EFP 135: How We Lost $25K To Russian Scammers – Part 1

Justin Cooke

May 2, 2015

We recently published a blog post about how Russian scammers defrauded us for more than $25K.

In today’s podcast, we dig into the details behind the story and explain some of the lessons we learned throughout the process.

The Low-Down Details of How We Got Scammed

This is actually a two-part episode. Part 2 will include an interview with the attorney that helped us with the case and his thoughts on how to protect yourself from online scams and frauds.

We’re sharing this in the hope that it helps you avoid a similar scam in your business.

Check Out This Week’s Episode Here:

Direct Download – Right Click, Save As

Topics Discussed This Week:

  • How We Realized We Were Being Scammed
  • Assessing The Damage
  • The Empire Flippers Strike Back
  • Reviewing Legal Options
  • A Happy Ending?

Lessons Learned:

  • Take your customers’ concerns seriously and look into it immediately.
  • Escrow isn’t the answer.Wire transfers IS the answer.
  • Asking for help can work.
  • Talking about this transparently helped us recover the sites.
  • There should be a global blacklist brokers and industry professionals can use.

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“I needed to know how many of these cases we could have been liable for.” – Joe – Tweet This!

“Our immediate action was to stop the bleeding and figure out the path to take.” – Justin – Tweet This!

“The pawnshop is where you look for stolen goods. For us, it was Flippa.” – Justin – Tweet This!

So – what did you take away from this episode? Have you ever dealt with credit card fraud? Let us know in the comments!

 

Justin Cooke:     Welcome to the Empire podcast, episode 135. We got scammed for 25 grand by a small Russian syndicate. In the first of our two-part series, we’re going to cover how we found out about the scam, our immediate actions taken, and our learning experiences throughout the process. You can find the show notes and all links discussed in this episode at empireflippers.com/scammers. Alright, let’s do this.

Announcer:                        Sick of listening to entrepreneurial advice from guys with day jobs? Want to hear about the real successes and failures that come with building an online empire? You are not alone. From San Diego to Tokyo, New York to Bangkok, join thousands of entrepreneurs and investors who are prioritizing wealth and personal freedom over the oppression of an office cubicle. Check out the Empire podcast.

                                                And now your hosts, Justin and Joe.

Justin Cooke:                     What may be worst about the money lost is the vulnerability we felt after we go scammed, Joe.

Joe Magnotti:                    Absolutely. I felt like we didn’t do our job, we didn’t know our customers well enough, they’re smart we’re stupid.

Justin Cooke:                     We had a seller warn us before we even went down the path. And the worst thing is it’s not just a seller, it’s a buddy of ours. Like I’ve had beers with the guy, we’ve hung out. I basically ignored him, which led to about $25,000 lost. We’re going to get into all of that in this episode, but I think it’s important to remember that $25,000 lost for our company is the equivalent to about $170,000 in sales for the month.

Joe Magnotti:                    Yeah, it almost made me throw up when I realized how much sales. I mean, that’s a month worth of sales, effectively. So it basically put us a month behind.

Justin Cooke:                     And the other side of the coin is that it’s not that big an amount of money in the grand scheme of things. In terms of where our company’s going Joe, right? It’s not even a big deal. But we’re conflicted, right? Because we’re boot strappers and so I think about all that money that could be in my pocket, right, from our company. At the same time we’re like $25,000 is a drop in the bucket to where we’re going. But it was really the feeling I felt that was the worst part of it all, I think.

Joe Magnotti:                    Yeah, for me definitely losing $25,000 felt like a very expensive lesson to learn. I’m glad we went through it because in the end, it did work out.

Justin Cooke:                     Yeah Joe, a good friend of ours who questions this whole transparency thing, who wonders what we’re doing in terms of monthly report, in terms of reporting everything. He asked us over beers, I don’t know if you remember this, but he’s asking us whether we’d actually talk about this publicly. Like is this something you’re really going to cover in a blog post or a podcast? And we told him yes, because we’re committed to sharing the good and the bad and this is definitely one of the bad things that happened. Hopefully people can take from this and learn from it. It was definitely a painful experience.

                                                But we waited to talk about it, right? We weren’t talking about it when we were going through it. We wanted to get to the other side so we could kind of share the story.

Joe Magnotti:                    Yeah, I think it was an effective way to do it because we had to make sure it played itself out and we found out exactly what happened. We’ll get into those details in a minute. But if we had started talking about it when we were feeling violated-

Justin Cooke:                     Oh my God.

Joe Magnotti:                    I don’t think it would have been as effective as when we had the whole story and were a little more objective like we are now.

Justin Cooke:                     Yeah, we got a little bit of analysis. It might have been a fun podcast to do because we would have been ranting and raving about it and we were freaking out about it. But I’m not sure how helpful it would’ve been. Anyway, it’s a two-parter. In part one we’re going to give the backstory and kind of walk through how it went down. We’re going to cover our lessons learned and some of our analysis of what happened. In part two, which should be next week, we’ll sit down with our attorney to discuss what we did right, what we did wrong, and some of the other awful things that can happen in business that may give you cause to have an attorney.

                                                Before we get into all that Joe, let’s pay the bills with our featured listing of the week. What ya got?

