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Kos Legal Filing Raises Further Questions about Research 2000

Via the Washington Post‘s Greg Sargent, Daily Kos has followed through on its plans to sue Research 2000 for what it alleges to be misrepresentation and fraud; a copy of their complaint can be found here.

The bulk of the complaint consists of legal boilerplate or charges which have already been made publicly. However, there is also a new set of facts that raises potential red flags about the financial terms of the deal. It concerns Research 2000’s willingness to provide Daily Kos with a substantial amount of “free” polling, in exchange for modifying the payment terms. The relevant sections of the complaint are extracted below.

16. Shortly after the 2008 election, Plaintiffs entered into negotiations with Research 2000 for a long term, multi-poll deal that included a weekly “State of the Nation” poll and state/race specific polls as requested by DailyKos through Kos Media. The agreement was reached orally, requiring Kos Media to make lump-sum payments twice in 2009 as well as an additional large payment in December 2008 at the initiation of the agreement.

17. The parties specifically agreed that the weekly “State of the Nation” poll was to include 2,400 respondents. This remained in effect until March 4, 2010, when the parties agreed to poll 1,200 respondents weekly.

18. The parties specifically agreed that polling as to specific electoral contests was to include 600 respondents, with primary oversamples of 400 respondents.

20. By the request of Ali, claiming it would provide “immense” help for cash flow reasons, Plaintiffs agreed to advance the second lump-sum payment to May 2009 in exchange for additional polls to be performed free of charge. More specifically, in 2009 the agreement between Plaintiffs and Defendants provided that Defendants would supply 150 polls to DailyKos. Plaintiffs offered to add an additional 59 polls to the 2009 agreement if Plaintiffs agreed to make a substantial advance payment. Kos Media accepted Defendants’ offer and advanced Defendants the money in exchange for the promised 59 polls.

Bear in mind that this is just one side’s re-telling of the story. Particularly since many of the commitments that Research 2000 and Daily Kos made appear to have been made orally, or otherwise fairly casually, Research 2000 might well have a substantially different interpretation of events.

If this portion of the complaint is accurate, however, it raises some troublesome questions. Research 2000 agreed to conduct 150 polls for Daily Kos in 2009, according to the complaint, which would be paid with three large lump-sum payments, one coming in December 2008 and two others coming at some point during 2009 itself.

Research 2000 asked, according to the complaint, and Daily Kos agreed, that the third and final of these payments be advanced to May 2009 because Research 2000 was having cashflow problems. This in and of itself is not especially interesting. If Research 2000 really were conducting polls, it would incur substantial fees, probably totaling at least several hundred thousand dollars per year, from the third-party call centers that it contracted with. Particularly if it were operating on a fairly low profit margin, Research 2000 could fairly easily encounter cashflow problems, if for example the call center itself demanded prompter payments.

What is more troubling, however, is how much Research 2000 was willing to give up in exchange for receiving payment from Daily Kos more quickly. They were willing to provide Daily Kos with 59 additional polls — an increase of almost 40 percent from the 150 polls that they had originally agreed to provide them with.

Say that it cost Research 2000 about $4 per interview to complete the 52 weekly, State of the Nation polls that it had agreed to provide to Daily Kos, which at the time consisted of 2,400 adult respondents each. Please note that the cost estimates included here are hypothetical. Based on my limited experience in actually commissioning polls, this would have been quite cheap for traditional telephone polling, but we’ll run with it for demonstration purposes in the absence of other evidence; it works out to $499,200 over the course of the year. Say also that the 98 state- and district-level polls that Research 2000 had originally agreed to provide to Daily Kos in 2009 cost it $6 per interview; the higher cost reflects the fact that these were polls of likely voters and therefore would have been more expensive to complete, since it takes time to screen the unlikely voters out from your sample. With 600 respondents per local poll, this would have cost Research 2000 an additional $352,800 over the course of the year.

Thus, the total cost of Research 2000’s polling in 2009 would have been $852,000 — $499,200 for the national poll, and $352,800 for the local polls. Suppose that 40 percent of the fees that Daily Kos owed Research 2000 for this polling were due with the third and final payment — this would have been $340,800.

In exchange for receiving this $340,800 a few months earlier than it otherwise would have, Research 2000 was willing to conduct 59 additional polls for Daily Kos. The cost of these polls, assuming they were 600-person state and local polls conducted at a cost of $6 per interview, would have been $212,400.

In economic terms, Daily Kos’s willingness to push forward the timing of the payments it made to Research 2000 represented a loan. Meanwhile, the additional polls that Research 2000 was willing to do represented interest on this loan. Therefore, in exchange for receiving a $340,800 loan, Research 2000 was willing to pay $212,400 in interest, in the form of additional polls.

Needless to say, that is an alarmingly high interest rate — 62 percent over a period of a few months — for a short-term loan. One would think that Mr. Ali could have done significantly better than that through a third-party institution like a bank. On the other hand, if the marginal cost of conducting polls was essentially zero to Ali, because he was not actually contracting with call centers to place real phone calls to real people, he might understandably be willing to give additional “polling” away rather cheaply.

Again, the dollar figures surmised here are hypothetical, although the proportions are the most important thing. If, for instance, Research 2000’s polling was twice as expensive as I hypothesized, or twice as cheap, it would still be incredibly generous to increase the amount of polling you were doing by 40 percent, in exchange for receiving some fraction of the payment a few months earlier. If the facts are as Daily Kos has alleged, then, this is another troubling set of circumstances for Research 2000.

By the way, the absolute amount that Daily Kos was paying for the polls is not immaterial. There is a threshold below which it would have been physically impossible for Research 2000 to conduct the volume of polls it claims to have been conducting; traditional telephone polls are fairly labor-intensive, and call center operators can only work so fast, even if they are working for not much more than minimum wage. Daily Kos did not detail the overall cost of the polling in its complaint, but it is possible that those figures themselves would raise red flags. (EDIT: Patrick Ruffini has made a similar point).

Nate Silver is the founder and editor in chief of FiveThirtyEight.