If Insiders Are Unloading, Why Is BIDZ.Com Buying Back Shares?

For certain key Bidz.com (BIDZ) insiders it seems that diamonds are not forever as they continue selling shares, while the company buys back its stock, faces a Securities and Exchange Commission investigation into its accounting practices, and defends several lawsuits claiming securities and consumer fraud.

Company buys back stock while two key insiders sell their shares

On July 1, 2009, Bidz.com announced that in its latest quarter ended June 30 (Q2 2009), the company repurchased 714,000 common shares at an average price of $3.50 per share for a total cost of approximately $2.5 million. The press release went on to hype the company's future prospects:

"With the price of our stock continuing to trade below what we believe to be a reasonable valuation, our Board of Directors believe that the continued aggressive repurchase of our Company's shares is an excellent use of capital," said, David Zinberg, the Company's Chairman and Chief Executive Officer. "The combination of our liquidity, profitability and our ability to successfully execute our business strategy gives us confidence that the continued repurchase of our shares will help to deliver long-term shareholder value."

Meanwhile, during that same quarter David Zinberg (Bidz.com CEO) and his sister Marina Zinberg (Bidz.com Vice President) sold a combined amount of 162,417 shares and pocketed gross proceeds of approximately $595,512. David Zinberg sold 30,000 shares at an average price of $3.83 per share for total proceeds of $114,941, while Marina Zinberg sold 132,417 shares at an average price of $3.63 per share for total proceeds of $480,571 (Source: Various SEC Form 4's).

Therefore, while Bidz.com is telling investors that the price of its stock is "continuing to trade below what we believe to be a reasonable valuation," the company's two key insiders are selling their shares. Apparently, David and Marina Zinberg are not voting for their company's long term prospects with their pocketbooks.

All of David Zinberg's and all but the last two of Marina Zinberg's stock sales during Q2 2009 were completed under a 10b5-1 plan that helps executives defend against potential allegations of insider-trading by removing their discretion as to when their stock is sold (Details here and here). However, as I will describe below, David Zinberg continued to de-facto control his discretion in selling Bidz.com stock by first adapting a 10b5-1 plan, terminating it before its expiration, and later selling stock under an apparently new 10b5-1 plan.

David Zinberg goes in and out of 10b5-1 plans and flip flops on salary

On August 15, 2007, Bidz.com announced that David Zinberg adopted a 10b5-1 plan. The company disclosed:

Rule 10b5-1 allows officers and directors of public companies to adopt written pre-arranged stock trading plans when they are not in possession of material, nonpublic information. Once a Rule 10b5-1 trading plan is established, the insider retains no discretion over sales under the plan, and the trades are executed through a broker in accordance with the terms of the plan at later dates without regard to any subsequent material non-public information that the insider may receive.

In addition, Bidz.com disclosed that Zinberg's $290,000 annual salary was, "...voluntarily being reduced to $1 per year and he is not expected to receive any bonus or stock option grants." The plan was due to terminate on July, 31, 2008.

On February 28, 2008, the company reported that Zinberg terminated his 10b5-1 trading plan "effective immediately" or five months before the termination date of July 31, 2008:

...David Zinberg’s Rule 10b5-1 Trading Plan has been terminated effective immediately. This plan was originally implemented in August 2007, after Mr. Zinberg voluntarily reduced his annual salary to $1, with no stock option grants. The Board of Directors has reinstated Mr. Zinberg’s annual salary of $290,000 per annum, as well as his eligibility to earn an annual bonus, effective March 1, 2008.

Note: Bold print and italics added by me.

However, on December 17, 2008, David Zinberg resumed selling his stock "as part of a 10b5-1 plan." I could not find any press release or report filed with the SEC that disclosed when David Zinberg resumed his terminated 10b5-1 plan or started a new plan. In any case, David Zinberg sold more stock under a 10b5-1 plan after the Bidz.com reported the early termination of his original 10b5-1 plan.

