Friday Nov, 25, 2022
Self-described sneakerheads bidding up prices for limited-edition kicks sold online have created profits for tens of thousands of entrepreneurial kids and adults.
In nine years, Michael Malekzadeh outpaced the crowd to become an American sneaker celebrity. He made more than $300 million in the sneaker resale market, where scarcity and cool have driven runaway prices.
Mr. Malekzadeh was known as one of the largest buyers and sellers of exceptional sneakers, including many he offered before they hit retail stores and some at cheaper-than-retail prices. He could get the rarest Nike Inc.’s Air Jordans, as well as Yeezys, which are expected to see a spike in resale prices after Adidas AG ended its partnership last month with rapper and entrepreneur Kanye West, who now goes by Ye.
Mr. Malekzadeh’s apparent success afforded him the kind of insouciant, gold-plated lifestyle that luxury sneakers are thought to reflect. On Instagram, the 39-year-old showed off his Ferraris and a six-figure Girard-Perregaux watch next to a hamburger. He also posted shots of himself riding a $29,000 Louis Vuitton bicycle inside his million-dollar home in Eugene, Ore.
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The business, in real life, was collapsing under the weight of unfulfilled orders, late payments and customer complaints. In May, Mr. Malekzadeh’s fiancée—also the company’s finance chief—pushed for both of them to come clean, according to people familiar with the situation.
Federal prosecutors a few months later charged the couple with bank fraud and Mr. Malekzadeh with wire fraud and money laundering. Customers claim they paid millions of dollars for shoes that never arrived. A court-appointed receiver is sorting out the remaining inventory of the entrepreneur’s company, Zadeh Kicks.
Early last year, Mr. Malekzadeh collected orders for about 600,000 pairs of Air Jordan 11 Cool Grey sneakers months before they hit stores, netting over $70 million, according to prosecutors. He priced the sneakers between $115 and $200 a pair, cheaper than their expected retail price of around $225, prosecutors said.
Mr. Malekzadeh was able to get only 6,000 pairs.
Prosecutors allege he collected preorder funds from customers while knowing he couldn’t fill all the orders. Since at least 2020, he spent more than $10 million of the company’s preorder proceeds on luxury goods, including watches, furs and handbags, they said. In a seizure warrant affidavit, federal authorities allege the couple also used customer money to help make a down payment on a house and complete about $600,000 of work to remodel it.
This is a Bernie Madoff-size scam for the sneaker market,” said Michael Schneider, chief executive of Secret Sauce, a sneaker reseller who runs an online community focused on sneakers and collectibles.
Mr. Malekzadeh and his fiancée, Bethany Mockerman, 39, have pleaded not guilty. They are cooperating with authorities and working to minimize the financial harm to customers, their attorneys said in separate written statements.
Thousands of individuals and businesses have filed claims against Zadeh Kicks, including one creditor that reported being owed roughly $15 million plus interest, according to documents filed by the court-appointed receiver. The company had 23,000 customers, the affidavit said, and unfilled orders went back as far back as 2018, according to former customers. Some of them were given now-worthless store credits.
“The Zadeh Kicks thing was the big hit that kind of wiped a lot of people,” said Minnat Azad, a sneaker reseller from Boca Raton, Fla.
Based on the company’s reputation among sneakerheads, Mr. Azad said, he ordered 100 pairs of Air Jordan 11 “Jubilee” sneakers in October 2020. Even though he received just 50 pairs, he said, he made a $5,000 profit reselling them.
It was the easiest money he had ever made, Mr. Azad said. “This guy is better than the S&P 500,” he recalled thinking about Mr. Malekzadeh.
It was such a good investment opportunity that he paid $100,000 for another 400 or so pairs of other sneakers. None came, he said.
First steps
Mr. Malekzadeh was born in Eugene, where Nike also took its first steps, and graduated from the University of Oregon in 2005. He enrolled at the Art Institute of Portland to study footwear design but dropped out. In 2010, he worked for a Nike store in the Portland area and was fired for reselling items that he was buying with an employee discount, according to people familiar with the matter.
In 2013, the same year Mr. Malekzadeh began dating Ms. Mockerman, he embarked on his sneaker-reselling career, according to the seizure warrant affidavit. He borrowed about $20,000 from his father to start his business, records show.
He didn’t think it was enough. Prosecutors allege that since 2013, the couple sent at least 15 fraudulent loan applications to banks, using doctored financial and bank statements to net around $20 million in loans.
Next, Mr. Malekzadeh built a supply chain for in-demand sneakers.
Resale markets have operated on the internet since the 1990s, mostly through sites like eBay, forums and consignment stores. Early on, sneaker resellers sought a competitive advantage through insider knowledge about inventories and securing pairs through personal connections at retail stores.
Buying online eventually rivaled the practice of waiting in line at retail stores on the day a highly sought sneaker went on sale.
Images of high-end fashion designers and celebrities in limited-edition shoes flooded social media, elevating sneakers to markers of wealth and prestige. Retail demand soared and expanded the secondary market, where people buy and resell items through eBay and newer platforms such as StockX and Goat.
Nike made $29 billion in revenue from Nike- and Jordan-branded footwear in the year ended in May. Analysts at Cowen, an investment bank, predict the $6 billion-a-year resale market will reach $30 billion by the end of the decade.
