Entrepreneur Magazine's Hot 100 Companies: Too Hot To Handle
Entrepreneur Magazine is being sued for $178 million by investors in Agape World, which posed as a "bridge loan" company, but which, it appears, turned out to be a traditional Ponzi scheme. It's reported approximately 1,500 investors lost nearly $400 million in the scheme.
Unfortunate investors in Agape World argue Entrepreneur Magazine was grossly negligent in ranking Agape World as a fast-growth company and that the ranking gave Agape undue credibility. Entrepreneur Magazine ranked Agape #73 in its 2008 Hot 100 company issue which ranks fast-growth companies. The investors argue Entrepreneur Magazine could full well anticipate Agape or any other highly-ranked company would use the ranking for self-promotion and therefore Entrepreneur Magazine should exhibit some care in creating the rankings.
Entrepreneur Magazine replied it is under no legal duty to use care when publishing information. The magazine's legal response states: "Entrepreneur, a publisher of a business oriented magazine, is under no duty to provide information with care to its readers."
The magazine continues: "A publisher, even those who maintain a paid subscription service, such as Entrepreneur, owes its readers no duty to ensure the accuracy of its publications, and thus, cannot incur liability for an allegedly inaccurate statement."
How does Entrepreneur Magazine compile its "Hot 100" list? Reading its legal response to the lawsuit, it sounds as if Entrepreneur Magazine merely took a list of companies provided by a "third-party" database company called "Centrispoint" and listed those with the highest-reported company growth. Then the magazine called the list its own.
It appears absolutely no due diligence was performed by Entrepreneur Magazine in creating the "Hot 100" listing. Nothing is confirmed, checked, cross referenced, or even questioned. If the company says it's true, it's true. Print it. If that's not a breeding ground for potential fraud, I don't know what is. Entrepreneur Magazine washes their hands of the issue. Surely, though, they were careful in selecting a credible database company that performs at least a modicum of due diligence to help ensure the companies are legitimate? Perhaps (But see CentrisPoint Footnote Below).
While Entrepreneur Magazine failed dismally to recognize Agape World as a Ponzi scheme, users of the bulletin boards at FatWallet.com instantly saw through the Agape scam (as a way of disclaimer, I'm not particularly familiar with FatWallet.com. Don't know them. Don't vouch for them. Don't want to be sued if they eventually give you bum advice.). (http://www.fatwallet.com/forums/finance/865655/?start=0)
A question posed to the Fatwallet.com bulletin boards asked if Agape was legitimate. The first response from SUCKISSTAPLES succinctly summed it up:
" '13-14% returns'
'mlm paid for signups'
'made a million'
how many braincells does it take to figure out this is 100% scam? "
Then civ2k1chimed in, predicting:
At some point, the whole house of cards will fall and then we'll see how "safe" this "investment" is.
A user Miser added:
It's a ponzi scheme, pure and simple. There is a reason that you must be "invited". Otherwise the scheme would be revealed by discriminating investors. Most successful scams work this same way.
User Avarice analyzed the basics of financing a bit and concluded the same:
Why would they choose to finance at a high rate with individuals rather than a low rate with banks/institutions? That is not a sustainable business model. Therefore, the other shoe will drop....the only question is when.
Another Greedy Member (self-described) of the boards also evaluated the financing aspect:
Now tell me this. If Agape is so successful, why haven't they gone public in the equity market to raise funds as a private equity operator? Companies like American capital and Allied Capital run similar operations, have larger scale, raise funds at cheaper rate than Agape and DON'T GUARANTEE RETURNS!!
This is fishy. Agape chooses higher cost of funding while guaranteeing investors money....that tells me
1) SCAM ALERT!!!
2) If it is legit, the owner is an idiot (and why would I let an idiot run my money??)
Several users echoed this thought: Why pay above market rates to get financing? Others evaluated typical business expenses and stated profits to show something was fishy with the claimed business success. Another user spotted an inconsistency in the 1999 founding date of the company. It turned out the founder of the company, Nicholas Cosmo, was in prison for fraud during this time in 1999. Eventually, the Fatwalleters exposed many of the key management and associates of Agape as having served prison time for fraud, drug trafficking, and robbery. Probably not the bunch you'd want to trust your hard earned money to.
When it came to evaluating Agape, the analysis of a handful of people on Fatwallet.com blew away Entrepreneur Magazine by leaps and bounds. Kudos to the individuals on Fatwallet.com who helped people protect their savings by exposing Agape World.
The lesson for investors is be sure to do your own due diligence. Research a company before investing in it. If enough money is at stake, perform a background check on the key principals in the company. Try to become a more sophisticated investor. Use the scuttlebutt method to understand what is really happening at a company.