Joe Magnotti:                    This week we’re talking about listing #40210, it’s in the culinary niche. Honestly it’s not really in the culinary niche, it’s about survival knives. But I guess knives, culinary, we were trying to come up with something cute there. It’s monetized with Amazon. Use Amazon US, Amazon UK, Amazon Canada. It’s making just over $300 in monthly net profit. It’s got some expensive in terms of adding articles, some link-building, some hosting with the CDN, and all those are factored into our net profit equation as per normal. It gets about 45,000 page views a month, so it does get a fair number of page views. We have it listed at just below $77,000.

                                                The site’s relatively new, but I do love the site in terms of getting something in the Amazon niche. Like if you’re looking for something that’s leading in the survival knife niche, this is there, this is doing well. It is steady for the time that it’s been up since April 2014. At least the last few months, and I think it has the legs to go the distance.

Justin Cooke:                     I don’t like how new it is. I love the traffic and earnings. I love the fact that it’s got a brandable domain name and I really think you can make that a five-figure business inside of twelve to eighteen months.

Joe Magnotti:                    Absolutely. I could see you building an entire forum or that kind of thing around this type of brand name out there. Also you know, we considered it for our investor program, but it just turned out to be too large for the portfolio that we had in mind for it. But it did tick all the other boxes. And I do think if somebody’s looking for a large Amazon site as a centerpiece to their portfolio, definitely this is a great type for them to have.

Justin Cooke:                     Yeah I love it in that three, maybe four hundred thousand dollar package. I love it in an investor package there. I don’t know what percentage is in Amazon, do you know Joe?

Joe Magnotti:                    It’s 100% Amazon-

Justin Cooke:                     No no no, what percentage they’re at in affiliate commissions.

Joe Magnotti:                    They’re at 8% in their Amazon…so yeah, there’s only one more level above them, which you would only need about 300 items to get to the next level. So…

Justin Cooke:                     Alright man, let’s get into the heart of this week’s episode.

Announcer:                        Now for the heart of this week’s episode.

Justin Cooke:                     Alright Joe, this is kind of a tough one to talk about man. I’m not exactly sure where to start off here, what do you think?

Joe Magnotti:                    Yeah, I definitely think we have to break down the timeline of events and go back to the time when we knew we were getting scammed. That would probably be a great place to start.

Justin Cooke:                     Okay, so let’s talk about how we realized we were getting scammed. Now it was right after Christmas, so right around the holidays. I got a Facebook chat or message from our buddy seller, he was selling a site, on a small e-commerce site that he had sold. And I mostly ignored him, to be honest with you. I kind of blew him off.

                                                It was around the holidays, I was still busy with work, and we had the holidays going on. I just kind of blew him off, honestly. It was a really small site, he was asking about “you know, I think this person might be in Russia, they’re saying they’re in Canada, it’s kind of sketch”. And I told him look, we don’t generally have credit card issues and that if there was any problem we’d cover it. He says, “you guys are on the hook for this one?”. I said yeah absolutely, we’re going to pay you out, it’s going to be fine, don’t worry about it.

Joe Magnotti:                    Yeah, definitely a case of not listening to your customers and not knowing your buyers well enough. But we’ve learned that lesson. But in this case, at this point we didn’t know that. The seller was giving us great information but we just weren’t listening.

Justin Cooke:                     Yeah. So didn’t really pay attention to him, unfortunately. Then, right around the middle of January, we had another purchase. That’s not surprising, we saw website, so people purchasing sites is pretty normal. But one thing that was a little odd about it was that it was immediate. There was no deposit, there were no questions. It was just a purchase. And we get that too, especially at that time we’re taking credit cards, no problem.

Joe Magnotti:                    And this was only for eight thousand and change, so it wasn’t that huge. So it’s possible. But…

Justin Cooke:                     We’ve had that before too, so it’s not totally out of the norm.

Joe Magnotti:                    Yeah. But again, no deposit, never heard of this customer before, never had any communication with him, wasn’t in the system at all. So-

Justin Cooke:                     But we still thought everything was fine. We weren’t looking into anything at all. And then February 5th, we had a chargeback from the original site.

Joe Magnotti:                    Right. That customer, that seller back in December that was talking about the site, his migration was a little bit of a disaster because it was a complicated setup and we really had to lead the buyer through the migration process.

Justin Cooke:                     So the first site that we’re talking about, there’s three in total just to make it clear. But the first one, we got a chargeback from the buyer. So they charged back on their credit card and you first thought well, there’s some problems with migration, it’s probably just an unhappy customer.

Joe Magnotti:                    Yeah, I mean we’ve seen this before- very very rarely but we have seen this before, where customers get cold feet, they’ve already pretty much done the transaction and they try to pull out via a chargeback. Normally we’re able to smooth it over and work its way out.

Justin Cooke:                     I think that’s the first thing you did actually, you reached out to the buyer to see if there were any problems. And then you started preparing on the backend, you know to fight the chargeback. We had a chargeback once before on a site that we actually won.

Joe Magnotti:                    Right. So I thought I was going to win this one too. So I started submitting all the information to Stripe, saying look they actually did buy the site, we have all the documentation to show that it was taken care of. I probably submitted that information by the 10th of February or something like that.

Justin Cooke:                     On February 14th, we got the second hammer falling. So we had this second chargeback. That’s when you started to get suspicious.

Joe Magnotti:                    Right. That was from that purchase back on January 19th of that second site. So that was the site that again, we didn’t know the customer, they never placed a deposit, and I started looking into that purchase and that migration specifically.

Justin Cooke:                     And what’d you find?

Joe Magnotti:                    Well, there was two major things. Number one, I was very familiar with the communication of the first chargeback because I had gone over all the details. And the communication of the second chargeback was very similar.

