Nov. 22, 2010 -- The Better Business Bureau says it will "launch an immediate investigation" into its biggest local chapter, the Los Angeles-area BBB, after an ABC News report revealed that the chapter sold memberships to non-existent businesses that immediately received A grades.
The L.A. BBB and its CEO, William Mitchell, have been blasted by critics over what they allege is a "pay for play" scheme in which A plus ratings are only given to business that pay an accreditation fee while F grades are routinely given to business that don't want to join. The probe could have repercussions for the rest of the nation's BBB chapters, however, since the L.A. chapter developed the controversial grading system that is now under fire nationally.
Steve Cox, CEO of the national Council of Better Business Bureaus, announced the probe of the L.A. BBB in a posting on the BBB web site Saturday . The L.A. probe was added to a previously announced list of actions the BBB said it planned to take in the wake of an ABC News investigation into its grading system, including no longer automatically awarding higher grades to businesses that pay for accreditation and conducting an "independent third party" review of its accrediting process.
"We are moving ahead with implementing changes right away," said Cox in a statement accompanying his post. "Some are immediate, others will take longer to complete. All will support our commitment to help consumers easily and quickly find trustworthy businesses."
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.
ABC News Investigation of the Better Business Bureau
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.
Mitchell declined to be interviewed for the 20/20 report and was unable to be reached for comment on the National BBB's decision to investigate his chapter. 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.