Failed company provides expensive lesson in online-rebate risks

Rebates made sense to these thrifty customers, but they got more than they bargained for when their refund checks bounced., the website that offered full rebates after selling items such as printers at highly inflated prices, lured many customers into maxing out their credit cards with the promise that they'd get their money back.


But on May 16, the Long Island, N.Y., company filed for Chapter 11 bankruptcy, leaving some $80 million in rebates unpaid to 200,000 people in North America.

Former CyberRebate customers - some who spent their life savings on purchases - are disputing their credit card charges. The Nassau County District Attorney is working with the New York State Attorney General's office to investigate the case. In Florida, 10 complaints are pending with the Department of Agriculture and Consumer Services.


As people grow more comfortable with Internet transactions, they tend to forget that scams exist even in the world of e-commerce.

"I'm very, very skeptical of purchasing anything over the Internet now," said Kyle Horne, a chemist from Bradenton, Fla., who is owed $27,000. "I really did not think that as a consumer something like this could happen to me and it could be legal."

For a while, at least, CyberRebate appeared to be successful. The company, founded by 24-year-old Joel Granik, saw 5.6 million visits to its Web site in March, almost as many as at and eBay. Big-time companies, such as Yahoo! Inc., were affiliated with the site. And CyberRebate claimed to have doled out more than $93 million in rebates since it was launched in 1998.

But when the dot-com went bust, its best customers became its biggest creditors. Yahoo! is owed $300,000, and more than $410,000. It doesn't look like customers will get their money back from CyberRebate, which says it has $24.5 million in assets. Of the top 20 creditors listed in its petition, nine customers are owed between $79,000 and $110,000 in rebates.

Jim Spratt, a 46-year-old consultant from Ponce Inlet, Fla., was one customer who was reeled in by CyberRebate's "No Fear Rebate Process."

Initially skeptical, he decided to place just one order and wait for his rebate check. When it worked out, he placed about 80 orders in the past year. He read positive articles about CyberRebate in newspapers such as the Wall Street Journal.

He didn't know that the New York's Better Business Bureau had received 171 complaints from customers and given the company an unsatisfactory rating, or that the New York Attorney General had investigated CyberRebate in August 2000 and reached a settlement after the company promised to improve its customer service.

Spratt received $40,000 in rebates but his last 15 refund checks bounced, leaving him $30,000 in debt.


Was CyberRebate's business model a well-intentioned effort that was doomed to fail or was it a scheme to swindle gullible consumers?

CyberRebate founder Granik reasoned that customers would eventually switch from buying free items to those that were fully priced. Ideally, the company would earn interest or cover some costs from the float on customers' money before sending out their rebate checks.

Granik did not return calls for this story.

According to a statement on its Web site, CyberRebate said: "We are currently in the process of creating a plan to repay our customers and creditors. It is our intention to pay back as much as we can, hopefully up to 100 percent of what we may owe."

Many manufacturers or retailers use rebates as a marketing tool to gather demographic information from customers, clear slow-moving inventory and to promote certain products. Companies that offer rebates rely on the fact that 90 percent of all consumers forget to send in their rebate forms. Rebate forms are sometimes disqualified for failing to adhere to strict requirements. For other customers, if their check doesn't arrive in the mail, they don't bother pursuing the matter.

But most of CyberRebate's customers sent in their rebate forms.


"You would assume one of the problems they probably had was not attracting the right kind of customer," said Rob Leathern, a Jupiter Media Matrix analyst. Some 56 percent of consumers build trust in an online merchant by placing a trial order, Leathern said.

But it's more important to examine a risky business model, he said, especially since customers would receive their rebates outside of the 60-day time period to dispute credit card charges.