Bidz.com & Citron Research: The Soap Opera Continues

Citron Research (formerly known as StockLemon.com) is at it again. I first became aware of this site a few years ago but it wasn't until their profile of Home Solutions (HSOA) that I began to follow their research. That stock has plummeted to below 2 since Citron began hounding the company. Despite the rumored questionable past of its founder Andrew Left (there is an entire blog dedicated to it), the company does provide some incredibly in depth research highlighting the shady business practices of certain businesses.

The only problem I do have is that Andrew and certainly its employees take positions in these companies ahead of the reports and undoubtedly profit big time as the disclaimer on the site says:

The principals of Citron Research most always hold a position in any of the securities profiled on the site. Citron Research will not report when a position is initiated or covered. Each investor must make that decision based on his/her judgment of the market.

This kind of front running needs to be stopped immediately because it can lead to a fabrication of the facts. Sure, there are many bloggers out there who write about stocks they own including myself, but when certain websites achieve a wide following and can impact a stock like Citron Research can, it has to be stopped.

The latest Citron Research report highlights Bidz.com (BIDZ), a stock I recently traded in the Self Investors Model portfolio and fortunately closed for a quick 30% gain before this debacle began. Since that report was published, the stock is down more than 50% in just two days and sinking another 3 bucks after hours as the company seeks to calm the nerves of investors. More on this in a bit.

There are certainly quite a few angry investors out there looking to place blame not only on Citron for running the article, but on IBD who had the stock listed atop the the IBD 100 and recently profiled it with a glowing review, not to mention the Roth Capital and Think Equity buy ratings.

The company obviously had no choice but to respond to this action and chose to hold a conference call. Big mistake. Have a listen to the conference call. During the first half, the CEO just reiterates that the company is strong, reaffirms the numbers, mentions they might pursue legal action.. blah, blah.

The most interesting is the second half when the company takes questions. Zinberg certainly stumbles a bit when asked about the inflated prices of televisions and a yellow ring currently under auction for half a milion dollars at the site. I certainly didn't walk away feeling tremendously confident about this company or its CEO, and it's clear that many others didn't either as the stock tanked during the latter half of the call. Eric Savitz of Barrons has a good rundown of the highlights of the call if you're short on time.

As usual, this is most likely a case of "not as bad or as good as it seems". The important thing to remember is that there are a ton of great companies out there run by management with a long history of success, so why look at this as a buying opportunity? There are just too many questions to be answered.

More importantly, why were these angry traders hurt so badly? The kind of selling volume that BIDZ was seeing on Nov 26th and a close at the lows of the day should have at the very least got you out of the stock with a small gain (had you bought at the proper breakout point above 15.19). I personally love this kind of volatility for day trading and believe it could run up 20 - 30% within the next day or two, but to be a "buy and holder" of this stock right now is in my opinion a mistake.

It should be interesting to see how this story unfolds over the next few months. Keep in mind that Citron Research is expected to come out with a second part to their Bidz.com research detailing the bid rigging allegations very soon which could further derail the stock.

Disclaimer: I don't currently have a position in Home Solutions (HSOA) or Bidz.com (BIDZ).

Comments

[HarMegiddo]

that was one of the scariest calls iv'e ever heard. anyone owning this stock is crazy. the site is an absolute sham. do 15 minutes of investigation, you can find that out too. you might want to go buy some land off of 1 of their certified merchants, or maybe an ancient roman coin?. haha, here's a link. web-1.bidz.com/allAuct...
here's the other web-1.bidz.com/allAuct...

[NO B S]

All I want to know is....is Citron WRONG? Is its information INCORRECT?

So they shorted ahead of the release. Big deal. That's not unethical...it's risky. If these companies are such stellar models of the business community, Citron would get killed. And if Citron lies, or turns out to be an anti pump-and-dump, they lose credibility...their articles mean nothing....and they end up eating their shorts (apologies to Bart Simpson).

All these people angry at Citron need to stick their tails between their legs, take their a$$-beatin', and go home. God Bless Citron.

[Numbersman]

"God Bless Citron". You've got to be kidding me.

