Red Flags at Bidz.com

Disclosure: Author is short BIDZ

Bidz.com (BIDZ) is an online auction provider of off-price jewelry and second tier accessories. Its model is unique in that everything is sold via auction. The auctions are not third party auctions as facilitated by eBay, but rather are controlled by the company.

In this report, we'll expose what we at Citron believe to be many red flags at BIDZ . We will make a few comparisons to previous reports written on other companies, as the issues at BIDZ seem to closely mirror issues we have discussed in the past.

BIDZ most closely reminds us of Medifast (Nasdaq:MED), which is down 70% since we first reported on it. Medifast became a “me too” company to Nutrisystems, which at the time was the darling of the market. Yet the company was not producing the same cash flow as the darling to which it wished to be compared.

This year, Blue Nile (NILE) has become a market darling. We believe that part of the run in BIDZ is due to the “me too” aspect of Blue Nile. Yet, much like Medifast, BIDZ is just not spinning off any cash. Actually their cash balance is the worst we have ever seen for a $500 million listed company. At the end of last quarter, Bidz had a paltry $1.1 million in cash.

This also reminds us of Home Solutions of America (Nasdaq:HSOA). While the company consistently put up revenue growth every quarter, the cash balance never increased. Hence the stock is down 80% since our first publication on it.

Where is all the BIDZ cash going? Inventory Inventory Inventory.

Instead of generating cash, BIDZ seems to be generating a lot of inventory. So instead of investors seeing a higher cash balance, they are seeing warehouses filled with “closeout and distress sale” jewelry.

With regard to inventory, BIDZ has consistently disclosed for over two years that:

If our sales levels increase, we will increase our inventory proportionately.

Most investors would prefer to see efficiencies to kick in with rising revenues, but instead, actual reported inventory levels are instead spiraling at least 300% higher than the run rate of revenue.

Year	2005	2006	2007 (9 months thru Sept)
Revenues	90.5 m	131.8 m	123.9 m
Ending Inventory	9 m	34.3 m	46.3 m
Days of revenues in inventory	46	124	140

Jewelry is notoriously vulnerable to valuation abuses and BIDZ’s closeout and distressed merchandise is even more so.

So what points of reference do we have? Lets compare BIDZ inventory with its competitors. We’ve chosen BlueNile.com,. the market leader in online jewelry sales and Overstock.com, the market leader in closeouts, who is also a major jewelry liquidator.

	Blue Nile.com (NILE)	Overstock.com (OSTK)	Bidz.com (BIDZ)
Revenues (9 months thru Sept)	207.3	468.8 m	123.9 m
Gross margins	20.76%	17.94%	28.0%
Ending Inventory	15.3m	22.4m	46.3 m
Days of revenues in inventory	34	22	140

Neither of these mature business models carries more than a quarter of BIDZ' alarming inventory levels. Bidz.com wants you to believe the values it is buying are so fantastic that it can swoop up deals with 50% higher margins than industry competitors can manage for cash. Where do these values come from? And what cash is it using to buy all these goods?

Cash	Blue Nile (NILE)	Overstock (OSTK)	Bidz.com (BIDZ)
Cash (Sept 07)	74.3 m	74.1m	1.1m

So after over two years of public company operation during which BIDZ CEO has generated a total of $1.1 cash, he pays himself 30,000 shares per month and holds 6 million stock options worth $78 million at today’s stock price.

Ironically, BIDZ inventory levels fly in the face of its own disclosures of inventory risks, including which leads them to conclude:

As a result, we may be required to take significant inventory markdowns, which could reduce our gross margin, if we do not accurately predict these trends or if we overstock unpopular merchandise.

That’s all the standard business risk stuff, but now it gets really interesting.

BIDZ's largest supplier for years has been LA Jewelry, owned and operated by Saied Aframian, who also happens to be one of BIDZ largest shareholders. Not surprisingly, LA Jewelry is also BIDZ largest creditor, and a large participant in BIDZ co-op advertising program. These “related party” transactions are all over BIDZ financials including:

• Over $5.3m accounts payables to a related party (nearly 20% of AP)
• Purchase of 11.6% of its merchandise from a related party
• Participation in co-op marketing (12%) by related party
• Guarantee agreement with the same party related for “minimum profit” on inventory purchased from the party.
• The related party owns 1,228,000 shares of BIDZ’s stock.

