I'm not sure about the scam portion, but from what I remember, you were given a word, then tried to spell it out via your keypad. For example, if the word was "computer", you'd dial the corresponding numbers (2-6-6-7-8-8-3-7).
Here's a commercial for it...they used to air all the time during USA's game show block in the early-90s. Apparently, you had 2 minutes to spell 21 words.