The beleaguered L.A. branch of the Better Business Bureau is fighting possible expulsion from its parent organization after a scandal over its ratings system.
The Council of Better Business Bureaus held a hearing last week to determine whether to expel the Better Business Bureau of the Southland Inc., a branch servicing Los Angeles, Orange, Riverside and San Bernardino counties.
The local branch sued to stop the hearing but a judge denied that request. Results of the hearing, conducted by an ad hoc committee July 18 and 19 in Arlington, Va., were not available at press time.
The committee was to review a report from internal auditors and forward a recommendation to the council’s operating committee, which will make a decision that can be appealed internally.
The fight is a result of a scandal last year that began after investigative news reports exposed a pay-for-play scheme in the L.A. branch, which grades local businesses on their trustworthiness. The reports found that the branch issued higher marks to those businesses paying membership fees. News cameras caught telemarketers telling businesses that their grades would be raised from a “C” to an “A-plus” if they paid a $395 membership fee.
A group of local businesses even managed to get high grades for nonexistent member companies they had created with names such as “Hamas,” named after the Middle Eastern terrorist organization.
In response, the council decided to hold last week’s expulsion hearing. It also announced reforms, including prohibiting local chapters nationwide from raising the letter grades of members that joined after they had been rated.
But the L.A. branch, by far the group’s largest with five offices and 100 employees, has made it clear it won’t go quietly. Its former president, Bill Mitchell, resigned after the scandal, but then rescinded his resignation in February, vowing to fight a takeover attempt by the national office. However, he resigned again in April, reportedly for health reasons.
The branch has also shown a willingness to take the fight into court, filing its failed request in Los Angeles Superior Court seeking a preliminary injunction to stop last week’s hearing.
“If the termination hearing proceeds in Virginia, Southland could lose its ability to operate under the Better Business Bureau mark,” the lawsuit stated.
The council successfully argued in court filings that the L.A. branch’s legal challenge was premature as no final decision would be made.
The L.A. branch and its attorneys declined to comment, citing pending litigation.
A new system
The letter grading system that led to so much trouble was only implemented fairly recently. For decades, chapters graded businesses as either “satisfactory” or “unsatisfactory.”
But in 2009, the L.A. branch led a national push to implement the new letter-grade system, which it designed and had been using locally for years. It was successful despite skepticism from other local chapters over how the organization could give precise letter grades to millions of businesses. The national Council liked the idea and threatened several local branches if they resisted the new system.
However, after the scandal broke, those concerns seemed justified. A lawsuit filed against the L.A. branch over the grading system resulted in the disclosure that the branch had employed more than 30 sales agents who earned a 45 percent commission on first-year memberships. That seemed to be incentive to pressure businesses to buy memberships if they had low grades.
Since the scandal, the L.A. branch has made efforts to reform the grading process. However, according to court documents submitted by the national organization in response to the injunction request, the L.A. branch is still not up to standards despite making “significant progress.”
Notably, auditors said the local branch still did not consistently ensure that its accredited businesses met Better Business Bureau standards, and still had issues handling and reporting consumer complaints about businesses. They also said it needed to implement a way of better reviewing consumer complaints about misleading or deceptive advertisements by businesses.
The auditors submitted a report to the committee holding last week’s expulsion hearing, and, in fact, recommended the L.A. branch be put on probation and not expelled. However, the recommendation does not have to be followed.
Probation would include severing all ties with Mitchell the former president. The local branch also would have to change its governance structure to include more oversight, provide board members with training regarding ethical responsibilities and submit to further evaluations.
Linda Sherry, a spokeswoman for San Francisco consumer group Consumer Action, said it would be difficult to rebuild the local branch’s reputation despite any reforms.
“The BBB is a very well-respected organization nationwide, but that kind of thing is a black eye and it’s hard to live down,” she said. “People start to talk about it and not trust the ratings.”
Terri Hartman, a manager at Liz’s Antique Hardware Store in Beverly Hills whose grade from the local Better Business Bureau was bumped up after paying a $395 membership fee, said neither expulsion nor any purported internal reforms would change her opinion.
“It’s closing the barn door after the horse is out,” she said. “The national office assumes the ultimate responsibility for what was going on. I think the whole thing is kind of a fraud.”
