Bidz.com under Siege from Investigations and Lawsuits

Bidz.com (NASDAQ: BIDZ) which is already under investigation by the Securities and Exchange Commission into its inventory accounting practices and is being sued for alleged shill bidding on its web site, is now facing several class action lawsuits alleging securities fraud and a new investigation by the Federal Trade Commission into its email marketing practices.

Last week, Barrack, Rodos & Bacine and Sarraf Gentile filed a class action lawsuit alleging securities fraud by Bidz.com and David Zinberg (CEO and President), based on issues raised in reports by short seller Citron Research (details of Citron reports here and here):

The complaint alleges that during the Class Period, defendants issued a series of false and misleading statements intended to project the picture of a financially sound and well-operating company, when, in fact, the company was operating with material deficiencies and undisclosed substantial problems that went to the heart of its business model. On November 26, 2007, a Citron Research article identified numerous "red flags" and revealed previously undisclosed material problems with the Company. Two days later Citron issued a second article that provided additional details, revealing, among other things, that the Company engaged improper business tactics in order to artificially raise the auction price of its products. On this news, the Company's stock price dropped from a closing price of $19.94 on Friday, November 23, 2007, to a low of $10.10 on November 28, a loss of nearly 50%. Note: Download lawsuit here.

In a press release, Bidz.com said that it "believes the plaintiffs' claims are entirely without merit and intends to defend the action vigorously." However, the company also disclosed that it "recently received a Civil Investigative Demand for information from the Federal Trade Commission relating to email marketing practices."

In February 2009, the SEC started investigating Bidz.com's inventory accounting practices and disclosures after I alerted them to possible violations of Generally Accepted Accounting Principles in accounting for inventories.

In August 2008, a class action lawsuit was filed against Bidz.com and certain members of its management, alleging that the "defendants have materially misrepresented the goods sold through the Bidz.com web site and are involved in a systematic program of shill bidding."

Advice to Bidz.com founder, CEO, and President David Zinberg

Be careful in selecting legal counsel and monitoring legal costs. Most white collar defense lawyers will defend your company to its last dollar and you to your last dollar.

Insist on detailed itemized billing with full documentation of costs. However, many law firms will even charge you for preparing invoices.

Watch out for document copying charges and pass along costs, such as those costs for sending legal staff home by car service due to overtime work on your account. Expert fees will eat any company alive, too.

Finally, it is a tossup over who is a worse opponent: Motivated government lawyers with almost infinite resources at their disposal or those bloodhound class action lawyers with a profit motive, representing clients screaming for justice.

Written by:

Sam E. Antar (a convicted felon and former CFO of Crazy Eddie)

Disclosure:

I do not own any Bidz.com securities, long or short.