1) Hashrocket has absolutely nothing to do with the criminal complaint
2) In the USA people are innocent until proven guilty
Now if you're interested in this case, read on...
There are hundreds of independent yellow pages (including Yellow Pages United) that legally use the term Yellow Pages and the "walking fingers" logo. http://en.wikipedia.org/wiki/Yellow_Pages
My partners have been doing direct mail and publishing a real, actual, yellow pages "Business Book" for something like 10 years. I've personally known them for almost 4 years and they're not crooks. They are important figures in the community and employ a few dozen people here. Their legal counsel for compliance with postal regulations is some of the best in the business and they have been operating without ever having any fear of being subject to criminal fraud prosecution.
Their detention hearing was today. After 5 hours of testimony the federal judge from Florida's Middle District decided to release Mark, Marian and Chris on bond, basically disagreeing with the Atlanta court's request. What I witnessed during the hearing was political grandstanding, a run-amok federal prosecutor trying to make a name for himself and sheer cluelessness on behalf of the government. A ton of "facts" in the criminal complaint simply don't make any sense. For instance, they claim that the FTC consumer complaint database has over 100,000 issues in it related to United Directories. That is plainly false and we heard testimony in court today that the FTC regularly investigates companies once they exceed 5-10 complaints. That the FTC would ignore 100 thousand complaints over the course of 5 years is complete bullshit.
Also, the $425MM figure being widely quoted in the news is based on deposits figures from United Directories' (UD) sweep account. SWEEP ACCOUNT. They summed up all the money ever deposited into the UD sweep account and spent hours claiming that the money had disappeared. It hadn't disappeared -- it never existed in the first place!
In an almost funny episode, the federal prosecutor admitted he did not know what a sweep account was, later calling the explanation "trickery" on the part of the defense.
There's so much more to this case than what the media is reporting and we're going to do our best to make sure that our side of the story, the truth, is heard. All of Hashrocket is pretty distraught, but we'll do our best to soldier on and support our friends in whatever way possible.
I have little doubt this is essentially what happened-- quite possibly operating completely within the law. Perhaps they do publish a book. But we've all heard about "directory" services like this and I dare anyone to keep a straight face and say they don't greatly benefit from deceiving people.
They produced, published and mailed out a real 1000+ page book, twice a year, and I'm aware that it cost them millions of dollars and lots of manpower to do so. We can debate the usefulness of paper-based yellow pages in this day and age until the cows come home, but either way it would not mean they committed fraud.
I do not think the pervious commentor was implying that they committed fraud; he or she was simply saying that they likely benefit from deceiving people. Many legit companies benefit from deceiving people.
I think it's rather rude of you and that previous commentor to assert such things. A company does not 'deceive' its customers just because you think the service they offer is useless and could only possibly be sold as a result of grandiose claims of effectiveness and other false pretenses.
In fact, in this day and age, large parts of the worlds still work the same way they worked ten years ago. Time and time again, we internet savvy folks grossly overestimate the amount of business and consumption that has shifted to 'the web'. Yes, Amazon has a revenue of 24.5 billion. Do you realize what the total size of that market is?
I know someone that still makes money printing books of coupons that the receivers can redeem to obtains discounts, rebates, etc. If you honestely believe that companies only invest in that out of custom and the false belief that it still yields results, then you are out of your mind. You are mistaking intelligence for knowledge and making claims about a subject you actually don't know anything about.
Sending businesses invoices that are not really invoices until you read the fine print is scammy, even if the majority will never get paid it is essentially hoping for administrative people not being 'on the ball' enough to realize what they're doing.
Big corporations invented 'purchase orders' for that reason so they're fairly well protected, but the smaller companies that outsource their books because they're too busy doing their work are the ones that are the victims of companies like these.
I've received a couple of such 'not invoices' from companies here in NL and Belgium and they're usually crafted well enough that you have to read them three times before you realize they're not legit. One of them actually presented itself as a 'kvk' which is short for 'kamer van koophandel', the local chambers of commerce.
They're parasites, pure and simple, selling a service for which there is no real demand other than to create a 'product' used as a fig-leaf to hide the scam behind.
Do you by chance have an example of the solicitations in question? Showing that the solicitation was designed in good faith (and not to confuse people) can go a long way to quell the rumor mill.
- They clearly state that it's not a bill/invoice.
