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Fraud, Money Laundering Charges Filed in $70M Sneaker Scandal

An online resale kingpin could face as many as 30 years in prison amid scathing allegations that he sold limited-edition and collectible sneakers that he knowingly could not fulfill, swindling consumers out of $70 million.

The U.S. federal government on Friday charged Michael Malekzadeh, founder of now-defunct online sneaker resale business Zadeh Kicks LLC, with wire fraud, conspiracy to commit bank fraud and money laundering.

A suit filed in an Oregon district court alleges that Malekzadeh advertised, sold and collected payments for the purchase of sneakers before their public release dates. He priced the pre-ordered sneakers at near or below MSRP to drive up the number of orders received. Customers would then pay for the sneakers via PayPal or wire transfer prior to their release date.

Malekzadeh is alleged to have received payments as early as fall 2020 for pre-ordered sneakers that he wouldn’t be able to fulfill, because the sneakers never arrived. He would then delay sending sneakers to his customers, sometimes for up to a year. He instead created a plan to deceive customers with various buy back offers, store credit and gift card plans instead of refunding money.

“In other words, Malekzadeh collected money for pre-order sales from victim customers knowing that actually fulfilling the orders would be financially ruinous,” the suit said.

One example in fall 2021 surrounded pre-orders for the upcoming release of the Nike Air Jordan 11 Cool Grey sneaker. Presale listing on Zadeh Kicks were priced around $115-$200 a pair, while the retail price was expected to be $225 when the sneakers dropped in December.

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Zadeh Kicks received and accepted pre-order sales for over 600,000 pairs of the Air Jordan sneakers, resulting in payments to Malekzadeh of over $70 million. But while he accepted payment for all the pre-orders, Malekzadeh acquired just 6,000 pairs of the shoes.

“Malekzadeh had no way of acquiring the quantity needed to fill the number of pre-orders,” the suit alleged.

The Zadeh Kicks owner owed customers more than $70 million for the unfulfilled sneaker orders, with “additional millions” held by customers in gift cards that were no longer usable.

According to court documents, Malekzadeh spent much of his profits on Bentleys, Ferraris and Lamborghinis. Some $3 million went to Louis Vuitton bags, jewelry, furs and $600,000 watches.

Aiding the wire fraud operation, Malekzadeh had transferred $2.4 million from his personal PayPal account to the Zadeh Kicks bank account in January.

Federal authorities have also leveled charges against Malekzadeh’s fiancée, Zadeh Kicks chief financial officer Bethany Mockerman, for conspiracy to commit bank fraud. Prosecutors say they falsified over 15 loan applications for more than $15 million in bank financing.

For the money laundering count, the suit alleges that around June 7, 2021, Malekzadeh knowingly transferred $790,000 from Zadeh Kicks LLC’s business bank account to his own personal bank account, so that he could purchase a $420,000 watch and a $79,000 automobile.

If convicted, both defendants will have to forfeit any property connected to their alleged crimes.

On May 19, Malekzadeh dissolved Zadeh Kicks LLC, with the official petition claiming that the company couldn’t keep up with exponential growth since January 2020. The petition said that the company was insolvent, and that “internal systems and processes were inadequate to maintain fulfillment at these levels.”

Five days later, the website shut down. And soon after, disgruntled customers came out of the woodwork in an attempt to collect cash or sneakers they already paid for. One Zadeh Kicks buyer told Complex they had $500,000 tied up in outstanding orders. Another customer told Bloomberg that he spent $143,000 on sneakers he didn’t receive, spread over 15 credit cards.

On the Better Business Bureau website, the company has a 1.73 rating out of five stars, with the most recent 10 reviews all generating one star.

Malekzadeh is also the subject of a civil lawsuit American Express filed last month that seeks monetary damages in excess of $2 million. The lawsuit accuses the Zadeh Kicks founder of fraud and breaching his contract with the credit card company.

In a 2021 credit application to Amex, Malekzadeh claimed Zadeh Kicks earned $17.4 million in profits during the calendar on total sales of $340.9 million, with the company having a net worth of $26.1 million when accounting for total assets less total liabilities.

In-demand sneakers that command attractive secondhand prices have been a breeding ground for fraudsters. Robberies where multiple pairs of sneakers are stolen, such as at a delivery company’s warehouse or across multiple stores at a time, reveal just how hot of a commodity the footwear continues to be for bad actors.

Dubious methods to procure coveted sneakers even cost one high-profile exec her job at Nike.

Last year, Ann Hebert, then the vice president and general manager of Nike’s North America business, resigned from her position after a Bloomberg investigation found that her 19-year-old son Joe used specialized programs known as “sneaker bots” for the purpose of reselling sneakers at his West Coast Streetwear brand. In one instance, Joe Hebert collected a $20,000 profit after buying 600 pairs of Adidas Yeezy Boost 350 Zyon sneakers for $132,000—with the purchases going on his mother’s credit card.

As for Malekzadeh, he has agreed to give up control of Zadeh Kicks. He also agreed to cooperate with the FBI, court documents indicate. So far, the FBI has seized $6.1 million in cash, plus watches, as well as about 1,100 pairs of sneakers from his personal collection.

David Stapleton, the federally appointed receiver now in charge of what’s left of the online business, says the company’s Oregon warehouse still holds 60,000 pairs of sneakers. He says he has received 3,500 emails from customers who say they’re still waiting for their sneakers.

There is one remaining mystery behind the Zadeh Kicks case, in that there doesn’t appear to be a consensus on where and how Malekzadeh was able to source so many of these sneakers in the first place. A Bloomberg report cites rumors that he secured the shoes from online resale marketplace StockX or a close connection with an employee at Nike (Malekzadeh lives in Eugene, Ore., a roughly two-hour drive from the athletic giant’s Beaverton, Ore. headquarters).

While the source of Zadeh Kicks’ footwear offerings is unclear, the company hasn’t been accused of selling counterfeit products.