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He may not have run a $50bn ponzi scheme but the domain name industry has found its Bernie Madoff. Yesterday, it was revealed that an employee of SnapNames, a popular domain name drop service and auctioneer, had been bidding on SnapNames domain name auctions, winning valuable domains, inflating auction prices and boosting revenue for the company in the process.

All told, the employee, who was an early member of the SnapNames team and a vice president at the company, is said to have participated in 5% of SnapNames' total auctions between 2005 and 2007 and that the value of his bidding accounted for 1% of SnapNames' revenue during that time.

According to Mason Cole, the VP of Corporate Communications for Oversee.net, the company that owns SnapNames, the total number of auctions affected could total 50,000. The employee's participation in SnapNames auctions represented a violation of the company's policy, which forbids employees from participating in its auctions.

Not surprisingly, the employee has been terminated. According to an FAQ posted on the SnapNames website, "SnapNames retained an experienced, independent accounting forensics firm". The company plans to issue rebates to affected bidders in the amount of the "difference between the prices they paid in winning auctions, and the prices they would have paid had the employee not bid in the auctions". It will also add 5.22% interest on top of this.

While SnapNames' action to rectify the situation is commendable (not every company would do the same), this isn't the end of story. In fact, it's really just the beginning.

For years, domainers had suspected that there was something unusual with 'halvarez', the username associated with the now-outed employee's SnapNames account. He was a prolific bidder in SnapNames auctions and the subject of much discussion. Early on, some suspected that there was more to halvarez than met the eye. Take, for instance, the comments in this thread, which hinted that halvarez had inside access:

He has bid up to 200$ in an auction where there were only two of us, interesting as i had a VERY high max bid set. How on earth did he know? In 95% of other auctions where i havent set such a high max bid or none at all he was not bidding up... I hope that Halvarez != Snapnames.

He never wins without an auction, meaning that he only adds names if somone has already added them. The question seems to be, how does he see the list of names already added to snapnames, when noone else can see it?

In the face of these suspicions, SnapNames always denied that it or anybody at the company was participating in auctions. Today, the story is that the halvarez account was set up under a different name than that of the employee in question, but early questions about halvarez's bidding, in retrospect, seem to have been dead on. As Cole admitted, "He had pretty deep insight into our system".

And he also had plenty of possible motives.

First, domains can be extremely valuable and it seems pretty likely that the employee was able to obtain at least a few gems between 2005 and 2007. There are rumors he sold some of his domains to at least one large, well-known buyer and if that's the case, he probably profited considerably.

Second, the employee's actions may have indirectly benefited him in his employment. Some commenters have speculated that his activity could have boosted SnapNames' revenue enough to have an impact on performance bonuses, for instance.

Finally, it is being reported that the employee was a shareholder of SnapNames. That would make sense given that he was an early employee. If his activities artificially boosted the company's revenues, it could have induced Oversee.net to pay more for SnapNames than it was really worth, in turn making his equity even more valuable when Oversee.net acquired SnapNames in 2007 for a rumored $25m.

Whatever the motive or motives, there can be no speculation that cleaning this up will be a mess.

SnapNames is, of course, trying to rectify the situation by offering rebates. But not all of those affected appear ready to take the money and move on. Some appear hesitant to believe that SnapNames has uncovered all of the tainted bidding and those who believe that this might be the tip of a giant iceberg may decide to look at their legal options. After all, there are plenty of unanswered questions. Some argue SnapNames didn't do enough to investigate the many complaints about halvarez. Others simply can't believe that SnapNames didn't know something was up given these complaints.

On the legal front, it's also possible that Oversee.net will take action of its own. If the employee's bidding artificially inflated revenue and Oversee.net was taken advantage of in its acquisition, it seems that it might seek recourse. And one has to assume that criminal charges against the employee may become a possibility as all the facts come to light.

Whatever happens, this is a real blow to a highly-visible part of the domain name industry. Not only will SnapNames have to deal with the fallout created by the domain industry's Bernie Madoff, it will have to try to rebuild customer trust. That won't be easy, and it won't happen overnight.

On a higher level, this incident could impact the entire market. Already, the domain name industry is considered by many to be shady. And now with the concerns over the lack of transparency at drop/auction services having been proven to be legitimate, one can only imagine that the fallout could be widespread. After all, Bernie Madoff wasn't the only one running a Ponzi scheme. Is halvarez merely the first person to get caught?

Last night, NameJet, another player in the drop/auction space sent out an email to customers explaining what happened at SnapNames, praising SnapNames for taking quick action and reassuring its customers that it has measures in place to prevent similar activity from taking place on its service.

For those who were cheated in SnapNames auctions, no amount of reassurance is likely to make any of these services appealing again for a very long time.

Photo credit: Shiny Things via Flickr.

Patricio Robles

Published 5 November, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2407 more posts from this author

Comments (9)

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Claire

"Not surprisingly, the employee has been terminated"

Hopefully, you just mean his contract

almost 7 years ago

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Peter

No Claire, he has been sent away for good.

We take these issues very seriously.

almost 7 years ago

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Bill

Apparently no criminal charges have been filed against the offender!

