Reframe – Frank Kern

On a warm summer day in 2002, in Charlevoix, Michigan, Richard Joseph’s bad luck began. The lawyer, husband, and father of two was walking across the driveway with a bag of garbage when his bare foot slipped in a puddle of water that had collected beneath his car’s air conditioner. His leg gave out and he landed on his back. While nothing was broken, the blow prevented blood from reaching his spinal cord. He laid there for an hour, unable to move, while his daughters watched television in the living room. By the time he was discovered, the damage had been done. He’d never walk again.

Eventually, Joseph would make it back to work at his law firm, although he couldn’t keep up his old pace. By August 2007, complications prevented him from working at all — possibly forever.

Joseph describes his mental state after yet another stint in rehab: “I’m moping, pretty much, and right around Christmas time I decided, you know, I’d better get my butt in gear and find something I can do from home. So, I tried to find work as a lawyer from home, but that was right when Michigan’s economy started to go to hell, and a lot of law firms weren’t outsourcing work.”

So he took to the internet, looking for “work from home” opportunities and requesting information from various websites.

Scamworld: The Movie

Modern snake oil salesmen

In February 2008, “out of the blue,” Joseph got a call from a salesman that identified himself as Ron Martino from PushTraffic, with a work from home opportunity.

“I told him what had happened to me, and he said, ‘gee… I have a brother who’s paraplegic. I know what you’re going through, and I will help you out.’”

Martino couldn’t talk him into anything straight away, so he began calling regularly, often just to chat. It was while this was going on that Joseph contracted MRSA, a multidrug-resistant infection he wasn’t expected to survive.

“He called me enough times. Because I knew him well enough I told him what hospital I was in. He called the hospital, got my room number, talked to me in the hospital. I remember this really well, because I was watching CSPAN and how the economy was going, and I’m sitting in this ICU room talking to him on the phone, and he’s talking to me like a good friend. He was being my friend.”

The courtship lasted around six months, and eventually Joseph agreed to purchase an e-commerce site from PushTraffic.

According to Joseph, Martino was going to set up the new website while he was in the hospital, and he guaranteed that in thirty days Joseph would be making between $4,000 and $5,000 a month, working from his bed for an hour a day.

Joseph hoped that, if he didn’t survive the infection, this source of income would be a lasting gift to his family.

While relating this all to me, he starts to choke up a little. “And I know all this stuff about ‘too good to be true,’ but he went into great detail about how his brother was a paraplegic, and he helped his brother do this, and that the reason he was going to do it was because of me, he could only have one person under his wing, so to speak.”

It was in this vulnerable state, facing death and trying to care for his family, that Richard Joseph charged $20,000 on his credit card, money that he has yet to reclaim after phone calls, a lawsuit, and nearly three lean years.

What Joseph didn’t know was that Martino was part of a vast criminal organization run by Los Angeles resident John Paul Raygoza.

Raygoza is an Internet Marketer — a 21st century snake oil salesman.

The term Internet Marketing in this context describes both a particular business model used to sell fraudulent products and services online, and the community or subculture that embraces it. It operates out in the open — with poorly designed websites, tacky infomercials, and outrageous claims designed to scare off the wary and draw in the curious, desperate, and naive. The Internet Marketer positions himself as a marketing “guru” with a product or coaching services guaranteed to generate income.

The path to internet riches begins with an introductory product, such as a book or DVD. This is often a loss leader: the real value for the Internet Marketer is that it allows him to capture your contact information. Once you’re in the system, your inbox will be flooded with offers for software, DVD sets, and coaching programs costing several hundreds or thousands of dollars.

This is what happened to Richard Joseph: after requesting free information online, some unscrupulous Internet Marketer sold his name to Raygoza’s company, PushTraffic, who ripped Joseph off.

Raygoza is an Internet Marketer, the snake oil salesman of the 21st centuryThere is another, legitimate form of “Internet Marketing” which operates much more closely to a traditional marketing business, but men like Raygoza have co-opted the term and run with it.

In some ways, his kind of Internet Marketing is an evolution of the old “make money from home, stuffing envelopes” ads you used to find in the back of Rolling Stone magazine, alongside those promising to make you a world famous songwriter or a musclehead who no longer has to take crap from bullies on the beach. In the internet, con artists have found a platform that allows them to scale their scams far beyond the penny stocks and worthless real estate deals of the past.

The Salty Droid is the pseudonymous blog of Jason Jones, a 36-year-old lawyer living in Chicago. It catalogs Internet Marketing’s misdeeds, telling the stories of the scammers’ victims with sarcasm and black humor. “This is a really dark topic,” says Jones, “and the [victims] feel raped almost, so the sense of outrage [on the site] is appropriate to their level of suffering.”

