DECLARATION OF DR. PETER J. VANDER NAT _________________________________________________________________ 1. My name is Dr. Peter J. Vander Nat, Ph.D. I am an economist employed by the Federal Trade Commission, Washington, DC 20580. 2. I have a doctoral degree in economics from the University of Notre Dame. 3. I have examined Fortuna Alliance promotional materials and charts (Attachment 1 to this declaration). Based on my review of these materials, I have estimated the amounts that participants in Fortuna can expect to gain or lose. 4. In this analysis I have assumed that Fortuna currently has approximately 17,000 members. Also, by using conservative assumptions (explained below), I estimate that if Fortuna were to close down today, the loss to consumers would be at least $3.7 million. 5. From studying the promotional materials, there appear to be several related versions of Fortuna's program. The Fortuna program that I have analyzed (an "Elite center" program) requires each member to make an initial cash payment of $250. Of this amount, $37.50 (15%) is removed for charitable contributions in the member's name. Of the remainder, Fortuna takes approximately half ($100), and the rest goes into a supposed profit-sharing fund. The profits (of $112.50 per member) are shared among members of a "tree" according to a formula based on the Fibonacci sequence.(1) 6. A tree, which Fortuna also calls an "Elite center" or sometimes a "co-op," is filled when it has reached 376 members that are distributed over 12 levels. When a tree is full, the member at the top of the tree -- one person at level 12 -- will receive a payment of $5,250. Additional members that may be below these twelve levels do not increase the benefit at the top. 7. According to Fortuna's "One Elite Entry" chart (Att. 1, p. 14), The second in the chain (one person at level 11) is to receive $2,981, a third and fourth (both at level 10) are to get $1,679 each, and so forth. As one moves down the tree, there are more people at each lower level, and these will receive progressively lower payments. In regard to a full tree of 376 members, only 20 people (or about 5% of them) would receive back $280 or more; the rest receive varying amounts that are all less than what they have invested. (As explained below, these stand to lose money if they do not recruit additional people). Near the bottom, there would be about 233 persons who are eligible, on per-capita basis, to obtain less than $6 for their initial cash payment of $250. 8. By studying Fortuna's promotional materials and comparing the different Fortuna charts and tables, I was able to better understand the monetary expectations set forth for the membership. This is not an easy process. I think a typical consumer could have a difficult time deciphering what the tables like the Elite chart really mean. The various juxtapositions of "levels" and "members" that appear in the charts and the pictorial presentations ("stick figures" of people stacked up on top of each other like an upside down pyramid) (Att. 1, p. 13) give the visual impression that the higher profit levels have progressively more members. The exact opposite is true. Also, the percentages listed in the "profit sharing" column of the Elite chart, namely 14%, 13%, 12%, and so on, formally add up to 100% and give the impression that 100% of money paid into the fund is eventually distributed back to the membership as trees continue to grow. This is illusory; as explained below, a substantial portion of these funds accrue back to Fortuna. 9. Each person gets a set percentage of new membership fees (an arrangement that Fortuna calls "profit sharing"). These "profit percentages," ranging from 2% to 14%, depend upon one's level in a tree; as more people are recruited, a given member moves up the tree and receives a greater profit percentage. Of the twelve levels that comprise a tree, Fortuna's Elite chart shows that the lowest level (a new member) receives 2% of the profit from the one person (namely, him or herself) who is at level one. This amount comes to $2.25 (2% of $112.50). Thereafter, a person can only earn additional profits from those members who are lower down the tree; i.e., from new recruits. 10. To elaborate, after an initial $2.25 from his/her own investment, a hypothetical member would earn $3.37 for the next recruit, $11.25 for two more recruits, $20.25 for three more recruits (beyond the last two), and so on. Persons at higher levels need not recruit directly, since their recruitees may do the actual recruiting. 11. Working up Fortuna's "profit sharing" scale, the Elite chart indicates it would take 33 recruits before a given member obtains a total return in excess of the original $250 investment. Also, extrapolating from this Fortuna table, it would take 30 recruits for a member just to break even (i.e., to receive back the total $250). 12. I have constructed a table (Att. 2 to this declaration) that shows how memberships may be distributed under Fortuna's stated formula by using a best case scenario for the members (namely that all trees reach level 12). Assuming there are currently about 17,000 members, the table conservatively estimates that about 6,511 members would be at the bottom.