France-based ad tech company Criteo — a leader in the retargeting space — has responded angrily to the latest allegations of ad fraud, describing them as “unsubstantiated and false” and attacking a blogger’s decision to publish under a nom de plume.

The claims stem from its legal dispute with US rival SteelHouse and, more recently, from an analysis by a blogger on US investment site Seeking Alpha.

Criteo is a Nasdaq-listed company with a market capitalisation of nearly $US2.5 billion. It settled its dispute with rival SteelHouse in November (prior to the commencement of legal discovery) after a vicious little ad fraud case dating back to the middle of this year.

What prompted its latest angry reaction was an enquiry by Which-50 to its corporate head office, asking it to respond to accusations (see below) published on Seeking Alpha.

On Sunday, Which-50 asked Criteo via its Australian media representatives to respond specifically to some of the claims in the report. However, rather than addressing each point, Criteo launched a broadside at Seeking Alpha and a blanket denial of any inappropriate practice.

Criteo’s response, which we received overnight, is published in full:

“The commentary published on Seeking Alpha by one anonymous contributor includes a number of unsubstantiated and false claims directed at Criteo and its business model. Criteo’s 90%+ customer retention rate (maintained for over 20 quarters) is ample proof that there is no validity to the claims in this article. Criteo is the global market leader in delivering digital performance advertising.

We do not use adware. We make money only when our clients do, because our business model is fully aligned to driving their sales. We rigorously monitor suspicious click activity automatically to ensure that only genuine clicks are charged to our clients. Criteo’s systems are regularly audited by external auditors.”

UPDATE: Criteo has now published a further rebuttal on its Investor Relations web site. In addition to the points made above Criteo more directly references the author of the post whom it criticises.

“By his own admission, the author’s motives in publishing the post were to obtain financial gains by short selling Criteo’s stock and to entice other investors to adopt the same conduct. Based on the content of the post, the author failed to clarify any facts relating to Criteo’s business model with Company officials before releasing the post.” UPDATE ENDS.

Ad fraud is shaping up as huge global problem and, at a projected scale of $50 billion by 2025, it is expected to be the second biggest money spinner for organised crime around the world unless trends can be reversed.

While Criteo and SteelHouse are in the spotlight today, they are not alone. More recently it was Dentsu — a company that controls a quarter of the advertising in Japan — which had to admit it had discovered “inappropriate operations” in its Japanese operations.

The industry itself believes that as much as 11 per cent of inventory on third-party networks could be fraudulent — according to data seen by Which-50.

And dodgy inventory is not the only problem.

Even Facebook was recently smacked around when it had to acknowledge it had “overestimated average time spent watching videos by between 60 per cent and 80 per cent”. In Facebook’s case there was no suggestion of fraud — just stupidity.

Facebook’s admission sent shockwaves through the industry, but it largely received the benefit of the doubt when it disclosed the error (which it attributed to its algorithms) and adjusted accordingly.

The back story

Before we get into the details, here are some things to consider. Having spent 30 years in media, we caution you that accusations are simply that — none of the claims against either company were tested in court. Furthermore, from long experience, “facts” that seem definitive and damning can actually be explained away legitimately.

Against that, however, the accusations in this case are very specific and surprisingly numerous.

It is also tempting to think Criteo might be able to avoid fallout from the stories which have surfaced since the dispute began. Investors certainly seem to think so, based on its positive share performance since the announcement of the settlement — but it might be too soon to say.

That’s because Criteo and SteelHouse both decided to end their standoff only after unloading every barrel on each other — then reloading and unloading again before finally abandoning a policy of mutually assured destruction. By they time they had kissed and made up, however, their public spat and subsequent legal filings left some very serious questions unanswered.

Back in June, Criteo accused rival SteelHouse of running a counterfeit ad click scheme. SteelHouse denied the accusation and launched its own counter claim — accusing Criteo of injecting adware into users’ computers and of buying inventory from “non-reputable sources” to bump its numbers.

By August, Criteo had assembled a bunch of former SteelHouse clients to back its claims. Then, in September, SteelHouse issued further claims arguing that Criteo’s login files were “indicative of adware, bots, click farms, or other code”.

All very entertaining stuff, unless it’s your ad budget they happen to be arguing about.

Criteo carries an extra burden. It’s a public company, so it is responsible for a lot of money. Other. People’s. Money.

By late October, a judge had dismissed the preliminary injunction sought by Criteo. Then, in November, the companies officially called a truce, releasing a joint statement that “Criteo and SteelHouse provide different business solutions, based on distinct attribution and pricing methodologies, to their clients. Through the legal process, both companies, as well as the online marketing industry, have gained greater clarity about the companies’ respective solutions”.

Yeah yeah, nothing to see here.

No doubt both hoped that was the end of the matter. Not so fast.

The allegations raised by SteelHouse during litigation in the US — which will now not be tested in court as the parties have agreed to settle that litigation — demand answers.

