Legal troubles shutter Adbot; future unclear

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Web media auction company Adbot stopped serving ads and its 15-20 remaining employees left Friday after being unable to come up with a bailout investor, according to company Sales Manager Sheri Frankel.

The company's exact legal status is still hazy. Its owner, James Frith, was not speaking to the press and declined to comment, and his lawyer, Michael D. Monico, did not return repeated calls.

The event comes on the heels of a Chicago U.S. District Court judge freezing the assets of Mr. Frith Dec. 15 after a Securities & Exchange Commission investigation into alleged fraud.


The judge entered a permanent injunction by consent against Mr. Frith, who neither admitted nor denied the charges, and his limited partnership company, Chicago Partnership Board. The judge ordered the immediate liquidation of CPB, which was the main source of capital funding for Adbot, and appointed Chicago lawyer J. William Holland as trustee to divest the assets of CPB.

Mr. Holland confirmed Adbot's closing. "They are unable to pay their debts as they mature, so they are fundamentally out of business."

He said he would assist a number of staffers who are trying "to resurrect the business and find some value in it."

Mary Keefe, regional director of the Chicago office of the SEC, said that Adbot was named a relief defendant in its case, meaning that while Adbot "didn't engage in the transactions, [it] benefited from them" because money from CPB helped finance Adbot.

The SEC charged Mr. Frith and CPB with fraud and misusing at least $3.4 million of CPB investors' funds. "We alleged that [CPB] customers' money was used for Adbot's operations," Ms. Keefe said.

Many of Adbot's staffers said they didn't see the investigation coming. "We kept thinking there should have been signs," said Margaret Raye, manager of writing, research and production at Adbot, who acted as company spokeswoman.

She said that other than sharing a floor with CPB, she didn't know Adbot had any relations with the company and was shocked when the FBI raided their offices Dec. 4.

Some of the marketers involved in Adbot's auctions said they had questioned Adbot's business model from the beginning.


As the Web's first ad auction company, its premise was appealing: It guaranteed Web publishers, many without full-time sales staffs or high traffic counts, a way to make money by selling excess ad banner inventory, a common Web problem. It also offered bargain prices.

At the first auction though, only a quarter of the 107 million ad impressions on the block sold; Adbot bought the rest at $5 per thousand impressions, which it later sold off at an unknown price.

In following auctions it let the market determine CPMs, which ranged from 50 cents to $6.

Steven Suslow, sales director at free e-mail service USA.Net sold 10 million ad impressions in the first auction and said he was amazed when he got paid in full because Adbot bought all its space.

"I've done the math a number of times, I really couldn't figure out the business model," Mr. Suslow said.

Working with Adbot "was a very painful process," he added.

He said the company was plagued with a number of different performance issues ranging from inaccurate counting of ads to slow delivery of banners.

"They were serving ads themselves or trying to, and I think they got over their heads," Mr. Suslow said.


At one point, Mr. Suslow said USA.Net's software showed a large discrepancy between the number of ads served in a month and how many ads Adbot counted.

He said Adbot eventually verified USA.Net's numbers and paid up, but by then USA.Net had decided not to participate in any more auctions.

"The concept that they sold was beautiful," said Doug Berger, CEO of directory site 411 Locate.

"We saw someone who was willing to do business with [small sites], and then we got nice, glossy brochures. But it seems like they spent all their money in marketing and no money in their technology."

Mr. Berger said Adbot let him break his contract after a month because its coding caused his site to break down.

Evan Neufeld, senior analyst at Jupiter Communications, said that with the exception of serious branders, the auction business model makes sense, especially for a media buying company that would rather sell space at 50 cents cost per thousand than have it go unsold.

"The actual concepts behind Adbot were intriguing," Mr. Neufeld said. "I think Adbot apparently wasn't up to the task. That's the price you pay to be first to market.

Copyright December 1997, Crain Communications Inc.

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