(2) These would have to generate more than 2.4 million (375 x 6,511) new recruits to reach level 12 and receive a promised $5,250. Also, and what is probably more important for this analysis, the members who are at the bottom would have to recruit nearly 200,000 new members (6,511 x 30) just to break even. And even if such numbers were recruited, these new people, in turn, would have to recruit some 6 million additional members just to break even. 13. There is another way of seeing the predicament of the large majority of the membership. Based on an assumption of 17,000 current members and by using the table that I have constructed (Att. 2), I estimate that at most 900 people would have progressed far enough to have the requisite 30 members who are at lower levels (giving the 900 a breakeven position, or better). Thus, if Fortuna were to close down with 17,000 members, the remaining number (at least 16,100, or 94.7%) would lose money. Also, the large majority of those who lost money would lose either all or the greater part of their initial investment. As the table shows, the total loss would come to at least $3.7 million. 14. The $3.7 million loss figure combines losses for those in levels 1-6. Although there are some "gains" to those at level 7 and higher, these payments are made out of other people's losses and thus constitute a questionable basis for an offsetting "gain" computation. Moreover, these gains are not likely to be as large as the schedule of payments to members that the Elite chart may at first convey. Fortuna states in its promotional materials that a member's account is charged a fee of $250 per month (after the first out-of-pocket payment of $250). Fortuna states that these monthly debits will not be subtracted from a member's account until "such time as your center(s) profit to the point where these funds are available." Thus, it appears that for those members who may be at levels 7 - 12, many will probably receive diminished positive returns, or no returns, due to the accrual of monthly debits against their accounts. 15. Another way to look at this matter is to estimate Fortuna's revenue. Again, this is not easy to calculate. Fortuna says it divides each fee of $250 in three parts: 15% or $37.50 for charity, 40% or $100 for itself, and the balance (45% or $112.50) for the profit sharing fund for members. With a membership of 17,000 having paid in $4.25 million, Fortuna would appear to receive $1.7 million. 16. But Fortuna also derives a substantial, hidden benefit from the profit sharing fund. For a filled tree with 12 levels, Fortuna is to receive flat rate fees of $100 x 376 members = $37,600. Also, contributions to the profit sharing fund would be 376 x $112.50 = $42,300. By using Fortuna's own Elite chart for outpayments to all the members at various levels, the total outpayments to members add up to $25,775. The difference between contributions and outpayments is $42,300 - $25,775 = $16,525, which accrues to Fortuna. Thus, Fortuna actually keeps a total of $54,125 (namely $37,600 + $16,525) from a filled tree. This equals 58% of the members’ fees, not the 40% Fortuna claims to keep. 17. Remarkably, this 58% share for Fortuna is the minimal share that the company is likely to obtain and accordingly determines the best associated outcome that members may hope to achieve (a 27% share for members, given that 15% goes to charity). For trees that are not fully populated with 376 members, Fortuna’s total share of the members' fees is greater than 58%. (Att. 2, p. 2) In any extended pyramid, it is certain that a large proportion of the members will be in unfilled trees. Thus one may safely predict that Fortuna’s actual share will substantially exceed 58%. 18. To calculate the total dollar benefit to Fortuna from the fund would require one to know, among other things, the average tree level. However, it can be shown by direct computation (Att. 2, p.2) that the total benefit which Fortuna derives from the fund varies inversely with the average tree level: the smaller the average tree level, the greater is the total benefit to Fortuna.(3) But whatever this benefit may turn out to be, it is in addition to the $1.7 million derived from the flat rate fees of $100 per member (using 17,000 members). 19. As an illustration of what Fortuna's total revenue may be, if the average tree level were to be as high as level 9 -- which I think would be a very generous assumption-- Fortuna's total benefit from the fund would be at least $1.2 million (Att. 2, p.2). Hence, Fortuna's total revenue would be $2.9 million, or 68% of members’ fees. Also, since 15% of fees are to go to charity, the membership (as a whole) would receive only 17% of the money paid to Fortuna. Moreover, as noted earlier, the proportion of profit that is finally credited to members' accounts must first be diminished by a monthly debit of $250 (wherever applicable). This means that the share of fees that would actually accrue to members' accounts will be less than the 17% just estimated; and whatever this reduction is, it accrues back as a positive return to Fortuna. 20. Finally, all of these computations assume that Fortuna has not kept for itself any of the claimed charitable contributions, that it has not assigned to itself or its principals any favorable positions high up in initial trees, and that it makes all the payments promised to eligible members. If any of these assumptions are incorrect, Fortuna’s own revenues would be even higher. 