Saied Aframian is a convicted felon and has served time in the Federal System for fencing stolen goods. Not just petty crime either, but for being the prime fence for a multi-million dollar nationwide ring of stolen watches and jewelry:

Aframian 1 (PDF)
Aframian 2 (PDF)

We are not suggesting that Bidz sells stolen goods; rather, we are observing the background of some of the individuals behind BIDZ who are most responsible for its reported profits. The question is whether all these related party transactions cast reasonable doubt over BIDZ reported financials as a fair reflection of the health of the business.

Considering the deal to guarantee margins to the company coincided with the public offering of BIDZ, we conclude that Mr. Aframian was well aware that there could be a lot more money made from his stock than from selling jewelry. Any time we have seen a company work on guaranteed margins by a large shareholder, the results have been dismal: i.e. Escala and Syntax Brillian, two stocks we previously covered, now trading 90% and 60% lower respectively from date of our initial report.

Speaking of the public offering, BIDZ filed a registration and began to trade on a public exchange. But Citron notes that in 2006, after paying for the preparations for an IPO, it then cancelled. Their stated reason was because insiders refused to sign lockup agreements. This alone should be a red flag.

What About the Business?

Two years ago we published a series of articles on Housevalues.com (Nasdaq:SOLD). Since time of first publication, Housevalues is down 70%. We noted that Housevalues.com had been the subject of an extraordinary volume of customer complaints posted online — while their product was sold online.

We believes that it is an uphill battle to grow an online business when there is a plethora of negative information and feedback from your customers online. Here is one link of the many (16 pages of complaints on just this site among others) that describe customer dissatisfaction with BIDZ.

The complaints are so rampant that this is the first publicly traded e-commerce site we have ever seen with an “F” rating from the Better Business Bureau.

We believe that the company is not being forthright with their customers when it comes to “retail value” or “appraised value”. All of the jewelry from BIDZ shows an appraisal from AIG Labs. This appraisal makes consumers feel as if they are getting a good deal on a credible piece of jewelry that might have a decent resale value. Going to the website of AIG we see their name on a big building, which conveys an illusion of credibility.

We paid a visit to AIG labs and an illusion it is. There is no name on the building (except in Photoshop…). As a matter of fact, the only signage they have is a white piece of paper on the front door to identify them. It appears to us that AIG is more of an “appraisal mill”, that enables Bidz.com to sell low priced items to an unknowing public.

One common complaint that we see online is “shill bidding”. On Wednesday, November 28, we will expose what we believe to be is some extremely questionable bids and bidding practices that occur on BIDZ.com. This part 2 will have much supporting documentation that the investing public should be made aware of.

Unlike eBay and other well-known auction sites, you cannot even click to contact or check the track record of bidders. And since the company is selling its own goods, rather than conducting auctions for independent sellers, the company is responsible for the legality of all aspects of the conduct of its auctions.

Conclusion

It is the opinion of Citron Research that Bidz.com’s business model is not sustainable. The large related party transactions, and the background of the individuals involved certainly provide plenty of reason for doubt. It is the opinion of Citron that the recent surge in stock price is completely unwarranted and the company is going to have to start generating real cash under a verifiable and transparent inventory valuation discipline before shareholders can take its earnings seriously.

Before buying into this “growth” story when the company has less than .70c per share in net asset value, investors would be advised to look carefully at what this company is really doing on its auction website. Stay tuned for part 2 in order to get more clarity of the business model of BIDZ. If the previous quarter is indicative of future performance, Citron believes that Bidz.com will end up in the same bucket as Medifast (MED), Housevalues (SOLD), Escala (ESCL), and Syntax Brillian (BRLC).

Disclosure: Author is short BIDZ

Comments

[primorec]

good work!

[chris dress]

Andrew:

Fine investigative work...you were able to unearth a 22 year old conviction against a major supplier/stockholder of bidz.com. Where did you get your journalism degree...Acme university? what is your next "newsflash".... Reagan elected president of USA?