Justin Cooke:                     What do you mean by similar?

Joe Magnotti:                    Rushing the migration. “Hey, how come this is not done? Hey can you push me the domain? Push me the domain now! Hey where are you guys? Push it now!” Just messages over and over and over again, trying to get us to push the domain very very-

Justin Cooke:                     And they were like three word messages, sometimes. Five word messages, right? It was odd and unique, right?

Joe Magnotti:                    Yes. Absolutely. And misspellings, bad English, that kind of thing. So we put that together, and also one of the other things I noticed was an email address used in the thread was very similar to another email address. In fact, it was just the same email address, number two. So we thought it was very strange and too coincidental for this not to be a case of something going on.

Justin Cooke:                     Okay, so it’s clear something’s going down. There’s something wrong here, and then we start realizing that it’s very likely the same person. But we didn’t have any proof, right? Turns out you and I start digging into it and digging into it and digging into it, and find out that it looks like the scammer is Russian. They’re using stolen credit cards from Canada, and the same language and style was used in both of those deals. Turns out it was three deals in total.

Joe Magnotti:                    That’s right.

Justin Cooke:                     So the next thing we need to do, now that we figured out we’re being scammed, right? I’m pretty sure the next day we set up a meeting. So it’s me, you, and Mike in a lunch meeting, and we got together because we needed to figure some stuff out. Basically, we needed to assess the damage.

Joe Magnotti:                    Yeah. And we wanted to say what’s our maximum liability here?

Justin Cooke:                     Yeah, how deep in this hole does it go? Are there five sites? Ten sites? Is it $200,000 over three, six months? We didn’t know.

Joe Magnotti:                    Because at this point, we’re looking at a little bit more than the $16,000 in chargebacks that I think we’re definitely going to lose because the guy whose credit card it is didn’t really make those purchases.

Justin Cooke:                     And we fought the first chargeback, right? So basically, not only were we victimized, but now we’re victimizing someone who supposedly had their credit card stolen, right? So we’re not making out too bad, they probably would’ve lost the chargeback if we continued following through because we had all the information. So we immediately sent our team back to assess all previous credit card purchases over the last three to six months, right?

Joe Magnotti:                    Yeah, I think that was really important for me because I needed to know how many of these cases we could have been liable for.

Justin Cooke:                     Now we found three sites over three months that had those same identical patterns. That was just over $25,000. We actually had a fourth that had just been purchased like the day before. But we shut that down, refunded the money, and halted migration.

Joe Magnotti:                    Yeah so the two we’ve already talked about, one happened in late December of 2014, one happened in mid-January. And then we had a third purchase that went through and the seller was already paid out in February. And that one was actually the biggest one, that was almost $15,000, about fourteen thousand and change.

Justin Cooke:                     And then we got a fourth that they tried right after whenever we started talking about it. And then a fifth later on. There was a fifth attempt that wasn’t even used because we had removed the links by that point. No one could buy sites directly. They had basically figured out the URL and tried to go in and buy the site anyway.

Joe Magnotti:                    Yeah, they had used some of our old UltraCart links to try to directly access stuff and make purchases which was, I guess, not so smart of us to keep those links out there. But we went ahead and removed those.

Justin Cooke:                     So anyway, we basically found our liability was three sites and about $25,000 or just over.

Joe Magnotti:                    And we hadn’t received a chargeback on the third one yet but we knew it was coming. Within a few days, a new one was received.

Justin Cooke:                     So our immediate reaction after that was to stop the bleeding. How do we stop the bleeding, what path can we take? And we did review some options. We looked at things like escrow, we looked at things like requiring someone to hold up a picture next to their ID card and credit card. We considered all these things. The real goal was, we wanted to be relatively easy for our customers to buy and sell websites. So we didn’t want to put a whole lot of barriers in place to keep them from doing that.

Joe Magnotti:                    Yeah, my biggest concern was that we would overreact here and then-

Justin Cooke:                     I want your blood type, I need you to mail in some DNA, yeah.

Joe Magnotti:                    Yeah, we were having a pretty tough February already at this point. I didn’t want to make sales even tougher.

Justin Cooke:                     So eventually we did realize we had to remove the ability to purchase with credit cards directly from the site. That was really and clearly our best move. We looked at escrow, and that was one of our options. The problem with escrow is that the reason it would’ve saved us from two out of the three purchases, was simply because they only take wires. We can fix that by only taking wires ourselves.

Joe Magnotti:                    Right. And the small one, honestly escrow would’ve allowed credit cards to be charged anyway. Yeah, so I guess escrow would’ve been on the hook instead of us. But in the end, I think that we can just fill in the blank and take the wires and do the migration ourselves.

Justin Cooke:                     So the other thing we did is we told our team any similar patterns have to immediately be sent to both Joe and I so we can take a look at it. We wanted to look at the pausers, buyers, we knew that this guy or these guys were going to be back. We wanted to make sure we were stopping them. But really, requiring wires was our way of stopping the bleeding.

Joe Magnotti:                    And our crew has been great at recognizing that. Any time they see someone trying to rush the migration, any time they see a foreign name that seems close to one of these two guys, those kind of things have been brought to our attention a couple of times.

Justin Cooke:                     So we wanted to do something about this. We wanted to take some action. So let’s talk about how the Empire Flippers strike back.

Joe Magnotti:                    I love that term, by the way.

Justin Cooke:                     You like that?