- The fine print explains that there is no obligation to subscribe.
- The fine print explains that they are not affiliated with the actual Yellow Pages.
- The fine print font is larger than your typical bank statement fine print.
- The typical Yellow Pages logo is prominently featured in the solicitation. This is probably not illegal, but can be seen as potentially misleading.
- The first line of the return card is addressed to YELLOW PAGES (as opposed to Yellow Pages United). Probably not illegal, but again, potentially misleading.
Opinion:
I think they (United Directories, not Hashrocket) adopted an unpleasant business model that I wouldn't want to be associated with. But considering Exibit A, it appears that as far as the solicitation goes, they may be operating within the borders of legality. It will be interesting to see what the court will decide.
If it is within the borders, it's just so, not by much. Also, legalities aside, this is unethical business behaviour and I wouldn't want to be associated with it in any shape or form.
But, hey, maybe there's no such thing as bad publicity.
I think in this case, there is such thing as bad publicity. And as much as it may be unfair, I'd be surprised if this story didn't affect Hashrocket as well (which is not guilty of any wrongdoing).
This kind of deceptive business is quite common, and they usually get away with it. It would be naive to think that the Feds have the resources to go after every company that engages in deceptive marketing. There is something more here. They have taken the trouble to get access to bank accounts, this is no minor step. I think they saw enough in those accounts to warrant going after this. While there may well have been a sweep account involved, the document seems to clearly imply that they looked at the pattern of individual deposits coming in from the "customers." To say that this is some overzealous prosecutor desperate for fame seems a bit hasty.
Consider that they pulled records of how many business reply cards came into the PO box and compared that to how many names were actually published in the book. They compared that to the bank accounts. While I have my doubts that the actual solicitation was illegal and that the total dollar amounts were so high, there seems to be more here than just an out of control prosecutor.
If United billed far more names than they actually published in the book, that would be fraud.
After reading the complaint, I think its pretty clear the reason the Feds thought it warranted this much investigation:
"In November 2009, two victims from the Charles Smith/YPDP fraud scheme contacted the United States Attorney's Office in the Northern District of Georgia, indicating that they were still receiving fraudulent Yellow Pages solicitations..."
When they investigated and realized that the solicitation came from a company owned by Charles Smith's brother, I'm sure that was enough to launch a full fledged investigation.
My analysis was in fact limited to the legality of the solicitation. I'm in no way qualified to figure out the legality of their operations in general.
Mark's brother Charles has been estranged from the family for 20 years or more. I have known the family which is very close knit and court was the first time I ever heard of the existence of Charles.
Just to clarify per what was presented by both the prosecution and the defense in the case the walking fingers logo and yellow pages name are public domain. The various local phone companies engaged in the exact same business model have no more claim to them than anyone else. The only difference being that most of them were given the advantage of government subsidies and a bureaucratic pseudo monopoly blessing.
True, although I'm betting the local phone companies' distribution model more accurately fits the traditional definition of "the Yellow Pages". When people think "Yellow Pages" they think of a free telephone directory distributed to all residences and businesses in the area being advertised in.
According to the complaint, United Directories published 27,626 copies of the book in 2009. Exhibit A of the complaint is an advertisement they sent to a small business in North Las Vegas for the "National Business Edition" of the "Yellow Pages". I don't see how, with 27,626 copies printed, the United Directories' Yellow Pages could possibly meet the traditional definition of "the Yellow Pages" in a "National Business Edition".
So yes, while probably not illegal, its deceptive to use the term "Yellow Pages" when you're just publishing a lower circulation business to business directory.
1) Hashrocket has absolutely nothing to do with the criminal complaint
If the people named in the complaint are executives of Hashrocket, then it has something to do with Hashrocket, however indirectly.
2) In the USA people are innocent until proven guilty
In the US criminal justice system, there is a presumption of innocence. That doesn't have much to do with whether one is actually guilty or innocent, in the USA or anywhere else.
It is, only if you make up an example quite unlike the one at hand. If an exec of a firm gets charged with fraud, it's not a piece of information you'd ignore when doing business with that firm, even if the fraud charges are regarding another venture. Suppose you're negotiating a deal with some company and in the process they tell you 'Oh, a couple of our key executives were just charged with fraud. But, really, this has nothing to do with us'. Your business partner mumbles 'Hmm, I'm not so sure about this...'. Do you reply 'Oh, quit being pedantic!'? Probably not.
