Fraudulent Software Startups and Misrepresentation

I recently learned of a U.S. software start-up claiming to have a team of professional developers in-house, but in-fact has all of its work done through two offshore companies (one in Eastern Europe, the other in Asia) who in turn contract other developers and designers. The company is also responsible for a number of high-profile websites and software applications, none of them developed internally.

How prevalent is this practice and what can be done to stop or discourage this fraudulent representation?

What they are doing is not illegal (unless they sign contracts that state developers must be based in a certain locatoin), but just not stating the facts as they are. If they are trying to convince customers' that they are based in the US then they are going to earn themselves a bad reputation. Can't see what you can do apart from contact them and make them aware that you know that having in-house developers is not true.

A lot of people probably won't mind as long as the work is up to scratch and professional.

Also, how do you know this to be true? They may have a couple of in-house developers in which case their statement is in fact true, even though most of the work is contracted out.

The best approach is to contact the company concerned.