Detecting consumer fraud: Bogus refunds

Investigative Reporters and Editors, Inc. The IRE Journal, May/Jun 2002 by Harris, Sheryl

Database shows public agency puffed up restitution numbers

If there's a consumer agency in your state that brags about the restitution it gets on behalf of consumers, chances are there's a great story lurking behind the numbers.

Ohio's consumer watchdog is Attorney General Betty Montgomery. Every year, Montgomery's office announces in press releases and annual reports that it has returned yet another record sum to consumers wronged by businesses.

My partner, T.C. Brown, and I were skeptical, so we ordered the agency's consumer complaint database. In and of itself, the database is a great source of information. Among other things, the database contains the name and address of every consumer who complains to the office, information on every business complained about, and a brief description of the problem.

The reaction to our request for the database was to stall, and we spent months arguing for its release. When we finally got the database, the restitution fields were missing. When we at last got the restitution numbers, they came minus the fields that would help us link refunds to the rest of the complaint database.

Eventually we got what we needed and it was worth the wait. The attorney general had claimed she helped return $10 million to consumers in 1999 and 2000. We found that at least $2.5 million of those refunds were bogus.

Our reporting showed that the attorney general's office inflated its restitution figures by:

* taking credit for refunds secured for consumers by other agencies or private attorneys;

* including offers of refunds or "savings" that consumers refused to accept;

* inflating the dollar value of refunds;

* counting refunds that companies promised but never provided.

The office that was supposed to help wronged consumers not only wasn't helping them, it was using their misfortunes to deceive the public about its effectiveness.

Remembering details

It was a clever scheme. The money was negotiated by the attorney general's office, but the dollars went directly from the companies to the consumers, so no standard audit of the office would uncover the inflated claims. And because the restitution numbers were only reported in aggregate, none of the consumers who was told a case was being dropped knew that the attorney general was in fact claiming the case as a "success."

Here's how we tracked the story: We cleaned up the data so that we could track each complaint's progress through the system. The database had multiple entries for each case. We worked up our own coding system and had to manually recode thousands of records so that we could eliminate duplicates and track the movement of each case through the office. We coded cases as "final action" when the attorney general either referred them to another agency or sent the consumer a letter saying she couldn't help them. It was tedious work, but when we linked this "final action" table with the restitution figures, we were immediately able to identify suspect cases - those in which refunds were awarded long after the AG had washed her hands of the case.

At first, we looked for obviously suspect refunds - say, where the amount of the refund was greater than the total cost of the product.

Using that list, we began calling consumers. We made some calls for small refunds, but overall we found that people whose problems were worth $2,000 or more remembered details better. Our strategy was to first ask consumers about the original problem before asking them about the refund. They seemed to remember better if we plugged into the thing that really bothered them (remember, they didn't know the AG was claiming them as successes) and it also gave us rich details to use later in the story. From the start, about 50 percent of the people denied having received the amount the attorney general cited. Some said they got refunds through other means. And still others said their cases remained unresolved. In our first 10 phone calls, we had identified $250,000 in disputed refunds.

If consumers agreed with the attorney general's figure, we marked the case in her favor and went on. We did the same thing if the consumer couldn't remember or made no sense (we had a couple of those). When a consumer disputed the refund, we got case files either from the consumer himself or from the attorney general's office.

We were surprised how clear it was from the correspondence in the files that figures were bogus or that refunds had actually been obtained by, say, the Better Business Bureau or another government agency. If the outcome wasn't clear from the file, we contacted the consumers' attorneys or the companies themselves for clarification. Companies were frequently helpful - they didn't want it said they'd been forced to give a consumer a refund when they hadn't.

Spotlight on consumers

We found it crucial to immerse ourselves in the agency's lingo. Included in the agency's calculation of restitution were "savings," which had a cash equivalent but wasn't actually cash (an example would be when a collections company forgave a debt). It was important for us to understand that distinction when we questioned consumers and wrote the story. In all, we interviewed and read the files of 162 of the 772 consumers who received refunds of $2,000 or more. We had hoped to interview more, but rumors began circulating that the attorney general might be looking for a new post. When we could show that a quarter of the dollars claimed were bogus, we decided to publish. If we had to do it again, we'd save time by making the cutoff $5,000, starting with the largest refunds and working our way down.