This has to be looked at as highly suspicious.  Strong indications are that federal authorities are now taking an interest in this case, and if they act then they will go through all the records with a fine toothed comb, examining all transactions and dealings not only of the auctions but with SnapNames and Oversees dealings with other companies.  In turn these other companies are likely to be investigated and we may well see many subsiduary legal investigations lauched throughout the industry.

Of course if federal tax evasion, money laundering, or if it is classed as organised crime of any kind was seemed to be involved then those involved can look forward to not only extremely long prison sentances but also having all of their assets seized, and that could include those assets that members of their families have amassed resulting from money originating from these crimes.

Wide spread calls are emerging for a massive class action in the civil courts.  Many people are wondering why two months ago Oversee/SnapNames started truncating their auction records so that they could no longer see who had bid in auctions they were involved in.  If as many are suspecting this was a forward move to restrict people being able to 'prove' a claim then this squarely puts Oversee in the firing line and all their assets would therefore be included in any civil claim as well as the personal assets of those on their board.

This, as Ron Jackson of DNJournal said, is like a 'dirty bomb', it is going to affect many who at first do not seem to be injured but are being poisoned nonetheless.

almost 7 years ago

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coniston

Surely it can't be true the police are not involved yet? can someone confirm whether or not he is? if not i would guess he's across the mexican border now with his loot. or he has travelled somewhere in the world with no extradition treaty with the U.S

when he was called into the office the police should have been waiting, or did oversee.net want to hide things first?

almost 7 years ago

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Porta

Call Craig Snyder, President of Snapnames and demand your money back.

Call him out for his scam.

Cell 206-718-3288
Phone 503-459-5205

almost 7 years ago

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Bruce Marler

As a domain investor and domain blogger who spends alot of time out speaking to small business about the value of online marketing and also the value of choosing the proper domain name (and buying on aftermarketing sites at times to get them) this type of news just continues to push the industry 10 steps back.

The value of choosing the proper name is so important, but as the people that are supposedly leaders in this industry do things like this it just makes it look like the wild west.

Its not the wild west and there are many good people that are doing great things for businesses by helping them choose the right name but now anyone that starts resarching buying a name on auction sites will see this and make them question the purchase being on the up and up.

Bad timing for an industry just starting to shed the shady image it had from way back when.

almost 7 years ago

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Jason

Oversee.net don't have a leg to stand on, they didn't get "taken advantage of". When they made the acquisition they'd have done some basic due diligence. Threads about Halvarez have been around since 2006, several of them. And Halvarez has been widely suspected and talked about. Oversee.net obviously screwed up and didn't do their research properly (as I've pointed out on my blog).   Sure, it's the right thing to do for the shareholders to attempt to take it to court and claw some of the money back. I don't condone the fraud - the perpetrator should be tried in court - but this should be a lesson to anyone looking to buy a going concern: don't skimp on the due diligence!

almost 7 years ago

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Michael

Frankly, I’m not a lawyer myself. But I would be very, very wary about signing this agreement even for the immediate case, for two reasons.

1. I truly believe that this was not just a one-man operation. Controls with so many millions of dollars floating around every day demand accounting from several sources. Even with Brady’s inside knowledge, such a systmatic looting of the system could not logically be committed by one man only.

2. Treble damages are put into place SPECIFICALLY for the general punitive calculations to cover legal costs, as well as to provide a substantial financial penalty to the complainant.

Now, I agree that a one- or two-time ripoff may not warrant this much trouble, but keep in mind that there is a lot more at stake. This is CRIMINAL territory. This activity is SPECIFICALLY outlawed all over the United States with regard to racketeering laws that are ALREADY on the books. I would submit that EVERY affected person file a criminal complaint in whatever jurisdiction you may be in against Oversee. While civil complaints may help get back the money in an expeditious manner, only a criminal complaint will add teeth to the regulation of an industry that, sadly, needs governmental intervention, at least temporarily.

Keep in mind that halvarez may NOT be the only entity. I understand that someone else had parsed through the data and made an educated determination that Brady only went through halvarez. But the investigation must be complete, thorough, and involve the entire management department of both Oversee and Snapnames.

Let’s face it: Martha Stewart spent six months for a LOT LESS than this. Granted, the laws were far more codified for her crimes, but existing racketeering laws should be sufficient to place Brady in deep doodoo, and perhaps make Oversee completely revamp the top leadership. Even if everyone else was clueless to Brady’s activities, the sheer lack of industrial knowledge by the leadership is enough to fire them all on their collective rear ends.

almost 7 years ago

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Austin

Our law firm is investigating a claim against SnapNames relating to allegations of bid rigging.  We would be very interested in learning more about your experience, and those of other SnapNames bidders whom you might know.  Anything you share would be confidential, unless you tell us otherwise.

    At some point, we may be interested in filing a class action lawsuit.  If we do, no one in the class would have to pay anything unless there was a recovery.  Even then, our fees would have to be approved by a court. 

    We would love to hear from you.  Thank you for taking the time to read this.

                                                        Austin Tighe

                                                        512.372.8100

                                                        austin@feazell-tighe.com

almost 7 years ago

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