The Air Jordan Drop So Hot It Blew Up an Alleged $85 Million Ponzi Scheme

(Bloomberg Businessweek) -- A private jet landed in May 2022 at a small airport near Eugene, Oregon, and dropped off two men. They hopped in a car and drove past vegetable farms and cannabis storerooms to a quiet business park at the western edge of town. Their destination was a dusty warehouse that held hundreds of rows of neatly stacked sneaker boxes, almost 60,000 in all. The shoes were the stockpile of Michael Malekzadeh, the owner of Zadeh Kicks, one of the largest US sneaker resale operations. Many of the sneakers were among the most valuable on the secondary market, selling for thousands of dollars a pair. The men had come for their cut—the value of what they’d ordered and not received from Malekzadeh..They were but a few of the former customers who’d shown up around the same time looking for him so they could get their shoes or their money back. Records show that the local police force received four calls about the address across two days, including two incidents described as “suspicious conditions” and one as “criminal trespass.” Local media reported that at one point shots were fired, with no one hurt..No one left the warehouse satisfied. The sneakers and the company no longer belonged to Malekzadeh. Days earlier the warehouse had been taken over by a court-appointed receiver, who was already working to liquidate the company’s assets..For at least four years, Zadeh Kicks had been offering sneakerheads and other resellers something no other company could: a way to order highly anticipated shoes months before their release, at costs often far below market value. Professional flippers depended on its too-good-to-be-true prices, even if they wondered how Malekzadeh could offer them for so many coveted models and in such large quantities..Sneakerheads had their theories. Maybe he made enough from certain orders that he could afford to take a loss on others. Maybe he had a contact at Nike Inc. leaking him info or funneling him shoes off the books. And was it true that one of his ex-wife’s relatives was a supply chain executive at Foot Locker Inc.? Whatever he was doing, it seemed to be working. Zadeh Kicks became a major force in resales, so significant to the market that smaller operators parlayed his presales to them into millions of dollars in profits. “For a long time I looked up to him—he was a good dude,” says Sebastian Catlin, co-owner of reseller Sneakorhead in Eugene, who first learned about Malekzadeh on Instagram. “Someone you aspired to be, and he would always seem straight-up.”.But there was no secret shoe pipeline. In fact, Malekzadeh would simply wait until the shoes he’d presold were released, then purchase them on the open market from retailers such as StockX, according to people familiar with his operation who asked to remain anonymous because the matter is sensitive. Delivery delays could persist as long as a year, but he managed to fulfill most orders—until one day he couldn’t..In an indictment handed down in July 2022, federal prosecutors alleged that Malekzadeh was often selling at a loss and pocketing some of the preorder proceeds. If he didn’t have enough merchandise to send someone their shoes, the prosecutors said, he’d sometimes “buy back” the preorder and pay a premium in cash or store credit. The indictment charged Malekzadeh with money laundering, wire fraud and conspiracy to commit bank fraud. The pattern prosecutors laid out effectively amounted to an $85 million sneaker Ponzi scheme that harmed thousands of people across the US. Court documents allege that Malekzadeh “advertised, sold, and collected payments from customers for preorders knowing he could not satisfy all orders placed.” His fiancée, Bethany Mockerman, the company’s chief financial officer, was charged with conspiring with him..Both have pleaded not guilty—the company’s dissolution documents say its inability to fulfill orders came about because demand for sneakers simply grew too fast and it didn’t have adequate internal processes to keep up. Malekzadeh and Mockerman have been released as they await trial or a possible plea deal with the government. If convicted, Malekzadeh faces up to 30 years in prison. In a statement, his lawyer wrote: “Since filing for receivership and initially cooperating with authorities last year, Michael has continued to work to ensure the maximum possible return to customers and investors. He has voluntarily turned over tens of millions