The old adage: 'If something seems too good to be true, it probably is' should be kept in mind. Several bulletin board users at fatwallet.com said greed is a scammer's helper. When people get greedy and want excessive returns, they are more likely to fall victim to a fraud. And never trust a magazine ranking alone to make an investment decision. Rankings and magazine feature stories by no means assure a company is legitimate.
In Entrepreneur Magazine's case, Agape investors argue Entrepreneur Magazine has committed gross negligence, essentially no care whatsoever, in ranking the "Hot 100." Entrepreneur Magazine seems to want to have its cake and eat it too. It creates the impression it has conducted extensive research to project an aura of authority and value to its publications. But, then, when legally challenged, Entrepreneur Magazine turns around and argues it merely republished what was commonly available from somebody else's database. Entrepreneur Magazine promotes itself as a leading provider of small business information, not a leading regurgitater of small business information.
Entrepreneur Magazine could have simply stated an honest disclaimer: "The company information in the Hot 100 List is provided by CentrisPoint. Entrepreneur Magazine has not verified, confirmed, or independently investigated the truth of any of the data provided by the companies." Such a disclaimer would help make it clear the data being reported had not been independently verified by Entrepreneur Magazine.
Such a disclaimer would also make readers think to themselves: "What the hell? You mean a company could be reporting false information, and you haven't tried to cross check any of it?"
Clearly, such an honest disclaimer would devalue the perceived worth of the list in the minds of the readers who felt they were led to believe the magazine conducted at least some independent analysis and due diligence of the companies ranked. Unsurprisingly, Entrepreneur Magazine seems to care more about getting a bit more money from its publication than benefiting subscribers. You will find no such brutally honest disclaimer by the magazine.
When an enterprising Fatwalleter e-mailed Entrepreneur Magazine to let them know Agape appeared to be a Ponzi scam, and asked what sort of due diligence was performed when ranking the companies, the Fatwalleter said Entrepreneur Magazine responded saying:
We do look into the businesses we list in our Hot 100 but obviously we cannot know as much as someone who has done business with these companies. This ranking does not endorse the business practices of these companies and we expect our readers to do their own due diligence.
What did Entrepreneur Magazine mean by saying they "do look into" the companies? That sounds contradictory to what Entrepreneur Magazine claims in their response to the lawsuit. "Look into" seems to suggest a dilettante expression for due diligence.
To say they "…cannot know as much as someone who has done business with these companies" seems to imply their level of research is fairly high. The magazine compares its level of knowledge to those who do business with the companies. Let's see: There are the company insiders; there are those who do business with the company; there is Entrepreneur Magazine; there are those who merely google information from the Internet; and there are the great bulk of the uninformed who have never even heard of the company. That's the impression I get reading Entrepreneur Magazine's response.
Had the magazine responded more openly they would have simply e-mailed: "We do not conduct any due diligence on the companies whatsoever. Our rankings and reported information is based on information provided by the companies." To be even more open, they could have added: "You, having probably spent ten minutes googling the company, almost certainly know vastly more about the company than we do."
In their legal response to the lawsuit, Entrepreneur Magazine writes:
The Plaintiffs set forth a naked and unsupported allegation that Entrepreneur had reason to know that Agape would use its inclusion in the "Hot 100 at a Glance" list to solicit investment and that investors would rely on the information provided in the Magazine in making investment decisions.
A naked and unsupported allegation? It's more obvious than naked and unsupported. For 30 years, companies mentioned in Entrepreneur Magazine's many rankings have used their position in the rankings for self-promotion. Google "Entrepreneur Hot 100" or "Entrepreneur Franchise 500." You'll find hundreds, if not thousands, of companies issuing press releases to brag about their ranking and how the ranking is evidence of their success and business savvy. Toss in the knowledge that Agape was a "bridge lender" which sought individual investment and it's nearly inconceivable Agape would not use its ranking to seek investors and boost its credibility.
Need further proof the magazine is aware its rankings are used to promote businesses? It comes from the Vice President of Entrepreneur Media, Ryan Shea. When suing Rieva Lesonsky, because she dared to create her own franchise ranking after she left Entrepreneur Magazine, Ryan Shea declared:
"...To many members of the public, their first exposure to EMI [Entrepreneur Magazine] is ..... from visiting one of the many ranked franchises who proudly display their ranking [in the Franchise 500 list]."
Further, Shea declared:
"EMI, has become an extremely valuable resource for both the participating franchisors wishing to promote and market their respective business models and prospective franchisees and other members of the general public interested in the relative merits of the franchises ranked therein."