When we met in the high-rise apartment that he shares with his wife, our surroundings belied the image he cultivates on the site: that of the angry, nerdy, loner-cum-robot. According to Jones, The Salty Droid is a satirical character he dreamt up between jobs, while studying the Ruby on Rails open source web framework and blowing off steam on Twitter and Blogger.

“The moment where I had the idea for The Salty Droid [blog] is actually on the site, it’s a really early post where I’m talking to this guy on Twitter, he responds to me — his name is Matt Bacak,” a well-known Internet Marketer.

Bacak — whom Jones had nicknamed “BallSack” — began promoting a free newsletter on his Facebook page (a “$197 value”). As Jones wrote on his blog at the time, “in the land of The BallSack: FREE! = Automatic credit card charge of $30 per/month.”

“I just kind of called him out on a lie,” Jones continues, “and he sort of freaked out. He blocked me, on Twitter. I’d been on Twitter as myself, you know. I’m just sort of abrasive and irritating normally. But no one had ever blocked me. That’s a weird thing to do.

“This whole project kind of flashed to me in a second. I was like, ‘This will work against them. They’re using all these open tools, and it’s great for their scam, but it’s really vulnerable to what I’m about to do.’ And it is really vulnerable to what I’m doing.”

Books and DVDs aren’t products,they’re relationship builders, a bridge to a customer’s credit card

In Internet Marketing, there are a few terms you have to know before you get started: leads, lead generation, and product launches.

A “lead” is a prospective customer, and “lead generation” refers to the creation of possible customers and building lists of these people. There are a number of ways to find potential marks: the sale of loss leaders like throwaway books or DVDs, ads on Facebook or The Huffington Post, Google AdWords, infomercials, and even media appearances on news programs — or Oprah. Once an unsuspecting consumer buys a product, they’re trapped: they’ve become a lead.

The purpose of lead generation is to be able to launch a product. This is what the Internet Marketer is after when they sell you a $20 book. The books and DVDs aren’t products — they’re relationship builders; a bridge to a customer’s credit card. The real “product” will be far more complex, and cost a customer a lot more money.

Unlike mainstream sales, where a product launch is an announcement, in Internet Marketing the product launch is a process. First, information about a new service or product trickles out slowly, among people in the IM community, creating hype and what marketers call social proof — essentially, “proof” that this is a quality product, not through actual evidence, but because the IM community’s echo chamber progressively reinforces the marketers’ claims. The product (again, there’s nothing of value here) is only available for a short period of time, creating a false scarcity that increases its perceived value. Affiliates in the IM community hammer their leads with ads for this “get rich quick” scheme, “magic bullet” business product, or whatever it is, hoping that a small percentage purchases it. The affiliate gets a small cut of the sale; the rest goes to the Internet Marketer selling the product.

An Internet Marketer can go on for years like this, continuously rehashing and re-releasing slight variations of the same product. After the launch, there is usually some sort of self-congratulatory video release, where the frazzled-looking marketer addresses a webcam, talking about the amazing success he’s had.

Glen Ledwell is an Australian transplant to the west coast who (along with his wife and their business partner) constitutes a third of Mind Movies, a company specializing in “enhanced visualization tools.” That is, they offer software that helps you make video slideshows. (They also offer the Mind Mastery World Summit DVD Package, “the world’s top Mind Masters guide to achieving your goals, manifesting your dreams, and becoming happier and healthier than ever before,” for $499.)

It’s all based on the psuedoscientific “law of attraction” popularized on Oprah and in the movie The Secret, as Ledwell told me in a hotel lobby in Virginia.

“Visualization, you know the movie, The Secret? We help people to visualize. What Mind Movies is, basically, is like a digital vision board. You put the pictures up and write up your goals? A mind movie is a digital version of that.”

The day after his Mind Movies Matrix product launched, Ledwell posted a video on his website. “We’re just about to crack the million dollar markers,” he says, before rattling off sales stats. He also assures his affiliates: “every promotion we do, you will get paid on.”

Richard Joseph was not the only person who had been nailed by the PushTraffic scam. Douglas Mattern, of Palo Alto, California, lost a total of $30,000 to two of the front companies formed for Raygoza’s enterprise. His first purchase, in August 2008, was a $5,000 IM training package that lasted a mere two sessions before the company ceased communication. About six months later, in March of 2009, PushTraffic contacted him again, this time through a salesman who identified himself as Matthew Silver. At this point, according to the criminal complaint, “Silver made many false statements including claiming that a large amount of hits to plaintiff’s website that would be guaranteed to recover his investment in a couple of weeks and then make substantial profits. Silver cited a figure of $40,000 profit and more.” This is a common tactic: use the victim’s desperation (desperation that is caused by being ripped off in the first place) to bilk him for even more money.

After losing an additional $15,000 to PushTraffic, Mattern would then pay out $10,000 for further training from a company called IncFortune, with the hopes of finally getting into online sales and recovering his losses. As it turned out, IncFortune was another Raygoza front.