of dollars in business and personal assets to the receivership and government. He has also provided assistance to ensure maximum recovery on business and personal assets. Michael remains committed to taking accountability and limiting the harm to others to the greatest possible extent.” A lawyer for Mockerman declined to comment..The sneaker resale market has boomed in recent years, reaching more than $2 billion in North America, according to financial services company TD Cowen. What was once a hobby for collectors has become a sophisticated market with full-time investors and speculators. Few capitalized off this metamorphosis more than Zadeh Kicks, which supplied everyone from callow teenagers looking to double a $1,000 investment to national operations that spent millions to fill up their distribution centers. Some lucky customers made hefty profits. But when the company shut down, thousands more lost their money—some as much as $1 million. People close to Malekzadeh say some were angry enough to send him into hiding. His trial, originally scheduled for June, has been postponed as the receiver works to sell off his inventory and repay customers. It’s unlikely they’ll all get their money back..Friends and business associates of Malekzadeh say he always wanted to be in the shoe game. He got a degree from the University of Oregon and began selling sneakers on eBay around 2010. He talked of working briefly at Nike, which was founded in Eugene, but then getting in trouble for reselling shoes. (Nike didn’t respond to a request for comment.).In those days, Malekzadeh sold sneakers he customized by hand. He built relationships with retailers and began buying up their unwanted inventory and flipping it online. “He was very artsy, very charismatic, and he always sounded like he had big goals,” says Tyler Angelos, owner of a paint company that briefly sponsored Malekzadeh as a sneaker artist in the early 2010s..Malekzadeh officially established Zadeh Kicks in 2013, initially with a straightforward model of purchasing sneakers and selling them off. His company started just as big shoemakers such as Nike and Adidas were developing a vast ecosystem of online special releases, routinely announcing “drops” of certain models that would leak to the public several months in advance to build anticipation. The secondary market followed suit, with sneakerheads such as Malekzadeh competing to nab as many shoes as they could and reselling them for a profit..He ran his operation out of the Eugene warehouse, which was in the same building as his family’s biotech company. The sprawling space gradually filled up with Nike Air Jordans, Adidas Yeezys and other models in the hottest silhouettes and colorways available. Zadeh Kicks was an unlikely business for the area, tucked in an industrial pocket across the street from a furniture distributor and an auto shop. But it soon became a major operation, despite requiring only a few employees to pack shipments. The small office Malekzadeh worked out of was decorated with posters, street art, his personal sneaker collection and a limited-edition carpet designed by Virgil Abloh, the late Louis Vuitton artistic director..Malekzadeh’s ambitions were briefly derailed in 2014 when a fire broke out at the warehouse, destroying thousands of pairs of sneakers. He told the magazine that it might’ve been caused by a stray cat knocking over candles he’d lit to mask the smell of dye. He also said his insurance company, Liberty Mutual, had sent a representative to get his collection appraised, counting more than 20,000 pairs of shoes, which Malekzadeh estimated were worth over $400,000. Liberty reimbursed him for the retail value of the damaged sneakers and auctioned off the ones that survived the fire. Malekzadeh said he bought them back for $32,000. (Liberty declined to comment.).Zadeh Kicks’ presales model began coalescing after the blaze. Customers would order sneaker designs as long as six months ahead of their expected release date, at lower prices than they were likely to find on the resale market once the shoe was out. The approach was uncommon, and Zadeh Kicks further distinguished itself with its low pricing and high volume..Buyers were essentially placing an options bet, locking in a price and hoping the shoes would be worth more once released. When they came out, Malekzadeh would fill orders by any means necessary. It no doubt helped that StockX, GOAT and Stadium Goods all launched around that time—as those sites evolved into major resellers, they became his biggest source for stock. As long as more preorders were coming in, he could afford to lose money filling ones for an earlier release. “He was running a weird, unregulated casino,” says Matt Halfhill, who runs the sneaker news site . “The problem is that he had to depend on buyers who were not that sophisticated in order to make money.”