‘Useless’ Business Help: Inside a $200 Million Fraud Case


'Useless' Business Help: Inside a $200 Million Fraud Case

Illustration by Leif Parsons for Bloomberg Businessweek

Maranda James, a stay-at-home mom in West Monroe, La., was looking for ways to bring in some extra income in late 2011. So when she stumbled onto a Facebook (FB) page that led her to a $49 online course about how to sell merchandise on EBay (EBAY), she bought it.

The initial sale led James down a rabbit hole that ultimately cost her more than $10,000 for services that promised to help her start a business, but delivered nothing, she says. She’s among tens of thousands of people who lost money in what the Federal Trade Commission calls a fraud that has scammed victims out of more than $200 million since 2008.

On Jan. 9, the agency sued seeking to shut down the group, called the Tax Club, in federal court in New York’s Southern District. The decade-old operation, based in Utah with Manhattan offices at the Empire State Building, purports to sell business assistance such as bookkeeping and tax advice to people like James who want to start small businesses, according to the FTC complaint (PDF).

Scams promoting work-from-home businesses are among the most common online frauds, preying on people who believe they’ll earn back the money they’re handing over to fraudsters. The FBI tracked more than 17,000 reports of online work-from-home scams in 2011, according to the Internet Crime Complaint Center. The victims reported losses of more than $20 million that year. An unknown number, like James, never go to authorities, so the full scope of the losses is hard to know.

The Tax Club has outward signs of credibility, with a fancy office address and video clips from appearances one executive made on Fox Business and local NBC News prominently displayed on its website. Those masked what the FTC says is an enterprise designed to rip off would-be business owners. The group is made up of a dozen companies operating under more than 60 business names, according to the FTC’s complaint. The agency says this web of entities, with names like Corporate Tax Network and the Success Planning Group, is controlled by three college friends, Edward B. Johnson, Michael M. Savage, Gary J. Milkwick, and a fourth man, Brendon A. Pack. The four moved millions of dollars among the intertwined corporate accounts and into their personal bank accounts, according to the lawsuit.

Johnson’s lawyer, Jeffrey Knowles, said in an e-mail that his client sold the company over a year ago and “strongly denies the FTC’s allegations” against him. Attorneys for the other three did not respond to two e-mails and phone calls seeking comment.

Maranda James’s encounter with the Tax Club mirrors the narrative in the FTC’s lawsuit. Shortly after she purchased the EBay selling course, James got a call from a Tax Club salesman who said he was referred by the company she bought the course from. Among the first questions he asked: “Have you ever owned a business before?” James says. “The first time you tell them no, not really, they go in for the kill then. You have absolutely no idea what you need.”

In less than two months at the end of 2011, James says, she signed up for a domain name, a logo, bookkeeping services, and tax assistance—all things she was made to believe she would need to open her planned Internet business. “It was very, very high pressure,” she says. “You were led to believe that you would be audited by the IRS if you did not go through these steps.” She knew she had a three-day window to get a refund. “What you don’t realize at first is you’re not going to know all this is useless until after three days is up,” she says.

James ended up charging more than $10,000 on credit cards for the services. The Tax Club salesmen (the callers were always men, she notes) even offered to get on the phone with her credit-card company and ask to raise her limit, she says. The services she was supposed to be purchasing were never delivered or were irrelevant to the business she hoped to start. When James asked for her money back in December 2011, the Tax Club refused, citing the three-day refund policy. Her credit-card company wouldn’t void the charges because she had approved the purchases online, she says.

Similar stories have played out for tens of thousands of Tax Club customers since at least 2008, according to the FTC. The Tax Club bought lists of customers from other companies that sold “work-at-home” programs. Then telemarketers, working from a suite on the 60th floor of the Empire State Building, called people like James and claimed they were referred by a company that the victim had done business with, the FTC says.

Sales calls could last an hour or more. The people on the phone used heavy-handed tactics, according to the lawsuit, including suggesting that the initial business program the victim purchased would fail without the Tax Club’s help. The FTC says the telemarketers maximized how much money they could extract from each customer.

“The exact price typically depends on the amount of savings and credit consumers have available,” the complaint says. “The Defendants’ sales representatives probe consumers’ financial circumstances during sales calls in order to maximize purchases and price.”

FTC spokesman Frank Dorman says the agency got more than 600 complaints about the Tax Club. There are no criminal charges associated with the case. The FTC, along with the attorneys general of New York and Florida, are suing to shut down the businesses and freeze the owners’ assets.

James has since paid off the credit-card charges from her Tax Club bill. She didn’t report them to any authorities, but left a negative review on the Tax Club’s Yelp profile. “I went through so many sleepless nights, just stressed out about all this money,” she says.