Their traffic decreased DRAMATICALLY when competitor, http://bigdeal.com showed up on the scene. That and the sudden uptick in clones is what probably caused their failure.
I find it irrational that people got more worked up about Swoopo than they do about gambling/lottery business models. Unlike with gambling you are able to purchase a product before an auction ends and use all the credits you had used on it. It's a pretty transparent model provided you think it through. It's recreational consuming that leverages a host of psychological principles really well - love it or hate it.