Joe Magnotti:                    Yeah.

Justin Cooke:                     It’s good, right? I’m the markety guy right here! The markety guy! No, okay, so we decided to do some deep diving with our internet research and login password skills.

Joe Magnotti:                    Okay, I’m going to stop you right here and make sure you understand. These scammers were not very smart. I’ll just go out and say that because the problem with them- I didn’t even want to refer to them as hackers- I have kind of a little bit of-

Justin Cooke:                     A respect for hackers.

Joe Magnotti:                    Yeah! Almost.

Justin Cooke:                     These guys are bad. They’re horrible, they’re wannabe hackers, I don’t know.

Joe Magnotti:                    Yeah, and they’re just not very good.

Justin Cooke:                     Which makes us even worse, by the way.

Joe Magnotti:                    That’s why when I say login password skills, basically what happened was the original seller, the one that we talked about back in December that pestered us about something being wrong with his migration. He had a password given to him by one of these Russian guys. And he said well, you know, here was a password for the account, go ahead and maybe you can access it. And I was able to access it. And then I said hmm, I wonder if he would use the same password on all the other email addresses he’s communicated with us.

                                                Sure enough, same password for all his email addresses.

Justin Cooke:                     So you’re logging in to all his- I’m getting messages from Joe, he’s like dude I got into another email. OH my God, you won’t believe what I got here. Dude, I got some crazy pictures. Like, it was insane.

Joe Magnotti:                    It was insane. And as I would log in, he would get notifications that people were logging in to these accounts. So we would have this battle back and forth where we were trying to change the passwords, I would try to enable two-factor authentication, change the phone number to my Vietnamese number. It was like this battle back and forth over the internet of him trying to chase me.

Justin Cooke:                     We got everything. We got emails, we got accounts, we got names, addresses, pictures, accounts set from emails. We actually got a picture of his US visa request, we’ve got his social media profiles, we’ve got a ton of stuff.

Joe Magnotti:                    I’ve got his Russian ID!

Justin Cooke:                     Yeah.

Joe Magnotti:                    I mean, it doesn’t get much more clearer than that. He was communicating with a hosting company. He needed to verify his real ID and he gave his actual picture ID.

Justin Cooke:                     And if anyone wants to see all this, we’re doxxing him man. We’re putting it out there. So I just published a blog post that has all this information, more if you want to dig into it. Look at the pictures, look at what we got. See what you can do. We’ll link to that in the show notes.

Joe Magnotti:                    Yeah the travel pictures are really hilarious, of him traveling through Europe and other places with all of his friends and stuff. Just tons of pictures about this guy.

Justin Cooke:                     So that’s what we started doing. We started collecting everything. We’re putting it in a Dropbox folder, collecting everything we could so we just had more and more information. Now we did always consider the nuclear option, right Joe?

Joe Magnotti:                    Yeah, I mean I always thought if we’re not going to get these sites back-

Justin Cooke:                     Everything we do, we can’t get the sites back, there’s nothing else we can do-

Joe Magnotti:                    Blow the sites up! I mean, here’s the thing. That’s what I never understood about the scam in the first place. It’s not like you stole something that I don’t know where you are. It’s like basically you stole a house. I mean, I know where the house is. So if I want to get rid of the house, if I want to tell everybody where the house is-

Justin Cooke:                     And put a bomb next to it. Just saying!

Joe Magnotti:                    I’m just saying! You know, I know the address of the house!

Justin Cooke:                     And it’s so funny, because we weren’t actually considering- like not seriously considering any of the crazy legal options or violence or that sort of thing.

Joe Magnotti:                    Right, no.

Justin Cooke:                     But it was always there, like you know? We weren’t seriously considering it but it was in the back of our minds.

Joe Magnotti:                    Right, but I mean I know some SCO tricks that definitely could be used against these sites that would effectively render them useless.

Justin Cooke:                     We can play around with it and test through it and if that doesn’t work, we have buddies that absolutely could do that.

Joe Magnotti:                    And another thing is they used the same password for the backend for WordPress. So I had access to the backend in WordPress for these sites. Absolutely could have done a lot of damage.

Justin Cooke:                     So instead of just doing that, because that is the nuclear option, we said look there’s gotta be some legal options here too right? So you start looking around for an attorney online. You started asking our contacts about an attorney that matches this scenario, that would be a good fit for us.

Joe Magnotti:                    Yeah, and whenever I look for people, I try to look for someone who has a good reputation online. I look at the Twitter feed, I look if they have a blog, that sort of thing. And I found this guy, a Canadian attorney who really has a lot of UDRP experience. That’s where I thought we were going to have to go with this. We would file a complaint with UDRP, we would get back- once we get the names back I can rebuild the sites and it doesn’t matter from there, right? That was my thinking.

Justin Cooke:                     And he actually referred us to a US attorney because he’s Canadian, it wasn’t really a good fit.

Joe Magnotti:                    Yeah because the UDRP couldn’t help us. The UDRP only helps with trademark issues. So you would go to the UDRP, you would say hey this was a stolen domain. They would say do you have a trademark on that domain. And they wouldn’t be able to help you because you don’t have a trademark on that. And so therefore that would cause a problem. Plus, UDRP complaints can be relatively expensive.

Justin Cooke:                     So we ended up working with Eric over at revisionlegal.com and we had consultation with him. We really just wanted to review our options. Now neither of us are big fans of attorneys and honestly we told Eric that upfront. We were like we’re not really fans of attorneys and he was like no problem, most people don’t. So we got past that and started discussing options with them. We wanted to know step-by-step what were the options we could take.

