Hashrocket execs (not Obie) charged in $425 million mail fraud case

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.

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!

http://en.wikipedia.org/wiki/Sweep_account

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.

"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."

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.

Thank You,

Adam Lowe

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.

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.

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.

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.

"Hashrocket is NOT connected with any wrongdoing. The gov is doing its best to railroad my partners but they are fighting back!! (PLS RT)"

http://twitter.com/obie/status/17608288414

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.

Can someone explain this? What is Hashrocket? Who is Obie? I assume this is related to ruby on rails?

http://bit.ly/united_dir_filing

And while I wish I could say I was a super L33T hacker, I'm afraid these docs are public record if you are set up to look.

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.

http://hashrocket.com/people/view/mark-smith/ http://hashrocket.com/people/view/marian-phelan/

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.

http://bit.ly/united_filing