower bar that is the very least this profession asks for—truth and accuracy. The pipe artist wiggles under that low bar. The highly-motivated but ethical journalist will clear the bar. Pipe artists and ethical journalists share a trait: they are ambitious. If they weren’t they wouldn’t be in the profession. But ethical journalists understand that facts are what distinguish, not the sheen they try to put on them.

The post Brian Williams Isn’t the Only Self-Aggrandizing Journalist appeared first on Zócalo Public Square.

After everyone had taken their seats, a man wearing an expensive-looking suit came up to the stage to introduce himself and the company we were there to learn about. He took us through a PowerPoint presentation about the company’s credentials with the Better Business Bureau and its successful track record in the business of selling legal insurance. He explained the value of these legal insurance plans, which give members 24/7 access to a variety of legal services for a monthly retainer that is a fraction of typical attorney fees.

However, the focus of the night’s presentation was to share with us the great opportunity the company provides those who want to make easy money while setting their own schedule. He told us about how the residual income he was earning through the company had enabled him, a young man only a few years out of college, to afford an enviable lifestyle, which included living in a waterfront condominium in Marina Del Rey and having all the vacation time he wanted. He explained that this income came every month in the form of overriding commissions he received on the sales made by those whom he recruited into the business—and in turn by those people that his recruits had brought to the business. Several other speakers shared their own triumphant stories of selling and recruiting for the company.

Then came the crux of the night’s event—the sales pitch. Sign-up forms were distributed, and the main speaker informed us that for only a limited time, those of us present could join in on this exciting opportunity for the low price of $125 and the purchase of a monthly membership. He reminded us that we were all there because we’d been invited by somebody, somebody who’d been getting paid for recruiting us as new members. How hard could it be? That very night, coaxed by the pretty girl’s assurances, I signed up to become an associate, thus beginning my brief but memorable experience with this company.

My story is in many ways typical of the methods many multi-level marketing companies use to recruit thousands of college students into their ranks every year. Multi-level marketing (MLM), also known as network marketing, generates income at least in part through the continuous recruitment of new associates into the business of selling a product or service. Often, these newly recruited associates or distributors have to pay considerable start-up costs or purchase large quantities of the products upfront, in addition to covering any business expenses they incur once they join. These businesses generally feature compensation plans that allow participants to earn income through commissions on their own sales as well as overriding commissions on sales made by their “downline”—anyone whom they recruit and anyone those recruits have subsequently recruited. This multi-tiered system of sales and recruitment grows geometrically in theory from one level down to the next, and if perpetuated indefinitely, in a manner resembling a pyramid with an ever-expanding base.

Since the mid-20th century, a multitude of companies employing variations of this business model have established themselves, with some of the better known being Amway, Avon Products, Herbalife, Mary Kay, Tupperware, and Vector Marketing. Associates working for these companies are independent contractors rather than salaried employees, and are generally expected to utilize relationship referrals and word-of-mouth marketing to sell their products directly to consumers.

My new company’s way of doing business became even more apparent during my team’s first meeting. At a small Internet café near LAX, I met with the pretty girl, our “team leader,” and four other new associates to go over our strategy and goals for the week. To start bringing in new people ourselves, the team leader had us each write down a list of personal contacts, whom we would then call. We were to establish contact with as many of our friends and acquaintances as possible using a script very similar to the one pretty girl had interested me with, which began something like Hey [name], I’ve only got a minute, but I’m working on this really exciting project that I thought you might be interested in …

In the span of a few days, my initial excitement turned into hesitation and eventually disillusionment as I began to see the business for what it was. Once I joined, hardly any mention was made of actually selling the products or services we supposedly offered; it was all about recruitment, recruitment, recruitment. Under pressure from my team leader to try to get my friends involved in this business, I realized that using misleading tactics to get people I knew to make an investment would be necessary if I was going to have any sort of return on mine.

While the concept of multi-level marketing is nothing new, the pyramid-like structure of this business model is the cause of some controversy. Pyramid schemes are ventures that generate revenue through an endless chain of recruiting new buyers (in this case “distributors”). “My” company seemed to have little interest in the sale of a legitimate product or service to an end consumer. While the sale of a marketable product or service to an end consumer is commonly viewed as the distinguishing aspect between legitimate MLMs and pyramid schemes, there are many who contend that they are one and the same.

Given the many forms of pyramid-structured businesses out there, and the variations amongst them, it is difficult to give an absolute verdict on what is and what is not a pyramid scheme. The Federal Trade Commission has said that a pyramid scheme involves forcing participants to buy more product than they could ever personally sell, and for those sales to occur only within the network of recruited distributors.

But it’s hard to draw clear lines, and not just for impressionable students. The most notorious MLM these days, the nutritional supplement company Herbalife, is the subject of an epic showdown between legendary Wall Street investors, who disagree vehemently over whether that publicly traded company is a booming business or a total pyramid-shaped sham.

By its own design, a system driven by the recruitment of new people into an ever-expanding marketing network, if perpetuated successfully, will lead to market saturation—with too many sellers peddling to too few buyers. If a pyramid scheme started by six people who each recruit another six people continues to grow in that fashion, the number of people involved at level 11 will exceed the population of the U.S. Level 13 would contain more than twice as many people as populate the Earth. Well-run franchise businesses, in contrast, limit “membership” to the club of sellers: imagine how much less valuable your McDonald’s franchise would be if the company allowed outlets on every block.

Since MLMs use business models that seem unsustainable under the laws of mathematics and the principles of supply and demand, it’s no wonder the vast majority of participants—most statistics put this percentage well into the 90s—in recruitment-driven businesses end up walking away with a net financial loss.

I was completely unaware of all this when, on my first weekend as an associate, I was pressured into attending a full-day, unpaid sales conference in Orange County. Company associates from all over Southern California converged on the convention center in Anaheim to hear from some of the top names in the company. The vibe was more cultish than corporate. As if on cue, those in the congregation would rise, clap, and sit back down before and after every speech, and would listen intently to every word being said as if it contained the key to their success.

Despite my misgivings, I still wanted to believe what I was hearing. I wanted to believe, as it seemed everyone else in the audience did, that the opportunity to achieve success with the company was real—and legitimate. But, within a week of joining and after much deliberation, I finally worked up the nerve to call my team leader to say I was quitting. I promptly mailed in the official forms in order to terminate my membership with the company and have my start-up payment returned before the refund period was over. Though I managed to get back most of my initial $125 dollar investment, many who join MLM companies aren’t so lucky.

This spring, I was invited by a friend to an informal sit-down at his buddy’s apartment. “I was wondering if you wanted to check out something one of my friends is involved in so I could have your input,” his oddly vague text message to me read, “its hard to explain over text sorry.” Sure enough, shortly after my friend and I arrived, I found myself among an audience of 15 or so, listening to a presentation on becoming “brand partners” to market a company’s energy drinks. After introducing the product, sharing their stories, and explaining the business model to us, the presenters predictably concluded the event by extending us the opportunity to become “brand partners”—with the purchase of $500 or $1,000 worth of product.

These marketers did such a good job in trying to convince us of the legitimacy of their business that by the end of their spiel I could not say with absolute certainly whether this was a scam or not. But this time I was definitely not about to find out.

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