                                                The problem was that it just wasn’t enough money to go all the way down the path. So if it was five million, we’re going to by hook or by crook, we’re going to do what we have to do to get that back. But $25,000 is like well, is litigation really worth it. So he did have some options early on that were worth trying.

Joe Magnotti:                    Yeah I have to say, Eric was very affordable. It was $2500, the retainer with him, and he was very efficient with his time and made sure not to overcharge us or anything. I was very impressed with his professional manner. What he first did was he collected all the evidence from him. I mean, obviously we had plenty of Zendesk tickets all in communication with these guys. Everything I had collected on the backend. I gave that all to him. He used BaseCamp, he was very technologically enabled for a lawyer, I thought. So-

Justin Cooke:                     For a lawyer! Everything you say from now on is “for a lawyer”.

Joe Magnotti:                    For a lawyer! So working with him is great. He sent some complaints to GoDaddy and another hosting company where the sites happen to be hosted at and filed complaints with them to try to scare them into giving the sites back. But they said without a legal sort of authority saying that the sites really do belong to Empire Flippers, there’s nothing we can do.

Justin Cooke:                     We need a court order, basically.

Joe Magnotti:                    We need a court order, that’s right.

Justin Cooke:                     So we continue going down that path. We were checking all these different options and nothing is really panning out. And then we got kind of towards the last option. He says look, I can actually get these sites taken down for you Joe, but we’re going to have to file a DMCA request and that’s basically it. We’re going to go through this process, we’re taking it down. The next step would be litigation but we’re not going to do litigation. It’s a minimum of $15,000 and of course it’s going to be miserable.

Joe Magnotti:                    Yeah, so we talked about litigation, we talked about actually suing them for it and they, obviously being in Russia would probably never respond. We would probably win by default and we would eventually decide it’s fact. But it would take at least $15,000, maybe more, and so that was determined not to be worth it for where we were at. But he did want to help us blow up the sites, and via a DMCA complaint-

Justin Cooke:                     The legal path.

Joe Magnotti:                    Yeah, the legal blow-em-up path would be to do that. Most hosting companies overreact at the DMCA complaints and so we would have some form of authority there to go ahead and say hey, we actually own this content, they’re using it illegally and therefore they would get their hosting account banned. Yeah, they might still own the domains, but they wouldn’t be able to have the sites up.

Justin Cooke:                     So that’s the path we started down. That’s what we were going to do, we were fine with it.

Joe Magnotti:                    We even sent complaints to AdSense and Amazon where they were making some money from as well. So those were other ways we were thinking of so we could stop the monetization of the sites.

Justin Cooke:                     One of the things that we actually thought about, we thought about this early on, is what are they really looking to do with the sites, right? Are they going to take these sites over and manage them long-term? Like you said, it’s a house So they’re going to go live in the house? What are they doing with this house? And it came to us pretty quickly that the plan would be to sell these sites. We started looking for them. It’s like if you get a really nice watch stolen, you might want to check the pawn shops around town. That’s the place it’s more likely to go.

                                                So we actually started looking at some of the pawn shops. One of the first pawn shops we looked was Flippa, right? So we went to the Flippa site and we ultimately- you saw the site for sale. And so you went after him right? Not Flippa. You went after the seller for doing that. You contacted Flippa and they were, to their credit, very gracious about it. Immediately took the listing down and were very cool about it. Which I think is really good.

Joe Magnotti:                    Not only that, they followed up with a personal phone call to me. They asked me for any of the other domain names that were involved, any of the people’s domain names. They canceled their accounts, they put them on a blacklist. They put the domains on a blacklist so they could not be resold on their platform whatsoever. They knew who I was to their credit, I didn’t have to tell them who Joe Magnotti was. They were like we know who you are. Cool, no problem, we’ll help you out. So that was great, and the marketing guys at Flippa, the support guys at Flippa as well, were awesome. Thank you so much.

Justin Cooke:                     Yeah that’s cool. And then we saw also there was some stuff going on in DigitalPoint, right?

Joe Magnotti:                    Yeah, there was a little bit of a back and forth on DigitalPoint. Some message there. Doesn’t look like they went through. Again, used the same password for his DigitalPoint account so I was able to access his messages. It doesn’t look like he did any transactions.

Justin Cooke:                     He wasn’t getting a lot of action over there huh? Not a lot of deals being made on DigitalPoint Forbes. Okay. We had them on Flippa, we got it shut down. Funny enough, we’re very open about this. So we mentioned it in a monthly report. We had mentioned this briefly, we kind of foreshadowed the blog post we were going to do and this podcast we’re talking about now. Then we had a blog reader reach out to us. He said hey, what exactly happened with that deal? He was kind of hinting around and so I explained it a bit more privately in an email back. He said huh, I think there’s something going on here.

                                                So we chatted a couple more times. Turns out, he ended buying these sites from the scammer.

Joe Magnotti:                    This is unbelievable. I mean, if this didn’t happen to me, if somebody told me this story, I wouldn’t believe them.

Justin Cooke:                     Yeah.

Joe Magnotti:                    And I’m telling you, it’s the truth!

Justin Cooke:                     We talk about it. It turns out this guy was one of the early bidders on that Flippa auction. So he saw the sites, thought it was a good deal, made a bid. Flippa shuts down the auction, and the seller is still reaching out to previous bidders to see if they’ll buy it on the side.