.Malekzadeh’s operating procedures weren’t especially sophisticated, either. He had a website, ZadehKicks.com, that he built with the e-commerce platform Shopify. After a shoemaker announced a forthcoming drop, he’d put links where people could preorder. Customers, especially repeat ones, could also email him directly with details of what they wanted. Most of the time, he’d simply reply with prices for different quantities, sometimes indicating a percentage discount for customers who placed larger orders, say of 250 pairs or more. He also sold stock he had on hand, promoting those sales and his presales on social media and in email blasts. Money typically came in through PayPal, though prosecutors also cited direct wire transfers for some orders. Emailed receipts could read like gnostic texts, featuring lines like “157x Nike Air Jordan Retro 4 Zen Master Amethyst Wave Bright Crimson Black- priv2 - 8 for $160.00 each.”.As Zadeh Kicks grew, other resellers used it to build their own businesses, sourcing sneakers from Malekzadeh in large quantities and flipping them at high margins. Among the largest was New Jersey-based Schmidty Kicks, which came to depend on Zadeh Kicks to provide sneakers for preorders of its own. Another significant source of customers came from “cook groups”—online communities, usually on Discord, where sneakerheads share advice and intel on how to acquire limited-edition shoes. Major groups, which could have more than a thousand people and sometimes charged monthly membership fees, would often include a particular reseller who sourced from Zadeh Kicks and would notify members when it was taking presale orders..Preorder customers kept coming to Malekzadeh despite regular delivery delays. If someone prodded too much, they were sometimes threatened with being banned from buying again. “We have had multiple emails from you now on this,” read one email response reviewed by from Zadeh Kicks to an inquiring customer. “They have been shipping, and in stages, and it is clear you cannot wait until completed so we will be refunding all those orders now. And if that is an issue we can refund all open ordres [] as well if you like and ban.”.PayPal’s rules require a guaranteed delivery within 20 days from the date of purchase, but Zadeh Kicks would often take 10 times longer than that to ship sneakers. Malekzadeh also circumvented Shopify’s $9,999 gift card limit by using a third-party app called Rise.ai to issue gift cards that wildly exceeded that number. (A spokesperson for PayPal says: “PayPal takes these matters seriously and continues to work with multiple stakeholders to navigate this situation.” One for Shopify says: “Shopify’s Acceptable Use Policy (AUP) clearly outlines the activities that are not permitted on our platform and we take action when stores are found in violation. Zadeh Kicks was removed from the Shopify platform last year.” Rise.ai didn’t respond to requests for comment.).When the coronavirus pandemic began in 2020, interest in sneakers—and in online speculation—spiked. New customers started coming to Zadeh Kicks by the thousands. People close to Malekzadeh recall watching him manage millions of dollars in sneaker deals mostly using his phone and a few spreadsheets, messaging individual buyers about quotes and delivery dates. Other resellers took notice, too. “We knew Eugene had some sellers, but on his level?” says Cadence Klindt, the other co-owner of Sneakorhead. “Oh man, this guy’s doing some of the biggest numbers in the game.”.The big-money sneakerheads usually congregate in hubs such as New York and Los Angeles, not sleepy college towns like Eugene. But Malekzadeh had some flash. In 2020 he and Mockerman bought a house on a hill in one of Eugene’s pricier locales, renovating it to include a five-car garage. Neighbors describe seeing cars collectively worth millions of dollars parked on the curb—a Rolls-Royce, a Lamborghini, a Porsche. Their engines could be heard revving from down the block. And Malekzadeh was just as conspicuous downtown, where Lambo sightings otherwise tend to be rare. Most of his fleet would show up on his social media posts..Malekzadeh liked to customize his rides, sending them to 503 Motoring, a luxury car shop in Beaverton, just outside Portland. He’d call 503’s president, Tim Walbridge, every few months to let him know about a new whip he’d purchased and line up custom rims, window tints, carbon-fiber body kits or other modifications. Malekzadeh always paid on time, Walbridge says, but he didn’t seem to drive much—the cars’ mileage was always surprisingly low. “He just kept telling us that sales were incredible,” Walbridge says. “He was busy. He was a hustler.”