Among those claims against Criteo by SteelHouse as reported by  investment site Seeking Alpha:

  • Some 25 per cent of Criteo’s 2016 projected revenues are based on fraudulent clicks;
  • Over 50 per cent of Criteo’s clicks (as measured by SteelHouse) had no original source (6x greater than industry average), suggesting potential “bot” traffic;
  • 3.6 per cent of Criteo’s users generate 25 per cent of its clicks;
  • Criteo is engaging in “click-cluster generation” even after the customer has purchased a product;
  • 44.9 per cent of Criteo clicks come from “clusters” — 13x the industry standard;
  • SteelHouse found one IP address that clicked on a Criteo ad 20,647 times across 96 of all 99 advertisers queried.

In Which-50’s view these issues constitute a clear matter of public interest for our industry. We were a little surprised that in its formal response to our enquiry, which listed these points above, Criteo chose not to address them — although it does directly deny using adware.

The argument that “Criteo’s 90%+ customer retention rate (maintained for over 20 quarters) is ample proof that there is no validity to the claims in this article,” is irrelevant. Customer retention does not prove anything of the sort, frankly.

There may be a legitimate reason, for instance, why “one IP address … clicked on a Criteo ad 20,647 [times] across 96 of all 99 advertisers,” or it may simply be that SteelHouse was talking through its hat when it levelled this accusation. Either way, this point, along with the others, needs answering.

Those 90 per cent of retained customers are entitled to that, surely.

At this stage let’s also remember there are two sides to the litigation. SteelHouse, which unlike Criteo does not seem to operate in Australia, should also address the issues raised about its behaviour.

Criteo alleged, “This case is about a new click fraud scheme hatched by SteelHouse — a performance-based online marketing vendor — to steal credit for online sales attributable to its competitors and partners, and to wrongfully take credit for direct traffic attribution (sales to Internet shoppers who reached the e-tailer’s web site by typing the e-tailer’s web address into their web browsers, not by clicking on an online advertisement placed by Steelhouse).”

That was just claim number one — and was followed by another 112 accusations from Criteo.

Seeking answers

A week ago (30 November) ago a blogger on investment site Seeking Alpha published a 35-page review into Criteo’s business practices and the conclusions are damning. The author of the Seeking Alpha story writes under the nom de plume The Friendly Bear — a point Criteo argues undermines the validity of the report.

We emailed the Seeking Alpha author, who said he contacted Criteo about the story and received a response which he described as surprising and as having “more holes in it than I could have ever imagined.

We also contacted one of the sources quoted in the Seeking Alpha report: Harvard Business School Professor Benjamin Edelman. In an emailed reply, Edelman made it clear he would not be commenting further on the story.

The Seeking Alpha report, headlined “‘Shakedown’: Advertisers ‘Swindled’ By Porn Traffic, Bots, And Adware As Criteo Settles ‘Click Fraud’ Litigation” gives you a pretty good flavour of the story.

Among the key findings from the Seeking Alpha story (and quoting them directly):

  • We analysed metacode relating to Criteo and found massive red flags including Criteo’s undisclosed relationship with Montiera, a notorious adware company, and Criteo’s ads on numerous shady web sites with suspicious traffic.
  • We join a chorus of skeptics, including vocal Criteo critic and Harvard Business School Professor Benjamin Edelman, who have publicly questioned the veracity of Criteo’s “return on ad spend” metrics.
  • Our analysis raises real questions about Criteo’s metrics — i.e., placing ad on a shady web site that derives traffic from porn, inconceivable margin profile, nefarious adware injections, etc.
  • Criteo’s decision to settle with SteelHouse (represented by Latham & Watkins) prior to discovery is particularly worrisome because Criteo initiated the action and our analysis appears to corroborate SteelHouse’s claims.
  • We believe advertisers are potentially wasting vast sums of money on Criteo and could pull back spend with limited sales impact, potentially invalidating Criteo’s entire business model, or ‘raison d’être’.

The writer says the evidence he has uncovered suggests the market is reading the wrong message into the settlement and that Criteo is acting from a position of weakness.

He also criticises the “black box” opacity of Criteo’s technology, which he compares unfavorably to Enron’s energy trading algorithms.

He writes, “Our own forensic analysis into Criteo suggests the market is potentially making a huge mistake by ignoring the claims that SteelHouse made against Criteo. We believe we have surfaced evidence (including Criteo’s ties to a notorious adware company, and Criteo’s advertising relationships with highly suspect web sites) that appear to corroborate many of SteelHouse’s claims. We provide just some of our evidence in this report.”

He then cites research by Edelman, which runs a consulting business in the ad fraud space.

In a presentation in April 2015, Edelman told a UK investor show that “Criteo systemically buys adware injection inventory onto the very site where advertisers already have reached the user on the advertiser’s own site — I have caught this dozens of times for clients and each time Criteo apologises but each time they do it again — always through a new partner.”

In the meantime here is the full and complete joint statement from Criteo and SteelHouse on their settlement. It was issued on November first, the day before Criteo’s latest financial results.

“Criteo (NASDAQ: CRTO) and SteelHouse have dismissed their respective claims, ending the lawsuit filed in the U.S. District Court for the Central District of California entitled Criteo S.A. v. Steel House, Inc., Case No. 2:16-cv-4207-SVW-MRW.

Criteo and SteelHouse provide different business solutions, based on distinct attribution and pricing methodologies, to their clients. Through the legal process, both companies, as well as the online marketing industry, have gained greater clarity about the companies’ respective solutions.

Criteo and SteelHouse agree that the focus should be on continuing to improve transparency in the ad tech industry.”

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