According to Bidz.com's recent proxy statement filed with the SEC:

As of August 16, 2007, Mr. Zinberg voluntarily reduced his annual salary to $1 per year. Mr. Zinberg’s annual salary of $290,000 per annum, as well as his eligibility to earn an annual bonus, resumed as of March 1, 2008. Effective April 1, 2009, Mr. Zinberg’s employment agreement was amended to increase his base salary to $500,000 per annum.

Note: Bold print and italics added by me.

Now David Zinberg has his cake and can eat it, too. His salary increased from $1 per year to $500,000 per year and he is still selling stock under a 10b5-1 plan. Both David and Marina Zinberg control over 10 million shares of Bidz.com's 22.8 million outstanding shares and have effective control of the company. In addition, David Zinberg's initial adoption of a 10b5-1 plan, his later termination of such plan, and still later sales of stock under a 10b5-1 plan seems to be an end around to paper over his discretion to sell stock and avoid potential insider trading liability. Hopefully, the company can provide some clarification on this issue.

Marina Zinberg has a 10b5-1 plan but sells stock outside the plan

Marina Zinberg's last two disclosed stock sales during Q2 2009, on June 26 and June 29, were not sold under a 10b5-1 plan. Therefore, she exercised her own discretion to sell her stock. On June 26, Marina Zinberg sold 4,567 shares at $3 per share for total proceeds of $13,701 and on June 29 she sold 7,850 shares at $2.94 per share and pocketed proceeds totaling $23,079. A few days after Marina sold those shares, Bidz.com issued the press release (above) claiming that the stock was undervalued and "confidence that the continued repurchase of our shares will help to deliver long-term shareholder value."

David and Marina Zinberg sell even more stock during Q3 2009

Just today, new SEC Form 4 filings revealed that both David Zinberg and Marina Zinberg sold even more stock after Q2 2009 pursuant to their 10b5-1 plans. David Zinberg sold another 10,000 shares and pocketed $29,240 in proceeds from July 1 to July 6. While Marina Zinberg sold another 18,900 shares and pocketed $53,537 in proceeds from July 1 to July 6 (Source: David Zinberg Form 4 and Marina Zinberg Form 4).

Should Bidz.com buyback stock with weak fundamentals?

In Q1 2009, Bidz.com reported revenues of $31.2 million compared to $61.9 million during the previous year period or about a 50% decline in revenues. The company also reported net income of $1.5 million compared to $4.6 million during the previous year period or about a 67% decline in net income (Source: 10-Q report).

At the end of Q1 2009, Bidz.com reported a cash balance of a mere $3.16 million. Working capital was reported at $33.4 million. Inventory, which is a key component of working capital, was reported at $38.5 million and it takes Bidz.com over 150 days to turnover its inventory. During Q1 2009, reported inventory loss reserves ballooned from $820k to $1.35 million or from 2.1% of gross inventory at the end of Q4 2008 to 3.3% of gross inventory at the end of Q1 2009, over a 50% increase in relative terms.

Bidz.com has not reported Q2 2009 financial results as of this blog post. The average analyst estimate for Q2 2009 sales growth is minus 45.4% and the average estimate of earnings per share growth is about minus 65%.

Today, Bidz.com common stock closed at $2.71 per share, far below the average price paid by the company to repurchase its shares and below the average selling price of both David and Marina Zinberg's shares during the latest quarter.

It seems like Bidz.com shareholders are getting the raw end of the deal as the company wastes precious resources by buying back stock during this time of economic uncertainty, while David and Marina Zinberg continue to cash out their stockholdings. Those Bidz.com stock buybacks seem to benefit the Zinberg's on the backs of other company shareholders.

Disclosure: I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other family members mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

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

Comments

[knight:]

I guess a thief would no one when he sees one

Jul 07 10:18 AM

[107Sid:]

You mean "know" rather than "no"??

