Border Lines

We have just learned that a class action lawsuit has been filed in the United States District Court for the Eastern District of California on behalf of purchasers of securities of Bidz.com, Inc. (NASDAQ:BIDZ). The complaint charges Bidz.com and certain of its officers and directors with violations of the Securities Exchange Act of 1934.

Bidz.com is an online retailer of jewelry, featuring a live auction format. The official complaint alleges that the Bidz.com failed to disclose and misrepresented the following material adverse facts which were known to defendants or recklessly disregarded by them:

– Bidz.com engaged in a practice known as “shill bidding” which artificially raised the auction price of its products

– Bidz.com was not forthright with its customers regarding “retail value” or “appraised value” of its products;

– Bidz.com lacked adequate internal and financial controls;

– As a result of this, the Bidz.com financial statements were materially false and misleading at all relevant times;

– And as a result, Bidz.com’s statements about its financial well-being and future business prospects were lacking in any reasonable basis when made.

On November 26, 2007, a Citron Research (”Citron”) article appeared on the website, Stocklemon.com. This article reveals a bunch of problems with the Bidz.com’s business model. This article exposed the Bidz.com’s questionable bidding and appraisal practices. There is an archive of the article here. The articles are also still live on the Citron Research website here and here. Borderlines has some of the text of the article below:

Bidz.com is an online auction provider of off price jewelry and second tier accessories. What makes their model unique is that everything is sold via auction. Yet, the auctions are not third party auctions as facilitated by Ebay, rather they are auctions that are controlled by the company. In this report, Citron will expose what we believe to be many red flags at BIDZ . Citron 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.

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.

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).

There was another article on November 28, 2007 that details information about questionable bidding practices–including “shill bidding” in order to drive up the price of items up auctions at Bidz.com. The article disclosed that certain items were bid on hundreds of times by the same few bidders.

On the negative news regarding the Company’s business practices, the Company’s stock dropped from a closing price of $19.94 per share on Friday, November 23, 2007, to a low of $10.10 per share on Wednesday, November 28, 2007, for a loss of nearly 50 percent on unusually heavy trading volume.

Barroway Topaz Kessler Meltzer & Check is the law firm representing the class, for more information you need to contact them: www.btkmc.com.

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