If your Chief Financial Officer is indicted for money laundering, it is a bit of a problem. Even if the charges are related to a completely separate company.
If these guys are as upstanding as Obie suggests they should resign as officers of Hashrocket immediately to avoid tainting hashrocket further.
The damage that has already been done can't be avoided but no need to risk further damage.
Distance is key here. Silent investor, maybe. Officer of the company, no way.
The bad bit here is that bankrolling legit companies like hashrocket from cash made with this scammy 'service' makes the money laundering claims more believable.
In the US criminal justice system, there is a presumption of innocence. That doesn't have much to do with whether one is actually guilty or innocent, in the USA or anywhere else.
Nor does this have much to do with whether the public (your paying customers and/or neighbors) believe you are actually guilty or innocent, unfortunately.
I think it's pretty foolish of Obie to defend his friends here so publicly. Even if this is all legal and they are eventually vindicated, most folks know of these sorts of "businesses" and very few people find them upstanding ventures. It makes me question what completely legal, but of questionable value, business practices Hashrocket themselves conducts?
I've read the complaint and had a look at a sample 'not an invoice' and I find it commendable that you stand by your friends in times of trouble but really, don't you think that their business model is more than just a little shady ?
It reminds me of people preying on old folks by overcharging them for washing their windows or mowing their lawn because they 'agreed' to being overcharged.
Hiding behind 'the fine print' is not usually the mark of a great business.
I don't know the details but what the article is reporting seems pretty bad. Why did that person receive an invoice from your partners' business book, if he was not signed up for it?
Or are going to say that it was not really an invoice, but an advertisement? In my opinion small business owners do not usually confuse an advertisement with an invoice, or otherwise they would not stay in business for long.
So if that person says it was an invoice, it probably looked like one.
The prosecution was asked to provide evidence that people received an invoice that had not signed up for the service. They were asked to provide a list of the businesses that complained and/or claimed fraud. They did not produce either. They just kept throwing out the same few numbers but never provided anything of substance to back up the numbers they claimed.
Totally understand your distraughtness. And loyalty to friends is a bfd in my book. That being said, it's probably in the best interests of you and hashrocket to not comment, to not talk about it, to have a conversation with your lawyer about it, and let the courts be the courts.
I think that it would be wise of you to stay publicly silent and to only state your position after the legal system has done its job and to take action then if necessary. I am a neutral third party, I think that you would be wise to heed my advice.
Yeah, Bernie Madoff was respected "in the community" as well. Usually the interface between the dark side and the shiny respectable businesses are folks just like these two. They want the respect and have the charisma and flexible ethics it takes to pull off the double life.
If I were Obie, I would cut the cord with these clowns and work on salvaging hashrocket, even if it means shutting it down and starting again free of financial entanglements with these two.
Accusations stain, opinions leave scar's and acquittal does not completely clean or heal.
Chose to remember, on this 4th of July, all the people who have given their lives so that the laws of our land can be properly exacted between the guilty and the innocent.
Chose to allow the courts to decide if United Directories crossed the line between legal and not.
Chose to wait. Chose to trust. Chose to say good things or nothing at all.
Because in the end, accusations stain, opinions leave scar's and acquittal does not completely clean or heal.
Chose to never abandon a relationship unless you can accuse them from first-hand knowledge and then do it face to face in private.
Not really related to the story, but can someone explain to me why Americans put '$425MM', where does the second M come from? Here in the UK we'd just put '£425m'? Just curious because I saw DHH use MM too.
In a lot of banking and finance, they use "M" to abbreviate thousands and "MM" to abbreviate millions. It's based on the roman numeral "M", so "MM" is meant to represent "a thousand thousands". Of course if you know anything about Roman numerals, "MM" is in fact = 2,000.
I believe the appropriate abbreviation is "$425M", not "$425m". The AP Stylebook avoids the issue altogether and dictates that million, billion, etc. should all be spelled out and in all lowercase.
Having absorbed the idea of 'sweep account' from Wikipedia, I'm not sure I understand why that matters to the tale. Summing up deposits sounds like bad practice, for sure, but I'm not having any luck understanding why the fact that it's a sweep account matters.
