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eBay touts anti-fraud software's might

The big auctioneer tells shareholders at its annual meeting that its internally developed application has helped make "major strides" in reducing fraud.

SAN JOSE, Calif.--eBay Chief Executive Meg Whitman told shareholders at the company's annual meeting here Wednesday that new software was helping the popular auction site make "major strides" in reducing fraud.

The company began testing an internally developed application called the Fraud Automated Detection Engine (FADE) about six months ago, and it has been live for roughly two months. The software collects data from defrauded customers, tracks it in a central database, and then predicts which new sellers are likely to be illegitimate.

eBay executives would not say how many potentially fraudulent sales it has halted. But Whitman said the technology has already helped eBay reduce its fraudulent sales rate, which she said is at less than one-tenth of 1 percent. Whitman said the software's ability to spot criminals will get better as the database of fraudulent sales grows.

Whitman joked that a "low-cost computer reseller with a home domicile of Romania" would likely raise red flags. eBay's fraud detectors at the company's headquarters here could then monitor the seller, tip off police or the post office, and ultimately save consumers money and annoyance.

eBay spokesman Kevin Pursglove emphasized that FADE would not automatically bar sellers based exclusively on their geography, merchandise category or other demographic information.

"We know we've got to be careful," Pursglove said after the 45-minute shareholder meeting at the Silicon Valley Conference Center. "We wouldn't get into redlining or Zip code tracking or anything like that. The reality is that everyone starts at zero, with a clean record."

eBay tightly guards data about fraud and doesn't disclose lists of hot spots for fraudulent sales, Pursglove said. He also noted that, by some measurements, fraudulent sales on eBay are less than one one-hundredth of 1 percent--lower than the figure given by Whitman in her speech.

But given the fact that eBay has 9 million items for sale on any given day and will likely process $13 billion in gross merchandise sales in 2002, small percentages could add up to thousands of dollars wasted on hundreds of fraudulent transactions each day. The company has been working hard to clean up fraud, forging closer ties with police officials, the U.S. Postal Service, international delivery services and authorities abroad.

Anecdotal evidence suggests that a disproportionate percentage of fraud happens from sales that originate from sellers in Eastern Europe. Pursglove also said that higher-priced items, such as computers and other electronics goods, have a higher rate of fraud than collectibles such as Pez dispensers and Beanie Babies. Technology products, ranging from Sun Microsystems servers to Dell Computer laptops and a variety of smaller electronic gadgets, constitute the largest category of goods sold on eBay.

Sports memorabilia is also a relative hotbed of fraud, usually in the form of inauthentic items being sold as genuine. eBay users in San Diego filed a class-action suit against the company in April 2000, alleging eBay was negligent in allowing forged sports memorabilia into auctions and allowing sellers who did not have a "certificate of authenticity," which is required in California. In January 2001, a judge ruled that eBay was immune to the requirement, but the members have appealed the decision.

"Sports memorabilia has had a lot of fraudulent activity for years," Pursglove said. "You can see that it just migrated from the offline world to the online world with eBay."

The fraud issue was also on shareholders' minds Wednesday. One of the few shareholders to ask a question during the open microphone session was an investor and buyer, who claimed he had a "bad experience" trying to buy an item from a seller several states away.

In other news from the meeting, eBay shareholders approved the appointment of directors Scott Cook and Robert Kagle. Cook has served on eBay's board since 1998 and is the founder of software maker Intuit. Kagle has served on eBay's board since 1997. Both were approved to serve until 2005.

Shareholders also approved changes to 1999 and 2001 equity incentive plans and ratified PricewaterhouseCoopers as the company's auditor for fiscal 2002.

eBay kicked off the morning meeting with 13 minutes of official motions, followed by a half-hour presentation and brief question-and-answer session with Whitman. But the sparsely attended event, which featured a plate of small bagels and two trays of fresh fruit, may get more heft next year.

When one shareholder inquired as to why only 40 shareholders attended the event--about half that of last year's annual meeting--Whitman said the company may boost the conference's profile next June. Whitman said she was impressed with the recent shareholder meeting of Seattle-based Starbucks Coffee, which attracted hundreds of investors and invited them to sample new java blends, socialize and learn more about the company's business plan and products.

eBay is hosting a larger event for eBay users--shareholders as well as buyers and sellers and others interested in joining the 40-million-member eBay community, in Anaheim, Calif., June 21-23. Depending on the success of eBay Live, Whitman said, she may decide to make the next shareholder meeting "more of an event."