Buying limited-run sneakers by computer at first gave buyers a fair shot at getting a pair when sales opened, a moment known as a drop. Some models sell out in less than a minute.
Resellers pay thousands of dollars for software to push them ahead of other online buyers and, at times, to place larger-than-allowed orders.
Mr. Malekzadeh initially relied on deals with store managers at authorized retailers around the country to buy in bulk before sneakers hit store shelves, according to people familiar with that issue.
He definitely had this image of being the end-all, be-all, backdoor plug,” Mr. Schneider said of Mr. Malekzadeh’s renown for acquiring inventory.
As supply pipelines began to close in the Covid-19 pandemic, Mr. Malekzadeh turned to buying items in large quantities primarily through StockX, paying for many in-demand sneakers at a significant markup, these people said.
A spokeswoman for StockX said that “no single buyer has ever represented more than 1% of our overall trade volume in a given year.”
High jump
2019 was a landmark year for the sneaker market. StockX secured a private market valuation of more than $1 billion. Sotheby’s sold a worn-and-torn pair of one of Nike’s first designs for $150,000 during its first-ever sneaker auction. Nike’s Jordan brand also recorded its first billion-dollar quarter in sales.
Zadeh Kicks sales also were on the rise, especially among other resellers. Some of them posted photos showing bulk orders from the company. Others gave shout-outs for the seemingly unbelievable deals they got. Mr. Malekzadeh left his signs of success across social media, giving the impression that anybody could make a buck reselling sneakers.
For years, the company had accepted money from customers preordering Air Jordans, according to its now-deleted website. As demand increased, so did customer wait times and cancellation fees. Customers were charged a 20% fee if they canceled a preorder, according to policies shown on the website. Later, it was 50%.
Refund rules also changed. In 2018, the company told customers they had to wait as long as 10 months past their order date to cancel without penalty. Instead of cash refunds to every customer, Mr. Malekzadeh offered store credits and gift cards.
He didn’t tolerate his customers bad-mouthing the company in posts over unfilled orders and delays, and threatened to ban them from buying his shoes.
When Damian Ortiz commented on Instagram about a problem, Mr. Malekzadeh emailed him. “We want to give you a one time courtesy (which we normally do not) that typically we BLOCK those who do not follow our listed policies,” the July 2019 email said.
Mr. Ortiz, of Oakland, Calif., estimated he lost about $14,000 in unfulfilled orders. He broke even overall doing business with Zadeh Kicks, he said, taking into account his earlier profits.
Missed shot
As luxury sneakers became more popular, the limited releases had the potential for hefty resale profits, especially if the shoes were a collaboration between a brand like Nike and a well-known fashion designer such as the late Virgil Abloh or rapper Travis Scott.
Some sneakers fail to match the hype, and investors lose money. Other times, sneakers drop in value because a shoe company decides to restock the model, killing the lure of exclusivity.
Indiana University finance major Arnav Kamra learned about the market’s ups and downs firsthand. He started reselling sneakers in 2020, as a 15-year-old high-school sophomore in Cary, N.C.
When his school moved to remote instruction during the pandemic, reselling sneakers became his focus, he said. With money from his parents, Mr. Kamra set up an online sneaker store.
By last year, he said he amassed a portfolio of assets, both sneakers and other collectibles valued at $40,000.
One deal in particular caught the teen’s attention. Zadeh Kicks was selling pairs of Air Jordan 1s that Nike released in collaboration with Mr. Scott for $590. The white leather and brown suede high-tops fetched about $2,000 in the resale market.
“The ROI was simply insane,” Mr. Kamra said, “I just convinced myself that I had to buy more.” He paid Zadeh Kicks close to $18,000 in various orders.
Mr. Kamra said that two days before his 18th birthday in May, he got an email from Zadeh Kicks. He was expecting a new, unbelievable deal from Mr. Malekzadeh. Instead, he said, it announced that Zadeh Kicks had been dissolved and no more orders would be filled, including his.
Mr. Kamra said he was still reselling but has turned his focus to schoolwork.
Early this year, Ms. Mockerman learned more details than she had previously known about significant discrepancies between the amount of money coming in and orders being filled, according to people familiar with that.
After some Zadeh Kicks buyers made threats about unfilled orders, Mr. Malekzadeh and Ms. Mockerman started fearing for their safety, according to people familiar with the situation. The couple sought help from lawyers who directed them to federal authorities, the people said.
In late May, Mr. Malekzadeh petitioned to dissolve his company.
Nike representatives have since been working with the court-appointed receiver and law enforcement, evaluating the remaining inventory in the Zadeh Kicks warehouse, according to reports filed by the receiver. A spokeswoman for Nike declined to comment.
Mr. Malekzadeh’s assets are being liquidated to cover debts. The Federal Bureau of Investigation seized cashier’s checks for $6.1 million and $290,000 from Mr. Malekzadeh, as well as handbags and watches.
Close to 60,000 pairs of shoes were found at the company warehouse. The receiver said it had fielded inquiries from customers seeking a share of the remaining inventory: some 48,000 pairs of Nike shoes, close to 8,500 Adidas and about 1,100 pairs in Mr. Malekzadeh’s personal collection.
Write to Inti Pacheco at [email protected]
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