.By 2021 trucks were arriving every day at the Zadeh Kicks warehouse, delivering as many as 1,000 pairs of sneakers addressed to Malekzadeh, according to someone with direct knowledge who requested anonymity discussing a sensitive matter. Most were UPS vans bearing boxes from StockX. Zadeh Kicks had quietly become one of the marketplace’s biggest buyers, inundating the local UPS facility with purchases, the person says. (StockX said in a statement that “No single buyer has ever represented more than 1% of our overall trade volume in a given year.”).Demand was peaking, and StockX and sneaker stores weren’t meeting it. Malekzadeh was resorting to more extreme tactics to fill orders, according to federal prosecutors. If he was struggling to deliver the shoes, he’d sometimes offer to refund the presale at a higher price than the customer had paid. Some cash might be reimbursed, but the buybacks usually consisted mainly of store credit or gift cards. Zadeh Kicks customers accumulated thousands in unspent credit from missed deliveries. The lucky ones who were still getting their sneakers included some of the big resellers, who kept right on flipping them and making hefty returns..Just before Christmas 2021, Nike dropped a particularly coveted sneaker: the Air Jordan 11 Cool Grey, a high-top with two silvery hues, patent leather sides, an icy-blue sole and a retail price of $225. They were immediately a top draw, hyped by basketball stars such as Jayson Tatum. Nike Chief Executive Officer John Donahoe told analysts and investors it was the single biggest release since the company began emphasizing direct-to-consumer sales in 2017..Zadeh Kicks had been offering the Cool Greys for as little as $115 since the fall before the drop. On release day it owed customers more than 600,000 pairs—an enormous chunk of Nike’s entire stock, which sneaker site estimated at 1.2 million to 1.7 million pairs. Malekzadeh had no hope of filling the order. What’s more, the cycle was already repeating: Even as he scrambled to find Cool Greys, he was getting tens of thousands of preorders for the next big Jordan release, the Air Jordan 4 Retro Military Black, due out the following May..It was all too much. At some point in early 2022, he went up to Portland, where he hired lawyers and told the US Attorney’s office what had happened. As of April, federal prosecutors later determined, Malekzadeh and Zadeh Kicks owed customers more than $70 million worth of undelivered sneakers. The following month he voluntarily dissolved the company, and the court overseeing his bankruptcy appointed David Stapleton as the receiver for its assets..The Heist Issue. The $500 million catalytic converter crime ring Could a legal rhino horn trade save the species? A low-tech, high-stakes benefits scam Is it stealing if it’s your own money? Brazil’s bank-robbing prison gang The strange murder of a rare violin collector An unsolved Brink’s jewelry heist And more weird heist hijinks.Stapleton, who didn’t respond to an emailed request for comment, posted an announcement on ZadehKicks.com and emailed customers to notify everyone of his appointment. He urged anyone who was owed money to get in touch. Within a day approximately 3,500 people responded, according to court documents, as Stapleton compiled a list of creditors that would eventually surpass 15,000. Word tore through social media, leading to threats against Malekzadeh and his family. Some Discord users formed a Zadeh Relief Group for customers seeking restitution. Within a few days came the report of gunfire at the warehouse..Stapleton took control of $2 million that was sitting in Zadeh Kicks’ bank accounts. He also began working through Malekzadeh’s possessions, including about 1,100 pairs of sneakers from his personal collection. Neighbors soon noticed trucks carting away the Bentleys and Ferraris in his driveway. Walbridge, at 503 Motoring, says he got calls from American Express Co., which