Going... Going... Gotcha!

SAN FRANCISCO (08/28/2000) - Edwin Stoddard, a computer systems analyst in McKenney, Virginia, loves bidding at online auction supersite EBay Inc., successfully buying computer components and software. So when he was looking for a digital camera, he went directly to EBay, where he found a seller auctioning off 15 Sony digital cameras with a beginning bid of US$400. He placed a bid of $542.

When the auction closed, Stoddard got an e-mail from the seller, a man named Robert Guest, who notified him that he was one of the successful bidders and instructed him to send $557 (including shipping) via a postal money order.

Guest gave him a post office box address and said to expect the camera in three days.

"I waited. And I waited," says Stoddard. "I started to get a funny feeling about it." Two weeks later, he got an e-mail from someone else who had successfully bid on one of Guest's 15 cameras. "He hadn't received anything and wondered if I had," remembers Stoddard. Then he got another, similar e-mail from another bidder, and then another. Over the next three weeks he heard from ten other buyers.

The group discovered that Guest had held prior auctions for watches and jewelry, and his EBay feedback ratings contained glowing reviews. But this impressive resume turned out to be a front for a big-time scam. Over 30 people had sent him money without receiving a thing, and the comments in his feedback page were from people who never bought his wares.

Altogether, Guest's scam netted him $37,000. But after two months of swindling, he got caught by federal and local government officials. Guest, a former pizza delivery manager from Blue Jay, California, said he used the stolen funds to feed his addiction to video poker. He's serving 14 months in prison for fraud and has been ordered to pay over $100,000 in restitution to his victims.

Scams on the Rise

As guest's case illustrates, online auction fraud is booming. It ranks as the most common type of Web scam and accounts for more than half of all consumer complaints on the Internet, according to the Federal Trade Commission. In fact, the number of complaints rose from 100 or so in 1997 to 10,700 in 1999.

"Anytime there's rapid growth in an industry, you also see rapid growth in fraud," says FTC Assistant Director Paul Luehr.

Most reported scams involve person-to-person auction sites, but fraudulent activities are becoming more sophisticated and are spreading to business-to-business auction sites, as well. B2B auctions--which can involve large-scale sales of raw materials and office equipment--provide opportunities for increasingly large frauds. In one recent case, I-Escrow, a Web-based escrow service, stopped a six-figure sale of satellite equipment to a buyer who tried to pass off a forged check. I-Escrow noticed discrepancies after the buyer's own information raised suspicions.

"B2B fraud is really coming to life," says Vince Gottman, senior director of customer support at I-Escrow. "Three years ago, most online auction purchases averaged about $20. Today, it's not unusual for [I-Escrow] to handle $100,000 to $200,000 deals."

Most of the major auction sites, such as Amazon Auctions, Auctions.com, EBay, and Yahoo, are taking steps to prevent fraud--albeit fewer than they could and should take. Government agencies are entering the fray as well, but they lack the finances and the personnel to chase every con artist. As a result, some victims have begun resorting to online vigilantism: warning potential victims and following scammers' digital tracks as the crooks change e-mail identities or acquire extra ones.

For the unscrupulous, the anonymity of the Web makes perpetrating fraud at an auction site alluring, and this anonymity will attract more-sophisticated con artists, too. You take risks whether you're the seller or the buyer. Should you stop using auction sites altogether? Not necessarily. You can protect yourself by being a smart shopper, by reading the transaction terms, and by knowing how to negotiate an auction sale.

Con Artists At Work

Hundreds of con artists are prowling Web auctions for their next victim. It's all too easy. Swindlers can easily set up fake identities by signing up for free e-mail accounts using false information. And to keep their identities concealed, deceptive sellers demand payment in the form of cash or a money order, since these are hard to trace. You should pay with a credit card, if possible, so you have a record of the transaction; in most cases, you can get a refund if you don't get the product.

Why would normal, intelligent people fall for a scam? "If it looks reputable, we trust it," says Philip McKee, assistant director of Internet Fraud Watch, a program of the National Consumers League (NCL). "And it's easy to look reputable online. It's not at all difficult to set up a personal Web site or an auction site with grammatically correct descriptions of goods and fancy digital pictures."

Con artists use varying methods to conduct their shady deals. Some crooks, like Guest, auction off merchandise they don't have or don't intend to give up.

That's what happened to Deborah Salem, a horse farm manager in New Jersey. She wired a seller--who supposedly lived in Romania--$1584 for a Compaq notebook she bid for on EBay. The laptop never arrived. When she e-mailed the seller, she never got a response. "I'll never buy anything on an online auction again," Salem says. "It's just too risky." She logged on to the FBI's Web site (www.ifccfbi.gov), where a case number was assigned to her incident. But the agency has yet to prosecute anyone.

