How to fire a client who is a scamming gullible people through your work?

I am the CEO of a small software services based company(7 devs including me). We
have been working for a customer for almost an year now. We created a job
portal for these guys from the ground up.

They told me that thier business model was:

1. They put up ads on newspapers and other media.
2. People looking for jobs call them.
3. An agent tries to sell the caller, one of their products which helps them get a job.
4. They said that if a job seeker buys their "paid product" they hookup the job
   seeker with one of their employers, meaning that they had contacts through
   which they patch up job seekers and potential employers.
5. The job portal itself showed jobs which were scraped from careerbuilder,
   monster etc,.

That's what I knew when our company took up the job. It still sounds like a scam, but I did some
research on these guys and found nothing suspicious. So, I went ahead and took
up the job, trusted that I was not doing anything wrong, and everything was hunky dory.

Recently I found that the job-seekers didn't actually call them, It was the
other way round. These guys got the information about people looking for jobs,
and called them up trying to sell their product. Now, when I search for the
company, I see a lot of complaints about these guys on ripoffreport.com and
800notes.com.

I am convinced that these guys are cheating people who are
desperate to get jobs. And, I am gonna stop working on all their stuff right
now. That is what I am gonna do. However, I need help figuring out a few
things:

1. What would be the best way to tell them, that I am going to stop working on their projects?
2. Also, these guys have told me recently, that they want more developers and
   that they want to build more things. So, How do I cut them off completely?
3. How can a company like ours spot these scammers before taking up a job in the
   future?
4. Lastly, is there anything I can do, to undo the damage I've done to these
   job-seekers?

P.S Please upvote this so that, I can get this in front of as many eyes as
possible. It's an anonymous account.
Thank you!

I respect your desire to disentangle yourself from what you consider to be an unethical client.

Personally, though, I don't feel like you're responsible for the client's misuse of the software. The software itself doesn't sound inherently unethical to me, either.

As far as avoiding this situation in the future - listen to your gut. Your gut told you that this might be a scam, so you did some research and then concluded it was okay. Now it looks like your initial instinct was right.

Here are my suggestions on how to get free from the client...

1. Resist the temptation to tell the client what you think of them or their "scam".
2. Make sure that you completely fulfill all the terms of the current contract that you have with them.
3. Hand over all deliverables, including source code (if your contract allows that). Make sure that the client has everything they might need in order to turn the project over to another software developer.
4. Politely decline when they request additional work. Don't give a long explanation - just say that you're pursuing other projects.
5. You might want to go above and beyond here and give them a list of skills that their new developer will need in order to take over the project. Point them towards one of the freelancer sites like odesk or guru.

Just get free from the client, keeping your assessment of their ethics to yourself. If they are scammers, then they're also the kind of people who will take you to court. That's why you want to make sure you fulfill every contractual obligation.

Finally, most of my contracts have a clause that allows either party to terminate the agreement with reasonable cause. Something like this may be an out for you, but only if the client has failed to completely live up to their end of the contract.

I'm not certain how this question relates to start ups, specifically, rather than general doing business-practice. But it's Monday, so:

1) Your ethical standpoint isn't really the point, legally, it's what is in the contract between your companies. The best way to tell would be to phone up and say you're not doing it, but are you allowed to stop straight away. The question is also, can you afford to stop working on it straight away?

2) Again, what does your contract say on the matter?

3) Well, how does anyone trust anyone else, meet them, talk to them...

4) Are you really responsible for this?

OP,

Not sure how your contract looks like, but I would do the following to avoid lawsuits and other distractions to your business:

1. Deliver exactly what was paid for to this point. If there is work remaining, that has been paid for, then you will have to deliver it or risk them suing you.
2. Tell the customer you have some very lucrative projects taking up your capacity. Thank them for their business and wish them good luck. Surrender all the documentation and sourcecode you are contractually obligated to deliver.
3. Resist the urge to discuss the real reasons for you disengaging. It is not worth it. You will not change them. Soon enough Attorney General for the state you are in will get them, if they are that unethical.

What can you do in the future? Not much. Do your research before on-boarding a client.

[Moved to an answer as per Robert C.]

Tell them directly about your concerns. Ask them the hard questions. Tell them your company is not comfortable with the risk of being sued regarding the business practices they use. Require that they indemnify you, etc based on the new information you discovered about them. If they were not honest about their practices I see no reason to continue working for them. If you took money from them either give it back or deliver what you are contractually obligated to deliver. If this kind of thing bothers you then add a clause in your contracts that allows you to back out.