The WebSmart fiasco: Lauded firm leaves behind pile of debts
MINOT, N.D. -- The day Randi Galegher lost her job she had $5 in her wallet, a 3-year-old daughter to feed, with rent and day-care bills to pay.
She could have covered those bills if her employer, WebSmart Interactive, paid her wages for her last three weeks of work.
Galegher is one of more than 620 WebSmart workers unexpectedly thrown out of jobs six months ago in Minot, Grand Forks and Saskatoon, Sask.
WebSmarts North Dakota employees still are waiting to collect more than $200,000 in back pay -- the largest wage claim in the states history.
They await word on whether authorities will bring criminal charges against owners of the former telemarketing company for misappropriation of their health-benefit withholdings.
An investigation by The Forum into how WebSmart went from being used by state officials as an example of effective economic development in North Dakota, to its virtual overnight collapse, reveals:
- WebSmarts owners built their business heavily on the backs of taxpayers. Public documents dont indicate what, if anything, the owners invested apart from borrowed funds.
- An examination of dozens of documents found when all its deals with various public entities are tallied, WebSmart received more than $2 mill-ion in grants, loans and other aid.
- Minot city officials dished out almost $300,000 in subsidies to WebSmart, but required no collateral, leaving local taxpayers investments unprotected.
- While WebSmart was being credited for creating good jobs in North Dakota, it was negotiating a deal with the city of Minot that committed the company to paying no more than $6,656 per employee per year.
- In an ironic twist, First Western Bank and Trust of Minot -- a bank largely owned by Gov. John Hoevens family -- now is the owner of record for WebSmarts real estate, which is valued at $792,200. It acquired the property as collateral to a failed $1 million loan, of which it provided $500,000.
Hoeven, however, says the State Bank of North Dakota, which funded the other half of the loan, also has equity in the headquarters.
- There is another connection between the governor and WebSmart. Hoeven and two of WebSmarts owners are from Minot and have been long-time friends. The owners contributed a total of $7,000 to Hoevens 2000 campaign.
- The Hoeven administration says the states $800,000 investment in WebSmart, made in two loans, is being paid off in monthly installments, but citing confidentiality considerations, it would not say how much repayment money is involved -- or who is making the payments.
- During the reporting of this series, Other Peoples Money -- Other Peoples Problems: The WebSmart Fiasco -- former WebSmart employees insisted repeatedly that their complaints to Minot officials about WebSmart were being treated lightly. Complaints included allegations of fraud and theft made against WebSmarts owners.
They claim they are victims of a good-old-boys network, consisting of well-connected businessmen, who include WebSmarts founders.
Attorney General Wayne Stenejhem told The Forum his office is investigating those complaints of possible wrongdoing.
- Employees also said they believed they were defrauding customers through a bogus sale of credit cards. They said they were assured by their supervisors that the sales plan was legitimate.
That sales plan is now being investigated by authorities in two states.
Galegher and her fellow WebSmart workers arrived one morning and discovered a note taped to the door telling them the business had closed until further notice.
WebSmarts largest client informed us early this week that they were going to be unable to meet any of their financial obligations to WebSmart, the note read.
That company represents the vast majority of WebSmarts current revenue stream. This has forced WebSmart to immediately cease all operations. ...
The night before had been normal at the telemarketing firm, with supervisors handing out cash bonuses to employees who made their sales targets.
Today, half a year after the fall of WebSmart, lawsuits and investigations keep stacking up. And a host of questions -- ranging from the approximately $2 million in public loans and grants to WebSmarts owners to how its operations apparently were unchecked by governments cutting the checks -- are left unanswered.
At the bottom of the many questions lurks another question, one investigators are digging to answer:
How did a business given such taxpayer support become, in the end, a boiler room for a telemarketing scam that burned its employees and snared scores of victims around the country?
But the question facing Galegher and other WebSmart workers is much more basic: How to pay the bills?
Public assistance spared Galegher from getting evicted from her apartment, and paid her utilities bills. But the 20-year-old single mother is treading water by running up her credit card bills.
One of her co-workers, Connie Boner, was forced into bankruptcy after losing her job and $1,440 in back wages owed by WebSmart. Now, as they approach retirement age, she and her husband are struggling to recover financially.
We just decided that was the only road we could take, Boner said of filing for bankruptcy. As long as I was working, we could do fine.
Key details change
WebSmarts application for aid from Minots MAGIC Fund three years ago tells an interesting story.
When first proposed, the companys founders, Robert Lamont and John Skowronek, offered to contribute $50,000 in owner equity for a financial package that would include a $100,000 grant from the MAGIC Fund, generated by a local sales tax.
A month later, when the actual application was made, WebSmarts owners had doubled their equity contribution, to $100,000, in a request involving almost $1.6 million in incentives. In return, WebSmart was to create 150 jobs within four years.
But several weeks later, in the formal agreement spelling out the assistance package and WebSmarts obligations, the owners contribution had evolvedfrom an obligation to pump $100,000 of their money into a requirement to invest at least $1.35 million.