Sounds like a sweep account is just an umbrella for a day-to-day account and an investment vehicle.
It's in this sentence at the end of the wiki article:
"Some companies choose to have all of their funds swept into a sweep account..."
Some sweep accounts go back and forth in total every night, some only go back and forth according to funds being over or under a certain threshold.
Let's say your business on average has $10k in an account that doesn't earn interest, because legally the bank can't pay you interest on a business checking account. But, they want to pay you interest, because they want your business.
Every night, the bank "sweeps" the money from the checking account into an investment account that earns interest, then "sweeps" it back into the checking account. That way, they follow the law and you get interest on your funds. It's a completely legit paper trade, nothing more.
However, if this happens every night, and you have $10k in your account on average, then in a week the sweep account shows $70k in deposits, though you're true balance is only $10k.
If you have an Etrade stock account, you see the exact same thing happening between the cash in your account and a money market fund, all transactions marked with the word "sweep" in one form or another.
If prosecution merely added up the deposits in a back-and-forth sweep account to get the $425mil number, then it is a bit ridiculous to call it a "$425mil fraud".
See http://news.ycombinator.com/item?id=1583135; not surprisingly based on your and adam_lowe accounts the Feds have filled a motion to drop all charges (I hope with prejudice). See the link for a bit more editorializing by various people including me, but when you compare this to their usual behavior it's very clear the Feds never had a case.
I can't wait for Obie's next book, "The Jails Way"
seriously though, if you associate and start businesses with people who send fake invoices for deceptive services like this, you are probably a sleazeball.
even if you do have glamour shots of yourself all over your webpage.
This bit from the Atlanta Journal Constitution shares more details on the case:
"From June 2004 to December 2008, United Directories deposited about $425 million into bank accounts -- all of the money from businesses submitting payments for ads, Johnson said. The company did in fact publish an advertising directory. In 2008, the company received payments from about 162,000 businesses, yet its directory contained only about 55,000 business names, Johnson said.
According to the criminal complaint, United Directories also misled businesses into thinking they were paying to renew advertisements in the actual Yellow Pages directory."
The facts of the case are being skewed far from reality. It is sad that innocent until proven guilty seems to have been lost in the rumor mill. Even in a court room at times today that seemed to be the case. Mark and Marian provided seed money for Hashrocket and founded the company with Obie. They also own a separate company called United Directories that provides a paper and online business listing service. The companies are completely separate entities. None of this has anything to do with or any impact on Hashrocket. Hashrocket is a stand alone, profitable consultancy. That being said, I have always known Marian and Mark to do everything they engage in with the utmost integrity.
Hashrocket and United Directories are in the same office building. I was in the conference room next to the United Directories space when the police came to serve their warrants to United Directories. The police officers proceeded to tell the United Directories employees, "You no longer have a job. This company does not exist anymore. You will not be receiving a paycheck." Again, what happened to innocent until proven guilty?
Then came the bail hearing today. It lasted 5 hours. I was shocked and disheartened at how few actual facts were presented by the prosecution in order for them to drag someone into court. I was further disturbed when there was almost no basis provided or facts provided to how they were making the jump from what information they did have to trying to accuse Mark, Marian and their employee Chris of the allegations against them. The prosecution then further showed a total lack of ability to understand a basic business banking account or simple math. The judge made the decision at the end of the day to release Mark, Marian and Chris on bond but the prosecution forced his hand with a legal technicality to delay the decision.
At the end of a very long and tiring day I have no reason to doubt my friends' character. I am saddened at what I saw transpire in our law enforcement and legal system over this past week. Hashrocket is self-sufficient and will continue to build awesome web applications for our clients. We would appreciate everyone's support in promoting facts over rumors.
None of this has anything to do with or any impact on Hashrocket.
...a company founded in part by some guys that run what is, at best, an ethically bankrupt company preying on the fears of gullible small-business owners, and at worst, an outright fraud?
Sure, that'll have no impact at all, because people don't care at all whether the consultants they hire have a reputation for dirty business practices...
At the end of a very long and tiring day I have no reason to doubt my friends' character.
That's more disturbing than you probably realize. If Hashrocket and its people refuse to condemn a pretty transparent attempt to trick people out of their money, and instead focus only on the technical legality of it, that says to me that Hashrocket is probably a pretty amoral company.
