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Bidz.com battles shareholders in class-action suit

By Michelle Graff
May 12, 2009

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Los Angeles--Online jewelry retailer Bidz.com Inc. and its Chairman and Chief Executive Officer David Zinberg are locked in a legal battle with shareholders, who claim that the company was "knowingly deceptive" in its financial reporting, and thus artificially inflated its stock price.

In a class-action lawsuit filed on May 7 in U.S. District Court for the Central District of California in Los Angeles, plaintiff Ramon Gomez of San Antonio, Texas, alleges, on behalf of himself and all others who purchased Bidz.com common stock between Aug. 13, 2007 and Nov. 26, 2007, that the inflated stock price allegations made in the lawsuit are based upon information gleaned by his attorneys who inspected U.S. Securities and Exchange Commission filings, press releases issued by Bidz.com, articles in newspapers and other periodicals, and "other matters of public record."

Specifically, the lawsuit cites two articles from Citron Research, formerly known as StockLemon.com, published in November 2007, that allegedly reveal that statements by Bidz.com were "materially misleading." After the report was published, the company's stock fell 50 percent from a closing price of $19.94 per share on Nov. 23, 2007, to $10.10 per share on Nov. 28, 2007, court papers say.

"As a result, investors have lost millions of dollars as a result of the acts and omissions complained of herein," the court documents say.

However, in response to the class-action lawsuit, Bidz.com said in a statement that the plaintiff's allegations are "without merit," and that it plans to defend the action "vigorously." The statement claims that the lawsuit was based solely on the report filed by Citron (formerly known as StockLemon.com), which later "publicly acknowledged that it held a short position in the common stock of Bidz.com, Inc." The company refuted the claims, the Bidz.com statement said.

"The complaint is another in a series of allegations against Bidz.com in the aftermath of the Citron Report, including complaints made to the Securities and Exchange Commission and the Federal Trade Commission," Bidz.com said in a statement issued on Monday. "Bidz.com has previously disclosed the investigation by the Securities and Exchange Commission and has recently received a Civil Investigative Demand for information from the Federal Trade Commission relating to e-mail marketing practices. Bidz.com is cooperating and responding to these investigations."

Included in the class-action lawsuit is the text of two press releases detailing the company's financial results for the second and third quarters of fiscal 2007, dated Aug. 13, 2007 and Nov. 12, 2007.

The lawsuit claims that the press releases were "false and misleading and caused the company's stock price to rise from roughly $8 per share to roughly $22 per share during the class period."

The statements were false, court documents state, because Bidz.com "was relying on unethical and fraudulent business practices to generate margins, revenues and profits," practices brought to light by Citron.

According to the Citron articles cited in court documents, Bidz.com engaged in "shill bidding" to artificially raise the auction price of its products.

In addition, Citron called into question the credibility of AIG Labs, which, according to court papers, Bidz.com used to grade the jewelry it sells.

"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," court documents state. "It appears to Citron that AIG is more of an 'appraisal mill' that enables Bidz.com to sell low-price items to an unknowing public."

The plaintiffs in the case are asking for compensatory damages "sustained as a result of the defendants' wrongdoing, in an amount to be proven at trial," and any other relief the court deems "just and proper," court documents state.
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