What a joke!

[Research Guy]

This article is true research. Your writing is far above many of the articles I read here. Authors should strive to create such original thought. Most here just regurgitate everyone else's ideas. Your investigative work was interesting and pertinent.

Keep up the good work.

[Mothermoney]

I expect you will be sitting in the same room with the SEC and FBI investigators with Davis Zinberg while they get to the bottom of this. Perhaps what he did is a crime no less than publishing highly negative information about a company in which you are short. This is certainly as biased as related party transactions.

On the other hand, I sold at $21.10, before your report was published based on negative feedback at consumer ripoff.com and the BBB. Perhaps you had a hand in that as well?

Interesting.

[Mothermoney]

Who better to call a spade, than a higher spade?

[Dr. Joe]

Could it be self serving AND the truth?

[BigCoxy]

This is the biggest load of crap, how self serving is this a**hole being short on this stock. I'm holding, they are making money.

[Dr. Joe]

AIG ---How to you explain the missing sign on the building? They have now (after this report) changed their website to show the building without the sign. Except of course the false picture from their website is still in Google cashe--just look at the AIG website and compare to a google cashe search.

[Dr. Joe]

Here are the comparisons:

64.233.169.104/search?...


www.aiglabs.com/about....

[Dr. Joe]

I will try that again:

64.233.169.104/search?...;;hl=en&ct=clnk&am...

and:

aiglabs.com/about.php

[Dr. Joe]

This does not seem to reproduce as pasted. It is the whole with the http:// in front of the 64.233 etc to the end of the URL which includes the "us". Or you can use the aiglabs.com url in a google search and click cashe.

64.233.169.104/search?...;;;hl=en&ct=clnk&a...

[trey]

From Yahoo Message:
Questions to ask Andrew Left, the author of this list of questions:

1. Are you the Andrew Left who lost his futures trading license after the Futures Trading Association judged him guilty (after a hearing) of having defrauded numerous customers?
2. Are you the same Andrew Left who was a defendant in a class action lawsuit for having defrauded customers of a stock brokerage house?
3. Are you the same Andrew Left who obtained a license and sold stocks under the false name of Henry Lipton?
4. Are you the same Andrew Left who filed a fraudulent biography with the SEC in a filing by Detour Online that omitted any mention of the work history described above?
5. Are you the same Andrew Left who was forced to resign his position at Detour Online?
6. Are you the same Andrew Left who was accused by Detour Online of stealing $25,000 from the corporate coffers?
7. On Augist 1, 2007, you published a blog post about HSOA that contained false and misleading information. You published this post while you also held a losing short position in HSOA. Was your blog post of Aug. 1 a deliberate attempt to use false and misleading information to manipulate the price of a publicly traded security?
8. On August 6, 2006, you hosted a conference call about HSOA that spread misleading information. This conference call was held three days in advance of the company's scheduled earnings release, and was held while you held a losing short position in this stock. Was your conference call a deliberate attempt to use false and misleading information to manipulate the price of a publicly traded security?
9. You posted a blog entry on HSOA on August 30, 2007, that contained false and misleading information. This was one day before you initiated a short position in HSOA. Was your blog entry a deliberate attempt to use false information to manipulate the price of a publicly traded security?
10. You posted a blog entry about HSOA on September 26, 2007, which contained misleading information. This was on the same day you closed a short position. Was your blog entry of Sep. 26 a deliberate attempt to manipulate the price of a publicly traded security?
11. In view of the accuracy of the factual basis for the previous 10 questions, why should any investor any where in the world believe even a single word you write about anything?