"And if Citron lies…..they lose credibility". Citron’s initial report is full of lies as noted below. At this point, in my opinion, Citron’s credibility is ZERO as you will clearly see by the lies and truths below.

"Shorted ahead of the release. Big deal. That's not unethical...Risky"... You've got to be kidding me. For the author (Andrew Left) to not disclose he purchased or sold short is absolutely unethical. For Andrew to bring up major concerns/doubt about a company and he takes a SHORT position prior to his article being published and doesn’t disclose it – that is dead wrong and unethical!! And he obviously didn’t do his homework to understand the company's business model. If he did, some of his concerns wouldn't have even been a concern.

Andrew Left’s research leaves a lot to be desired. Just look at the lies and truths below.

1) LIE: “Zinberg sells 30,000 shares per month and holds 6 million stock options worth $78 million at today’s stock price”.

TRUTH: In Part II, Andrew said “let us offer one important correction. In the initial report we stated that CEO Zinberg pays himself 30,000 shares per month. This was not correct. He has been selling 30,000 shares per month from his own holdings”. And Andrew failed to mention that this is a pre-arranged sale in lieu of only taking a $1 annual salary as reported at the SEC web site: (www.sec.gov/Archives/e...). Also, Mr. Zinberg announced on the conference call that he has reduced the sales to 10,000 shares per month starting in December. Furthermore, Andrew failed to mention that Zinberg does NOT own any options.

2) LIE: “BIDZ largest supplier for years has been LA Jewelry, owned and operated by Saied Aframian”.

TRUTH: Saied Aframian does NOT own LA Jewelry, he is just the manager. On the BIDZ conference call, Mr. Zinberg stated that he was just a manager. And Andrew failed to correct this lie in Part II.

3) LIE: Saied Aframian is a convicted felon and has served time in the Federal System for fencing stolen goods”.

TRUTH: All I could find was that Saied Aframian was convicted of credit card fraud, not fencing stolen goods as Andrew claims. Also, Andrew failed to mention that this happened 22 years ago. And since I can’t find anything to the contrary, I have to assume that Mr. Aframian has had a clean record since then.

4) LIE: “Any time we have seen a company work on guaranteed margins by a large shareholder, the results have been dismal”.

TRUTH: While Saied Aframian is a large shareholder (owns 5% of the outstanding shares), Mr. Aframian is not the owner of LA Jewelry. And Andrew fails to mention that LA Jewelry is now supplying only 11.6% of BIDZ’s items.

5) LIE: “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”.

TRUTH: While an IPO was scheduled in June 2006, it was cancelled the day it was supposed to start trading. The company said it was due to various reasons, but primarily because most to the shareholders did not sign the lock-up agreement. The investment bankers who were purchasing a lot of the shares felt it was too risky without most of the shareholders locked-up for 6 months. So, they pulled out. And the IPO failed. It’s important to note here, that the INSIDERS all signed the lockup (Andrew stated that the insiders refused to sign lockup agreements). Then, BIDZ re-grouped and started quietly trading on the OTCBB on June 1, 2007 and moved to the NASDAQ Capital Market on June 6, 2007.

6) LIE: “Citron paid a visit to AIG labs and an illusion it is”.

TRUTH: AIG Labs is a legitimate appraisal company. They have been in business for sixteen (16) years. Check out their web-site: www.aiglabs.com/

7) LIE: “One common complaint that we see online is “shill bidding”. On Wednesday, November 28, Citron 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.”

TRUTH: Part II, published November 28, 2007, did NOT provide one stitch of proof that there is “shill bidding” going on at BIDZ’s auction site.

8) LIE: “It is the opinion of Citron Research that Bidz.com’s business model is not sustainable”.

TRUTH: BIDZ.com was founded nine (9) years ago (in 1998). So, it has been sustainable for nine (9) years -- and with phenomenal growth. It started from nothing and has turned into a successful and profitable company today.

Andrew Left is rumored to have a questionable past. Just Google his name and see what you find out.

Can BIDZ improve some things? Absolutely, as anyone and any company can and should.

God Bless the TRUTH!!

[Numbersman]

Correction: Under Truth #5 -- BIDZ started trading on the OTCBB on May 1, 2007 (not June 1, 2007).