Joe Magnotti:                    That’s right! And he winds up buying it. Old sites!

Justin Cooke:                     The two big sites-

Joe Magnotti:                    The two big sites. So the first site actually, the seller and I still had a way to get that site back. The first site we talked about, the small e-commerce site that only sold for $2,000, we had already gotten that site back under our [crosstalk 00:26:32].

Justin Cooke:                     It was the two bigger ones that we were worried about. So this guy reaches out to us, “hey I think I have them”. We go back and forth, we’re like Oh my God, those are the sites. This is insane. To his credit, Nate was amazing about it. Like really really cool. Says hey guys, here’s the deal. I don’t want to be involved in some sketchy stuff. I definitely don’t want you guys to get screwed. Why don’t you just take the sites back.

                                                So you were talking to him and said look, hey, why don’t we work out this deal because we don’t want to see him screwed either. That’d be another victim of the whole deal. So why don’t we take the sites back, give us a few months, let’s verify the earnings or whatever, and we’ll get you paid back and then we’ll take whatever’s leftover.

Joe Magnotti:                    Right. And so we’re just going to resell the sites at this point. I have the sites back under our position. Thank you so much to Nate Kay, really appreciate that. He’s been great in making sure that we had everything back and under our control, we worked with our migration team to get the sites back. Everything is right where we left it off. So they’re making the same amount of money that they were making before, which is great news because we can at least recover them at what they sold for originally. We can get Nate paid for his money lost as well. And yeah, I guess if all in, there’ll be some fees, some lawyer feeds, some fees to Nate, whatever. We’ll take a little bit of a loss but not a $25,000 loss.

Justin Cooke:                     Yeah it’s crazy! If you hold over three or four months and then sell them, it’s possible besides doing even better we made money on the deal. That would be ridiculous.

Joe Magnotti:                    That would be a ridiculous ending to the story, for sure.

Justin Cooke:                     It would be. Right now we’re looking at, all things staying the same, we lost about five grand. So really, I’d say us talking about this publicly, as I mentioned at the top of the show one of our friends was like are you really going to talk about this? Are you really going to get any [inaudible 00:28:10]. We said absolutely! Think about this Joe. It was us talking about it, being open about it, and having the reach that we have with our blog that got Nate reaching out to us anyway.

Joe Magnotti:                    That’s right.

Justin Cooke:                     If we weren’t talking about it, he would never know.

Joe Magnotti:                    Yeah the authority and the transparency that we have absolutely got us out of this bind.

Justin Cooke:                     Saved us $20,000!

Joe Magnotti:                    Yes.

Justin Cooke:                     That’s one of those weird intangibles that you just don’t know how it’s working for you until you see it. This is how I see it.

Joe Magnotti:                    I don’t think any other broker would’ve been able to pull this off because they don’t have the kind of transparency and the kind of ability to talk about their successes and their failures like we do.

Justin Cooke:                     Yeah, well, maybe they wouldn’t have made the mistakes we did either. Just throwin’ that out there Joe! They don’t make the errors that we make. But you would never know, honestly- every deal’s a winner when you work with a different broker. Alright Joe, let’s get into some of the lessons learned here. I think there are some takeaways that are pretty important.

                                                The first thing is, and we mentioned this before, is we really need to take our customers’ concerns seriously and we need to look into their concerns immediately. It’s not guaranteed, but I think we could’ve saved ourselves all this hassle by looking into [BT’s 00:29:19] issue early on.

Joe Magnotti:                    Absolutely, I think that that’s a great point. I think knowing our customers, just to further that point a little bit more, knowing our customers is a good idea too. I’ve taken a real front and center approach to making sure I know our customers. I mean it’s become easier because I was on the phone with them so much in March. But now that I have access to tools like [inaudible 00:29:41] and ZenDesk, I’m looking at every purchase making sure I know the names, knowing where they’re from, that kind of thing so that if there are any kind of inconsistencies later on, I’m able to figure that out.

Justin Cooke:                     The second part I want to bring up is for us, escrow wasn’t the answer. Now, we know for sure that one of the deals would’ve gone through, it’s possible a second one would’ve gone through as well. What really would have protected us here is just wire transfers. Even though we were looking at ease of use and we were trying to balance ease of use for our customers versus that protection, as we move up the value chain we’re going to have to lean towards a bit more protection. Just to make sure- if we’re not doing well, our customers aren’t doing well in our marketplace right?

Joe Magnotti:                    Yeah, I mean I still think there is room in the market for an escrow migration service probably. Not sure if there’s a lot of margin in it.

Justin Cooke:                     Let me ask you this, if Quiet Light offered escrow service, would we use theirs? No.

Joe Magnotti:                    No, we wouldn’t.

Justin Cooke:                     It’d be a competitor.

Joe Magnotti:                    Yeah, it would be a competitor.

Justin Cooke:                     It’s hard. So that’s the problem too. It can’t be a competitor, but it can’t be someone who doesn’t know the industry. That’s a weird problem to have, right? What about like a [CenturaGuth 00:30:48], they opened up a [crosstalk 00:30:49]

Joe Magnotti:                    Yeah if they had an escrow service that also did the migration and they were judge, jury, and executioner and made sure they didn’t have to send it to some third-party arbitration or something like that-

Justin Cooke:                     That’d be much more interesting.

Joe Magnotti:                    That would be much more interesting to me. And I think that would’ve helped in this case. But escrow.com, as much as they are nice guys over there, I don’t think would’ve helped much in this situation.