While the specific list in question differs (Franchise 500 versus Hot 100), executives at Entrepreneur Magazine should have no logical basis to claim their readers or listees will distinguish between the (supposedly) quality lists and the hastily-assembled lists.
A key reason Entrepreneur Magazine likes making positive lists of companies is that it benefits the magazine by encouraging the companies to promote their rankings and, thus, indirectly, promote Entrepreneur Magazine. I don't recall too many lists with titles such as "The Slimy 100: America's Most Unethical Businesses," "The Financially Challenged 50," or "The Inept 100: America's Most Incompetent Businesses." Such lists would not benefit the magazine, because the companies wouldn't promote their rankings (Yes, I know, possibly some of the Inept 100 would.).
We can again turn to the knowledge of Fatwallet posters who said getting ranked by Entrepreneur Magazine would be useful to keep the Ponzi scheme going by drawing in new investors. While Entrepreneur Magazine has beefed up its disclaimer to cover its legal butt, the magazine's lack of conscientiousness has been exposed.
Entrepreneur Magazine says it isn't currently accepting submissions for the Hot 100. The magazine just published its newest list: The Brilliant 100.
--- Centrispoint Footnote--
I had never heard of CentrisPoint so I googled CentrisPoint to find their website. First registered in 2007, the web domain centrispoint.com boldly states "Untitled Document." The company apparently has not developed a web site, which I found surprising, because in Entrepreneur Magazine, the company boasts that "CentrisPoint is a leading provider of economic and business data… CentrisPoint serves businesses and governments worldwide."
Perhaps they do serve governments and businesses worldwide, but it would be nice if they had a website. How many leading database companies don't have a website in 2009? Doing a WhoIs search to find the true owner of the web domain CentrisPoint.com shows the owner uses a private domain name registration service to obscure his identity. This means people wishing to know the true owner of the domain will hit a roadblock. For all we know, the company is run by a nine-year-old in Nigeria. Legal discovery can, of course, get payment information for the domain and other information to find the owner, but a mere writer seeking to learn more about CentrisPoint to ask a simple question is out-of-luck. A search of corporate records for Washington D.C., California, and NY gave no results for Centrispoint.
Surely Google can help. Googling CentrisPoint, gives 292 entries. Many are connected to Entrepreneur Magazine and none seems to shed much light on the company. Googling "CentrisPoint -entrepreneur" (CentrisPoint without the word "entrepreneur" on the same webpage) turned up only 17 hits. Most of those appeared to be sites that just regurgitate text they find around the Internet to generate search engine hits or sites unrelated to any company.
Seventeen hits of low informational value. For a company that is a "leading provider of economic and business data," it seems we should expect more. Wouldn't there be more media coverage? Is Entrepreneur Magazine the ONLY company that uses CentrisPoint? What is the true connection between CentrisPoint and Entrepreneur Magazine? Was it purely coincidence that Agape's fabricated growth rate allowed it to beat out a reported 20 million other businesses in the Centrispoint database and land on Entrepreneur Magazine's "Hot 100" list? How much due diligence protects the quality of the database? Entrepreneurial minds want to know. Investors in Agape should want to know even more.
Peter Shea, owner of Entrepreneur Magazine seemed to claim in an interview with Jan Norman that Dun and Bradstreet was the source of the data used to compile the "Hot 100" list. Shea said: "…we got the list for [?] Dun & Bradstreet…and it was based on numbers the company gave Dun & Bradstreet."
The "Hot 100" issue says the source of the ranking is a Centrispoint database. There is no mention of Dun & Bradstreet. A search Dun & Bradstreet's website shows no hits for Centrispoint.
Another webpage on entrepreneur.com says: " CentrisPoint is a new marketing research and services firm with an innovative approach to marketing." No mention is made of Dun & Bradstreet.
It's curious that while Entrepreneur Magazine says the Centrispoint database is the ultimate source of the "Hot 100" rankings, that Entrepreneur Magazine has apparently in the past accepted "submissions" to the "Hot 100." How does this work? Who knows? But it seems difficult to reconcile Centrispoint as the source of the data while data is apparently being collected by Entrepreneur Magazine.
Curiously, in 2007, Entrepreneur Magazine created a "Hot 500" ranking, in which it claimed the data was provided by an organization called the "Corporate Research Board" which was described as "…a leading provider of economic and business data, research, and information. CRB services governments and businesses worldwide." Entrepreneur Magazine's description of the "Corporate Research Board" here is an exact word-for-word match of its description of Centrispoint.