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Fraud lingers despite eBay efforts

If the auction site is a golden city, con men and scam artists lurk in the back alleys. But that's not stopping the company from continued double-digit revenue growth.

Joseph D'Amelio thought he'd found a great deal on eBay: a 2000 Porsche 911 for $50,000.

After talking to the seller and getting a copy the car's title sent to him in advance, he wired the money to an escrow company--and fell victim to an elaborate scam. The seller had actually hijacked a legitimate eBay member's account and set up a fake escrow service.

Out the money and angry at eBay, the Atlanta resident is vowing to never shop there again: "This wasn't $50. This was $50,000. But there was no help," said D'Amelio, who said he got form letters back from eBay when he alerted them to the fraud. "They're useless in a bad situation. I tell everybody to stay away from eBay."

D'Amelio's complaint strikes at the heart of the small but persistent problem of fraud at eBay. Although the company downplays fraud as affecting only one one-hundredth of one percent to one-tenth of one percent of all auctions, eBay's business model rests on buyers and sellers trusting each other. A whiff of a scam, and the deal is off--and eBay loses not only the commission, but also, in cases like D'Amelio, a once loyal customer.

And D'Amelio, who once bought a $2,000 Cartier watch off eBay, is just the kind of big-ticket buyer eBay wants to attract.

"The way that fraud affects all of us here is it's a huge impediment to get new buyers in particular to come on to the site, because they are afraid of it," Mike Jacobson, the company's general counsel, told eBay members gathered last weekend at an "eBay Live" conference. Fraud, he said, is one of the company's "biggest issues."

While not a new issue, online auction fraud is increasingly important for eBay as the high-flying company pushes aggressively into higher-value auctions, part of its overall goal of reaching $3 billion in revenue in 2005. To get there, the company needs buyers coming more often and spending more money. Already, technology products are eBay's biggest sellers, and the pricier eBay Motors section has quickly become a top category.

But scam artists target big-ticket items, too, forcing eBay into an ongoing game of one-upmanship in erecting more and more security measures. In June, the company added new fraud-detection software and in May announced a new authentication program with Verisign. But some eBay categories are more prone to fraud than others, eBay spokesman Kevin Pursglove said at a recent shareholder meeting.

"Sports memorabilia has had a lot of fraudulent activity for years," Pursglove said, noting that such items also have a high fraud rate in the offline auction world. More expensive items, such as computers and consumer-electronics products, also have higher fraud rates, he said.

Some big-ticket cons have been well documented. Earlier this year, federal charges were filed against three people accused of falsely boosting eBay bids up to over a million dollars on collectible glass. In another case, two people pleaded guilty to their role in boosting bids to over $100,000 for a fake Richard Diebenkorn painting.

Even small-ticket items can attract scam artists. Earlier this year there was a rash of so-called account hijackings like the one D'Amelio described.

Auction fraud makes up 10 percent of all online and offline related complaints to the Federal Trade Commission and an online watchdog group, the National Consumers League's Internet Fraud Watch, said auction fraud made up fully 70 percent of their complaints.

"A lot of people that we get complaints from have participated in online auctions before and never had any problems," said Susan Grant, director of Internet Fraud Watch. "It lulls you into thinking that it's just one nice Internet community out there, when in fact there are some people who don't have what they are advertising at all or have grossly misrepresented those items."

eBay's new defenses
To curtail the problem, eBay has several new programs to identify likely frauds and beef up checkpoints to dissuade scam artists.

• Tracking software: New anti-fraud software collects data on known fraudulent auctions to predict and prevent future problems. Chief Executive Meg Whitman recently joked that the program may flag a "low-cost computer reseller with a home domicile of Romania," allowing eBay to monitor the seller or tip off authorities.

• Authenticating users: Working with Verisign, eBay has unveiled an authentication service that uses databases of phone numbers, addresses and credit reports in order to verify sellers' identities, especially of those sellers who offer high-value goods.

• Stricter reviews: The company has begun requiring sellers to undergo a review process before selling airline tickets, lodging or vacation packages. Sellers will only be able to sell such items after proving they either work for or own a travel company or own the property being offered for lodging.

These measures add to eBay's traditional feedback system that rates sellers and includes comments about past transactions.

"If we can cut down on the number of bad transactions and stop bad actors earlier in their eBay careers, we're really going to help in a couple of ways: much less bad press, much less bad word of mouth," Jacobsen said.

Perception versus reality
eBay's continued double-digit revenue growth is evidence that fraud doesn't have much impact on the bottom line.

"The company is doing more to combat fraud than it ever has before," said Shawn Milne, a financial analyst who covers eBay for SoundView. "It's a relatively small issue."

But even the perception of fraud can scare off customers. Consumer advocate Jean Ann Fox said she's never bought or sold anything through any online auction and doesn't plan on doing it anytime soon.

"I'm leery of auctions myself," said Fox, the director of consumer protection at the Consumer Federation of America. "I'd be reluctant to spend any significant amount of money for something I can't see."

That wariness illustrates the harmful effect of even a hint of fraud.

"How big a problem is fraud? It's a huge perception problem. It's a tiny real problem. But perception and reality are the same thing," said Rosalinda Baldwin, editor of The Auction Guild, and a longtime eBay watchdog and critic.

"It's a big limitation to the industry--not just to auctions, but to buying online altogether, because people's perception is they're going to be ripped off."