Justin Cooke:                     Third part I want to mention is asking for help can work. What I mean by asking for help is reaching out to other people in your industry and telling them when you have a problem. I mean, us reaching out to Flippa- which Flippa could have every reason to say hey, you guys go to hell, we don’t care about you- and they were very helpful. They were very helpful in shutting down the auction and making sure they put them on their blacklist. So reaching out to your competitors in times where something’s gone wrong is not a bad option.

Joe Magnotti:                    Yeah, absolutely. I mean I can only imagine what those sites would’ve sold for at full auction because they were good sites. So they probably would’ve gone a lot more than what Nate had paid for them and the scammers would’ve made a lot more money.

Justin Cooke:                     If someone had brought to us, we would’ve had to pay more for it, so yeah.

Joe Magnotti:                    And Flippa would’ve probably made a lot more money, so I’m glad that they were true to their word and did the right thing.

Justin Cooke:                     Yeah, it was really helpful. The fourth point I want to talk about is that talking about this transparently helped us recover the site. I called this a win for transparency, Joe, what do you think?

Joe Magnotti:                    Transparency and authority we had, if this doesn’t prove it to you I don’t know what will.

Justin Cooke:                     Wow. Put the sales hat on! “If this doesn’t do it, I don’t know what will”. I give up! I quit!

                                                The fifth one I want to mention is that- I know this is kind of interesting- I really think there should be a global blacklist with brokers and other industries of professionals where we can blacklist clear and obvious scammers, but them on, put their information up there, exchange amongst each other. I know that we do it internally, I know Flippa does it internally, I know some of the other brokers do it internally. I really think we should probably combine forces on that one.

Joe Magnotti:                    Yeah I mean we talked about this at our quarterly meeting you know, as something that we wanted to do and maybe head up or something like that. But yeah, if there was-

Justin Cooke:                     I just want it done. I want someone to do it.

Joe Magnotti:                    Yeah. If there was some sort of organization our there together-

Justin Cooke:                     With help.

Joe Magnotti:                    That had all the brokers together at some- I don’t know what exactly it’d be called- but it would be interesting if at least there was a blacklist of names, addresses, and common criminals that are trying to take advantage of our industry.

Justin Cooke:                     One of the last things we want to say about this is we really wanted to thank the people that were involved in helping us with this. I mean Nate Kay, for example, for bringing the sites back to us, was fantastic. The funny thing is, Joe, he’s actually selling a site with us right now after this whole thing has gone done. So he’s selling- we earned business out of it. I swear to God we’re going to make money on this.

Joe Magnotti:                    Amazing, I know. And then of course we have the three sellers Brendan, Manny, and Simon Collins. Simon Collins was actually really great. He helped me do a lot of research on his end with GoDaddy, try to get the domains back. So really appreciate that guys, and we owe you.

Justin Cooke:                     Yeah, thanks to Nate and the sellers, you guys really helped us out and we’re thankful and lucky that didn’t end up a lot worse. Alright man, let’s do some news and updates.

Announcer:                        You’ve been listening to the Empire podcast. Now some news and updates.

Justin Cooke:                     Alright Joe, so the first thing I’ll mention is that we weren’t exactly as clear as we’d like to be in this podcast episode about all the details. If anyone wants to read the entire story, I just wrote a full-on blog post about it where we go over the scammer’s name, we show all their pictures, and we tell a full detailed account of the story. We’ll link to that in the show notes as well.

Joe Magnotti:                    Yeah, make them rank for scammers from Russia. Yeah.

Justin Cooke:                     I want to write their first and last names, man. You search their names and they show up.

Joe Magnotti:                    Absolutely. It’s a complicated story to tell, so you would probably read better than listen to but if you guys do have any questions, please let us know. We’re trying to be very transparent about the whole situation.

Justin Cooke:                     Yeah, next thing is we’re actually leaving this week to go to the Philippines buddy. We are in your hotel room right now. I’m on my way to the airport. I got the bags downstairs. My flight is at 1 AM. I’m taking [inaudible 00:34:49] to the Philippines. It’s 10:30 PM right now, so I’ve got a late night ahead of me.

Joe Magnotti:                    Yeah, you know, I’m a little sad to be leaving Saigon, but at the same time I do miss the Philippines and I’m excited to get back there.

Justin Cooke:                     We’re going to have our whole team together, man. It’ll be me, it’ll be you, it’ll be Mike, it’ll be the new guy Andrew, it’ll be everyone in Davao. So we’re going to have some fun, we’re going to do some island-hopping, we’re going to take the team out, maybe a little karaoke night which I know you love. You can do a little Madonna or something up there on the stage.

Joe Magnotti:                    Boyz II Men.

Justin Cooke:                     That’s your song right there. So we’ll do a little Boyz II Men and have some fun at karaoke night. The other thing is you actually spoke to the guys at escrow.com and there was a couple of interesting findings you had. One of them, one of our concerns that sites are going to go arbitration, was not that big of a deal. In fact, they said very, very few sites ever end up going to third-party arbitration. And that was one of our concerns is, why do we want someone who doesn’t know the business at all arbitrating the deal. How do they even know about that?

Joe Magnotti:                    Yeah, they said like five out of ten thousand go to arbitration. Which I thought was-

Justin Cooke:                     Amazing.

Joe Magnotti:                    Wow, amazing!