Don't delude yourself, whether the legal shrapnel hits Mark, Chris and Marian or not, this reflects terribly on Hashrocket because of the poor ethics displayed, and others from the company publicly jumping to their defense and declaring that they've done nothing wrong worsens the perception substantially, it shows us that Hashrocket as a whole sees no ethical problem with running a straight up scam, as long as it's done within the letter of the law.
We would appreciate everyone's support in promoting facts over rumors.
The details may be relevant to the legal situation, but one look at that "advertisement" is all it took for me to throw out any doubt that these guys operate in an ethical void.
If you want to be a just-barely-legal scammer, that's fine, go for it, you might get rich and you might even avoid prison if you're smart enough. Just don't expect your more legitimate businesses to slip the stink of the scammy ones, that's not the way trust works.
Well, Adam, the facts are that your friends are running what can best be characterized as a shady business. Perhaps they didn't break the law, but I find it saddening to see Hashrocket folks fall over themselves to defend business practices such as these. Makes one question what kind of business-ethics Hashrocket encourages, doesn't it?
I think it's a bit much to suggest that your friend's business is just an innocent victim of an overzealous and incompetent law enforcement system. The complaint has enough facts contained in it to at least suggest that there is something shady going on. The very nature of their industry is suspect.
Defend them all you want, but consider that it only encourages people to associate the accused (and their ethics) with those with the people at Hashrocket.
My goal was simply to relay some of the facts that came out of sitting through a round of court proceedings. One of the main things being that a lot of what was put in the complaint seemed to be just plain wrong. That being said my intent was not to defend the industry or the business model. I got out of recruiting early in my career because I couldn't tolerate all the shady practices and lack of ethics in that industry. I simply ask that everyone give them the courtesy of due process and not condemn the hardworking employees of Hashrocket for something they had nothing to do with. We are a separate company in a totally different industry. We are self sufficient financially and have been for some time now. We have always and will continue to pursue the highest level craftsmanship in our development and complete transparency in working with our clients.
What is most disturbing is that these weren't far-away investors of Hashrocket. One was the CFO and they were directly funding Hashrocket since its inception. As Obie's business partners, that's pretty shady. And whether its determined that they were within their legal limits or not, we've all been made aware of how sleazy the whole operation is. Hashrocket would do well to distance themselves from this stuff as much as possible, and declare that they will no longer receive money from an operation that survives on scamming people out of their money. The more Obie shouts to the world, "These are my FRIENDS", the worse he looks.
He's probably right about the prosecutor being a grandstanding twit with little interest in justice, but only concerned about his own political career. I've been involved in (though not a party to) two criminal cases and neither case left me with much admiration for prosecutors. I realize they are just doing their job, but it's clear their own interest are placed far above the needs of justice.
But Obie is wrong about the nature of these types of directory businesses. As a business owner, I've come in contact with these type of companies and the most gracious description of them would be "ethically challenged". While they may operate under the letter of the law, they rely upon naivete and/or lack of scrutiny. They are no better than those companies that add a charge to your phone bill and hope you don't see it.
I can understand why people are disappointed to learn that Obie has decided to associate himself with people that are involved in these types of shady businesses. I also see why people would be concerned that Obie has partnered with these kind of people in building Hashrocket.
I don't really care if a company wants to be "hip" or whatever, but title's like "Chief Morale Officer, in charge of alchohol and fun activities" just make you look like idiots.
I dunno about that. They just sold to Amazon because they were running out of money.
Exactly how much revenue does a competent CEO need to accumulate before they can turn a profit and become solvent? Tony marketed his way to $1 billion with borrowed money, but it's shameful to have the much revenue and run out of funds.
Well, to be fair, most of the borrowed money came from his own pocket, which is why he ended up owning more than 40% of zappos (probably more that 50% if you include venture frogs' 36% involvement).
Most boards hate companies who spend extravagantly on their employees. For example, even though Google is doing great, quite a few of their board members hate how Eric Schmidt feeds Google employees so well. According to a few I know at google, they had to pull back a few items on the menu to keep the board happy. Most boards are just after profits and don't really see the connection to employee happiness.
