Millions vaporized in CyberRebate collapse

I warned in my Feb. 23 column that CyberRebate charged vastly inflated prices and didn't issue refund checks for up to four months. That's long after the 60-day period credit card holders are given to dispute charges on their statements if anything goes wrong.

At the time, CyberRebate received mostly fawning press coverage for its business model, in which it held consumers' money for 10 to 14 weeks before issuing any rebate checks. On Feb. 26, The Wall Street Journal carried an article describing CyberRebate as "one of the Internet's most popular shopping destinations."

Many reporters assumed CyberRebate earned a profit by collecting interest or selling some items for less than a full 100 percent rebate. In fact, as CyberRebate CEO Joel Granick told me in an interview for the original story, the company depended on the fact that at least 5 percent of its customers never got around to sending in the required rebate forms.

CyberRebate priced its items as much as 10 times above list. If the 5 percent non-claim rate is correct, CyberRebate could double its money on each item shipped, averaged across thousands of orders.

But many consumers didn't seem to care about the high prices, because the bottom line, after the promised rebate, was $0.00.

Playing on its lure of "free" products, CyberRebate, founded in 1998, became the No. 3 online retailer in the United States for the last week of January 2001.

At that point, the company trailed only eBay and Amazon.com, according to PC Data Online, a firm recently acquired by NetScore Online.

Court documents filed this week by CyberRebate state that the company owes $83.3 million to customers and creditors, but has assets of only $24.5 million. The difference, $58.8 million, is the subject of frantic pleas and possible legal action by desperate consumers, some of whom sent CyberRebate their entire family savings in a syndrome eerily like a gambler's addiction.

Martin McMillan of Galax, Va., is owed the most of any individual: $115,000 in rebate checks, according to CyberRebate's court filing. "I got things like Game Boys, digital cameras, stuff that I could sell on eBay," McMillan said in a telephone interview. "It just seemed that it was free merchandise, only tying up my credit cards for three months."

McMillan got a rude awakening yesterday when he received a FedEx from New York Bankruptcy Court informing him that he is one of CyberRebate's 20 largest creditors. "I'm just worried about us having to declare bankruptcy ourselves," McMillan says of himself and his wife. "We make about $65,000 and have $150,000 in credit."

Other individuals, many owed tens of thousands of dollars, are streaming into Internet discussion groups like the Rebate Recovery Alliance.

Repeated calls to CyberRebate seeking comment went unanswered, and the company's public relations firm failed to respond to voice mails.

Ken Dreifach, chief of the Internet bureau for New York State's Attorney General, said CyberRebate seemed to have reformed after an investigation last year found irregularities affecting "10 to 20 percent" of all refunds. But about three weeks ago, Dreifach says, "we saw a bump up of complaints."

Edgar Dworsky, founder of ConsumerWorld.org, an advocacy group, says CyberRebate customers who haven't yet received their promised rebate checks should contest their credit card charges in writing.

A spokeswoman for American Express, Judy Tenzer, said in an interview that the giant credit card company "will often take on the responsibility and make sure our customers are not liable" in cases of bankruptcy.

For all too many people, CyberRebate was a gigantic computerized dream machine. But the dream has collapsed, and no one knows how this story will end.

Brian Livingston's Wired Watchdog column appears at CNET News.com every Friday. Do you know of a problem affecting consumers? Send info to tips@BrianLivingston.com. He'll send you a book of high-tech secrets free if you're the first to submit a tip he prints.