Cons also lie about products to induce sales. Jon Marshall, a computer engineer in Texas, got scammed when he bought a $1600 IBM ThinkPad on EBay: It had a slower processor and a smaller hard drive than advertised. "I e-mailed the guy, and he said he'd send me a refund to make up the difference in [features], but he never did," says Marshall. "Four weeks later, the seller's e-mail address was no longer good."

Marshall had paid with a credit card and tried to rescind the deal. But the credit card company refused because it had conducted a legitimate transaction with PayPal.com, a Web-based third-party payment service that Marshall had used to pay for the laptop. Customers enjoy limited protections when they use a credit card at PayPal. The company now reimburses defrauded customers--if the seller had previously passed PayPal's verification process. If a seller wasn't verified, however, customers aren't covered.

Despite his mishaps, Marshall still shops at auction sites--albeit more cautiously. "I finally found the ThinkPad I wanted on EBay," he says. "But this time, I made sure that the seller was local. I met him and closed the deal in person."

Most online auction transactions, though, can't be done in person. Shoppers often rely only on a site's information about the seller. Feedback forums, for instance, are places on auction sites where bidders or sellers can post feedback about trading partners. But the Web's anonymity lets dishonest sellers manipulate these areas.

"I've had cases where con artists have multiple e-mail addresses and use these different names to boost their ratings to build a stellar but false reputation," says Christopher Painter, an attorney with the Deputy Chief of the Department of Justice's Computer Crime and Intellectual Property Section.

EBay's forum formerly allowed users to post numerical ratings about sellers and buyers without verifying that transactions between those parties had actually taken place.

One way to protect yourself from such a scam, suggests Painter, is to check the value of previous auctions when you look at feedback. If a seller has great feedback for a series of $100 sales, but you're bidding on a $1500 computer, then you might want to reconsider the purchase. For this reason, Yahoo Auctions includes the values of sellers' previous auctions in its feedback forum.

Anonymity also lets swindlers participate in their own auctions under a different user ID--a practice called shilling--to drive up auction prices. And if the seller is using a different user ID, it's difficult to spot the fraud and stop it. Recently, EBay canceled a $135,805 sale of an abstract painting to a computer executive because the seller had violated its rules by bidding on the painting himself.

One way to spot a shill, according to the NCL, is to determine if the seller's and a bidder's e-mail addresses include the same ISP domain name. That isn't definitive proof, but it can be reason for suspicion. If you suspect a shill even though domain names differ, check the seller's feedback postings. Is the suspicious bidder leaving positive feedback on the seller? Also, look at the bidding pattern--shills tend to bid early and high in an auction to set a tone.

Of course, none of these methods is foolproof. Fortunately, if you make a bid but then have doubts, most sites will allow you to cancel it as long as you can give a reason.

Third-Party Victims

Even more complicated than shilling, according to the Internet Fraud Council, a private, nonprofit organization that monitors online fraud, is the triangulation scam. Such a scheme involves three parties: a con artist, shoppers, and an online catalog company. It is this third party that gets ripped off. The swindler purchases merchandise from e-merchants using stolen identities and credit cards, then sells the goods at auction sites to unsuspecting bidders who pay via wire transfer. The scammer then sends the items to winning bidders, thereby converting stolen computers and VCRs into cash. "This type of scam is unique to the Internet and is fostered by the high degree of anonymity and speed inherent in online transactions," says Paul Fichtman, chairman of the IFC. Scams of this kind are still going on, and law enforcement officials have yet to prosecute such a case.

Though the fraud incidents that have been uncovered indicate the crooks are most often sellers, buyers can also be swindlers. Shoppers have used stolen credit cards to purchase goods at auction sites. They've also asked their credit card company to issue a refund for purchases they received by falsely attesting they never got the merchandise. Sellers are out the money if they can't prove they shipped the item (by providing a tracking number, for instance). More commonly, says Holly Anderson of the NCL, a dishonest buyer simply sends a bad check.

See You In Court

Last April, six defrauded shoppers filed the first class action suit of its kind against EBay, challenging its user agreement. The plaintiffs purchased autographed sports memorabilia that turned out to be forged copies. They argue that California law requires dealers and auctioneers of sports memorabilia to provide a certificate of authenticity to the buyer.

If the lawsuit is successful, all online auction sites will be required to authenticate at least the sports memorabilia that's for sale. "If we win," says James C. Krause, a San Diego attorney who filed the suit, "the wall that most auction sites hide behind will be cracked. Other suits could follow, extending liability beyond sports memorabilia."

Shielding The Sites

Auction sites are realizing that mounting fraud is likely to hurt business. But smaller sites aren't assuming too much responsibility for policing auctions, because they worry they'll be sued if something goes wrong. "They're [also] worried that too many safeguards would give the impression that [they] are not to be trusted, or that they aren't safe," says the NCL's McKee. And since auction sites get a percentage from each sale, most of them are focused on increasing volume rather than minimizing fraud.

