When jewelers complain about the Internet, they inevitably aim their verbal darts at Blue Nile. But another site is emerging that could be just as formidable a force.

It’s called Bidz.com, and whether jewelers have heard of it or not, it’s worth paying attention to. Dealing primarily in closeouts, and with a genuinely appealing interface, Bidz seems aimed at the kind of hardcore jewelry fans and bargain hunters who patronize the TV shopping channels. (According to the site’s founder, many jewelers shop on it, too.)

The site sells some 10,000 pieces of jewelry a day, including watches and engagement rings, and was expected to have 2008 revenues in the vicinity of $250 million. And, despite the bad economy, it’s growing. In the third quarter of 2008––a period when Blue Nile’s sales fell 3 percent—its sales climbed 38 percent. (That gain, however, was fueled mostly by increased business-to-business sales.)

But it also has been the subject of controversy, about its business practices, how its auctions are conducted, and its associations. And while it has received its share of write-ups in the press, they haven’t all been positive.

Bidz.com has, by the usual dot-com standards, an unconventional background. It began as a chain of pawnshops that also sold bail bonds. When the chain hit 20 stores, founder and CEO David Zinberg, an immigrant from Moldavia, decided to take it public.

“I was worried I couldn’t control sales of jewelry, so I began selling on eBay,” Zinberg told JCK in an interview at last summer’s JCK Show ~ Las Vegas. “But eBay was not effective. You can be one of 1,000 people selling the same product.”

Bidz was launched in February 1999, using items Zinberg got from his jewelry connections. It started each auction at one dollar, with no reserve—which means there is always the chance a bidder could walk away with a fantastic bargain. (Zinberg says 20 to 25 percent of the merchandise is sold below cost; a company presentation says “a managed ‘loss’ ratio creates a powerful viral marketing effect.”)

But what really made the site stand out was its other innovations: Unlike eBay, which ends auctions at a set time, Bidz stretches them for 15 seconds when a new bid comes in. This not only increases revenue but also extends the most exciting part of an auction. Bidz also developed software that lets viewers see the prices jump right on screen. When an auction heats up, customers feel as though they’re in the middle of a real-life bidding war. This turned Bidz into more than a sales vehicle—it became a form of entertainment in its own right.

In 2007 the company became listed on NASDAQ. It debuted at less than $10 a share and within a year had soared to a high of $22.50. The magazine Smart Money hailed it as an “under the radar” success story that has been “dazzling Wall Street with its solid financial performance.”

Then all hell broke loose. The same week Bidz’s share price hit its peak, a company called Citron Research (formerly Stocklemon.com) issued a damning report, accusing it of “shill bidding” and questioning its business model. As a result, the price of Bidz stock fell more than 50 percent, a wave of negative publicity hit, and executives had to field a parade of hostile questions during a conference call. The stock has never fully recovered.

But here’s where the story becomes a bit more complex. Citron is no ordinary research company but one with a peculiar business model of its own. Citron generally puts out damaging reports on public companies in which it has a short position. If the stock declines, it makes money. So its report was less an example of research than an economically driven hit piece.

But the Citron report wouldn’t have made such an impact if it hadn’t uncovered some damaging facts. Its section on shill bidding claimed that a TV with a list price of $1,500 was auctioned for over $2,000 on Bidz. It also disclosed that Bidz received a grade of “F” from the Los Angeles Better Business Bureau.

Since then, the negative noise around the company has ebbed somewhat but not completely gone away. Following the Citron furor, Samuel Antar, a convicted felon who had a role in the Crazy Eddie electronics chain scandal and is now a self-styled crusader against corporate malfeasance, accused the company of deceptive accounting in his blog.

In August, the company was hit with a class-action lawsuit over the shill bidding allegations. The suit claims an informant revealed that Bidz used “bots”—software that performs automated tasks—to bid up the value of items. It notes that many of the bidders’ names use a similar number-nickname combo, suggesting they were automatically generated. (At press time, the company had not responded but had until Jan. 31 to file a motion to dismiss the suit.)

In September, a Barron’s piece criticized some of the people Zinberg has known over the years, calling them “an impressive array of violent felons and fences.”

Zinberg claims most of the criticism has come from short sellers hoping to make money by hurting the company. “[Citron’s] Andrew Left, Samuel Antar, this is how they operate,” he says. “They have a lot of money behind them. They load up short and make a profit. They don’t do it for the consumer.”

The company has made changes. Although it denied practicing shill bidding, it ended sales from third parties, like the TV set. (It once sold some genuinely unconventional items, including real estate.) It also promised to keep better tabs on who is bidding.

