The bombshell suit, filed in the U.S. District Court in New Jersey, also alleges that Yahoo used its Overture pay-per-click advertising network to make money from the practice of typo-squatting, in which slight variations of popular URLs are registered so as to serve ads to users who type in misspelled versions of domain names.

A Yahoo spokesperson declined comment on the suit. "We will vigorously defend our position," the company said in a statement sent to eWEEK.

The suit comes less than a month after Edelman blew the lid off a spyware-powered click-fraud scam using the Yahoo-owned Overture pay-per-click network to swindle advertisers. Yahoo has also been closely linked to Direct Revenue, an adware vendor that was recently sued by the New York attorney general's office.

According to Edelman's suit, Yahoo has routinely breached agreements with advertisers and placed advertising in spyware programs that serve annoying pop-up ads. Instead of "highly targeted" ads being placed on "high-quality" sites, Edelman alleged, ads are actually routed to low-quality sites without bona fide content, constituting syndication fraud.

To read more about a spyware-powered click fraud that was linked to Yahoo, click here.

The suit also alleges that Yahoo's pay-per-click network is easily abused when competitors click on an advertiser's ad for the sole purpose of hiking that advertiser's cost.

"[Instead] of safeguarding against such abuse, finding such practices and diligently putting a stop to them, [the] defendants have actually engaged in such abuses," the complaint said.

Another explosive claim in the suit is that Yahoo "knowingly manipulated" the weaknesses in its Overture advertising system by increasing the volume of improper ad displays during financial reporting periods when the company was at risk of failing to meet investor expectations.

"Advertisers want no part of spyware-delivered advertising," the suit said. "Staff of the FTC and the New York attorney general's office have repeatedly instructed advertisers to be wary of spyware-delivered advertising. Furthermore, advertisers recognize spyware for the scourge that it is, and they therefore seek to keep their ads out of spyware," it said.

In Yahoo's case, the suit noted that Yahoo's own policies make it clear that syndication partners must not place ads in pop-ups or pop-unders, two ad-serving methods.

The suit referred to existing litigation against adware vendors Direct Revenue and Intermix, where it was disclosed that Yahoo places advertising in spyware provided by those companies.

In the Direct Revenue case, the New York attorney general released financial statements to show that the adware firm earned $226,964 from showing Yahoo Overture pay-per-click advertising during April 2005, with similar amounts for May and June 2005.

The class-action suit lawsuit also drew attention to Yahoo's association with typo-squatters who deliberately take control of misspelled domains for the sole purpose of serving cost-per-click advertising.

"Particularly egregious is that defendants even charge their advertising customers for ads shown on typo-squatting sites targeting those customers' own names," the suit alleged.

Yahoo Overture ads served on domain parking and bulk registration sites are also included in the suit.

Google's domain parking service is also known to be serving pay-per-click ads to thousands of typo-squatting sites. Researchers at Microsoft have identified a large-scale typo-squatting scheme that uses multilayer URL redirection to game Google's AdSense for domains program.

Microsoft has since released a lightweight tool called Strider URL Tracer help pinpoint large-scale typo-squatters.

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