21. Fortuna's growth must eventually stop, since the world does not have an indefinite supply of people who are able or willing to spend $250 on an investment scheme. At whatever point Fortuna stops growing, at least 95% of the participants will lose money. Also, new recruits are being added monthly, and the total loss to consumers will rapidly move above the $3.7 million bench-mark. I declare under penalty of perjury that the above statements are true and correct to the best of my knowledge. _______________________________________________ Dr. Peter J. Vander Nat, Ph.D. Date _________________________________________________________________ Attachment 2 - Fortuna's Elite Centers Representative Projected Respective # at each level Members at Losses at Level (one tree=376) each level levels 1-6(4) --------- --------------- ---------- ------------- 12 1 45 11 1 45 10 2 90 9 3 136 8 5 226 7 8 362 6 13 588 $60,000 5 21 950 $165,000 4 34 1,537 $327,000 3 55 2,487 $580,000 2 89 4,024 $983,000 1 144 6,511 $1,613,000 ------------------------------------------------------------ Totals: 376 17,001 $3,728,000 -- The table assumes that growth occurs in keeping with Fortuna's promotional c laims and thus uses the Fibonacci sequence for the growth in membership. The table assumes th at all Elite center "trees" continue on long enough to reach the highest level.(5) Attachment 2 (continued) Final Row: Estimates of Fortuna’s Share of Member’s Total Fees RESPECTIVE TREE LEVELS: payment at to each person level 6 7 8 9 10 11 12 -------------- ----- --- --- --- --- ---- ---- ---- $5,249.25 12 1 $2,981.24 11 1 1 $1,679.62 10 1 1 2 $937.12 9 1 1 2 3 $516.37 8 1 1 2 3 5 $280.12 7 1 1 2 3 5 8 $148.50 6 1 1 2 3 5 8 13 $76.50 5 1 2 3 5 8 13 21 $37.12 4 2 3 5 8 13 21 34 $16.87 3 3 5 8 13 21 34 55 $5.62 2 5 8 13 21 34 55 89 $2.25 1 8 13 21 34 55 89 144 Size of tree: 20 33 54 88 143 232 376 F's Payout for tree: $396 $852 $1,764 $3,553 $6,996 $13,530 $25,775 REVENUE/TREE size x $112.50 $2,250 $3,713 $6,075 $9,900 $16,088 $26,100 $42,300 + size x $100 $2,000 $3,300 $5,400 $8,800 $14,300 $23,200 $37,600 = revenue/ tree $4,250 $7,013 $11,475 $18,700 $30,388 $49,300 $79,900 F's profit/ tree: $3,854 $6,161 $9,711 $15,147 $23,392 $35,770 $54,125 Estimates of F's Share of All Fees (as based on avg tree leve l) if avg level is: 6 7 8 9 10 11 12 total no. of trees: 850 515 315 193 119 73 45 F's profit from fund $1,575,943 $1,473,828 $1,357,211 $1,226,218 $1,080,808 $ 921,095 $747,141 F's total Revenue $3,275,943 $3,173,828 $3,057,211 $2,926,218 $2,780,808 $2, 621,095 $2,447,141 Members' Fees $4,250,000 $4,250,000 $4,250,000 $4,250,000 $4,250,000 $4, 250,000 $4,250,000 F's revenue/fees 0.77 0.75 0.72 0.69 0.65 0.62 0.58 _________________________________________________________________ Endnotes (1) A "Fibonacci sequence" is a sequence of numbers, classically displayed as 1, 1, 2, 3, 5, 8, .. , in which each term (after the second) is the sum of the two preceding terms. The sequence occurs in nature; it describes the rate at which certain plants propagate (by first generating buds, which in turn generate new plants, etc.). (2) This is a lower-bound (or minimal) estimate in that it makes use of the assumption that all the various trees reach level 12. Given the very large numbers of new recruits needed to move to the higher levels (see text above), we may reasonably expect that many trees do not make it to the higher levels. Thus, the number of those who are at or near the bottom is likely to be greater than what the table shows. (3) I proceed as follows in Att. 2, p.2. Placing as many trees of level 12 as possible into a population of 17,000 members, I deduce there would be 45 such trees (each tree being a level 12 tree). This represents a best case scenario for the membership. Since inpayments and outpayments can be calculated for a tree of any specified level, one can (as in Paragraph 15b) deduce Fortuna's total profit on level 12 trees and also the related percentage of the total membership fees that accrue back to Fortuna (58%). By then considering an average tree level below 12 (say level 11), one can again calculate the maximum number of trees of level 11 there could be in a membership of 17,000 (namely 73 such trees, making every tree a level 11 tree). Again, one can deduce the percentage of members' fees that then accrue back to Fortuna (62%). The calculation is carried out for average tree levels that range from 12 down to 6, showing corresponding increasing percentages for Fortuna. (4) Each entry of loss has subtracted the promised payment to members at the respective levels. For example, a level 5 loss is computed as 950 x ($250 - $76.50); results rounded to the nearest $1,000 for each level. Losses are thus computed relative to the initial cash payment of $250 and have not considered any monthly debit ($250/ month) against members' accounts. These debits probably remove (or wipe out) the off-setting payments that are allowed in the above computations for levels 1-6. Thus, losses are likely to be larger than shown. (5) This is a very optimistic assumption and generates the smallest losses for the members. Due to recruiting difficulties, a number of trees may be expected to stop growing before anyone would reach levels 11 or 12, and possibly sooner. Thus, the current membership of about 17,000 would probably have a larger distribution of members toward the bottom of the scale than what is shown above, with correspondingly larger estimates of losses.