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.