Short seller's report claims misconduct in Zeta Global's data collection practices

The November 13, 2024 Culper Research report has brought significant attention to Zeta Global's (NYSE: ZETA) business practices. According to the report, Culper Research identified two major areas of concern regarding Zeta's operations and financial reporting.

The first allegation centers on what Culper describes as "two-way" contracts between Zeta and third-party consent farms. According to the report, these arrangements involve Zeta simultaneously acting as both a supplier and buyer of consumer data. The researchers claim this structure allows Zeta to "flatter reported revenue growth" while raising concerns about potential revenue round-tripping.

The second major allegation involves what Culper calls a "network of consent farms." According to their investigation, these are websites designed to collect consumer data under what they characterize as false pretenses. The report claims these sites bait visitors with job applications, stimulus money offers, or other rewards that "simply do not exist."

A central piece of evidence presented in the report involves Zeta's acquisition of Apptness Media Group in October 2021. While Zeta described Apptness as "a digital survey platform" and stated it was "focused in the jobs market," Culper's investigation claims to have uncovered at least 40 websites run by Apptness that allegedly operate as consent farms.

The report provides specific examples, including higherincomejobs.com. According to Culper's analysis, 98% of inbound website visitors land on subdomains such as "amazon03.higherincomejobs.com" or "fedex05.higherincomejobs.com," which allegedly use company logos without authorization to collect personal information.

Culper further alleges that after Zeta's March 2022 acquisition of ArcaMax Publishing, the company created new websites specifically to funnel ArcaMax's traffic into consent farms. The report cites arcamaxjobs.com and signupconfirmed.com as examples, noting both domains were registered shortly after the acquisition.

The researchers claim to have found evidence of widespread data collection practices through these networks. According to SimilarWeb data cited in the report, these websites collectively received 158.7 million visits from 85.9 million unique visitors in the past year.

The report also draws parallels between Zeta's practices and those of Fluent Inc., which faced Federal Trade Commission charges in July 2023 for operating what the FTC called "a massive consent farm enterprise." According to Culper, Zeta's former Chief Revenue Officer was previously employed at Fluent during the period of alleged misconduct.

The timing of the report is particularly significant as it follows Zeta's announcement of strong Q3 2024 financial results, which showed 42% year-over-year revenue growth. Culper estimates that consent farms have become integral to Zeta's business, potentially driving almost the entirety of this growth.

Understanding the Alleged Mechanisms

Data Collection Infrastructure

The Culper report provides detailed technical analysis of how the alleged consent farming operation functions. At its core, the researchers describe a network of interconnected websites designed to capture personal information through various entry points.

According to the report, these websites employ sophisticated redirect mechanisms. When users interact with initial landing pages, they are guided through a series of forms and confirmations that ultimately lead to data collection points. The researchers documented how even after declining multiple prompts, users were still directed to additional data collection forms.

Revenue Recognition Concerns

The report raises specific concerns about Zeta's revenue recognition practices, particularly regarding what it terms "two-way" contracts. These arrangements allegedly involve Zeta both buying data from and selling data to the same partners, raising questions about the economic substance of these transactions.

The researchers note that in Zeta's 2023 Form 10-K, the company's auditor identified revenue recognition related to "contracts with third parties in which the Company is acting as both a vendor and a customer" as a critical audit matter. According to Culper, Zeta is the only public company they found that has disclosed such language within the past five years.

Partnership Network Analysis

The report details an extensive network of partnerships and relationships between Zeta and various data brokers and marketing companies. Through corporate records and website registrations, the researchers mapped connections between multiple entities they claim are involved in the consent farming operation.

Examples include Digital Media Solutions (DMS), which filed for bankruptcy in September 2024. The report cites bankruptcy filings that name "Zeta: Apptness" as a major customer, suggesting a two-way relationship between the companies.

Industry Impact

Regulatory Precedent

The report places Zeta's alleged practices within a broader context of regulatory action in the digital marketing industry. It draws particular attention to the FTC's July 2023 charges against Fluent Inc., which alleged similar consent farming practices.

Corporate History

Culper's research also examines the history of Zeta's management team, particularly CEO David Steinberg's previous company, InPhonic Inc. The report notes that InPhonic faced FTC charges in 2007 regarding customer rebates and later SEC charges in 2012 related to alleged round-trip transactions.