Inside the boiler room

“The basic objective of all boiler rooms is the same. Find out how much credit is available on the victim’s credit card [and] take all of it.”

PushTraffic was what is known as a boiler room. As Dan Thies, an SEO professional and former employee of an Internet Marketing company called StomperNet, explains, Internet Marketers often “sell super-cheap products so they can get the names and phone numbers, and turn people over” to boiler room companies who try to sell the unsuspecting consumer fraudulent goods.

By way of example, Thies tells me a story about an employer sold a customer list “to some operation in Nevada… you know, it was supposed to be business setup services, but when they called people up on the phone they weren’t offering stuff like that, they were pitching this thing that was a guaranteed business grant which, as far as I can tell, it basically involves you take out a second mortgage on your house. To me, that’s just indescribably fucking evil.”

The Verge obtained a number of these recordings for this story, one in which a salesman places a call to a lead and identifies himself as Brent Austin. He’s just checking in with Leigh*, who bought a “make money off the internet” e-book called Power Cash Secret. The book probably cost her around $50, but the purchase got her on a lead list, and soon she received a call from the boiler room.

“Our marketing team is telling me that you’re not generating the traffic that you could be to your home-based business,” Austin says aggressively.

There is a good reason, explains Leigh*: “I don’t know what I’m doing … I’m not very computer savvy.”

Over the course of the next forty minutes, Austin spins a tale of once being “in the same boat” as Leigh.

“Running a website myself? That’s like a foreign language to me. Well, it was… now I’m actually on top of my game, and I’m an internet guru. There’s a lot to the internet that people just don’t realize nowadays.”

After feeling her out a bit, the questions get more personal — these are the kinds of questions you would never expect a salesperson to ask you.

“Are you in debt?” “Could you ballpark that debt for me?” “And how is that split? Is it a 60-40 split between [credit] cards and car?”

Leigh, in her mid-50s, is a nurse who rents a house. She’s not greedy, she’s not looking to get rich — she just wants to be able to stash away some money for when she retires.

Incredibly, Austin says, “We’ve got a pilot program that we do every two years, we have been doing it since the beginning of the company’s start. We give twenty people five websites. And with these twenty people we gauge what’s been selling the best, because each person has these five websites — so that’s five products, there’s a hundred products out there that we can test.”

Austin asks Leigh to grab a pen and paper so he can give her a little lesson about affiliate marketing, which he calls “the best, first way, and actually the best way, to make money online.”

“I’m sorry. What, sir?” She sounds stunned.

“Affiliate marketing,” Austin repeats, “is actually the number one way to make money online right now.”

It’s clear he has her turned around. “OK. This is … affiliated marketing?”

Austin describes how the program is supposed to work — hell, he says he has a client generating $12,000 a month “from e-book sales alone.” And then, after Leigh expresses some confusion, he goes on to explain that e-book stands for “electronic book.”

“You should be bringing in at least $1,200 per week, every week … that’s the minimum that anyone within our coaching program is doing now.”

Leigh seems to relax. At one point they talk about her interest in flowers. Austin continues to pitch, but it’s obvious Leigh is still at sea when it comes to his descriptions of internet businesses.

Austin goes on to say that he is “cutting checks for at least $5,000 a week, for each client.” The implication being, of course, that soon she’ll be getting her own $5,000 checks.

This part sounds good, but he’s talking pretty fast and with all the terminology he uses — landing pages, proven success method, earn while you learn — Leigh’s obviously confused.

When asked if she has any questions, Leigh responds: “I don’t have any questions, because I don’t know what to ask you, you know. You’ll have to tell me what I’m doing here, and how I do it.”

“I’m trying to get a gauge. How long have you been trying to make money online?”

“Oh, I haven’t. Like I said, I joined on your site… and that’s been three months ago? And I just haven’t done a thing with it… I actually tried to get out of it and, I don’t know, I received your call and I thought, well, maybe I should at least talk with you, because I don’t know what I’m doing at all.”

“Have you even looked at the e-book that we sent you?”

“No, I don’t know how.”

She doesn’t know how to read a PDF, she doesn’t want to be an internet marketer, she doesn’t understand what Austin’s saying — but she needs something like this — and this makes her vulnerable.

Leigh asks how much all of this will cost.

“It’s not a thing of you paying us,” says Austin, reframing the question. “We want you to prove to us that you’re actually willing to participate and willing to learn, and you actually invest into your marketing.”

“Well, what is that going to cost me to invest?”

“That depends on your level, uh , let’s — we’re contracted with big names, such as Visa and Mastercard.”

He is implying some sort of endorsement by these two well-known and trusted companies, when in reality all this means is that he can accept payments from either major credit card.