[trey]

I'm guessing he has no resonse to this:)

[trey]

BTW -- "Henry Lipton" (AKA Andrew Lemon) gets his rocks of of teabagging:

en.wikipedia.org/wiki/...

hmmmm....any longs feel like they've been tea-bagged?:)

[trey]

From Yahoo Message Boards:

Whether he was correct or not is the purpose of my thread...Here is what Left does not want you to know (sorry for the caps, but it's a cut and past from someone's DD on the HSOA board

It appears that Left has been convicted of fraud by the NFA (National Futures Association) Summarized below (link to full report at end)

Respondent/Effective Date
0253075 LEFT, ANDREW EDWARD 03/02/1998

Penalty/Event Summary
0253075 LEFT, ANDREW EDWARD
• RESTRICTIONS ON ACTIVITIES 2 YRS
• REQUIRED TO TAPE RECORD 2 YRS
• TEMPORARY BAR FROM NFA MEMBERSHIP 3 YRS
• MAY NOT SUPERVISE 2 YRS
• OTHER--SEE NARRATIVE

Narrative Summary
COMPLAINT -

ON DECEMBER 21, 1995, NFA'S BUSINESS CONDUCT COMMITTEE ("COMMITTEE"... ISSUED A COMPLAINT TO UNIVERSAL COMMODITY CORPORATION ("UCC"), ANDREW N. STERN ("STERN"), CARL ROBERT SAATHOFF ("SAATHOFF")... LARRY S. FREEDBERG ("FREEDBERG"... LARRY ALAN KAHN ("KAHN"), JOHN THOMAS CIARAMELLA ("CIARAMELLA"... MARTIN SOMMERS ("SOMMERS"), DAVID RAY BRIDGES ("BRIDGES"), LEONARD PETER VITELLO, JR. ("VITELLO"), BENJI SCOTT DAYAN ("DAYAN"), JEFFREY LAWRENCE BURSTEEN ("BURSTEEN")... ARNOLD BARRY ZAGER ("ZAGER"), KENNETH ALAN ZINNER ("ZINNER"), WILLIAM KELLY PARKS ("PARKS"), MICHAEL D. BUSHEY ("BUSHEY"), MITCHELL GROSS ("GROSS"), DANIEL ALAN GETZ ("GETZ"), DAVID SCOTT STEINFELD ("STEINFELD"... ANDREW EDWARD LEFT ("LEFT") AND ADRIAN MULLER ("MULLER").

ON FEBRUARY 13, 1998, A DESIGNATED PANEL OF NFA'S HEARING COMMITTEE ISSUED A DECISION AFTER A HEARING TO BRIDGES, VITELLO, DAYAN, BURSTEEN, ZAGER ZINNER, PARKS, GROSS, GETZ AND LEFT. THE PANEL MADE THE FOLLOWING FINDINGS AND IMPOSED THE FOLLOWING PENALTIES:

ANDREW LEFT -


THE PANEL FOUND THAT LEFT MADE FALSE AND MISLEADING STATEMENTS TO CHEAT, DEFRAUD OR DECEIVE A CUSTOMER IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). LEFT'S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.

CONSEQUENTLY, THE PANEL BARRED LEFT FROM ASSOCIATION WITH AND FROM ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR THREE YEARS; ORDERED HIM TO TAKE AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR TWO YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS.

[trey]

Thief?!

stocklemonaide.blogspo...

[trey]

From NFA:

UNIVERSAL COMMODITY CORPORATION
NFA 95BCC00020
NFA ID: 0244735
The following decision was rendered against ANDREW LEFT (author of current slander against HSOA from Citrus Research, aka StockLemon)
THE PANEL FOUND THAT LEFT MADE FALSE AND MISLEADING STATEMENTS TO CHEAT, DEFRAUD OR DECEIVE A CUSTOMER IN VIOLATION OF NFA COMPLIANCE RULES 2-2(a) AND 2-29(a)(1). LEFT'S CONDUCT WAS INCONSISTENT WITH JUST AND EQUITABLE PRINCIPLES OF TRADE.
CONSEQUENTLY, THE PANEL BARRED LEFT FROM ASSOCIATION WITH AND FROM ACTING AS A PRINCIPAL OF ANY NFA MEMBER FOR THREE YEARS; ORDERED HIM TO TAKE AN ETHICS TRAINING COURSE; AND PLACED RESTRICTIONS ON HIS ACTIVITIES FOR TWO YEARS WHICH PREVENT HIM FROM SUPERVISING ANY AP AND REQUIRE HIM TO TAPE RECORD AND LOG ALL CONVERSATIONS WITH CURRENT AND POTENTIAL CUSTOMERS

[trey]

More Red Flags:

ok...so it looks like (and is) a personal attack against this lemon-turd....That said: I have no problem / admitting that, based on DD, I think he's a thief and a fraud...who copulates / profits from pounding unsuspecting, newly listed legits or pennies...whomever. He hides behind the CA Anti-SLAPP law...according to the website it's a " public interest law firm and policy organization dedicated to protecting the rights of Californians to participate in government and civic affairs and to speak freely about public issues"...." CASP provides legal assistance and representation to individuals and organizations being SLAPPed in California courts and engages in policy advocacy to improve the functioning of the anti-SLAPP law in the Legislature."....

