The CEO of the Los Angeles chapter of the Better Business Bureau, William Mitchell, has announced his resignation in the wake of an ABC News report into allegations that the chapter had engaged in a "pay for play" scheme by awarding more favorable ratings to businesses that paid for BBB membership. The announcement comes amid an ongoing investigation of the chapter by the BBB's national headquarters.
Mitchell and the L.A. BBB have been blasted by critics for giving A plus ratings only to businesses that pay an accreditation fee, while businesses that don't want to join are given lower grades, despite having few, if any unresolved complaints. The ABC News investigation also revealed that in a test the L.A. BBB, known as the BBB of the Southland, sold memberships to non-existent businesses that immediately received A grades.
The L.A. probe was added to a previously announced list of actions the national BBB said it planned to take following the ABC News investigation, including no longer automatically awarding higher grades to businesses that pay for accreditation and conducting an "independent third party" review of its accrediting process. The controversial grading system that was used by the BBB nationwide was devised by Mitchell and first used by the Los Angeles chapter.
A spokesperson for the national BBB would not give further details on Mitchell's resignation. Mitchell was unavailable for immediate comment on his decision to resign.
The Los Angeles-area Better Business Bureau is by far the largest of the 108 BBB chapters in the U.S. and brings in the most revenue from membership fees. According to its 2009 tax filing, the L.A. BBB raked in over $6.2 million in accreditation fees in 2008 and paid longtime CEO Mitchell an annual salary of $409,490.
Mitchell devised the letter grade system to replace the previous "satisfactory/unsatisfactory" BBB rating, and has been using it in Southern California for the past five years.
His system was adopted nationwide by the Better Business Bureau in January 2009. In a deposition for a lawsuit in which the L.A. BBB was sued over its grading system, Mitchell testified that his office employed over 30 sales representatives who earned a 45 percent commission for selling first year memberships to business owners.
However, the letter grade system has led to considerable friction in the L.A. business community, with some claiming the BBB was in the business of selling grades for cash. As reported by 20/20, a group of Los Angeles business owners, determined to prove that the accreditation system was a sham, paid $425 apiece to buy BBB memberships for a number of fictitious firms, including one for a non-existent company called Hamas, named after the Middle East terror group. The bogus company listed L.A. BBB CEO Bill Mitchell as its president and gave a non-existent address for its headquarters. The L.A. BBB awarded a membership and an A minus rating to a non-existent sushi restaurant in Santa Ana, California and an A plus to a bogus firm named after Stormfront, a white supremacist group.
The ABC News investigation also showed how two small Los Angeles businesses, with an ABC News producer and camera present, were told by BBB telemarketers that their C grades could be raised to an A plus if they paid to join the BBB. Terri Hartman, the manager of Liz's Antique Hardware, says she was told only a payment could change her grade, which was based on one old complaint that had already been resolved. After Hartman paid the $565 membership fee the next business day her C grade was replaced with an A plus and the one complaint was wiped off the record.
"The only way I was going to get that A was to give her my credit card number," said Hartman. "I feel it's not on the up and up and I feel that the Better Business Bureau deserves a C minus based on their own rating system."
In another case, Carmen Tellez, the owner of a company that provides clowns for parties, says she was also told she had to pay to raise her C minus grade, based on a two-year old complaint that she said had already been resolved. The C minus became an A plus the very next day after she provided her credit card for the $395 membership charge.
"If I'm paying for a grade, how is the customer supposed to trust the Better Business Bureau?" asked Tellez.
At the time of the 20/20 report, the head of the national BBB, Steve Cox, characterized the L.A. examples documented by ABC News as "anomalies" and said they were simply mistakes made by sales representatives.
"That's an inaccurate statement that business people are able to buy A's," Cox said. "We have more than 500,000 non-accredited businesses who have A ratings," Cox added.