In fact, $1.3 million was borrowed, in a series of loans from First Western Bank and Trust in Minot, largely owned by the Hoeven family. One of the loans, for $1 million, was split in half with the state-owned Bank of North Dakota, which loaned $500,000 -- and a subsidy of more than $60,000 to buy down the interest rate.
Lamont and Skowronek have refused requests from The Forum to divulge details about the loans and any equity they contributed to WebSmart.
Bob Hale, a Minot businessman and an outspoken critic of the MAGIC Fund, has studied the WebSmart deal.
We have been unable to determine that a dime of equity was put in by the owners, he said.
This much is clear: At least for the MAGIC Funds portion of the financial package, the owners werent required to put in a dime of their own money into the deal with the city.
Determining the owners financial contributions in WebSmart isnt a side issue; its an important element of a wage collection lawsuit by the state on behalf of WebSmarts employees.
To collect, the state is trying to pierce the corporate veil, the protection normally given to a corporations owners. If a corporation has little capital behind it, and a company is in essence an empty shell used by its owners, they can be held responsible for the companys obligations.
If the state succeeds in getting behind the veil -- not an easy legal task, lawyers say -- other creditors likely would follow.
If the states successful in piercing the corporation, its Katie bar the door, said Heidi Heitkamp, a lawyer who represents almost 20 former WebSmart workers.
Some unconventional math was built into the definition of the full-time jobs WebSmart had to create in return for grants of $230,000 it received from the Minot MAGIC Fund.
Under its agreement with the city, WebSmart had to employ 125 full-time workers, at hourly wages ranging from $7.50 to $10, by Aug. 7.
What qualifies as a full-time job?
Under the agreement, its defined as a job of at least 32 hours a week for 26 weeks over a 39-week reporting period -- or, put another way, 52 percent of the hours accumulated by someone working 40 hours a week over a year.
Heres the math: Someone making $8 an hour, working 32 hours a week for 26 weeks, would earn $6,656, before deductions. By contrast, someone making $8 an hour, 40 hours a week, for 50 weeks would earn $16,000, before taxes.
Yet in September 2002 WebSmart gave the city notice that it would miss the job obligations it assumed under the grant agreement.
The problem: high employee turnover, a dilemma its owners pleaded, was common in the world of telemarketing.
Instead, owner John Skowronek asked the city to use a new employment standard, using total payroll figures instead of the number of jobs over 26 weeks.
Skowronek made his pitch the same month WebSmart defaulted on two public loans totaling $385,000 it received in Grand Forks -- without ever making a single payment.
The next month, despite the default and WebSmarts warning that it was having difficulty meeting its job requirements, the city of Minot granted WebSmarts landlord a three-year property tax exemption of $12,000 a year for extra space it was leasing.
At the time, Skowronek said WebSmarts average hourly wage was about $8.50 -- but the company recently had advertised for openings starting at $6 an hour.
Phony sales pitch
WebSmart telemarketers who sold for a company called Global Financial, Inc., quickly learned the key to making sales: avoid unpleasant details.
Global Financial offered MasterCard and Visa cards designed to help consumers reestablish their credit.
Customers were told the cards would rebuild their credit six times faster than other cards.
Card holders could pay as you go, with a limit of up to $2,500.
The offer, available for a low, one-time fee of $221.95, came loaded with enticing extras: $500 in groceries, $100 in gas and two nights in motel among many others.
Never mind that the offers for gas and groceries really were coupons, already available on the Internet.
Never mind that the card was a debit card, not a credit card, so any charges on the card had to come from the holders bank account.
Only the alert customer heard the fine print in the sales pitch.
Thats why you said it fast, former WebSmart employee Kelly Hoffart said. If you wanted a sale, you said it fast.
Global Financial, Inc., based in Atlanta, was the subject of an investigation by consumer protection officials in Georgia, who recently referred their case to prosecutors for possible criminal charges.
Few if any customers actually received the cards after paying the fees to Global Financial, according to Georgia authorities.
Customers cheated by Global Financial posted complaints on the Internet, on sites such as ripoffreport.com, as early as August 2002 -- coincidentally, about the time WebSmart started selling the bogus cards.
The president of a company with a similar name -- Global Financial, Inc. of Fort Lauderdale, Fla. issued a notice on his companys Web site that said, in part:
We have never defrauded anyone and in fact have posted a disclaimer for unhappy victims of the Atlanta company on our website.
We have been as much a victim as anyone else, having received upwards of 20 complaints a day along with an equal number of email complaints. ...
By winter, many of WebSmarts Minot employees had come to believe Global Financial was a scam, according to employees interviewed by The Forum.
One day in February, for instance, Williams got a call from Hoffart, her friend and fellow WebSmart employee.
The feds are coming, Hoffart joked. She later explained: I thought what they were selling was a fraudulent product. I wasnt comfortable with it and neither were most of the people I sat next to.
In fact, Williams said, some employees were so uncomfortable selling for WebSmart that they quit their jobs or accepted work that paid less money.