As for the “F” from the Better Business Bureau, Zinberg says, “If you go to the Better Business Bureau site, we have 250 complaints in three years. We are selling 400,000 pieces a month. Do you know any company selling 400,000 pieces that only gets about 10 complaints a month, and all of the complaints answered to the customers’ satisfaction? The Better Business Bureau isn’t used to companies that do such a big business.”

He continues, “We only have a 3 to 4 percent return rate, the lowest in the industry. That probably speaks better of our customer satisfaction.”

On the question of his associations, Zinberg notes that no one currently working at the company has a criminal record, and his spokesman told Barron’s that being in the pawnshop business means dealing with people “with less than sparkling backgrounds.”

Bidz also has gone on offense. Following the Citron report, it announced the company would investigate its critics for “naked shorting” (shorting stock without enough money to cover it). Bidz’s move was cheered by its hard-pressed investors, who have battled detractors (inevitably accused of being short sellers) on blogs and message boards.

However, when he spoke with JCK a few months after the company announced the investigation, Zinberg seemed unenthusiastic about it. “These investigations are very long and usually fruitless,” he said. “As a CEO of a company, I am not focused on investigations.”

JCK has had its own questions about Bidz. First, in February, we noticed that some pieces were being sold at a Rapaport list price. In some cases, they weren’t even diamond pieces. Zinberg called those listings “unique” and “abnormal,” and no Bidz listings along those lines have been spotted in recent months.

The company also does a lot of marketing via e-mail, which many see as junk e-mail, or “spam.” Zinberg denies the company uses spam and asked JCK to forward any Bidz advertising e-mail and he would say where it was from.

JCK tried to do this with an e-mail from Bidz that was flagged by its spam filtering service. It was forwarded to the JCK e-mail system and was quarantined as spam, this time by Microsoft Outlook. When it was forwarded to the e-mail of Bidz’s public relations person, it was returned by her company’s e-mail system as spam. So while Bidz may not think of its e-mails as spam, three different spam filters, including the one used by its PR company, say otherwise.

Controversy aside, Zinberg remains optimistic about the future. The company is winning industry acceptance. Last summer, it was honored by the Indian Diamond and Colorstone Association at its annual dinner during The JCK Show ~ Las Vegas. And when former sightholder L.I.D. was liquidated last year, Bidz and another party won its assets.

Financially, the company seems strong. A release notes that Bidz.com has been profitable in each of the last 17 quarters and was expected to be profitable in the third quarter of 2008. It has also engaged in several stock repurchases. In the end, the bad press didn’t hurt the company’s sales or profits, Zinberg says.

“Half of the stories that were written about us are gone,” he notes. “And even when we got so much negative publicity, we grew as much as 42 percent. These issues were brought up and did not stick. The [shareholders] who believed in the company, the ones who believe that performance should not be based on innuendo and rumor, they were the people who got hurt.”

The company is expanding aggressively and is planning a direct mail and TV campaign. Its TV ads note, “When big jewelry companies have extra inventory, they sell it to Bidz.com,” and proclaim, “Everybody wins at Bidz.com.”

It also has launched Spanish- and Arabic-language versions of Bidz as well as Buyz.com, a nonauction site that has fixed prices (a direction eBay seems to being going as well). Zinberg says this will better position the company for natural Internet search. “Because Bidz is constantly refreshing, we don’t come up high on natural search,” he explains. “In addition, because we don’t have fixed pricing, we don’t show up on comparative shopping networks like Froogle.”

Zinberg also wants to increase the site’s wholesale offerings and may exhibit at jewelry trade shows like The JCK Show ~ Las Vegas. “We have many jewelry store owners who buy from us and resell,” he says. “Because our boxes are generic and not stamped, they can be easily resold on eBay, Amazon, and Overstock.”

Speaking last summer, before the financial crisis hit, Zinberg predicted big things ahead. “I see us selling $1 billion annually within the next five years. I think we should be more effective than the TV home shopping channels. They are able to show one piece an hour. We have hundreds of pieces all the time.

“If you look at pieces, Blue Nile sells about 500 pieces a day. We sell about 15,000 pieces a day. They have a profit margin of 22 percent. We can work on as low as 5 percent, although our overall margin is 29 percent.”

Although Blue Nile’s stock is valued significantly higher than Bidz’s, Zinberg thinks that will change as the market grows more comfortable with his company.

“We want to be part of the jewelry industry,” he says. “We are removing a lot of the inefficiencies from the industry. We are creating efficiency, and that is why people are coming to us.”