I remember hearing about this a year ago but it's really in full swing now. In fact the serps are infested with them. I'm sure it will all work out in due time though.
Obviously with a vast network of existing links visitors are bound to click through - finding something they most likely were not looking for.
Although you may gain short term ranking - you lose big time in the brand department.
Personally I prefer a satisfied customer over a dissatisfied visitor.
In addition, there was a reason the domain was dropped, which could include being bankrupt or scam.
In this respect you can easily inherent whatever problems arose to the domains original demise including massive support and customer service calls, which will eat away all that enormous profits you initially believe you will make.
Adding all those previous domain customers are unlike to become your loyal following... the previous owners would most certainly leave a bad taste in their mouths.
I recently found one whose owner could not afford renewal. It got snapped by a cybersquatter.
I contacted both. The original owner stated he would like to have his domain back. I am in the process of buying it back for him. In exchange, he said he will be more than happy to credit us with statement on his home page:
"Sponsored by..." or
"My favorite Widget site is ..."
We won´t get much traffic but a link from a PR7 site for $50 will not hurt...Win-win.
In the Google serps it still seems to keep those sites up high but not at the top. The focus has changed to buying text ads anyway.