Nonetheless, WebSmarts owners defended the product they were selling for Global Financial. In March, Skowronek told a newspaper reporter in Saskatoon, Sask., where WebSmart employees were speaking out about their concerns that customers were being defrauded, that the business was legitimate.
We have the ability to monitor Global Financials customer service line at random, Skowronek told the StarPhoenix of Saskatoon. We can listen to the calls that come in because, obviously, we dont want to be selling something for a company out there who is not performing.
A few weeks later, however, WebSmart abruptly stopped selling Global Financial -- replacing it with an almost identical offer by a company identified as Vertex One Benefit Group.
The announcement came a couple of weeks after one WebSmart employee, Randi Galegher, got a call from an ABC network television reporter asking her about the mushrooming complaints from Global Financial customers.
Galegher told her supervisor. Ten days later, more than half a dozen executives in suits arrived for a meeting.
I thought they were coming to shut us down, she said. The next day Vertex was here.
Employees were handed scripts for Vertex One, virtually identical to those for Global Financial. In a newsletter to employees, WebSmarts owners boasted of helping to create Vertex One.
Workers were told there wouldnt be any problems, Galegher said, and to get busy: Get on the phone and dial.
Targeted high risks
Global Financial targeted a vulnerable niche: customers with bad credit.
WebSmarts callers were handed lists of prospects, people apparently who had been denied loans or credit cards.
People struggling to pay their bills, something many WebSmart employees could identify with.
WebSmart employees started at $7.50 an hour. Wages commonly hovered around $8 an hour, employees said, although some earned $9.
Cash bonuses and other rewards, including gift certificates or merchandise, sweetened the paychecks.
WebSmarts verification staff heard from angry Global Financial customers, desperate voices on the other end of the line screaming that theyd paid their money but hadnt received their MasterCard or bonus packet.
A lot of times it would be people like myself, trying to rebuild their credit, said Sylvia Lawson. Many were older people, or single mothers, or college students.
Lawson lasted less than three days selling for Global Financial, and remembers making just one sale, to an elderly woman, before asking to be moved to a lower-paying customer service assignment.
I felt bad about making that sale that day, she said. You were stressed out to make a sale.
Still, Lawson had her own bills to pay, and an 11-year-old daughter to support. I didnt have any other choice. I didnt have any other jobs to go to.
A handful of talented sales people earned hefty cash bonuses, Williams said, conservatively estimated they added at least $300 to their base weekly paycheck. But they were the exception.
There were some people who did really well, she said. They were driven. Money talks.
Teams of workers gave cheers during breaks, competed for prizes and exchanged high fives when sales targets were met.
Despite efforts to relieve the tedium of telemarketing, there was always pressure to perform on the sales floor.
It was very much the boiler room, Williams said. Slam, slam, slam -- go, go, go.
No further ahead
Since losing her job at WebSmart, Randi Galegher worked for several months as a cashier at a convenience store.
Last week she was hired as a full-time receptionist at a medical clinic.
Her credit card is just $4.19 from reaching her $1,000 borrowing limit, and she recently was served with papers ordering her to pay $5,000 in medical bills.
Im broke right after pay day, she said.
Co-worker Sylvia Lawson, who has an 11-year-old daughter to support, moved into public housing and lost her long-distance phone service after losing her job and back pay.
It put me so far behind it was hard to believe, Lawson said. I had no groceries in the house, none at all. I didnt even have a penny for my name.
Lawson is a veteran telemarketer, with almost 10 years of experience. Her yearly pay never exceeded $14,000 to $17,000. Even working full-time, she was below the poverty line for a mother with one dependent.
The one bright spot, she said, is that losing her job prompted her to go to cosmetology school. She dreams of opening her own nail salon.
Connie Boner, the former WebSmart worker who was pushed into bankruptcy after losing her job and back pay, said she worked for half a year without qualifying for health insurance, beginning on full-time, temporary worker status.
So after I worked there six months I wasnt really any further ahead.
New firm at it
Another telemarketing firm, Phase 2 Solutions, has moved into the former WebSmart call center in Minots industrial park.
Phase 2 is leasing the office space and equipment left by WebSmart in a turnkey arrangement. It reports having 113, with plans to employ 125 by early November. It starts telemarketing staff at $8 an hour, plus commissions.
Economic development leaders in Minot and in Gov. John Hoevens administration heralded the arrival of Phase 2. WebSmart owner John Skowronek said he and partners Marius Buzz Stitzer and Robert Lamont were responsible for Phase 2 coming to Minot, not the politicians who rushed to take credit.
Skowronek wrote to the city attorney, who later filed suit to collect the $230,000 the city says it is owed by WebSmart, to make the case that it had fulfilled its obligations by making commercially reasonable efforts to meet its job quotas -- jobs now carried on by Phase 2.
When we created WebSmart, Skowronek wrote, it was for the sole intention of bringing jobs to our community. Jobs that we thought would be good jobs, solid jobs.
Readers can reach Forum reporter Patrick Springer at (701) 241-5522