asked if Malekzadeh had any outstanding balances. Federal prosecutors rang him up, too, wondering if 503 had any of Malekzadeh’s cars in the shop. It did have one, which it worked with the Federal Bureau of Investigation to transfer. (Amex declined to comment.).In July the federal government officially charged Malekzadeh and Mockerman. Court documents showed Malekzadeh had managed to acquire only about 6,000 pairs of the Cool Greys, and prosecutors alleged that Zadeh Kicks had pocketed the $70 million from the undelivered orders and left customers with only store credits or gift cards, or with nothing at all. The federal investigation into Malekzadeh’s activities encompassed the FBI, the IRS and the Department of Homeland Security, as well as a state task force; agents seized assets including about $6.4 million in cash, almost 100 high-end watches and hundreds of designer handbags. By the following spring, Malekzadeh had sold his house, too..About a thousand Zadeh Kicks creditors are still waiting to hear whether they’ll get any money back, according to court documents. They range from one-time buyers out 200 bucks to full-time resellers owed $1 million or more. One jilted buyer, speaking on condition of anonymity, says he lost more than $600,000, mostly on one large order placed via wire transfer just prior to the catastrophe. He’d never resold shoes before—it just seemed like a no-brainer investment..Among those Zadeh Kicks owes money to is Brett Schmidt, president of Schmidty Kicks, who filed for bankruptcy earlier this year, citing liabilities of at least $18 million. Court documents from the proceeding show he owes money to more than 600 customers of his own, with some of the debts reaching six figures. (A lawyer for Schmidty Kicks declined to comment.).Customers have filed almost 400 complaints with the Federal Trade Commission, and credit card companies have received hundreds of claims from people disputing Zadeh Kicks charges. PayPal has refunded some customers, though since last July it’s sent rejection letters to others, particularly those it deemed resellers, saying its policies didn’t apply in their circumstances..Anyone else hoping to get their money back will have to wait until the receiver finishes liquidating Zadeh Kicks’ assets. Stapleton’s firm has been selling off stranded merchandise on eBay, including Ben & Jerry’s Nikes that look like a melting cow (listed for $1,500) and Nike Zoom Kobe 6 Protro sneakers in neon green ($700). As of May 2023 the sales had raised nearly $2.6 million, well shy of the total owed to creditors. The selloff and the $2 million from Zadeh Kicks’ accounts must also pay for the receivership process and the company’s rent and other expenses—$1.84 million, all told, as of May..Stapleton’s team has also been working to identify the customers who made the most money from Zadeh Kicks, arguing that their profits should be returned to the receivership and used to help repay those who lost the most money—a power often exercised in liquidation proceedings. Thus far, he’s sent clawback letters to 19 former customers who collectively made $16 million from Zadeh Kicks. Nearly all have responded, but it’s unclear how many will cooperate..Malekzadeh left a trail of personal creditors, too. Amex filed a lawsuit in federal court against him and Mockerman, trying to get back more than $2 million in unpaid balances. Financial filings show Malekzadeh also had dealings with at least six other lenders. All are trying to get money back..No one knows how long it’ll take for cash to start flowing to those who ordered shoes on Zadeh Kicks. Almost a year after the company’s implosion, on a sunny day in May, Malekzadeh’s father’s blue Porsche 718 Boxster convertible was parked outside the warehouse, where the family biotech business is also located. He responded to a knock at the company’s office but declined to answer questions about Zadeh Kicks, then shut the door. On the warehouse floor, boxes were still stacked high. Security cameras and personnel monitor the facility 24 hours a day, to ensure that workers—and the sneakers—are safe..More stories like this are available on bloomberg.com.©2023 Bloomberg L.P.

The Air Jordan Drop So Hot It Blew Up an Alleged $85 Million Ponzi Scheme

Michael Malekzadeh’s Zadeh Kicks made millions of dollars taking big presale orders for coveted sneakers at low prices and scrambling to fill them. Then came the Air Jordan 11 Cool Grey.

NDTV Profit

NDTV Profit

Follow Us

DOWNLOAD THE APP