In fact, there was a YC company board who rejected the purchase of an expensive espresso machine just because the employees wanted it... that destroyed employee morale for the next 2-3 months, and also caused traffic to go down. Eventually the board gave in and bought the company the espresso machine and it really paid off -- employees were happy, traffic rebounded, and board members actually stated that they wished they knew this earlier. Won't say which YC company, but it was a talk from one of the YC dinners during my round.
tl;dr: Boards are always after the cash and rarely see the connection to keeping employees happy, yet time after time they make the same stupid mistakes.
If the claim of HALF A BILLION dollar fraud is true it seems unlikely that Obie would not know something about it. If my buddies and business associates made that kind of money I sure as hell would know everything about it. HOWEVER, this does not diminish HashRocket or Obie's work-- the Rails Way is THE book that taught me Rails. Hashrocket has contributed so much to the ecosystem I sure hope that doesn't change.
edit: It seems quite plausable that HashRocket people actually helped developed the "fraud" site... If they can pull off a HALF A BILLION dollar scam just think that they can do for my company! The line between innovation and fraud is often very thin.
I believe that's the relevance of the sweep account issue. If you're using the "deposits" into a sweep account as the basis for measuring the supposed & claimed "fraud", its an incredibly overinflated figure.
This is an extreme demonstration of brand value and why some companies are so quick and determined to cut out trademark misuse.
Selling listings in a "directory" at $300 a pop isn't easy. Stick the phrase "Yellow Pages" and a YP logo on it, however, and you can clearly clear millions of dollars over several years.
Here in Europe there's a company that sends out something similar. For example in Italy it's called "Registro italiano delle imprese in internet". I mistakenly registered with them and they started sending me invoices of more than $1000 dollars each (which I never paid).
I did some research and they have been declared illegal in many countries but somehow never got charged. If these guys are doing the same thing, then I don't know if it's illegal or not in the USA but it surely is something unethical with the only goal of spilling money from people.
And as I said on Twitter... If I were in his situation I would keep my mouth shut and would be directing all questions to my lawyer. Otherwise you run the risk of increasing the guilt by association. This kind of stuff can ruin a company.
I understand the desire to publicly defend your biz partners, especially if they're your friends. So if you trust your friends enough to put your name and business on the line for them, then I guess ignore my advice. IAMAL, so what do I know? :)
I talked to my lawyer and he was fine with me publicly commenting on it, especially since the mainstream media is doing its best to turn this into a huge story.
AND
I do trust my partners enough to my name and business on the line for them. They are innocent.
while not illegal, the direct marketing online yellow pages biz is shady as hell, comparable to online lotto's, online deals and foreclosures database purveyors, and "punch the monkey"-style advertisers (all legal businesses that employ many people). Not something I'd consider as a value-added business, more sucker-traps than anything else. The fact that "yellow pages" and the logo are up in the air makes that entire industry a massive gray area. I wouldn't want to be associated with that. What would we say if 37signals launched a bargain network service tomorrow? . . . not illegal, but goodwill down the drain.
There is a huge difference between innocent according to the letter of the law and innocent in a real-life sense.
See the OJ Simpson case for a nice example of the two.
Your friends may be 'innocent' according to the letter of the law - when all is said and done. But meanwhile they look guilty as hell in the eyes of the general public of maybe not scamming half a billions worth of dollars but still a significant amount out of the pockets of hardworking people and corporations.
It may be 'legal' but it certainly isn't 'right', and by associating yourself so strongly with these people you are not helping yourself or hashrocket.
Your lawyer has no stake in your public image but you do, your interests are not aligned and I think you've been given some bad advice.
There is a huge difference between innocent according to the letter of the law and innocent in a real-life sense.
Definitely. As a matter of fact, courts in the United States don't even claim to determine innocence; rather they determine guilt. You're either "guilty" or "not guilty" beyond a reasonable doubt of a crime.
I visited Hashrocket's Jacksonville office for a couple days earlier this year, just to watch and learn from the programmers there. They seem like a good group of people, and I'm sorry to see them getting caught up in this.
The alleged fraud in this story was by some Hashrocket execs as part of a separate company. If all of this turns out to be true, I still wish the best for the programmers at Hashrocket.
I think reading any/all headlines with the mindset of "interesting if it's true" is worthwhile here. The facts need to materialize before declaring fraud or any other type of malice. $425 million makes for a wonderful headline.
