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Bust-Out Swindles Appear to Be Busting Out All Over

April 26, 1995

Den-Mar Products Inc. thought it had paid its dues the first time.

In mid-1992, swindlers conned the company into selling them more than $30,000 worth of jalapeno peppers _ and never paid the bill. Later, the Englewood, Colo., seller of food products lost again in a similar scam _ perpetrated by the same people under a different guise.

The losses put a big dent in cash flow and earnings, says Gene Mincks, Den-Mar’s manager of food-service sales. ``We had to struggle for a while,″ he says, adding that about three months ago the company was approached by yet another suspect would-be customer.

As a victim of so-called bust-out scams, Den-Mar has plenty of company. In bustout fraud, swindlers order merchandise, never pay for it, and make their money reselling the goods.

The number of bust-out schemes has risen by between 30 percent and 50 percent in five years, estimates Robert Lawson, director of the loss-prevention department of the National Association of Credit Management, a trade group based in Columbia, Md. He says the problem has surged to ``all-time heights″ during the past year, with evidence of ``hundreds″ of bust-outs during that period.

Small businesses are often the targets of bust-out artists, law-enforcement officials and others say. These concerns commonly lack the resources and time to do thorough credit checks of new customers. Increasing competition in many fields has also pushed large numbers of businesses to relax their credit standards. When firms ``get a little desperate to move product off the shelf, the con men come out; it’s like watering a plant,″ says Harvey Head, a Sonoma County, Calif., deputy sheriff.

Very large companies are also targets for bust-out crooks, experts say. Although most of these big companies have credit departments, some get lax when an order involves five-digit or even six-digit amounts (which are small change at billion-dollar concerns).

Once largely the province of the Mafia, bust-out scams are increasingly being pulled off by other organized criminal groups, law enforcers say.

Bust-out artists sometimes make small initial orders at very large firms to give them credibility with small businesses. If many smaller companies ``see a Procter & Gamble as a reference, they will just give credit″ to the con artist without further checks on his creditworthiness, says Todd Scheffer, senior investigator for the National Association of Credit Management.

A loss that a large firm can shrug off can mean the difference between life and death for a small company. One small plastic-bag manufacturer in California was forced out of business after losing $300,000 to a bust-out that operated from the Chicago area early in this decade, says John Diwik, a Federal Bureau of Investigation special agent in Chicago.

Mr. Diwik says two men were convicted of fraud in that case, which allegedly netted more than $3 million in merchandise. Both are now in prison, he adds.

But small firms’ role in the scams isn’t always as innocent victims. Some are buyers _ usually at deep discounts in cash-only transactions _ of the merchandise stolen by the crooks. The FBI’s Mr. Diwik says mom-and-pop stores were often the recipients of the stolen merchandise in the bust-out scam that he worked. Though such firms might be culpable, they are rarely charged with any crime because it is hard to prove that they knew they were buying stolen merchandise, law-enforcement officials say.

Well organized, the crooks sometimes keep track of victims in hopes of hitting them again. In the Den-Mar case, the company first shipped its jalapeno peppers to con artists, who immediately sold the goods and disappeared without paying, says the company’s Mr. Mincks. The crooks’ references turned out to be fronts set up by the swindlers, he adds. The group used a different front when it hit Den-Mar again, for goods priced at $1,600.

Two leaders of those and other alleged bust-outs have been criminally charged in state court in San Bernadino, Calif., and federal court in Las Vegas. One, who had a previous federal fraud conviction, had been a fugitive until he was apprehended earlier this year while working at a suspect telemarketing company, law-enforcement officials say. Both men have been convicted of, or pleaded guilty to, at least one felony related to bust-out activities against Den-Mar and other companies. Both are in custody.

Den-Mar’s bust-out experience has made the concern much more vigilant about giving out credit. For one thing, Mr. Mincks says that if he has any questions about a would-be customer, he now tries to visit its offices personally.

In one case a few months ago, he found that the would-be buyer had an office with no computers, which struck him as odd in this day and age. While there, Mr. Mincks met a Dun & Bradstreet representative, who was running a credit check on the firm. Mr. Mincks says that man later told him that one of the company’s principals had five aliases. Mr. Mincks says he reported the would-be customer to the local police.

Credit experts counsel small businesses to check thoroughly any references supplied by a would-be customer. They say independently checking the telephone number and address of a reference with the telephone company also helps. In bust-outs, references often turn out to have a phone number that is actually at the same address as that of the would-be customer. Or sometimes it is a voice-mail box at a private post office.

Joining business trade groups that have access to databases of credit information can also help. Experts urge being wary of customers who go along for a time paying their bills but then make a sudden large surge in orders _ a possible prelude to a bust-out.

If a small firm ``can do things to make it harder, maybe these credit criminals will at least try another company,″ says Mr. Scheffer, the credit-fraud investigator.

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