Apparently, Mr. Lemon requires legal assistance from the state...

wHATEVER, bottom line, from what I've read, he's been sued numerous times for the same kind of fraud, he's stolen money from his employer, and he shorts, admittedly, the stocks he bashes.....what more do you need to know?! If I had the time, I'm sure I could come up w/ a lot more on this POS but seriously, what more does one need?! Banned from NFA for "MISLEADING STATEMENTS TO CHEAT, DEFRAUD OR DECEIVE A CUSTOMER"....stol... and cashed checks from former employer....there's tons more he's accused of....deal or no deal, I would steer clear of anything this guy says. And by the way, I'm not a long, or a short....I got in, got out, I lost a little. But after doing a little home work on this JACKASS, I felt the need to post some facts about this lemon flavored turd. My guess is, this (alleged) fraud (eg., his short selling blog article about BIDZ, HSOA, to name a couple) cost a lot of people a LOT OF MONEY...leading to his benefit. What's funny is, if you listened to the conference call, a guy named "Sherman McCoy" -- a character from the movie " The Bonfire of the Vanities" -- entered (no NEW news...this has been reported repeatedly....his life as a self-assumed "Master of The Universe" on Wall Street is destroyed when his mistress, Maria Ruskin, runs over a black youth in the Bronx while driving McCoy's car)...and that was one of many "suspicious, flaming" inquiries over the course of the call until mgmt realized they were being attacked, and bailed. Ya think Lemon was in on this? Hmmm....seems easy enough to draw conclusions....but I'll leave it to the readers. Bottom line, leave it to the readers...convicted fraud, or....?

[trey]

Turds have a distinctive smell...this one smells like a lemon.

[trey]

Oh...and one last time....LEMON --- you're a turd...I hope you end up in the fed. I'm guessing though, by the "substance" of your content, and the deeds that you've done, you might actually enjoy the pokey -- and I DO mean POKEY! I will sleep well 2night -- you? lol. didnt think so...soon you'll be the bitch that you are:) Good luck w/ that:) lol.

[trey]

Something tells me, Lemon-Turd won't respond to any of this....that's cool. Despite his BIZZARO career "progression"... from convicted thief, to much bigger thief...he's still gonna be on the down low here:)

[traci]

When you can't attack the statement, attack the person who made it.

I don't care who Andrew Left is or was or why he did the research. I don't care if he's actually a gay Satan in a ballet tutu. He made quite a few valid points. There are hundreds of people out there trying to pump up the price of shady stocks and almost no one complains about them. I have to appreciate the balancing effect. The fact that it irritates the management and shareholders of these companies as much as it seems to...well, that's just an added bonus. Hell, it becomes almost an obsession with them. Look at the number of posts by "trey," from 2AM to 6AM on a Friday night / Saturday morning.

[MichaelGoode]

Rather than re-hashing old lies about Left, why not read the truth about him? I did a series of articles about him on my blog. I do not know him personally but I do read his blog:

Can You Trust the StockLemon: Part 1
www.goodevalue.com/200.../

Can You Trust the StockLemon: Part 2
www.goodevalue.com/200.../

Can You Trust the StockLemon: Part 3
www.goodevalue.com/200.../

Can You Trust the StockLemon: Part 4
www.goodevalue.com/200.../

[Itsonlyme]

I agree with Traci. It seems to me the only reason a person would attack the writer of the article is since the content is so infuriatingly true. I think its great to find some articles out there that actually shed light on the other side of the fence. I have always specultated that Bidz.com was just another front for online scamming, now I feel there is more validity to my intial impression.
Thanks Andrew.