Justin Cooke:                     But the interesting thing is, even though few deals go to arbitration, they don’t track disputes that don’t end up in arbitration. So for example, if a dispute arises, and the seller let’s say doesn’t contest it or the buyer doesn’t contest it, they call that a non-arbitration deal.

Joe Magnotti:                    That’s right. So a lot of times, if there’s an outright scam, what the seller’s going to do is he’s not going to try to contest that right? Because he knows it’s going to cost him money in arbitration, the arbitrator will probably rule against him, escrow.com will give the money back to the buyer. Sure he’ll get his domain back, and none is loss. But he’ll be out of the 200 bucks or whatever he had to pay arbitration. So most scam sellers just know it’s better off to just accept the fact that the buyer wants his money back, get his domain back and move on to another sucker. So they don’t include that in their stat of only five deals went to arbitration out of ten thousand. Which is true, it didn’t actually go to arbitration. But I think it skews the numbers in the fact of how many deals really don’t make it all the way through.

Justin Cooke:                     Yeah the other thing I want to bring up is a point of clarification. The guys over at Effy International reached out to us after our last podcast. I think I was joking about them owning stock in escrow.com or something, I teased them a little bit. And they said no way, hold on there Justin. No no no we do not own escrow.com, we do not own stock in the company, just wanted to make that clear. So we wanted to at least report back and say they reached out to us, said they don’t own the company, they don’t own stock in the company, and they don’t have anything to directly deal with the company. They just like their services.

Joe Magnotti:                    Yeah I mean apologies, bad joke I guess. We were just kind of fooling around about it, but-

Justin Cooke:                     Well because they do pimp it a lot, I mean they definitely pimp escrow, man. There’s no question about that. Escrow.com you should check out- I’m pimping them right now, in proxy. But yeah they really like them. So that was our point. Like oh my God there must be. But either way no they don’t own escrow and we’ll leave it at that.

                                                Alright man, let’s do some listener shouts. Also know as the indulgent, ego-boosting, social proof segment. We’ve got Brad Stevendorfer gave us a five-star review on iTunes. Said “a phenomenal podcast. This podcast is always time very well-spent. The content is always excellent and the episodes are dense with great information. Justin and Joe are extremely knowledgeable and easy to follow. Never before have I stopped a podcast to rewind and listen to sections multiple times. I often even take notes. Something for every skill level, whether experienced or new to buying and building sites like me, it’s my go-to podcast on my soul-sucking morning commute. All my other subscriptions have taken a back seat. My girlfriend is also now hooked. Great stuff”. Well thank you so much Brad, glad you got your girlfriend hooked. It’s Empire Flippers podcast, great thing to do as a couple. [inaudible 00:38:34] what are we talking about.

Joe Magnotti:                    It’s great couple listening.

Justin Cooke:                     Let’s sit down together and listen to the Empire podcast. Alright Brad, I really appreciate that.

Joe Magnotti:                    Yeah, thank you so much Brad.

Justin Cooke:                     On Twitter, J.R. wanted to thank us and self-made business man for sharing his story on our podcast. He thought that was really excellent. We had him on a couple of episodes ago. Darcy Mason on Twitter said “Justin, do you guys build your own sites too?” Longtime listeners will remember that we actually got started building small sites ourselves and made a real business about it and stopped talking about that publicly in how we built them up. Ultimately over time, the return we were getting on those small sites we were building ourselves diminished. We’re still making a little bit of money but we realized the opportunity wasn’t nearly as big and wide as it was before. That’s kind of when we started heading into the brokerage path.

Joe Magnotti:                    Yeah, we don’t build our sites anymore. We do have some sites in our own library, thank to Nate on that as we discussed before. We might be selling those in the future, sites that we’ve acquired in other ways. So, but yeah, no future plans to build our own sites either.

Justin Cooke:                     We’ve published a guest post this week about a guy that bought a site and inside of four months I think, he had tripled the earnings. So on Twitter bluesheepdog said “excellent example of increasing value on a site purchase. Not only is income up but three times the equity as well”. That’s true, if he’s got the earnings up three times, obviously the site is worth that much more. I’d actually recommend to that guest poster that put that post up, that he should probably look at selling it. I think it’s still growing right now, pretty heavily, but somewhere in the next three to six months if earnings start to level out, he should look at selling that. He’s got a nice fat return. I think he should take it and sell it off to someone else. Let them run with it.

Joe Magnotti:                    Yeah, definitely sites that are on the incline are easier to sell and sell faster.

Justin Cooke:                     Justpauseit said “In [inaudible 00:40:19] you mentioned a UK e-cigarettes website that sold for eight figures. Do you have further info about that?” I don’t. I mean, I do, but I probably shouldn’t talk about it any further, honestly.

Joe Magnotti:                    Yeah, that’s true.

Justin Cooke:                     That’s it for episode 135 of the Empire podcast. Thanks for sticking with us. We’ll be back with part two next week. You can find the show notes for this episode and more on empireflippers.com/scammers and make sure to follow us on Twitter @empireflippers. See you next week!

Joe Magnotti:                    Bye-bye everybody!

Announcer:                        Hope you enjoyed this episode of the Empire podcast with Justin and Joe. Hit up empireflippers.com for more. That’s empireflippers.com. Thanks for listening!

 


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  1. Jeff Doehler says:

    It’s awesome how you guys are following your style of being open and honest about this, even if it’s a painful topic! I’m glad it more or less worked out in the end, it definitely proves your point of focusing on building authority and trust.

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