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Criticism puts auction site Bidz.com under microscope

THE INTERNET

Bidding patterns, customer complaints raise concern

February 19, 2008|Michael A. Hiltzik and Joseph Menn | Times Staff Writers

A few weeks ago, the chairman of online auction site Bidz.com forecast good news ahead. The company was headed for another blowout quarter, David Zinberg said, with sales topping the already-rosy projections made in November.

The announcement was designed partly to quell questions that had been swirling around the Culver City-based company for months.

The questions involve, among other things, what critics say are irregularities in bidding patterns on the site, as well as persistent customer complaints that have led the Better Business Bureau to give the company a grade of “F.”

Critics also have raised questions about Bidz.com's relationship with Saied Aframian, a primary jewelry supplier who served time in prison for receiving stolen property.

Zinberg, an immigrant from the former Soviet state of Moldova, attributes much of the criticism to short sellers -- investors betting on a drop in a company's stock price, and who aren't shy about trying to push it in that direction.

Indeed, public records indicate that investors had sold short nearly 3.9 million Bidz shares as of Jan. 31, a significant proportion of the roughly 10 million shares available for public trading.

Still, the questions appear to be having an effect; Bidz.com's shares have tumbled more than 30% since Zinberg's upbeat Jan. 14 announcement.

As Zinberg tells it, there's no mystery to the company's success. He says Bidz is enjoying strong growth because of the allure of its auction style and management's hard work.

"We come here at 7 a.m., we're the first ones to show up, and we love what we do," he said in an interview at the company's 52,000-square foot headquarters and warehouse.

But there may be reasons for the stock's downdraft other than short sellers' innuendo. Nearly half of Bidz's shares are owned by Zinberg and his sister, Marina Zinberg -- and they have been selling relentlessly, unloading 210,000 shares for nearly $2 million since Aug. 15, regulatory filings show.

In recent months, moreover, the company's two largest institutional stockholders dumped their combined 1.5 million shares. Neither would discuss their reasons for divesting.

Zinberg says his stock sales make up for his decision to take no salary from Bidz. Nevertheless, he cut the pace of sales back sharply starting in December.

The successor to a chain of 12 Southern California pawn shops Zinberg owned in the 1990s, Bidz offers fast-moving online auctions, mostly for cheap costume jewelry but occasionally featuring precious gems and fine watches it says are worth tens of thousands of dollars.

The auctions start at $1 and carry no reserve price, meaning that bids don't have to reach a minimum level to win an item. Unlike EBay, which brings individual sellers and buyers together, Bidz is the seller of almost every item on its website.

The company raised its first $20.5 million in capital through a series of private stock sales dating back to the late 1990s. In regulatory filings, the company has acknowledged that these sales were in violation of federal and state securities laws.

Bidz.com, which trades on the Nasdaq stock market, never completed a conventional public offering of the sort that normally involves extensive scrutiny by the Securities and Exchange Commission.

The company's leading supplier of jewelry is Los Angeles Jewelry Production Inc., a downtown jewelry district firm managed by Aframian, who also is listed in regulatory filings as a co-owner of the firm.

An Iranian immigrant, Aframian served a two-year term in state prison in the 1980s for receiving stolen property. In a 2006 civil suit, a New York jewelry wholesaler accused him of stealing $285,000 in jewelry that he had left overnight in Los Angeles Jewelry's office safe. The case was settled on confidential terms.

Aframian, who declined to comment, is the third-largest shareholder of Bidz, behind the Zinbergs.

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Frequent complaints

As for its customer service, the Better Business Bureau says Bidz's "F" is based on customer complaints of shoddy merchandise and misrepresentation of items' quality or value.

A frequent target is the company's "compare" price, a dollar figure Bidz posts for many auctioned items that purports to represent the maximum price that has been advertised online for items that are "similar or the same."

Karen Leonard, a Philadelphia-area resident who filed a complaint last month with the Better Business Bureau, said she paid $800 for a diamond ring on which the "compare" price was $10,769.

After getting the shipment, "I knew immediately that it couldn't be worth $10,000," she said in an interview. "But the description [on the Bidz website] made you think you were getting a really good deal."

She said Bidz has refused to refund the full purchase price on grounds that the item was "as described" and therefore subject to a 15% restocking fee.

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