“So it kinda depends on your level of investment,” he continues. “What we like to do here is OPM: Other People’s Money. Before you actually see a bill for your credit card, you’re on the way by paying that back before your 45 days is up on that credit card statement [sic] is actually coming to you. So we actually let our clients tell us what they can bring to the table and invest into their own market.”

OK, so again: “What kind of money are we talking about?”

“We’ve got three different platforms, Leigh, that we actually bring people in on. Now, I’m going to give you a breakdown, tell me what platform you might be able to come in on, and I’ll work with you to get you through this platform, or get you up to the next platform. Because what I can do is, as a senior principal here, I can go down to my financial department, and if you can bring ‘so much’ to the table I’ll tell them to invest the rest into you, because you sound like someone I want to work with…”

He rambles on in this way for a while, which is calculated to put Leigh further off-balance. Then he gets around to the cost of the program, which “depends on what I can get you approved for.”

In other words, the product costs whatever she can get her hands on.

In other words, he’s going to bleed her only credit card dry.

“Leigh,” he asks. “Do you work better with Visa or with Mastercard? Because what we’re going to do is try and get you approved on some type of level and see what we can, what level I can bring you in on. OK?”

This is always the point in the sales call where people start to freak out, when strangers start asking for credit card info. And Leigh is no different.

“Well, what I have is a Visa card,” she says, sounding wary.

“If you can cough up $5,000,” Austin explains, “it’s gonna be a return after a full year of one website, it will get you to that $70,000 that I had you give me your goals and dreams about. Because of our proven success method, we actually have to analyze each client that comes through at what level they bring in, so we can make sure that if you come in on the $5,000 level you will make this amount of money, which is the $70K a year.”

“Well, to tell you the honest truth, I cannot do $5,000. I don’t have any money laying around.”

Eventually, he talks her into a $500 investment, and when she agrees to that he tells her he’s going to “try to put you on that platform of at least $1,000.” He just talked her up to a grand without her realizing it: “Now, we have to bring you in on at least $1,000. That way, it’s a secure tool into your investment, and we invested more into you also. We went ahead and invested the $4,000 into your marketing.”

“Do I need to pay that back to you?”

“No. What I need you to do is prove to me that you’re actually gonna be a loyal [sic], a client, and willing to learn.”

After this, all Brent Austin needs is for Leigh to print out a form, sign it, and fax it to him. Then she will be well on her way to earning big money as an internet guru.

The recording winds up after ten more minutes, with Brent trying to teach Leigh how to use a printer.

*This name has been changed

“What we like to do here is OPM: Other People’s Money.”

Over the years, there have been a number of Federal Trade Commission lawsuits aimed at Internet Marketing.

In November 2011, the FTC dismantled an operation called Grant Connect with a $29.8 million judgement. Kyle Kimoto and Juliette Kimoto, his ex-wife and former Mrs. Nevada, were among a large group implicated in a wide range of scams, including fake government grants, credit offers, and acai berry dietary supplements. The group had a number of front companies and websites, and used a call center based in the Philippines. Kyle is currently serving 29 years in a federal prison on a separate fraud conviction.

In another case, the FTC issued a $247,000 judgement against Frank Kern and Instant Internet Empires for selling a $47.77 collection of web templates that “promised that buyers could make more than $115,000 a year using the product.”

The rumor is that Frank Kern was selling leads generated by sales of Instant Internet Empires to a boiler room called I Works, owned by a man named Jeremy Johnson. Johnson, or “the millionaire adventurer,” as he is known in Utah, became a national news story in 2010 when he organized a trip to Haiti to deliver medical supplies in the wake of the earthquake. As the Mormon Times gushed, Johnson lives in a six million dollar home that “looks like a European palace… only a little smaller,” with porticos, balconies, a turret, and the one accessory that no European palace could be without: a rock-climbing wall.

Johnson is currently being pursued by the Federal Trade Commission to the tune of $275 million. According to the complaint, I Works is “a far-reaching Internet enterprise” using all the scams from the Internet Marketers’ playbook, including generating leads by selling cheap entry-level products, and “forced upsells,” which is IM-speak for tricking customers into purchasing more expensive products or simply charging their credit cards for products they didn’t order.

According to Roberto Anguizola of the FTC’s Bureau of Consumer Protection, who worked to take down Grant Connect, “savvy internet fraudsters use fake information, they use a host of shell companies [and they] use internet registrations that are private or themselves are fraudulent” to cover up their tracks. “If it’s a hydra of an internet scam, and you just chop off one tentacle, you may be missing the rest of it, and it will regenerate in a form that will not be recognizable — if you’re not careful how you do it. One of the things we do is, we follow the money trail. To make sure that we’re really getting to the bottom of it. A lot of the time, a lot of these fraudsters have front people, so you’ve completely failed in a fraud investigation if all you do is get the front men that the real scamsters want you to get.”

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