Paul Luehr of the FTC says that some sites are lax in protecting users: "It's the smaller, newer sites, interested in carving out a niche, that typically have few fraud-prevention mechanisms in place." Some B2B auction sites, including TradeOut.com, don't provide even a feedback system.

The big auction sites, though, are taking action to minimize scams. "[They're] realizing that fraud may discourage users from participating in auctions and may affect their business," says Luehr. So they're establishing mechanisms to protect users. Amazon.com Auctions and EBay, for example, offer buyers a guarantee on purchases, though many other auction sites do not. (At Amazon, items are guaranteed up to $250, with no deductible.) Another mechanism is a system that allows the bidder to pay by credit card to the auction site--the function of Amazon Payments service and EBay Billpoint. The site then sends a direct deposit to the seller's checking account.

"It adds security because the buyer doesn't have to send cash or a money order, or reveal the number of a credit card," says Jeffrey Blackburn, general manager of Amazon Auctions. "It also lets us verify a seller's bank account and social security number." About 70 percent of Amazon's auction listings offer the Amazon Payments option, which guarantees purchases up to $2500.

Amazon also has a fraud-investigation team that ensures sellers are who they profess to be. Amazon and EBay require bidders and sellers (and Yahoo requires sellers only) to provide a credit card number, an address that matches the billing address on the credit card, and a phone number. "We think a credit card can be a disincentive to committing fraud," says Kevin Pursglove, spokesperson for EBay. Even so, crooks like Guest can evade that by using illegitimate credit cards.

EBay insures transactions up to $200 (with a $25 deductible). Claims filed with EBay go to its fraud investigation team, and into the FTC's Consumer Sentinel database. EBay's fraud team monitors complaints, sometimes halting auctions or removing user privileges. The site offers an escrow service, I-Escrow.com, which holds payment until the bidder has inspected the purchase (see "Payment Tips," at left). EBay's software can detect deceptions like shilling, and it will now let you rate users only if you've conducted a transaction with them.

Government Takes Action

Federal, state, and local law enforcement agencies are joining forces and stepping up efforts to tackle online auction fraud, but don't count on them to get your money back. The problem is too great for any one task force, so agencies are sharing information and resources. The FTC calculates that, since February, local, state, and federal agencies have filed at least 35 Internet auction fraud cases. Since 1994, the FTC itself has brought 140 actions against 406 defendants in Internet auction fraud cases. Crooks have had to pay fines or even serve prison time.

As part of the government's increased fraud surveillance, the FTC recently launched Project Safebid to train local, state, and federal law enforcement officers in fighting auction fraud and encouraging cooperation in investigating and prosecuting Web auction scam artists. The agency also established Consumer Sentinel, a consumer fraud database that holds over 250,000 complaints and is accessible to more than 200 U.S. and Canadian law enforcement agencies.

In May, following the lead of the FTC, Attorney General Janet Reno unveiled the Internet Fraud Complaint Center, which will be supported by the FBI and the National White Collar Crime Center. The complaint center has established a Web site as a central repository for allegations of fraud--a one-stop-shopping approach for tackling the problem.

For the most part, though, the Attorney General's offices have focused their efforts in prosecuting high-profile cases such as Robert Guest's, hoping to set an example that might deter similar crimes. But because online auction fraud is only one of the many problems government agencies must address, lots of fraud cases aren't investigated because the amount of money involved is small. "If someone has defrauded another out of $25, it's still fraud, but it's highly unlikely any law enforcement agency is going to assign the case to anyone," says Painter. The government hopes the new databases will help them track con artists and aggregate cases. "We'll be able to see that the one scam worth $25 was actually part of a larger scam worth $50,000," Painter adds. "Then we can rationalize spending a lot of money to further investigate a case."

What's Next

Fraud will increase with the growth of Internet shopping and online auctions.

"What we should see in the future is that con artists will become more sophisticated and be able to defeat the safeguards," says Jack Levin, a sociologist and criminologist at Northeastern University.

Most fraud watchers say auction sites can and must do more to help fight fraud.

Sites should follow the lead of Amazon, EBay, and others by requiring users to submit a credit card number, address, and phone number. They also could bar users from submitting free e-mail-based addresses. Another option may be to require free e-mail services to get identifying personal information from their users. Auction sites could offer insurance and escrow services. As EBay is now doing, they could forward fraud complaints to the FTC's database.

Government agencies can allocate only limited resources to auction scams. But they must ensure that law enforcement officials are well informed about such tools as the FTC database and the FBI Web site for fraud complaints.

Ultimately, fraud watchers say that preventing scams comes down to savvy buyers and sellers. Organizations such as the FTC and National Consumers League publish guides to help buyers and sellers avoid online auction fraud.