Jul 07 11:46 AM

[ain't no fo...:]

Follow the stock option awards. Many companies make a big deal out of announcing stock buybacks, but that is usually a crock... they merely buy back enough shares to replace newly minted shares produced by insider option exercises, so its a zero sum game - more shares outstanding due to the preferential option awards that get exercised, then the buyback to cover those shares.

Net/net, the public shareholders get screwed because the cash to buy back those new shares comes right out of shareholder equity - and right into the insiders' pockets.

And yet they have the nerve to look the shareholders in the face and say they are doing it because they think the shares are undervalued... bull!

Jul 07 12:22 PM

[joof:]

It has been known to happen that stock buybacks are timed to support the scheduled insider selling. Can't really prove it in many cases...but the insiders can sell as the company is executing buybacks that support stock price

Jul 07 06:03 PM

[Sam E. Antar:]

joof:

We did the same scam at Crazy Eddie: stock buybacks while insiders were selling. If you find some outlandish examples of other companies doing it, please contact me.

Sam


On Jul 07 06:03 PM joof wrote:

> It has been known to happen that stock buybacks are timed to support
> the scheduled insider selling. Can't really prove it in many cases...but
> the insiders can sell as the company is executing buybacks that support
> stock price

Jul 07 10:37 PM

[Sam E. Antar:]

Imagine if all the companies that bought back stock instead retained the capital, how many fewer companies would be in trouble today.


On Jul 07 12:22 PM wpdragon wrote:

> Follow the stock option awards. Many companies make a big deal out
> of announcing stock buybacks, but that is usually a crock... they
> merely buy back enough shares to replace newly minted shares produced
> by insider option exercises, so its a zero sum game - more shares
> outstanding due to the preferential option awards that get exercised,
> then the buyback to cover those shares.
>
> Net/net, the public shareholders get screwed because the cash to
> buy back those new shares comes right out of shareholder equity -
> and right into the insiders' pockets.
>
> And yet they have the nerve to look the shareholders in the face
> and say they are doing it because they think the shares are undervalued...
> bull!

Jul 07 10:39 PM

[funy1.blogs...:]

Sam,

wasn't the price the stock is bought back the difference between BIDZ and Crazie Eddie's?

Wasn't crazy Eddie buying back its stock as it was skyrocketing so the insiders can sell at stratospheric prices?

It's not apples to apples if BIDZ is buying back stock at an 60-85% discount to its highs as opposed to Crazie Eddie which was buying back after a 50% discount to its highs but one must remember that those highs are more than 1500% of its debut so in reality Crazy Eddie's was buying back stock at 10 times their original price and hence they were buying at massively inflated prices precisely to protect the selling prices of the insider criminals.

If David Zinberg and his sister are insider criminals then they're pretty lousy criminals at pumping the stock and faking earnings since they are selling at very low prices compared to the pump and dump that was Crazy Eddie's.

Although I cannot 100% rule out misdeeds, Maybe the two siblings have been living it up expecting BIDZ to skyrocket and now have to sell at desperate prices to fund their large mortgage payments?

Who knows how over leveraged they are in terms of their income or expected income?

The CEO of Chesapeake Energy over leveraged himself on his own stock CHK and he was forced to sell at the bottom setting lows of $10 after buying on margin in the 40's-50's due to greed of expecting ever rising energy prices.

All I am saying is sometimes things do not go as you expect and you are forced out at the bottom.

Jul 08 11:39 AM

[Sam E. Antar:]

Insiders at Crazy Eddie, like insiders at Bidz, sold high and low. BTW, how is that conspiracy theory of yours claiming that I am working in cahoots with Goldman Sachs?

Jul 09 03:58 AM

[31October:]

I knew inmates who could make a more carefully measured [and spelled] argument that yours.

Yes, a person who has committed trading offenses will have a deeper understanding of trading patterns than we could. Perhaps you should welcome the wisdom of experience. Or, you could buy some BIDZ shares. Either way, your jab said more about you than it did about the author.


On Jul 07 10:18 AM knight wrote:
> I guess a thief would no one when he sees one

Jul 14 08:25 AM