Putting BIDZ.com Shares on Sale

OVER 20 YEARS, David Zinberg has risen from a pawnbroker and bail bondsman to become chief executive of one of the largest online retailers of jewelry, BIDZ.com (BIDZ). This year, he expects his Website to auction nearly $250 million worth of watches, rings and other closeout merchandise to buyers from as far away as Colombia and the Middle East. But the Los Angeles-based entrepreneur is said to be frustrated that the stock of his fast-growing enterprise has fallen from 22.50 to 8.72 in the past nine months. The slump, say BIDZ executives, is the fault of short-selling scalawags whose "naked" sales account for the stock's regular appearance on the list of shares whose sellers fail to properly deliver them.

The discount on BIDZ shares may also have something to do with the impressive array of fences and violent felons with whom Zinberg has been in business in the past two decades. The 50-year-old chief executive has no criminal record, but a number of his partners and key employees have startling rap sheets...and added arrests and convictions to those records while working with Zinberg.

The jewelry dot-com may be small carat, with a market capitalization of just $207 million, but it catches the eye. The company did not make Zinberg available to Barron's, but it says Zinberg didn't know of his associates' priors. BIDZ just settled a suit in which Cartier accused BIDZ and Zinberg of hawking counterfeits of its trademark "tank" wristwatch. A vice president with a criminal record who helped BIDZ auction the ZIL limousine once used by Soviet party boss Yuri Andropov is no longer with the company. "There's nobody in the company today that has a criminal record," says Vice President Leon Kuperman. "It's not something that we have to worry about at this point."

Discussions about Zinberg's associates appeared on blogs as long as six months ago (see blogs.barrons.com). But Kuperman says the company only recently dug into the allegations after receiving an anonymous letter to its board. Just last Wednesday, he says, BIDZ first saw documentation alleging that co-founder and director Garry Itkin had run an illegal strip club on Sunset Boulevard, while also serving as BIDZ's chief financial officer in 1999. Itkin's alleged partner in the Sunset Strip club was Oleg Khersonsky, the licensed agent for several of Zinberg's pawn shops, who was arrested for assault with a deadly weapon and also for "oral copulation with a person under 14 through force or fear."

Kuperman also says BIDZ just discovered last week a 1998 Los Angeles small-claims case in which Zinberg was named as a defendant alongside a shoe-business partner named Sergey Proshak, whose felonies include failure to register as a sex offender, and Tommy Gambino, a reputed underboss of the Los Angeles mafia who precipitated a Clinton-era scandal by paying presidential stepbrother Roger Clinton to lobby, unsuccessfully, for a commutation of a 45-year sentence Gambino's father was serving for heroin trafficking.

Friday, the company's public-relations consultant Rich Layne said that BIDZ director Itkin denies he was an owner of the strip club. Itkin was merely a financial adviser to Khersonsky, whom the articles of incorporation showed as sole shareholder. Any claims that the BIDZ co-founder was a strip-club owner are just short sellers' misinformation, said Layne. But Itkin's denial Friday doesn't seem to square with his signature on an apparent agreement in which he and Khersonsky sold their equity interests in April 2000 for $422,000 to a recent émigré named Alex Brusilovski. Itkin's agreement was attached to a fraud suit that Brusilovski filed a year later in a Los Angeles state court, where he alleged that Itkin and Khersonsky failed to tell him that the strip club was losing its liquor license at the time of the sale because the owners failed to restrict the performances to "bikini dancing" and allowed nudity and simulated sexual intercourse.

Zinberg left the eastern European country of Moldova as a teenager and found his way to Los Angeles. Starting in 1988, he began acquiring pawn shops. A decade later he had 17 of them across L.A., a bail-bond outfit, a dental lab and a deli. He also started looking for outside money, with makeshift private-placement memoranda that described pawn-brokering as "high-yield short-term non-recourse consumer loans secured by tangible personal property, such as jewelry, consumer electronics equipment and firearms."

Not every investor was satisfied. Starting in 1994, a woman named Yelena Simonyan alleged that she invested over $1.1 million in several pawnshops on the invitation of Zinberg, Itkin and an employee and part-owner of the pawnshops by the name of Michael Merzlak. In a fraud and embezzlement suit she filed against them six years later in an L.A. state court, Simonyan said they gave her a job and a share of the pawnshop profits until 1996 and then the money stopped. She also alleged that Zinberg took large sums of money and took pawned items from the shops. She won a jury verdict and a $700,000 judgment against them. They gave her 37,500 shares in BIDZ.

By April 1999, Zinberg had discovered the Internet. After using eBay (EBAY) to auction off some jewelry, he started his own dot-com called BIDZ and then merged it with his bail-bond and "collateral lending" operations (which he renamed from Union Pawn to Asset Lenders of America). BIDZ's unregistered prospectuses showed ownership of BIDZ as initially split 50/50 between Zinberg and a young fellow named Michael Henderson, who had managed the pawnshops since 1991. Without registering with the Securities and Exchange Commission, they sold shares to some 800 investors.

A June 2002 lawsuit filed against BIDZ and Zinberg by Henderson's mother after his death from a drug overdose described his longtime addiction to cocaine, heroin and ecstasy. He became so addled that he developed paranoid delusions that the SEC was going to bust them for their unregistered stock sales. Henderson was afraid of radio waves. He thought characters on TV were discussing him. His psychiatrist said he hallucinated visions of Satan. His mother demanded Henderson's half share of the dot-com. Despite the plain language of the prospectuses, Zinberg replied that Henderson had been holding shares only on behalf of Zinberg's sister Marina. Ultimately, the suit was settled.

In a declaration filed for that lawsuit, Zinberg said that he was aware that Henderson was a convicted felon...as was Henderson's mother.

The deceased pawnshop manager wasn't the only dubious colleague of Zinberg. Michael Merzlak, the pawnbroker that Simonyan named in her lawsuit, had arrests or convictions going back as far as 1983, for such crimes as attempting to buy stolen property. Zinberg's partner in a footwear business called Famous Shoe's Liquidator, Sergey Proshak, was a sex offender with prior arrests for assault and battery, and kidnapping. Vladislav Shulga, who worked for a Zinberg pawnshop, pleaded guilty to defrauding Medicare and paying kickbacks to doctors for business sent to a medical lab that Shulga owned. Another pawnshop employee named Steven Proshak owned a chain of 10 adult- day-care centers called Circle of Friends. Just last year, California suspended the centers amid a fraud investigation.