As for Stoddard, who lost $557 on Robert Guest's scam, he still shops at online auctions. "You can find things there that you can't find in stores," he says.

"And often for cheaper prices." But he now makes his purchases a little differently. He always checks EBay's feedback forum. "At least now you can be sure that the person posting the feedback has actually bought something from the seller." He also enters an auction only if the product being sold is what the seller has sold before. If he spends more than $100, he pays with a credit card or through a Web-based service such as PayPal.

So far he hasn't received money back from the Guest scam. "I don't expect to receive much or anything at all," he says. Despite his bad experience he'll continue to shop at Web auctions. "But I warn people now: Don't be afraid, just be wary."

Auction Tips

Sniffing Out Scams a Mile Away

As you shop around for your next PC or an autographed copy of Dr. Ruth's Sex for Dummies, be aware of scammers' tactics. Here's what you can do to protect yourself:

* Do your homework. Know what you're bidding on, its value and warranty, and the seller's return policy and shipping charges. Insist that the shipment be insured.

* Check the feedback ratings. If the seller has bad or little feedback, don't bid.

* Check the seller's background. Get a seller's physical address and other identifying information, such as a phone number.

* Avoid shills (sellers or their cohorts bidding on an item to boost its price). See if the seller's and the shill's e-mail addresses have the same ISP domain name. If they do, withdraw.

* Evaluate your payment options. If possible, use a credit card or an escrow service.

* Read the terms of your credit card. The National Consumers League reports that some auction sites bill charges to credit cards as cash advances, not as standard purchases, and these may not be fully covered by the cards' dispute rights.

* Don't bid if you still feel uncomfortable about a listed item for any reason.

A similar one will likely be available from a reputable seller.

* Fill out a complaint form on the National Consumer League's site if you've been defrauded, and talk to an NCL counselor about how you can avoid the same problems in the future. The site will also help you file a fraud report that goes to the FTC and your state's attorney general. Report the scam to the U.S.

Department of Justice and to the FBI's Internet Fraud Complaint Center at www.ifccfbi.gov.

* Read the FTC's Internet Auctions: A Guide for Buyers and Sellers, downloadable from the Web at www.ftc.gov. The NCL also offers Be E-Wise: How to Shop Safely Online at www.nclnet.org. If you are in doubt about a transaction, contact an NCL counselor at 800/876-7060 or www.nclnet.org for advice.

Consumers Fight Back on Their Own

Site Guardians

Recalling real posses of the Old West, some Netizens are building virtual posses to track scam artists and warn shoppers of a con in progress.

Robert Denton of Michigan collects watches. He spends at least an hour and a half nightly on EBay monitoring watch auctions and spotting clues to fakes in photos. "I've seen listings for Cartiers, Guccis, and Rolexes that normally sell for $1000 and above, but on the site, the seller offers them for $10," says Denton.

He's written EBay over 50 times to inform the company of a fraud. He always gets a canned e-mail response, thanking him and saying the auction will be investigated. But the fraudulent auctions remain posted. Frustrated, Denton has taken to e-mailing the high bidder of a fraudulent watch auction, telling the buyer that he or she is buying a fake.

"I get letters of thanks all the time," Denton says. But he's also received death threats from sellers who want him to mind his own business. Denton does not take those threats too seriously, but EBay has warned him that he's interfering with auctions and must stop.

Why does he bother to get involved? "I feel an obligation to inform the buyer," he says. EBay passes along all fraud claims to the FTC and, to protect shoppers, insures purchases up to $200.

Payment Tips

The Escrow Option

Several online escrow services want your business, but the most prominent are I-Escrow.com (www.iescrow.com) and escrow.com (www.escrow.com). Both charge similar fees--1 to 4 percent--depending on the sale amount and the payment method (credit card, check). Make sure that the service is licensed, which provides additional protection for consumers, since it abides by a set of regulations. Read the fine print and any info in the online terms of service statement on how disputes are handled.

Other smart escrow tips:

**When the the amount of money is more than you want to risk, then escrow is the way to go.

**Before bidding, ask sellers if they'll use escrow. If they refuse, don't bid.

**Escrow fees can be paid by the buyer, seller, or split. Make sure it's clear who pays. On high-ticket items, negotiate.

**Escrow services typically require buyers and sellers to resolve disputes themselves. Find out if the service will act as arbiter.

**Sellers should watch out for shoppers who may return a fake or a damaged version of the original. Mark items with an impossible-to-duplicate symbol, such as a signature. --Gregg KeizerFor more on online auctions, see www.pcworld.com/oct2000/auctions. Nina Schuyler is a San Francisco-based writer and author of The Business of Multimedia (Allworth Press). Gregg Keizer is a freelance writer in Eugene, Oregon. Chart data produced by PC World Senior Editor Ed Albro.

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