Industry Evolution

The researchers discuss how the digital marketing industry's need for fresh, opted-in consumer data has created incentives for potentially problematic data collection practices. They argue that Zeta's acquisitions of Apptness and ArcaMax were specifically intended to expand its consent farming capabilities.

Market implications

Financial Impact Assessment

The report estimates that consent farms have driven almost the entirety of Zeta's revenue growth since acquiring Apptness and ArcaMax. The researchers suggest these operations now represent approximately 56% of Zeta's LTM Adjusted EBITDA.

Regulatory Risk Analysis

Given recent regulatory actions against similar practices, particularly the FTC's charges against Fluent, the report suggests Zeta faces significant regulatory risk. The researchers draw parallels between Zeta's alleged practices and those that led to enforcement actions against other companies in the industry.

Market Response

The report discusses potential market implications, noting that Fluent's stock has declined 65% since the FTC first announced its investigation in March 2023. The researchers suggest Zeta, trading at higher multiples, could face similar pressure if regulatory scrutiny increases.

The report concludes by expressing skepticism about Zeta's current valuation, noting it trades at "7.2x revenues or 51x its $167 million in LTM Adj. EBITDA," while its earnings are "soaked up" by $215 million in LTM stock-based compensation.

Zeta's Defense: Company Rebuts Short Seller Claims

On November 13, 2024, within hours of the Culper Research report's publication, Zeta Global issued an official statement addressing the allegations. According to the business wire release, the company characterized the report as "riddled with misrepresentations, speculative conjecture, and categorically false statements."

In its point-by-point rebuttal, Zeta first addressed concerns about its accounting processes. According to the company's statement, "Zeta is confident in its internal accounting processes and controls." The company emphasized that Deloitte, its independent auditor, performs annual audits of its financial statements. Notably, Zeta pointed out that Culper's report incorrectly identified E&Y as their auditor, using this error to question the report's overall accuracy.

Regarding revenue recognition practices, Zeta defended its evaluation of contracts and determination of revenue recognition in accordance with Generally Accepted Accounting Principles (GAAP). The company stated that its management regularly briefs the Audit Committee of the Board of Directors on relationships with customers who are also vendors. According to Zeta, "In the aggregate, revenue generated by Zeta's customer relationships that are also vendors is insignificant."

The company specifically addressed the allegations about data collection practices, stating, "Zeta is confident in its data collection practices, policies and processes to ensure compliance with applicable laws." The statement explicitly denied operating "consent farms," asserting that Zeta "has made significant investments in its data protection, data governance, and privacy oversight and is regularly audited and reviewed by partners and clients."

Regarding the specific allegations about Apptness and ArcaMax, Zeta provided concrete figures to counter the report's claims. According to the company, "the total contribution of Apptness and ArcaMax to Zeta's business is not material. Together, through the third quarter of 2024, their year-to-date revenue contribution is less than 3% and they make up less than 1% of Zeta's data assets." The company noted these contributions have trended downward.

To further discredit the report's claims, Zeta pointed out another alleged inaccuracy regarding Digital Media Solutions, stating it "is not a material customer or partner, as demonstrated by its trailing twelve-month revenue being less than $200,000 as of September 30, 2024."

The company concluded its response by emphasizing its commitment to transparency and open communication, directing investors to review the company's financial statements and other related materials at its investor relations website. This approach aimed to demonstrate confidence in its financial reporting and business practices while encouraging stakeholders to examine the primary source documents themselves.

The timing of Zeta's response, issued on the same day as the short seller report, appeared designed to quickly address market concerns and maintain investor confidence. The rapid and detailed nature of the response suggested the company had anticipated potential scrutiny of its business practices and was prepared to defend its operations and reputation.

Financial Community Reaction

In the wake of both the short seller report and Zeta's response, the financial community's reaction has been mixed. The company has scheduled a webinar for November 20, 2024, to be hosted by William Blair, where it plans to discuss its "robust accounting processes and controls, data collection policies, and privacy oversight."

Legal and Regulatory Implications

The conflicting narratives between Culper Research's allegations and Zeta's denials have attracted attention from the legal community. Law firm Hagens Berman announced an investigation into the matter, though it's important to note that such announcements often follow short seller reports as a matter of course.

Market Impact

The immediate market reaction to these developments reflected the uncertainty created by the competing narratives. The company's upcoming webinar and future financial disclosures will likely play a crucial role in shaping market perception and resolving questions raised by the short seller report.