Illegal, maybe not...but malicious? Certainly. An advertisement just doesn't come out accidentally looking like it's an invoice from the Yellow Pages (the real ones), that takes effort. The intent is crystal clear, it's not to convince someone that they would gain something from your service, it's to trick them into thinking that they already owe the money.
Really, now - can anyone honestly imagine any plausible scenario by which this "business model" could have been devised other than "Hey, I've got a great idea, Yellow Pages is not a trademarked term, let's print up an ad that looks like one of their bills and send it to millions of small businesses, some of them probably won't read the fine print and they'll pay up, thinking that they'll be removed from the Yellow Pages if they don't!"
If you really think this was more innocent than that, I've got a bridge to sell you. Even if it's legal, this is some shameful shit, and that Hashrocket is associated with (let alone founded by) these douchebags casts a long dark shadow over its image...
So on taking a further look at the court filing I think what we have here is your basic "real world spam" business model. Unfortunately these things are all over the place as they are a proven way to generate money by sending out a firehose of solicitations for an essentially useless "service".
Looking at the solicitation it clearly covers it's ass with all sorts of disclaimers, despite looking deceptively like a bill at first glance. I don't think the solicitation itself will hold up in court as being fraudulent alone. What they are alleging is that they did not even bother to put all the names in the book, and they did not send out as many books as they said they would.
You might ask yourself how such a mailing could be successful. Well, it is a sad truth that there are many aging business owners in many small towns across this country who are not quite on the ball enough to read the fine print anymore. Who falls for all those Nigerian emails? Obviously someone. Basically what these guys are doing is vacuuming up small checks from old man Higgins who is still running the ole' TV repair shop in downtown Podunk, even if nobody much bothers to fix their VCR anymore and the new Wal-Mart has got em for $49 anyways.
At some level this is along the lines of those "Who's Who" books that select you to be in a book of awesome people, and wouldn't you like to buy a copy? That kind of thing is pointless and deceptive, but not illegal. There seems to be more going on here.
A few questions:
Why get mail at a PO Box in Atlanta if this business is in Florida and it is so legitimate?
Illegal or not, do you really think this is the kind of ethics you want in your CFO? Or was it a deal with the dark side that had to be made?
After reading the complaint, I came to a similar conclusion. Was it fraud & money laundering? That's for the court to decide and they have a presumption of innocence.
Regardless of that outcome though (and assuming United Directories doesn't dispute that Exhibit A is one of their advertisements), its pretty clearly a shady business in my mind. While technically (probably) legal, its a spammy business model that adds very little value.
Its not really fair to Hashrocket employees that this will taint Hashrocket's reputation, but it unfortunately will to some extent.
Oh and totally agreed about the whole -- if your brother's already been indicted for the same exact thing and is currently a fugitive you might want to rethink the business model -- thing. That just shows a complete lack of common sense.
And another thing. Why in the hell would you run a yellow pages company if your brother is already a "fugitive" for doing the same thing. Really? Don't you think that might be a sign... I mean... Really?
Deceptive marketing is not illegal per se, but intent to deceive (a question of fact, based on the type of marketing used) is illegal. However, this is difficult to prove.
1) Design an "order form" that looks deceptively like a renewal form for the regular local yellow pages. The goal is to confuse the recipient that this is a renewal for your local yellow pages that you already subscribe to. Make the return address of your company say "YELLOW PAGES." Take advantage of the fact that the term Yellow Pages and the walking fingers logo are not copyrighted.
2) Have your shady lawyer review your order form and add enough disclaimers to cover your ass and comply with postal regulations. Everything is spelled out in the fine print. This is not a bill. You are ordering a service to be included in our book. We are not affiliated with your local phone company. We are not even going to send this book to anyone except other "subscribers" and a few libraries, etc. We will also put you on a website.
3) Mass mail this "Order Form" to your database of business names across the country. The response rate is small. But as the $300 fee is relatively high and your actual cost is negligible, the payoff is worth it. Note that by ordering you are set up to auto renew your $300 order. The book is published twice a year.
4) Send customers a bill. Charge credit card, get a check. Note that this could be an area where the prosecutor vastly overestimated the dollar amounts involved The total count of incoming mail was for order form replies. A smaller fraction of those recipients would actually have paid the bill which presumably arrived later.
-If customer uses a credit card to pay, set up auto renewal, per terms of order form.
5)Have book of names printed. How many to print? Well, you actually aren't obligated to print more than a handful, per the terms of the solicitation. Here is the crucial number to optimize because printing those books actually costs money. You need to print just enough to send to customers to show they got something. Did they send one to each customer? The prosecutor is alleging they did not based on records from the printer. Again though, they never said they would publish any specific amount or that as a subscriber you would get a copy yourself. Assuming they did actually send a book to each subscriber, then the scope of the dollar amounts involved would be much smaller than alleged, though still quite lucrative.
So why print and mail books at all? Two reasons. One is to maintain some defensibility to the business in case you ever end up in court (cough.) The second is so you have something to show the smaller subset of your customers who pay but end up complaining. When they try to file a credit card chargeback you can send them a book and prove some service was provided.
Now. Up to this point, we could be within the bounds of legality. But the prosecutor seems to be alleging something more. Specifically that the number of names actually printed in the book was far below the number of paid orders. This would clearly be fraud. But maybe they did print every paid customer's name in the book. Maybe the prosecutor indeed has his accounting wrong and maybe United was hyper careful to keep their records in order. This is where the crux of the case will probably lie. To get access to the books though, the prosecutor had to get the indictment, and that's why he filed with the information he had.
6) Test, optimize,repeat. Mailings aren't cheap. You've got to try to keep that response rate up. Which zip codes do you mail to? Which customers can continue to be charged year after year? Are repeat mailings worth it? How many chargebacks can you handle before your credit card processor dumps you? Some database work is required to keep that mailing list optimal.
7) Build a website so you can provide additional "service" to your customers to increase response rates and cut down on the need to pay for all those expensive printed books. Hell, maybe even creating a web directory for small business might actually provide some value. Start looking around for people who can help you build a website.
8) So now you've got this cash cow, but the problem is it is a deceptive business at best. You want to be a respected member of the community, and flash some cash out on the beach. No one can know what these mailings of yours look like. So you put your PO box in one state under one name, and you put your office in another state where you live under a name that sounds impressive. United Directories. You can tell everyone at cocktail parties that you are the premier publisher of B2B directories for specialized verticals, yada yada.. But that's not enough. You want to be part of something really fun and sexy, so you invest in this new software consultancy. Despite having very little to add to the business other than cash, charisma and perhaps innovative bookkeeping skills, you get to be Chairman and CFO. Finally. Respect.
9) Everything's cool. Ignore those letters of inquiry from the FTC. You can make this work. Your brother was an idiot and got too sloppy. Maybe it's time for a new Porsche.
10) Somehow despite that fact that you are a total sleazeball, you've managed to fund a great company and stand back enough to avoid destroying it. When the shit hits the fan, it's time to call in some favors.
ego can help build empires but it is often their downfall.
Just my interpretation.
Here's the indictment. Guess I'm good at hacking something.
Mark Smith funded and funds Hashrocket. Hashrocket isn't profitable without Mark Smith. If Obie had no knowledge of this scam then I feel sorry for him and this situation. I guess "The Rails Maturity Model", the Hashrocket Way and BizConf includes taking scam money and pretending to be profitable.
You're confusing Hashrocket, the web development company, with United Directories, the company being charged. The people being charged are essentially initial investors. Pointing a finger at Hashrocket in this scenario is not unlike blaming every startup that was invested in by an angel or VC that later ended up involved in fraudulent activity. None of this means that Hashrocket is not at all at fault, but based on the news that we all have, you're drawing unreasonable conclusions. If however you have other sources, please share them here, otherwise you're just trolling.
The two executives charged seem to be a bit more than passive investors, considering they are right on Hashrocket's site. One is the CFO. That's not good.
On second look I have to concede that I could be under-rating their authority. To be fair major investors will often sit on boards, but there's no need for me to make further conjecture.
Hashrocket isn't profitable? Why not? Consulting is a pretty straight-forward business model, and they're pretty well known, so they shouldn't have much trouble charging enough to cover their costs.
Appears their DBA was "Yellow Pages United" - hah!
Their fake-directory was called "The Business Book" and members also received submission to https://www.yellowpagesunited.com/.
Compare that logo to the one at http://www.yp.com and you can see the beggining of the problem.
These guys had a true pump model - they're even a testimonial for a high-volume FAX website - http://www.faxcomanywhere.com/customers/united-directories.h... - which you can be sure was used to fax-spam the country.